10-Q 1 unt-2015630x10q.htm 10-Q UNT-2015.6.30-10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
[Commission File Number 1-9260]
UNIT CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
73-1283193
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
 
7130 South Lewis, Suite 1000, Tulsa, Oklahoma
74136
(Address of principal executive offices)
(Zip Code)
(918) 493-7700
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x]            No [  ]                                                     
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x]            No [  ]                                                     
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [x]                 Accelerated filer [  ]                 Non-accelerated filer [  ]                 Smaller reporting company [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]            No [x]                                                     
As of July 24, 2015, 50,414,951 shares of the issuer's common stock were outstanding.



TABLE OF CONTENTS
 
 
 
Page
Number
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

1


Forward-Looking Statements

This report contains “forward-looking statements” – meaning, statements related to future events within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included or incorporated by reference in this document that addresses activities, events or developments we expect or anticipate will or may occur in the future, are forward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts,” and similar expressions are used to identify forward-looking statements. This report modifies and supersedes documents filed by us before this report. In addition, certain information we file with the SEC in the future will automatically update and supersede information in this report.
 
These forward-looking statements include, among others, such things as:

the amount and nature of our future capital expenditures and how we expect to fund our capital expenditures;
the amount of wells we plan to drill or rework;
prices for oil, natural gas liquids (NGLs), and natural gas;
demand for oil, NGLs, and natural gas;
our exploration and drilling prospects;
the estimates of our proved oil, NGLs, and natural gas reserves;
oil, NGLs, and natural gas reserve potential;
development and infill drilling potential;
expansion and other development trends of the oil and natural gas industry;
our business strategy;
our plans to maintain or increase production of oil, NGLs, and natural gas;
the number of gathering systems and processing plants we plan to construct or acquire;
volumes and prices for natural gas gathered and processed;
expansion and growth of our business and operations;
demand for our drilling rigs and drilling rig rates;
our belief that the final outcome of our legal proceedings will not materially affect our financial results;
our ability to timely secure third-party services used in completing our wells;
our ability to transport or convey our oil or natural gas production to established pipeline systems;
impact of federal and state legislative and regulatory actions affecting our costs and increasing operating restrictions or delays and other adverse impacts on our business;
our projected production guidelines for the year;
our anticipated capital budgets;
the number of wells our oil and natural gas segment plans to drill during the year; and
our estimates of the amounts of any ceiling test write-downs we may be required to record in future periods.
These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, and expected future developments, and other factors we believe are appropriate in the circumstances. Whether actual results and developments will conform to our expectations and predictions is subject to several risks and uncertainties, any one or combination of which could cause our actual results to differ materially from our expectations and predictions, including:
the risk factors discussed in this document and in the documents (if any) we incorporate by reference;
general economic, market, or business conditions;
the availability of and nature of (or lack of) business opportunities we pursue;
demand for our land drilling services;
changes in laws or regulations;
decreases or increases in commodity prices; and
other factors, most of which are beyond our control.
You should not place undue reliance on any of these forward-looking statements. Except as required by law, we disclaim any current intention to update forward-looking information and to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date of this document to reflect unanticipated events.


2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
June 30,
2015
 
December 31,
2014
 
 
(In thousands except share amounts)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
839

 
$
1,049

Accounts receivable, net of allowance for doubtful accounts of $4,008 and $5,039 at June 30, 2015 and at December 31, 2014, respectively
 
108,109

 
189,812

Materials and supplies
 
7,956

 
5,590

Current derivative asset (Note 10)
 
14,587

 
31,139

Current income taxes receivable
 
1,364

 

Current deferred tax asset
 
11,527

 
11,527

Assets held for sale (Note 3)
 
12,649

 

Prepaid expenses and other
 
9,503

 
13,374

Total current assets
 
166,534

 
252,491

Property and equipment:
 
 
 
 
Oil and natural gas properties on the full cost method:
 
 
 
 
Proved properties
 
5,173,365

 
4,990,753

Unproved properties not being amortized
 
460,963

 
485,568

Drilling equipment
 
1,667,614

 
1,620,692

Gas gathering and processing equipment
 
650,679

 
628,689

Saltwater disposal systems
 
60,239

 
56,702

Transportation equipment
 
40,568

 
40,693

Other
 
75,799

 
57,706

 
 
8,129,227

 
7,880,803

Less accumulated depreciation, depletion, amortization, and impairment
 
4,752,931

 
3,747,412

Net property and equipment
 
3,376,296

 
4,133,391

Debt issuance cost
 
9,461

 
10,255

Goodwill
 
62,808

 
62,808

Non-current derivative asset (Note 10)
 
137

 

Other assets
 
14,757

 
14,783

Total assets
 
$
3,629,993

 
$
4,473,728


The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

3


UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - CONTINUED

 
 
June 30,
2015
 
December 31,
2014
 
 
(In thousands except share amounts)
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
105,309

 
$
218,500

Accrued liabilities (Note 5)
 
55,700

 
70,171

Income taxes payable
 

 
481

Current portion of other long-term liabilities (Note 6)
 
16,891

 
15,019

Total current liabilities
 
177,900

 
304,171

Long-term debt (Note 6)
 
926,908

 
812,163

Other long-term liabilities (Note 6)
 
141,153

 
148,785

Deferred income taxes
 
560,432

 
876,215

Shareholders’ equity:
 
 
 
 
Preferred stock, $1.00 par value, 5,000,000 shares authorized, none issued
 

 

Common stock, $.20 par value, 175,000,000 shares authorized, 50,423,251 and 49,593,812 shares issued as of June 30, 2015 and December 31, 2014, respectively
 
9,831

 
9,732

Capital in excess of par value
 
481,973

 
468,123

Retained earnings
 
1,331,796

 
1,854,539

Total shareholders’ equity
 
1,823,600

 
2,332,394

Total liabilities and shareholders’ equity
 
$
3,629,993

 
$
4,473,728


The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.


4


UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands except per share amounts)
Revenues:
 
 
 
 
 
 
 
 
Oil and natural gas
 
$
107,256

 
$
198,498

 
$
213,325

 
$
386,705

Contract drilling
 
55,015

 
114,278

 
150,092

 
220,878

Gas gathering and processing
 
52,176

 
92,655

 
106,129

 
185,836

Total revenues
 
214,447

 
405,431

 
469,546

 
793,419

Expenses:
 
 
 
 
 
 
 
 
Oil and natural gas:
 
 
 
 
 
 
 
 
Operating costs
 
45,972

 
44,723

 
91,183

 
85,138

Depreciation, depletion, and amortization
 
68,101

 
71,245

 
145,219

 
130,925

Impairment of oil and natural gas properties (Note 2)
 
410,536

 

 
811,129

 

Contract drilling:
 
 
 
 
 
 
 
 
Operating costs
 
36,485

 
66,494

 
88,231

 
130,298

Depreciation
 
13,265

 
20,239

 
28,278

 
38,634

Impairment of contract drilling equipment (Note 3)
 
8,314

 

 
8,314

 

Gas gathering and processing:
 
 
 
 
 
 
 
 
Operating costs
 
40,592

 
78,648

 
84,767

 
159,608

Depreciation and amortization
 
10,848

 
10,109

 
21,542

 
19,700

General and administrative
 
9,624

 
10,600

 
18,994

 
20,237

Gain on disposition of assets
 
(415
)
 
(195
)
 
(960
)
 
(9,621
)
Total operating expenses
 
643,322

 
301,863

 
1,296,697

 
574,919

Income (loss) from operations
 
(428,875
)
 
103,568

 
(827,151
)
 
218,500

Other income (expense):
 
 
 
 
 
 
 
 
Interest, net
 
(7,956
)
 
(4,131
)
 
(15,196
)
 
(7,921
)
Gain (loss) on derivatives not designated as hedges
 
(1,919
)
 
(10,709
)
 
4,667

 
(29,075
)
Other
 
24

 
(49
)
 
22

 
71

Total other expense
 
(9,851
)
 
(14,889
)
 
(10,507
)
 
(36,925
)
Income (loss) before income taxes
 
(438,726
)
 
88,679

 
(837,658
)
 
181,575

Income tax expense (benefit):
 
 
 
 
 
 
 
 
Current
 
803

 
8,475

 
868

 
18,270

Deferred
 
(165,140
)
 
25,844

 
(315,783
)
 
52,000

Total income taxes
 
(164,337
)
 
34,319

 
(314,915
)
 
70,270

Net income (loss)
 
$
(274,389
)
 
$
54,360

 
$
(522,743
)
 
$
111,305

Net income (loss) per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(5.58
)
 
$
1.12

 
$
(10.66
)
 
$
2.29

Diluted
 
$
(5.58
)
 
$
1.11

 
$
(10.66
)
 
$
2.27


The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.


5


UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Six Months Ended
 
 
June 30,
 
 
2015
 
2014
 
 
(In thousands)
OPERATING ACTIVITIES:
 
 
 
 
Net income (loss)
 
$
(522,743
)
 
$
111,305

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion, and amortization
 
196,576

 
190,813

Impairments (Notes 2 and 3)
 
819,443

 

(Gain) loss on derivatives
 
(4,667
)
 
29,075

Cash (payments) receipts on derivatives settled
 
21,082

 
(17,955
)
Deferred tax expense (benefit)
 
(315,783
)
 
52,000

Gain on disposition of assets
 
(960
)
 
(9,621
)
Employee stock compensation plans
 
12,329

 
11,655

Other, net
 
1,944

 
3,076

Changes in operating assets and liabilities increasing (decreasing) cash:
 
 
 
 
Accounts receivable
 
77,894

 
(45,150
)
Accounts payable
 
(16,327
)
 
(11,585
)
Material and supplies
 
(2,366
)
 
2,458

Accrued liabilities
 
(11,811
)
 
7,440

Other, net
 
2,995

 
2,017

Net cash provided by operating activities
 
257,606

 
325,528

INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
(371,572
)
 
(420,235
)
Proceeds from disposition of assets
 
5,130

 
40,825

Other
 

 
303

Net cash used in investing activities
 
(366,442
)
 
(379,107
)
FINANCING ACTIVITIES:
 
 
 
 
Borrowings under credit agreement
 
396,000

 
129,300

Payments under credit agreement
 
(281,500
)
 
(129,300
)
Payments on capitalized leases
 
(1,757
)
 
(711
)
Proceeds from exercise of stock options
 
4

 
887

Book overdrafts
 
(4,121
)
 
35,888

Net cash provided by financing activities
 
108,626

 
36,064

Net decrease in cash and cash equivalents
 
(210
)
 
(17,515
)
Cash and cash equivalents, beginning of period
 
1,049

 
18,593

Cash and cash equivalents, end of period
 
$
839

 
$
1,078

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the year for:
 
 
 
 
Interest paid (net of capitalized)
 
15,886

 
6,223

Income taxes
 
3,142

 
15,800

Changes in accounts payable and accrued liabilities related to purchases of property, plant, and equipment
 
92,743

 
(29,247
)
Non-cash reductions to oil and natural gas properties related to asset retirement obligations
 
5,956

 
15,432

Non-cash additions to property, plant, and equipment acquired under capital leases
 

 
(26,510
)

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

6


UNIT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PREPARATION AND PRESENTATION

The accompanying unaudited condensed consolidated financial statements in this report include the accounts of Unit Corporation and all its subsidiaries and affiliates and have been prepared under the rules and regulations of the SEC. The terms “company,” “Unit,” “we,” “our,” “us,” or like terms refer to Unit Corporation, a Delaware corporation, and one or more of its subsidiaries and affiliates, except as otherwise indicated or as the context otherwise requires.

The accompanying condensed consolidated financial statements are unaudited and do not include all the notes in our annual financial statements. This report should be read with the audited consolidated financial statements and notes in our Form 10-K, filed February 24, 2015, for the year ended December 31, 2014.

In the opinion of our management, the accompanying unaudited condensed consolidated financial statements contain all normal recurring adjustments (including the elimination of all intercompany transactions) necessary to fairly state the following:

Balance Sheets at June 30, 2015 and December 31, 2014;
Statements of Operations for the three and six months ended June 30, 2015 and 2014; and
Statements of Cash Flows for the six months ended June 30, 2015 and 2014.

Our financial statements are prepared in conformity with generally accepted accounting principles in the United States (GAAP). GAAP requires us to make certain estimates and assumptions that may affect the amounts reported in our unaudited condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. Results for the six months ended June 30, 2015 and 2014 are not necessarily indicative of the results to be realized for the full year of 2015, or that we realized for the full year of 2014.

Certain amounts in the accompanying unaudited condensed consolidated financial statements for prior periods have been reclassified to conform to current year presentation. Certain financial statement captions were expanded or combined with no impact to consolidated net income (loss) or shareholders' equity.

Regarding the unaudited financial information for the three and six month periods ended June 30, 2015 and 2014, our auditors, PricewaterhouseCoopers LLP, reported that it applied limited procedures under professional standards in reviewing that information. Its separate report dated August 4, 2015, which is included in this report, states it did not audit and it expresses no opinion on that unaudited financial information. The reliance placed on its report should be restricted in light of the limited review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (Act) for its report on the unaudited financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

NOTE 2 – OIL AND NATURAL GAS PROPERTIES
    
Full cost accounting rules require us to review the carrying value of our oil and natural gas properties at the end of each quarter. Under those rules, the maximum amount allowed as the carrying value is referred to as the ceiling. The ceiling is the sum of the present value (using a 10% discount rate) of the estimated future net revenues from our proved reserves (using the unescalated 12-month average price of our oil, NGLs, and natural gas), plus the cost of properties not being amortized, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, less related income taxes. If the net book value of the oil, NGLs, and natural gas properties being amortized exceeds the full cost ceiling, the excess amount is charged to expense in the period during which the excess occurs, even if prices are depressed for only a short while. Once incurred, a write-down of oil and natural gas properties is not reversible.

During the first quarter of 2015, the 12-month average commodity prices decreased significantly, resulting in a non-cash ceiling test write-down of $400.6 million pre-tax ($249.4 million, net of tax).


7


During the second quarter of 2015, the 12-month average commodity prices decreased further, resulting in a non-cash ceiling test write-down of $410.5 million pre-tax ($255.6 million, net of tax).

NOTE 3 – DIVESTITURES

We sold non-core oil and natural gas assets, net of related expenses, for less than $0.1 million during the first six months of 2015, compared to $11.3 million during the first six months of 2014. Proceeds from those sales reduced the net book value of our full cost pool with no gain or loss recognized.

In December 2014, we removed from service 31 drilling rigs, some older top drives, and certain drill pipe no longer marketable under the current environment and based on estimated market value from third party assessments (Level 3 fair value measurement), we recorded a write-down of approximately $74.3 million pre-tax. During the first quarter of 2015, we sold one of these drilling rigs to an unaffiliated third party. The proceeds of this sale, less costs to sell, exceeded the $0.3 million net book value of the drilling rig resulting in a gain of $7,900. During the second quarter we decided to place the remaining 30 drilling rigs and most of the equipment for sale in an auction to be held during the third quarter. Any equipment not sold at the auction will be sold within the next twelve months. As a result, these assets have been classified as assets held for sale. Since December, the estimated fair value of the drilling rigs and other assets has declined based on the estimated market value from similar auctions. Based on these estimates, we recorded an additional write-down of approximately $8.3 million pre-tax during the second quarter. The proceeds from the sale of these assets, less costs to sell, is expected to be approximately $12.6 million.

During the first quarter of 2014, we sold four idle 3,000 horsepower drilling rigs to an unaffiliated third-party. The proceeds of this sale, less costs to sell, exceeded the $16.3 million net book value of the drilling rigs, both in the aggregate and for each drilling rig, resulting in a gain of $9.6 million.

NOTE 4 – EARNINGS PER SHARE

Information related to the calculation of earnings per share follows:
 
 
Income (Loss)
(Numerator)
 
Weighted
Shares
(Denominator)
 
Per-Share
Amount
 
 
(In thousands except per share amounts)
For the three months ended June 30, 2015
 
 
 
 
 
 
Basic earnings (loss) per common share
 
$
(274,389
)
 
49,148

 
$
(5.58
)
Effect of dilutive stock options, restricted stock, and stock appreciation rights (SARs)
 

 

 

Diluted earnings (loss) per common share
 
$
(274,389
)
 
49,148

 
$
(5.58
)
For the three months ended June 30, 2014
 
 
 
 
 
 
Basic earnings per common share
 
$
54,360

 
48,642

 
$
1.12

Effect of dilutive stock options, restricted stock, and SARs
 

 
474

 
(0.01
)
Diluted earnings per common share
 
$
54,360

 
49,116

 
$
1.11


Due to the net loss for the three months ended June 30, 2015, approximately 307,000 weighted average shares related to stock options, restricted stock, and SARs were antidilutive and were excluded from the earnings per share calculation above.

The following table shows the number of stock options and SARs (and their average exercise price) excluded because their option exercise prices were greater than the average market price of our common stock:
 
 
Three Months Ended
 
 
June 30,
 
 
2015
 
2014
Stock options and SARs
 
259,085

 
24,500

Average exercise price
 
$
50.50

 
$
73.26



8


 
 
Income (Loss)
(Numerator)
 
Weighted
Shares
(Denominator)
 
Per-Share
Amount
 
 
(In thousands except per share amounts)
For the six months ended June 30, 2015
 
 
 
 
 
 
Basic earnings (loss) per common share
 
$
(522,743
)
 
49,063

 
$
(10.66
)
Effect of dilutive stock options, restricted stock, and SARs
 

 

 

Diluted earnings (loss) per common share
 
$
(522,743
)
 
49,063

 
$
(10.66
)
For the six months ended June 30, 2014
 
 
 
 
 
 
Basic earnings per common share
 
$
111,305

 
48,568

 
$
2.29

Effect of dilutive stock options, restricted stock, and SARs
 

 
442

 
(0.02
)
Diluted earnings per common share
 
$
111,305

 
49,010

 
$
2.27


Due to the net loss for the six months ended June 30, 2015, approximately 206,000 weighted average shares related to stock options, restricted stock, and SARs were antidilutive and were excluded from the earnings per share calculation above.

The following table shows the number of stock options and SARs (and their average exercise price) excluded because their option exercise prices were greater than the average market price of our common stock:
 
 
Six Months Ended
 
 
June 30,
 
 
2015
 
2014
Stock options and SARs
 
261,270

 
49,000

Average exercise price
 
$
50.34

 
$
67.83


NOTE 5 – ACCRUED LIABILITIES

Accrued liabilities consisted of the following:
 
 
June 30,
2015
 
December 31,
2014
 
 
(In thousands)
Lease operating expenses
 
$
20,257

 
$
20,709

Employee costs
 
10,854

 
31,451

Taxes
 
9,134

 
3,284

Interest
 
6,560

 
6,654

Third-party credits
 
4,040

 
2,825

Other
 
4,855

 
5,248

Total accrued liabilities
 
$
55,700

 
$
70,171

 

9


NOTE 6 – LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES

Long-Term Debt

As of the dates in the table, our long-term debt consisted of the following:
 
 
June 30,
2015
 
December 31,
2014
 
 
(In thousands)
Credit agreement with an average interest rate of 2.2% and 2.9% at June 30, 2015 and December 31, 2014, respectively
 
$
280,500

 
$
166,000

6.625% senior subordinated notes due 2021, net of unamortized discount of $3.6 million and $3.8 million at June 30, 2015 and December 31, 2014, respectively
 
646,408

 
646,163

Total long-term debt
 
$
926,908

 
$
812,163


Credit Agreement. On April 10, 2015, we amended our Senior Credit Agreement (credit agreement) previously scheduled to mature on September 13, 2016. The amended credit agreement has a maturity date of April 10, 2020. The amount we can borrow is the lesser of the amount we elect (from time to time) as the commitment amount or the value of the borrowing base as determined by the lenders (currently $725.0 million), but in either event not to exceed the maximum credit agreement amount of $900.0 million. Our current elected commitment amount is $500.0 million. We are charged a commitment fee ranging from 0.375 to 0.50 of 1% on the amount available but not borrowed. The fee varies based on the amount borrowed as a percentage of the amount of the total borrowing base. To date, for this new amendment, we paid $2.6 million in origination, agency, syndication, and other related fees. We are amortizing these fees over the life of the credit agreement.

The borrowing base amount–which is subject to redetermination by the lenders on April 1st and October 1st of each year–is based primarily on a percentage of the discounted future value of our oil and natural gas reserves. We or the lenders may request a onetime special redetermination of the borrowing base between each scheduled redetermination. In addition, we may request a redetermination following the completion of an acquisition that meets the requirements in the credit agreement.

At our election, any part of the outstanding debt under the credit agreement may be fixed at a London Interbank Offered Rate (LIBOR). LIBOR interest is computed as the sum of the LIBOR base for the applicable term plus 1.75% to 2.50% depending on the level of debt as a percentage of the borrowing base and is payable at the end of each term, or every 90 days, whichever is less. Borrowings not under LIBOR bear interest at the prime rate specified in the credit agreement that cannot be less than LIBOR plus 1.00%. Interest is payable at the end of each month and the principal may be repaid in whole or in part at any time, without a premium or penalty. At June 30, 2015, the outstanding borrowings under the credit agreement were $280.5 million.

We can use borrowings for financing general working capital requirements for (a) exploration, development, production, and acquisition of oil and gas properties, (b) acquisitions and operation of mid-stream assets, (c) issuance of standby letters of credit, (d) contract drilling services, and (e) general corporate purposes.

The credit agreement prohibits, among other things:

the payment of dividends (other than stock dividends) during any fiscal year over 30% of our consolidated net income for the preceding fiscal year;
the incurrence of additional debt with certain limited exceptions; and
the creation or existence of mortgages or liens, other than those in the ordinary course of business and with certain limited exceptions, on any of our properties, except in favor of our lenders.

The credit agreement also requires that we have at the end of each quarter:

a current ratio (as defined in the credit agreement) of not less than 1 to 1; and
a leverage ratio of funded debt to consolidated EBITDA (as defined in the credit agreement) for the most recently ended rolling four fiscal quarters of no greater than 4 to 1.

As of June 30, 2015, we were in compliance with the covenants in the credit agreement.


10


6.625% Senior Subordinated Notes. We have an aggregate principal amount of $650.0 million, 6.625% senior subordinated notes (the Notes). Interest on the Notes is payable semi-annually (in arrears) on May 15 and November 15 of each year. The Notes will mature on May 15, 2021. We incurred in connection with the issuance of the Notes $14.7 million of fees being amortized as debt issuance cost over the life of the Notes.

The Notes are subject to an Indenture dated as of May 18, 2011, between us and Wilmington Trust, National Association (successor to Wilmington Trust FSB), as Trustee (the Trustee), as supplemented by the First Supplemental Indenture dated as of May 18, 2011, between us, the Guarantors, and the Trustee, and as further supplemented by the Second Supplemental Indenture dated as of January 7, 2013, between us, the Guarantors, and the Trustee (as supplemented, the 2011 Indenture), establishing the terms and providing for issuing the Notes. The Guarantors are all of our direct and indirect subsidiaries. The discussion of the Notes in this report is qualified by and subject to the actual terms of the 2011 Indenture.

Unit, as the parent company, has no independent assets or operations. The guarantees by the Guarantors of the Notes
(registered under registration statements) are full and unconditional, joint and several, subject to certain automatic customary releases, are subject to certain restrictions on the sale, disposition, or transfer of the capital stock or substantially all of the assets of a subsidiary guarantor, and other conditions and terms set out in the Indenture. Any of our subsidiaries that are not Guarantors are minor. There are no significant restrictions on our ability to receive funds from any of our subsidiaries through dividends, loans, advances, or otherwise.

Before May 15, 2016, we may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make whole” premium, plus accrued and unpaid interest, if any, to the redemption date. On and after May 15, 2016, we may redeem all or, from time to time, a part of the Notes at certain redemption prices, plus accrued and unpaid interest. If a “change of control” occurs, subject to certain conditions, we must offer to repurchase from each holder all or any part of that holder’s Notes at a purchase price in cash equal to 101% of the principal amount of the Notes plus accrued and unpaid interest, if any, to the date of purchase. The 2011 Indenture contains customary events of default. The 2011 Indenture also contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to incur or guarantee additional indebtedness; pay dividends on our capital stock or redeem capital stock or subordinated indebtedness; transfer or sell assets; make investments; incur liens; enter into transactions with our affiliates; and merge or consolidate with other companies. We were in compliance with all covenants of the Notes as of June 30, 2015.

Other Long-Term Liabilities

Other long-term liabilities consisted of the following:
 
 
June 30,
2015
 
December 31,
2014
 
 
(In thousands)
Asset retirement obligation (ARO) liability
 
$
96,368

 
$
100,567

Capital lease obligations
 
24,188

 
25,876

Workers’ compensation
 
17,681

 
17,997

Separation benefit plans
 
11,368

 
11,276

Deferred compensation plan
 
4,406

 
4,055

Gas balancing liability
 
3,623

 
3,623

Other
 
410

 
410

 
 
158,044

 
163,804

Less current portion
 
16,891

 
15,019

Total other long-term liabilities
 
$
141,153

 
$
148,785


Estimated annual principal payments under the terms of debt and other long-term liabilities during each of the five successive twelve month periods beginning July 1, 2015 (and through 2020) are $16.9 million, $39.0 million, $9.1 million, $8.3 million, and $288.9 million, respectively.


11


Capital Leases

During 2014, our mid-stream segment entered into capital lease agreements for twenty compressors with initial terms of seven years. The underlying assets are included in gas gathering and processing equipment. The current $3.5 million portion of our capital lease obligations is included in current portion of other long-term liabilities and the non-current portion of $20.7 million is included in other long-term liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets as of June 30, 2015. These capital leases are discounted using annual rates of 4.00%. Total maintenance and interest remaining at June 30, 2015 related to these leases are $10.5 million and $3.2 million, respectively. Annual payments, net of maintenance and interest, average $3.9 million annually through 2021. At the end of the term, our mid-stream segment has the option to purchase the assets at 10% of the fair market value of the assets at that time.

Future payments required under the capital leases at June 30, 2015:
 
 
Amount
Ending June 30,
 
(In thousands)
2016
 
$
6,195

2017
 
6,195

2018
 
6,195

2019
 
6,195

2020
 
6,195

2021 and thereafter
 
6,869

Total future payments
 
37,844

Less payments related to:
 
 
Maintenance
 
10,489

Interest
 
3,167

Present value of future minimum payments
 
$
24,188



12


NOTE 7 – ASSET RETIREMENT OBLIGATIONS

We are required to record the estimated fair value of the liabilities relating to the future retirement of our long-lived assets. Our oil and natural gas wells are plugged and abandoned when the oil and natural gas reserves in those wells are depleted or the wells are no longer able to produce. The plugging and abandonment liability for a well is recorded in the period in which the obligation is incurred (at the time the well is drilled or acquired). None of our assets are restricted for purposes of settling these AROs. All of our AROs relate to the plugging costs associated with our oil and gas wells.

The following table shows certain information about our AROs for the periods indicated:
 
 
Six Months Ended
 
 
June 30,
 
 
2015
 
2014
 
 
(In thousands)
ARO liability, January 1:
 
$
100,567

 
$
133,657

Accretion of discount
 
1,757

 
2,366

Liability incurred
 
5,986

 
1,900

Liability settled
 
(1,566
)
 
(1,917
)
Liability sold
 
(246
)
 
(877
)
Revision of estimates (1)
 
(10,130
)

(14,538
)
ARO liability, June 30:
 
96,368

 
120,591

Less current portion
 
3,277

 
3,118

Total long-term ARO
 
$
93,091

 
$
117,473

_______________________ 
(1)
Plugging liability estimates were revised in both 2015 and 2014 to account for changes in the cost of services used to plug wells over the preceding year. We had various upward and downward adjustments.

NOTE 8 – NEW ACCOUNTING PRONOUNCEMENTS

Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The FASB has issued ASU 2015-03. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. We are in the process of evaluating the impact it will have on our financial statements.

Revenue from Contracts with Customers. The FASB has issued ASU 2014-09. This affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. Early adoption is not permitted. We are in the process of evaluating the impact it will have on our financial statements.


13


NOTE 9 – STOCK-BASED COMPENSATION

For restricted stock awards and stock options, we had:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In millions)
Recognized stock compensation expense
 
$
4.8

 
$
4.5

 
$
9.1

 
$
8.3

Capitalized stock compensation cost for our oil and natural gas properties
 
1.0

 
1.0

 
1.9

 
1.8

Tax benefit on stock based compensation
 
1.7

 
1.7

 
3.4

 
3.2


The remaining unrecognized compensation cost related to unvested awards at June 30, 2015 is approximately $30.4 million, of which $4.8 million is anticipated to be capitalized. The weighted average period of time over which this cost will be recognized is 0.9 of a year.

The Second Amended and Restated Unit Corporation Stock and Incentive Compensation Plan effective May 6, 2015 (the amended plan) allows us to grant stock-based and cash-based compensation to our employees (including employees of subsidiaries) as well as to non-employee directors. As of the date of this report, a total of 4,500,000 shares of the company's common stock was authorized for issuance to eligible participants under the amended plan.

We did not grant any SARs or stock options during either of the three or six month periods ending June 30, 2015 and 2014. The following table shows the fair value of restricted stock awards granted to employees and non-employee directors during the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
Shares granted:
 
 
 
 
 
 
 
 
Employees
 

 

 
724,442

 
438,342

Non employee directors
 
25,848

 
13,768

 
25,848

 
13,768

 
 
25,848

 
13,768

 
750,290

 
452,110

Estimated fair value (in millions):
 
 
 
 
 
 
 
 
Employees
 
$

 
$

 
$
23.6

 
$
22.4

Non employee directors
 
0.9

 
0.9

 
0.9

 
0.9

 
 
$
0.9

 
$
0.9

 
$
24.5

 
$
23.3

Percentage of shares granted expected to be distributed:
 
 
 
 
 
 
 
 
Employees
 
N/A

 
N/A

 
96
%
 
95
%
Non employee directors
 
100
%
 
100
%
 
100
%
 
100
%

The restricted stock awards granted during the first three and six months of 2015 and 2014 are being recognized over a three year vesting period, except for a portion of those awards made to certain executive officers. As to those executive officers, 50% of the shares granted, or 148,081 shares in 2015 and 40% of the share granted, or 71,674 shares in 2014, (the performance shares), will cliff vest in the first half of 2018 and 2017, respectively. The actual number of performance shares that vest in 2017 and 2018 will be based on the company’s achievement of certain stock performance measures at the end of the term, and will range from 0% to 150% of the restricted shares granted as performance shares. Based on the selected performance criteria, the participants are estimated to receive the targeted amount (or approximately 100%) of the 2015 and 2014 performance based shares. The total aggregate stock compensation expense and capitalized cost related to oil and natural gas properties for 2015 awards for the first six months of 2015 was $4.4 million.


14


NOTE 10 – DERIVATIVES

Commodity Derivatives

We have entered into various types of derivative transactions covering some of our projected natural gas and oil production. These transactions are intended to reduce our exposure to market price volatility by setting the price(s) we will receive for that production. Our decisions on the price(s), type, and quantity of our production subject to a derivative contract are based, in part, on our view of current and future market conditions. As of June 30, 2015, our derivative transactions comprised the following hedges:

Swaps. We receive or pay a fixed price for the commodity and pay or receive a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

Collars. A collar contains a fixed floor price (put) and a ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the call and the put strike price, no payments are due from either party.

We have documented policies and procedures to monitor and control the use of derivative transactions. We do not engage in derivative transactions for speculative purposes. The change in fair value on all commodity derivatives is reflected in the statement of operations and not in accumulated other comprehensive income (OCI).

At June 30, 2015, the following non-designated hedges were outstanding:
Term
 
Commodity
 
Contracted Volume
 
Weighted Average 
Fixed Price
 
Contracted Market
Jul’15 – Dec’15
 
Crude oil – swap
 
1,000 Bbl/day
 
$95.00
 
WTI – NYMEX
Jul’15 – Dec’15
 
Crude oil – collar
 
2,000 Bbl/day
 
$58.00-$64.40
 
WTI – NYMEX
Jul’15 – Dec’15
 
Natural gas – swap
 
40,000 MMBtu/day
 
$3.98
 
NYMEX (HH)
Jul'15 – Sep'15
 
Natural gas – collar
 
30,000 MMBtu/day
 
$2.58-$3.04
 
NYMEX (HH)
Jan'16 - Dec'16
 
Natural gas – swap
 
10,000 MMBtu/day
 
$3.25
 
NYMEX (HH)

The following tables present the fair values and locations of the derivative transactions recorded in our Unaudited Condensed Consolidated Balance Sheets:
 
 
 
 
Derivative Assets
 
 
 
 
Fair Value
 
 
Balance Sheet Location
 
June 30,
2015
 
December 31,
2014
 
 
 
 
(In thousands)
Commodity derivatives:
 
 
 
 
 
 
Current
 
Current derivative asset
 
$
14,587

 
$
31,139

   Long-term
 
Non-current derivative asset
 
137

 

Total derivative assets
 
 
 
$
14,724

 
$
31,139


If a legal right of set-off exists, we net the value of the derivative transactions we have with the same counterparty in our Unaudited Condensed Consolidated Balance Sheets.

For our economic hedges any changes in fair value occurring before maturity (i.e., temporary fluctuations in value) are reported in gain (loss) on derivatives not designated as hedges in our Unaudited Condensed Consolidated Statements of Operations.


15


Effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations (derivatives not designated as hedging instruments) for the three months ended June 30:
Derivatives Not Designated as
Hedging Instruments
 
Location of Gain or (Loss) Recognized in
Income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivative
 
 
 
 
2015
 
2014
 
 
 
 
(In thousands)
Commodity derivatives
 
Loss on derivatives not designated as
    hedges(1)
 
$
(1,919
)
 
$
(10,709
)
Total
 
 
 
$
(1,919
)
 
$
(10,709
)
_______________________
(1)
Amounts settled during the 2015 and 2014 periods include a gain of $10.1 million and a loss of $9.1 million, respectively.

Effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations (derivatives not designated as hedging instruments) for the six months ended June 30:
Derivatives Not Designated as
Hedging Instruments
 
Location of Gain or (Loss) Recognized in
Income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivative
 
 
 
 
2015
 
2014
 
 
 
 
(In thousands)
Commodity derivatives
 
Gain (loss) on derivatives not designated as hedges (1)
 
$
4,667

 
$
(29,075
)
Total
 
 
 
$
4,667

 
$
(29,075
)
_______________________
(1)
Amounts settled during the 2015 and 2014 periods include a gain of $21.1 million and a loss of $18.0 million, respectively.

NOTE 11 – FAIR VALUE MEASUREMENTS

Fair value is defined as the amount received from the sale of an asset or paid for transferring a liability in an orderly transaction between market participants (in either case, an exit price). To estimate an exit price, a three-level hierarchy is used prioritizing the valuation techniques used to measure fair value. The highest priority is given to Level 1 and the lowest priority is given to Level 3. The levels are summarized as follows:

Level 1 - unadjusted quoted prices in active markets for identical assets and liabilities.

Level 2 - significant observable pricing inputs other than quoted prices included within level 1 either directly or indirectly observable as of the reporting date. Inputs (variables used in the pricing models) that are derived principally from or corroborated by observable market data.

Level 3 - unobservable inputs developed based on the best information available and may include our own internal data.

The inputs available to us determine the valuation technique we use to measure the fair values of our financial instruments. We corroborate these inputs based on recent transactions and broker quotes and compare the fair value with actual settlements.


16


The following tables set forth our recurring fair value measurements:
 
 
June 30, 2015
 
 
Level 2
 
Level 3
 
Gross
Amounts
 
Effect
of Netting
 
Net Amounts Presented
 
 
(In thousands)
Financial assets (liabilities):
 
 
 
 
 
 
 
 
 
 
Commodity derivatives:
 
 
 
 
 
 
 
 
 
 
Assets
 
$
14,517

 
$
273

 
$
14,790

 
$
(66
)
 
$
14,724

Liabilities
 

 
(66
)
 
(66
)
 
66

 

 
 
$
14,517

 
$
207

 
$
14,724

 
$

 
$
14,724

 
 
December 31, 2014
 
 
Level 2
 
Level 3
 
Gross
Amounts
 
Effect
of Netting
 
Net Amounts Presented
 
 
(In thousands)
Financial assets (liabilities):
 
 
 
 
 
 
 
 
 
 
Commodity derivatives:
 
 
 
 
 
 
 
 
 
 
Assets
 
$
27,784

 
$
3,355

 
$
31,139

 
$

 
$
31,139

Liabilities
 

 

 

 

 

 
 
$
27,784

 
$
3,355

 
$
31,139

 
$

 
$
31,139


All of our counterparties are subject to master netting arrangements. If a legal right of set-off exists, we net the value of the derivative transactions we have with the same counterparty. We are not required to post cash collateral with our counterparties.

The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the table above.

Level 2 Fair Value Measurements

Commodity Derivatives. We measure the fair values of our crude oil and natural gas swaps using estimated internal discounted cash flow calculations based on the NYMEX futures index.

Level 3 Fair Value Measurements

Commodity Derivatives. The fair values of our natural gas and crude oil collars are estimated using internal discounted cash flow calculations based on forward price curves, quotes obtained from brokers for contracts with similar terms, or quotes obtained from counterparties to the agreements.


17


The following tables are reconciliations of our level 3 fair value measurements: 
 
 
Commodity Collars
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands)
Beginning of period
 
$
857

 
$
(4,464
)
 
$
3,355

 
$
(2,595
)
Total gains or losses (realized and unrealized):
 
 
 
 
 
 
 
 
Included in earnings (1)
 
111

 
(4,401
)
 
888

 
(7,829
)
Settlements
 
(761
)
 
2,784

 
(4,036
)
 
4,343

End of period
 
$
207

 
$
(6,081
)
 
$
207

 
$
(6,081
)
Total losses for the period included in earnings attributable to the change in unrealized loss relating to assets still held at end of period
 
$
(650
)
 
$
(1,617
)
 
$
(3,148
)
 
$
(3,486
)
_______________________
(1)
Commodity collars are reported in the Unaudited Condensed Consolidated Statements of Operations in gain (loss) on derivatives not designated as hedges.

The following table provides quantitative information about our Level 3 unobservable inputs at June 30, 2015:
Commodity (1)
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
 
(In thousands)
 
 
 
 
 
 
Oil collar
 
$
239

 
Discounted cash flow
 
Forward commodity price curve
 
$0.37 - $4.33
Natural gas collars
 
(32
)
 
Discounted cash flow
 
Forward commodity price curve
 
$0.00 - $0.15
 _______________________
(1)
The commodity contracts detailed in this category include non-exchange-traded crude oil and natural gas collars that are valued based on NYMEX. The forward pricing range represents the low and high price expected to be paid or received within the settlement period.

Based on our valuation at June 30, 2015, we determined that risk of non-performance by our counterparties was immaterial.

Fair Value of Other Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made under accounting guidance for financial instruments. We have determined the estimated fair values by using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop these estimates. Using different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

At June 30, 2015, the carrying values on the Unaudited Condensed Consolidated Balance Sheets for cash and cash equivalents (classified as Level 1), accounts receivable, accounts payable, other current assets, and current liabilities approximate their fair value because of their short term nature.

Based on the borrowing rates currently available to us for credit agreement debt with similar terms and maturities and also considering the risk of our non-performance, long-term debt under our credit agreement has historically approximated its fair value and at June 30, 2015 was $280.5 million. This debt would be classified as Level 2.

The carrying amounts of long-term debt, net of unamortized discount, associated with the Notes reported in the Unaudited Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 were $646.4 million and $646.2 million, respectively. We estimated the fair value of these Notes using quoted marked prices at June 30, 2015 and December 31, 2014 which were $625.6 million and $605.5 million, respectively. These Notes would be classified as Level 2.

Fair Value of Non-Financial Instruments

The initial measurement of AROs at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with property, plant, and equipment. Significant Level 3 inputs used in the

18


calculation of AROs include plugging costs and remaining reserve lives. A reconciliation of the Company’s AROs is presented in Note 7 – Asset Retirement Obligations.

NOTE 12 – INDUSTRY SEGMENT INFORMATION

We have three main business segments offering different products and services:
 
Oil and natural gas,
Contract drilling, and
Mid-stream

The oil and natural gas segment is engaged in the development, acquisition, and production of oil, NGLs, and natural gas properties. The contract drilling segment is engaged in the land contract drilling of oil and natural gas wells and the mid-stream segment is engaged in the buying, selling, gathering, processing, and treating of natural gas and NGLs.

We evaluate each segment’s performance based on its operating income, which is defined as operating revenues less operating expenses and depreciation, depletion, amortization, and impairment. Our oil and natural gas properties outside the United States are not significant.

The following table provides certain information about the operations of each of our segments:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
 
Oil and natural gas
 
$
107,256

 
$
198,498

 
$
213,325

 
$
386,705

 
 
 
 
 
 
 
 
 
Contract drilling
 
60,813

 
135,782

 
165,751

 
260,040

Elimination of inter-segment revenue
 
(5,798
)
 
(21,504
)
 
(15,659
)
 
(39,162
)
Contract drilling net of inter-segment revenue
 
55,015

 
114,278

 
150,092

 
220,878

 
 
 
 
 
 
 
 
 
Gas gathering and processing
 
69,163

 
116,354

 
142,967

 
236,714

Elimination of inter-segment revenue
 
(16,987
)
 
(23,699
)
 
(36,838
)
 
(50,878
)
Gas gathering and processing net of inter-segment revenue
 
52,176

 
92,655

 
106,129

 
185,836

 
 
 
 
 
 
 
 
 
Total revenues
 
$
214,447

 
$
405,431

 
$
469,546

 
$
793,419

Operating income (loss):
 

 

 
 
 
 
Oil and natural gas
 
$
(417,353
)
 
$
82,530

 
$
(834,206
)
 
$
170,642

Contract drilling
 
(3,049
)
 
27,545

 
25,269

 
51,946

Gas gathering and processing
 
736

 
3,898

 
(180
)
 
6,528

Total operating income (loss) (1)
 
(419,666
)
 
113,973

 
(809,117
)
 
229,116

General and administrative
 
(9,624
)
 
(10,600
)
 
(18,994
)
 
(20,237
)
Gain on disposition of assets
 
415

 
195

 
960

 
9,621

Gain (loss) on derivatives not designated as hedges
 
(1,919
)
 
(10,709
)
 
4,667

 
(29,075
)
Interest expense, net
 
(7,956
)
 
(4,131
)
 
(15,196
)
 
(7,921
)
Other
 
24

 
(49
)
 
22

 
71

Income (loss) before income taxes
 
$
(438,726
)
 
$
88,679

 
$
(837,658
)
 
$
181,575

_______________________
(1)
Operating income (loss) is total operating revenues less operating expenses, depreciation, depletion, amortization, and impairment and does not include general corporate expenses, gain on disposition of assets, gain (loss) on non-designated hedges, interest expense, other income (loss), or income taxes.


19


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Unit Corporation

We have reviewed the accompanying unaudited condensed consolidated balance sheet of Unit Corporation and its subsidiaries as of June 30, 2015, and the related unaudited condensed consolidated statements of operations for the three-month and six month periods ended June 30, 2015 and 2014 and the unaudited condensed consolidated statement of cash flows for the six month periods ended June 30, 2015 and 2014. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying unaudited condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of operations, shareholder’s equity and of cash flows for the year then ended (not presented herein), and in our report dated February 24, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2014, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 
/s/ PricewaterhouseCoopers LLP
 
Tulsa, Oklahoma
August 4, 2015


20


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis (MD&A) provides an understanding of our operating results and financial condition by focusing on changes in certain key measures from year to year. We have organized MD&A into the following sections: 

General;
Business Outlook;
Executive Summary;
Financial Condition and Liquidity;
New Accounting Pronouncements; and
Results of Operations.

Please read the following discussion and our unaudited condensed consolidated financial statements and related notes with the information in our most recent Annual Report on Form 10-K.

Unless otherwise indicated or required by the content, when used in this report the terms “company,” “Unit,” “us,” “our,” “we,” and “its” refer to Unit Corporation or, as appropriate, one or more of its subsidiaries.

General

We operate, manage, and analyze our results of operations through our three principal business segments: 

Oil and Natural Gas – carried out by our subsidiary Unit Petroleum Company. This segment explores, develops, acquires, and produces oil and natural gas properties for our own account.
Contract Drilling – carried out by our subsidiary Unit Drilling Company and its subsidiaries. This segment contracts to drill onshore oil and natural gas wells for others and for our own account.
Mid-Stream – carried out by our subsidiary Superior Pipeline Company, L.L.C. and its subsidiaries. This segment buys, sells, gathers, processes, and treats natural gas for third parties and for our own account.

Business Outlook

As discussed in other parts of this report, the success of our consolidated business, and that of each of our three operating segments, depends, to a large extent, on: the prices we receive for and the amount of our oil, NGLs, and natural gas production; the demand for oil, NGLs, and natural gas; and, the demand for our drilling rigs which influences the amounts we can charge for those drilling rigs. Although all of our current operations are within the United States, events outside the United States can affect us and our industry.

Both within the United States and the world, deteriorating commodity prices have brought about significant and immediate changes affecting our industry and us. The decline in commodity prices has caused us (and other oil and gas companies) to reduce our level of drilling activity and spending. When drilling activity and spending decline for any sustained period of time the number of our drilling rigs working and the rates we charge for them also decline. In addition, lower commodity prices for any sustained period of time could affect the liquidity condition of some of our industry partners and customers, which might limit their ability to meet their financial obligations to us.

How long the current depressed prices for oil and natural gas products continue is uncertain. As noted elsewhere in this report, commodity prices are subject to several factors most of which are beyond our control.

The impact on our business and financial results because of the reduction in oil and NGLs (and to a lesser extent natural gas) prices is uncertain in the long term, but in the short term, it has had several consequences for us, including:

In March 2015, we incurred a non-cash ceiling test write-down of our oil and natural gas properties of $400.6 million pre-tax ($249.4 million net of tax) and in June 2015, we incurred a non-cash ceiling test write-down of our oil and natural gas properties of $410.5 million pre-tax ($255.6 million net of tax). We will experience a non-cash

21


ceiling test write-down in the third quarter of 2015. It is difficult to predict with reasonable certainty the amount of expected future impairments given the many factors impacting the ceiling test calculation including, but not limited to, future pricing, operating costs, drilling and completion costs, upward or downward reserve revisions, reserve adds, and tax attributes. Subject to these numerous factors and inherent limitations, holding these factors constant and only adjusting the 12-month average price to an estimated third quarter ending average (holding July 2015 prices constant for the remaining two months), we currently anticipate that we could recognize an impairment in the third quarter of 2015 of approximately $300 million.
We have reduced the number of gross wells we plan to drill in 2015 by approximately 68% - 73% from the number of gross wells drilled in 2014.
The majority of our drilling rig customers have significantly reduced their drilling budgets for 2015, resulting in a significant reduction in the average utilization of our drilling rig fleet. At December 31, 2014, we had 75 rigs operating, at June 30, 2015, this number was 32.
Due to the decline in NGLs prices, we operated our processing facilities in full ethane rejection mode which reduced the liquids sold. As long as NGLs prices continue to be at or below second quarter levels, we expect to continue operating in full ethane rejection mode. While processed volumes increased in the first quarter of 2015, they started to decline in the second quarter. As low commodity prices continue, we expect the reductions in drilling activity around our systems will reduce the number of new wells available to connect to our systems and result in lower processed volumes as production from wells previously connected naturally decline.

We have reduced our total 2015 capital budget for all three of our business segments by approximately 52% as compared to 2014, excluding acquisitions and ARO liability. Our budget is designed to keep our capital expenditures substantially within our anticipated cash flow.

Our 2015 current capital expenditures budget is based on realized prices for the year of $53.73 per barrel of oil, $17.03 per barrel of NGLs, and $3.18 per Mcf of natural gas. Our budget is subject to possible periodic adjustments for various reasons including changes in commodity prices and industry conditions. Funding for the budget will come primarily from our cash flow and borrowings under our credit agreement.

Executive Summary

Oil and Natural Gas

Second quarter 2015 production from our oil and natural gas segment was 5,054,000 barrels of oil equivalent (Boe) which was an decrease of 1% from the first quarter of 2015 and an increase of 9% over the second quarter of 2014. Production for the second quarter of 2015 was negatively impacted by approximately 125,000 Boe due to an unexpected shut-in of some of our production in East Texas due to maintenance of a third party's processing facility. The increases over the second quarter of 2014 were primarily from production associated with new wells drilled in 2014.

Second quarter 2015 oil and natural gas revenues increased 1% over the first quarter of 2015 and decreased 46% from second quarter of 2014, respectively. The increase over the first quarter of 2015 was primarily due to higher oil and NGLs prices and higher NGLs and natural gas production partially offset by lower oil production and natural gas prices. The decrease from the second quarter of 2014 was due primarily to lower oil, NGLs, and natural gas prices partially offset by higher NGLs and natural gas production.

Our oil prices for the second quarter of 2015 increased 15% compared to the first quarter of 2015 and decreased 41% from the second quarter of 2014. Our NGLs prices increased 39% over the first quarter of 2015 and decreased 60% from the second quarter of 2014. Our natural gas prices decreased 9% and 34% from the first quarter of 2015 and second quarter of 2014, respectively.

Operating cost per Boe produced for the second quarter of 2015 increased 3% over the first quarter of 2015 and decreased 6% from the second quarter of 2014. Costs increased between the second and first quarters of 2015 primarily due to higher gross production taxes due to higher sales revenue and fewer gross production tax credits somewhat offset by lower lease operating and workover expenses. The decrease from the second quarter of 2014 was primarily due to higher production volumes.


22


For the remainder of 2015, we have derivative contracts covering approximately 3,000 Bbls per day of oil production. We have hedged 70,000 MMBtu per day of natural gas production in the third quarter of 2015 and 40,000 MMBtu per day of natural gas production in the fourth quarter of 2015. The contracts for the oil production are a swap contract for 1,000 Bbls per day and a collar for 2,000 Bbls per day. The swap transaction was done at a comparable average NYMEX price of $95.00. The collar contract was done at a comparable average NYMEX floor price of $58.00 and a ceiling price of $64.40. The natural gas production in the third quarter is hedged by swaps for 40,000 MMBtu per day and collars for 30,000 MMBtu per day. The third quarter swap transactions were done at a comparable average NYMEX price of $3.98. The third quarter collar transactions were done at a comparable average NYMEX floor price of $2.58 and ceiling price of $3.04. The natural gas production in the fourth quarter is hedged by swaps for 40,000 MMBtu per day. The fourth quarter swap transactions were done at a comparable average NYMEX price of $3.98. 

For 2016, we have a derivative contract covering 10,000 MMBtu per day of natural gas production. That contract is a swap contract at a comparable average NYMEX price of $3.25.

As of June 30, 2015, we completed drilling 33 gross wells (21.85 net wells). For all of 2015, we plan to participate in the drilling of approximately 50-60 gross wells. Excluding acquisitions and ARO liability, our estimated 2015 capital expenditures for this segment are $308.5 million. Our current 2015 production guidance is approximately 18.6 to 19.0 MMBoe, an increase of 2% to 4% over 2014, although actual results continue to be subject to many factors.

Contract Drilling

The average number of drilling rigs we operated for the second quarter of 2015 was 30.7 compared to 50.1 and 73.5 in the first quarter of 2015 and the second quarter of 2014, respectively. Late in the fourth quarter of 2014, the number of our drilling rigs operating started to decline and has continued to decline throughout the first six months of 2015 due to lower commodity prices and operators reducing their drilling budgets. As of June 30, 2015, 32 drilling rigs are operating. We have recently been notified of a customer's intent to terminate early the contracts on two BOSS drilling rigs both of which are under term contracts that contain early termination penalties.

Revenue for the second quarter of 2015 decreased 42% and 52% from the first quarter of 2015 and the second quarter of 2014, respectively. The decreases were due primarily to fewer rigs operating. The second quarter of 2015 included early contract termination revenue of $1.6 million compared to $12.7 million in the first quarter of 2015. There was no early termination revenue during the second quarter of 2014.

Dayrates for the second quarter of 2015 averaged $19,881, a 1% decrease from the first quarter of 2015 and were essentially unchanged from the second quarter of 2014. The decrease from the first quarter of 2015 was due to downward pressure on dayrates with lower demand.

Operating costs for the second quarter of 2015 decreased 29% and 45% from the first quarter of 2015 and the second quarter of 2014, respectively. The decreases were due primarily to fewer rigs operating.

Low commodity prices continue to curtail our customer drilling budgets and demand for our drilling rigs. As a result, we are experiencing reduced drilling rig utilization. Almost all of our working drilling rigs in 2015 have been drilling horizontal or directional wells. Our drilling rig fleet consists of drilling rigs capable of meeting our customers' demands whether it be for oil, natural gas, or NGLs and whether it be for shallow, deep, vertical, or horizontal type drilling. Current and future demand for drilling rigs and the availability of drilling rigs to meet that demand will affect our future dayrates.

As of June 30, 2015, we had 32 drilling rigs operating. Of those, 18 are on spot market contracts and 14 are on term drilling contracts, with original terms ranging from six months to two years. Four term contracts are up for renewal in 2015 (three in the third quarter and one in the fourth quarter), seven are up for renewal in 2016, and three are up for renewal in 2017. Term contracts may contain a fixed rate for the duration of the contract or provide for rate adjustments within a specific range from the existing rate. Some operators who had signed term contracts have opted to release the drilling rig and pay an early termination penalty for the remaining term of the contract. During the first six months of 2015, we recorded $14.3 million in early termination fees.

During the second quarter of 2015, three BOSS drilling rigs were placed into service for third-party operators. We have completed our new build program for drilling rigs contracted for 2015 delivery. Some of the long lead time components for three additional BOSS drilling rigs were ordered during 2014 and will be delivered in the next twelve months. Currently, we do not have any contracts to build new BOSS drilling rigs. Our estimated 2015 capital expenditures for this segment are $99.7 million.

23



In December 2014, we removed from service 31 drilling rigs, some older top drives, and certain drill pipe no longer marketable under the current environment and based on estimated market value from third party assessments (Level 3 fair value measurement), we recorded a write-down of approximately $74.3 million pre-tax. During the first quarter of 2015, we sold one of these drilling rigs to an unaffiliated third party. The proceeds of this sale, less costs to sell, exceeded the $0.3 million net book value of the drilling rig resulting in a gain of $7,900. During the second quarter we decided to place the remaining 30 drilling rigs and most of the equipment for sale in an auction to be held during the third quarter. Any equipment not sold at the auction will be sold within the next twelve months. As a result, these assets have been classified as assets held for sale. Since December, the estimated fair value of the drilling rigs and other assets has declined based on the estimated market value from similar auctions. Based on these estimates, we recorded an additional write-down of approximately $8.3 million pre-tax during the second quarter. The proceeds from the sale of these assets, less costs to sell, is expected to be approximately $12.6 million.

Mid-Stream

Second quarter 2015 liquids sold per day increased 5% over the first quarter of 2015 and decreased 21% from the second quarter of 2014. The increase over the first quarter of 2015 was due to additional well connects. The decrease from the second quarter of 2014 was due to operating in ethane ejection mode in 2015. For the second quarter of 2015, gas processed per day decreased 2% from the first quarter of 2015 and increased 15% over the second quarter of 2014. The decrease from the first quarter was primarily due to reductions in drilling activity around our systems which has reduced the number of new wells available to connect to our systems. The increase over the second quarter of 2014 was primarily due to connecting new wells to both existing and newly constructed systems to replace production declines from wells already connected. For the second quarter of 2015, gas gathered per day increased 9% over the first quarter of 2015 and increased 11% over the second quarter of 2014 due to additional wells added to our systems.

NGLs prices in the second quarter of 2015 decreased 8% from the prices received in the first quarter of 2015 and decreased 45% from the prices received in the second quarter of 2014. Because certain contracts used by our mid-stream segment for NGLs transactions are percent of proceeds (POP) contracts–under which we receive a share of the proceeds from the sale of the NGLs–our revenues from those POP contracts fluctuate based on the price of NGLs.

Total operating cost for our mid-stream segment for the second quarter of 2015 decreased 8% from the first quarter of 2015 and decreased 48% from the second quarter of 2014 due to lower gas purchase prices.

We completed the connection of our Buffalo Wallow gathering system to our Hemphill County, Texas facility and delivered Buffalo Wallow gathered gas to the Hemphill processing facility on January 1, 2015. Our Hemphill facility has a total processing capacity of approximately 135 MMcf per day. During the second quarter of 2015, we added three new wells to this system and had an average throughput volume of 88 MMcf per day.

At our Perkins facility, our total processing capacity is now 27 MMcf per day after completing several projects to upgrade our processing capacity and increase liquid recoveries. During the second quarter of 2015, we connected four new wells to this system.

In the Mississippian play in north central Oklahoma, we continue to connect new wells and increase volumes on our Bellmon system. During the second quarter of 2015, we connected 12 new wells to this system. Our total processing capacity at this facility is approximately 90 MMcf per day from two cryogenic processing plant skids. During the second quarter, we had an average throughput volume of 41 MMcf per day at this facility.  

At our Segno gathering facility located in southeast Texas, we have several upgrade projects in process which will increase our gathering capacity up to 120 MMcf per day. We have completed the installation of additional dehydration equipment at this facility and are in the process of looping a section of pipeline. We are currently acquiring the right of way for the line looping project and expect to begin pipeline construction in the third quarter of 2015. This project is expected to be completed and operational by year end.

In the Appalachian region, we are continuing to expand the Pittsburgh Mills gathering system. We are completing the construction of an expansion project which extends our gathering system into Butler County, Pennsylvania. This project consists of a seven-mile pipeline with a related compressor station and provides us an additional outlet for our gas. The pipeline has been completed and we gathered gas from a new well pad connected to our system in the first quarter of 2015. Construction of the compressor station is underway and will be completed by the time compression services are required. This expansion project will allow us the ability to connect additional well pads scheduled to be drilled in 2015 and 2016.

24



Also in the Appalachian area, we recently began construction of the Snow Shoe gathering system. This is a new fee-based gathering system which will be located in Centre County, Pennsylvania and will consist of approximately seven miles of 16” and 24” pipeline and a related compressor station. The 16" pipeline is almost complete and we are continuing to work on the installation of the 24" pipeline. Construction is expected to be completed the fourth quarter of 2015. 

Our estimated 2015 capital expenditures for this segment are $68.4 million, excluding acquisitions.

Financial Condition and Liquidity

Summary

Our financial condition and liquidity depends on the cash flow from our operations and borrowings under our credit agreement. The principal factors determining our cash flow are:
 
the quantity of natural gas, oil, and NGLs we produce;
the prices we receive for our natural gas, oil, and NGLs production;
the demand for and the dayrates we receive for our drilling rigs; and
the fees and margins we obtain from our natural gas gathering and processing contracts.

 
 
Six Months Ended June 30,
 
%
Change (1)
 
 
2015
 
2014
 
 
 
(In thousands except percentages)
Net cash provided by operating activities
 
$
257,606

 
$
325,528

 
(21
)%
Net cash used in investing activities
 
(366,442
)
 
(379,107
)
 
(3
)%
Net cash provided by financing activities
 
108,626

 
36,064

 
NM

Net decrease in cash and cash equivalents
 
$
(210
)
 
$
(17,515
)
 
 
_______________________
(1)
NM - A percentage calculation is not meaningful due to a percentage greater than 200.

Cash Flows from Operating Activities

Our operating cash flow is primarily influenced by the prices for and the quantity of our oil, NGLs, and natural gas production; settlements of derivative contracts; third-party demand for our drilling rigs and mid-stream services; and the rates we can charge for those services. Our cash flows from operating activities are also affected by changes in working capital.

Net cash provided by operating activities in the first six months of 2015 decreased by $67.9 million from the first six months of 2014 due primarily to lower revenues due to lower commodity prices and lower utilization partially offset by changes in operating assets and liabilities related to the timing of cash receipts and disbursements.

Cash Flows from Investing Activities

We dedicate and expect to continue to dedicate a substantial portion of our capital expenditure program toward the exploration for and production of oil, NGLs, and natural gas. These capital expenditures are necessary to limit inherent declines in production, which is typical in the capital-intensive oil and natural gas industry.

Cash flows used in investing activities decreased by $12.7 million for the first six months of 2015 compared to the first six months of 2014. The change was due primarily to a decrease in capital expenditures partially offset by a decrease in the proceeds received from the disposition of assets. See additional information on capital expenditures below under Capital Requirements.


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Cash Flows from Financing Activities

Cash flows provided by financing activities increased by $72.6 million for the first six months of 2015 compared to the first six months of 2014. This increase was primarily due to borrowings under our credit agreement offset partially by a decrease in our book overdrafts (checks issued but not presented to our bank for payment before the end of the period).

At June 30, 2015, we had unrestricted cash totaling $0.8 million and had borrowed $280.5 million of the $500.0 million we had elected to then have available under our credit agreement. On April 10, 2015, we amended our credit agreement to extend the maturity date from September 13, 2016 to April 10, 2020. Our credit agreement is used primarily for working capital and capital expenditures.

The following is a summary of certain financial information as of June 30, 2015 and 2014 and for the six months ended June 30, 2015 and 2014:
 
 
June 30,
 
%
Change (1)
 
 
2015
 
2014
 
 
 
(In thousands except percentages)
Working capital
 
$
(11,366
)
 
$
(103,284
)
 
89
 %
Long-term debt
 
$
926,908

 
$
645,925

 
44
 %
Shareholders’ equity
 
$
1,823,600

 
$
2,294,687

 
(21
)%
Ratio of long-term debt to total capitalization
 
34
%
 
22
%
 
 
Net income (loss)
 
$
(522,743
)
 
$
111,305

 
NM

_______________________
(1)
NM - A percentage calculation is not meaningful due to a percentage greater than 200.

The following table summarizes certain operating information:
 
 
Six Months Ended
 
 
 
 
June 30,
 
%
Change
 
 
2015
 
2014
 
Oil and Natural Gas:
 
 
 
 
 
 
Oil production (MBbls)
 
2,046

 
1,760

 
16
 %
NGLs production (MBbls)
 
2,615

 
2,228

 
17
 %
Natural gas production (MMcf)
 
33,064

 
28,881

 
14
 %
Average oil price per barrel received
 
$
51.73

 
$
92.95

 
(44
)%
Average oil price per barrel received excluding derivatives
 
$
48.13

 
$
97.81

 
(51
)%
Average NGLs price per barrel received
 
$
10.37

 
$
34.57

 
(70
)%
Average NGLs price per barrel received excluding derivatives
 
$
10.37

 
$
34.57

 
(70
)%
Average natural gas price per Mcf received
 
$
2.80

 
$
4.14

 
(32
)%
Average natural gas price per Mcf received excluding derivatives
 
$
2.39

 
$
4.47

 
(47
)%
Contract Drilling:
 
 
 
 
 
 
Average number of our drilling rigs in use during the period
 
40.4

 
70.7

 
(43
)%
Total number of drilling rigs available for use at the end of the period
 
94

 
118

 
(20
)%
Average dayrate
 
$
20,032

 
$
19,766

 
1
 %
Mid-Stream:
 
 
 
 
 
 
Gas gathered—Mcf/day
 
348,666

 
315,116

 
11
 %
Gas processed—Mcf/day
 
187,592

 
155,807

 
20
 %
Gas liquids sold—gallons/day
 
584,389

 
737,353

 
(21
)%
Number of natural gas gathering systems (1)
 
27

 
38

 
(29
)%
Number of processing plants
 
13

 
14

 
(7
)%
_______________________ 
(1)
In January 2015, our mid-stream segment transferred nine natural gas gathering systems to our oil and natural gas segment.


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Working Capital

Typically, our working capital balance fluctuates, in part, because of the timing of our trade accounts receivable and accounts payable and the fluctuation in current assets and liabilities associated with the mark to market value of our derivative activity. We had negative working capital of $11.4 million and $103.3 million as of June 30, 2015 and 2014, respectively. This is primarily from the timing of our accounts payable associated with our capital expenditures. The effect of our derivative contracts increased working capital by $14.6 million as of June 30, 2015 and decreased working capital by $15.8 million as of June 30, 2014.

Oil and Natural Gas Operations

Any significant change in oil, NGLs, or natural gas prices has a material effect on our revenues, cash flow, and the value of our oil, NGLs, and natural gas reserves. Prices and demand for domestic natural gas are influenced by weather conditions, supply imbalances, and by worldwide oil price levels. Domestic oil prices are primarily influenced by global oil market developments. All of these factors are beyond our control and we cannot predict nor measure their future impact on the prices we will receive.

Based on our first six months of 2015 production, a $0.10 per Mcf change in what we are paid for our natural gas production, without the effect of derivatives, would cause a corresponding $528,000 per month ($6.3 million annualized) change in our pre-tax operating cash flow. The average price we received for our natural gas production, including the effect of derivatives, during the first six months of 2015 was $2.80 compared to $4.14 for the first six months of 2014. Based on our first six months of 2015 production, a $1.00 per barrel change in our oil price, without the effect of derivatives, would have a $330,000 per month ($4.0 million annualized) change in our pre-tax operating cash flow and a $1.00 per barrel change in our NGLs prices, without the effect of derivatives, would have a $419,000 per month ($5.0 million annualized) change in our pre-tax operating cash flow. In the first six months of 2015, our average oil price per barrel received, including the effect of derivatives, was $51.73 compared with an average oil price, including the effect of derivatives, of $92.95 in the first six months of 2014 and our first six months of 2015 average NGLs price per barrel received was $10.37 compared with an average NGLs price per barrel of $34.57 in the first six months of 2014.

Because commodity prices affect the value of our oil, NGLs, and natural gas reserves, declines in those prices can cause a decline in the carrying value of our oil and natural gas properties. In the first two quarters of 2015, the unamortized cost of our oil and gas properties exceeded the ceiling of our proved oil, NGLs, and natural gas reserves. As a result, we recorded in March of 2015 a non-cash ceiling test write down of $400.6 million pre-tax ($249.4 million, net of tax) and in June of 2015, we recorded a non-cash ceiling test write-down of $410.5 million pre-tax ($255.6 million, net of tax). At June 30, 2015, the 12-month average unescalated prices were $71.68 per barrel of oil, $30.54 per barrel of NGLs, and $3.39 per Mcf of natural gas, then adjusted for price differentials.

We will experience a non-cash ceiling test write-down in the third quarter of 2015. It is difficult to predict with reasonable certainty the amount of expected future impairments given the many factors impacting the ceiling test calculation including, but not limited to, future pricing, operating costs, drilling and completion costs, upward or downward reserve revisions, reserve adds, and tax attributes. Subject to these numerous factors and inherent limitations, holding these factors constant and only adjusting the 12-month average price to an estimated third quarter ending average (holding July 2015 prices constant for the remaining two months), we currently anticipate that we could recognize an impairment in the third quarter of 2015 of approximately $300 million. The estimated third-quarter 2015 impairment is partially the result of a decrease in our proved undeveloped reserves of approximately 23%. This decrease was primarily due to certain locations no longer being economical under the adjusted 12-month average price for the third quarter. As a result, we have eliminated those locations from our future development plans. Given the uncertainty associated with the factors used in calculating our estimate of both our future period ceiling test write-down and the decrease in our undeveloped reserves, these estimates should not necessarily be construed as indicative of our future development plans or financial results.

Price declines can also adversely affect future semi-annual determinations of the amount we can borrow under our credit agreement since that determination is based mainly on the value of our oil, NGLs, and natural gas reserves. Such a reduction could limit our ability to carry out our planned capital projects.

Our natural gas production is sold to intrastate and interstate pipelines and to independent marketing firms and gatherers under contracts with terms ranging from one month to five years. Our oil production is sold to independent marketing firms generally in six month increments.

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Contract Drilling Operations

Many factors influence the number of drilling rigs we are working at any given time and the costs and revenues associated with that work. These factors include the demand for drilling rigs in our areas of operation, competition from other drilling contractors, the prevailing prices for oil, NGLs, and natural gas, availability and cost of labor to run our drilling rigs, and our ability to supply the equipment needed.

Although our rig personnel are a key component to the overall success of our drilling services, with the present conditions existing in the drilling industry we do not anticipate increases in the compensation paid to those personnel in the near term.

Low commodity prices continue to curtail our customer drilling budgets and demand for our drilling rigs. As a result, we are experiencing reduced drilling rig utilization. Almost all of our working drilling rigs in 2015 have been drilling horizontal or directional wells. Our drilling rig fleet consists of drilling rigs capable of meeting our customers' demands whether it be for oil, natural gas, or NGLs and whether it be for shallow, deep, vertical, or horizontal type drilling. Current and future demand for drilling rigs and the availability of drilling rigs to meet that demand will affect our future dayrates. For the first six months of 2015, our average dayrate was $20,032 per day compared to $19,766 per day for the first six months of 2014. The average number of our drilling rigs used in the first six months of 2015 was 40.4 drilling rigs compared with 70.7 drilling rigs in the first six months of 2014. Based on the average utilization of our drilling rigs during the first six months of 2015, a $100 per day change in dayrates has a $4,040 per day ($1.5 million annualized) change in our pre-tax operating cash flow.

Our contract drilling segment also provides drilling services for our oil and natural gas segment. Some of the drilling services we perform on our properties are, depending on the timing of those services, deemed to be associated with acquiring an ownership interest in the property. In those cases, revenues and expenses for those drilling services are eliminated in our statement of operations, with any profit recognized as a reduction in our investment in our oil and natural gas properties. The contracts for these services are issued under the same conditions and rates as the contracts entered into with unrelated third parties. We eliminated revenue of $15.7 million and $39.2 million for the first six months of 2015 and 2014, respectively, from our contract drilling segment and eliminated the associated operating expense of $12.2 million and $26.8 million during the first six months of 2015 and 2014, respectively, yielding $3.5 million and $12.4 million during the first six months of 2015 and 2014, respectively, as a reduction to the carrying value of our oil and natural gas properties.

Mid-Stream Operations

Our mid-stream segment is engaged primarily in the buying, selling, gathering, processing, and treating of natural gas. It operates three natural gas treatment plants, 13 processing plants, 27 gathering systems, and approximately 1,450 miles of pipeline. It operates in Oklahoma, Texas, Kansas, Pennsylvania, and West Virginia. Besides serving third parties, this segment also enhances our ability to gather and market our own natural gas and NGLs and serving as a mechanism through which we can construct or acquire existing natural gas gathering and processing facilities. During the first six months of 2015 and 2014, our mid-stream operations purchased $33.0 million and $45.8 million, respectively, of our natural gas production and NGLs, and provided gathering and transportation services of $3.8 million and $5.1 million, respectively. Intercompany revenue from services and purchases of production between this business segment and our oil and natural gas segment has been eliminated in our unaudited condensed consolidated financial statements.

This segment gathered an average of 348,666 Mcf per day in the first six months of 2015 compared to 315,116 Mcf per day in the first six months of 2014. It processed an average of 187,592 Mcf per day in the first six months of 2015 compared to 155,807 Mcf per day in the first six months of 2014. The amount of NGLs sold was 584,389 gallons per day in the first six months of 2015 compared to 737,353 gallons per day in the first six months of 2014. Gas gathering volumes per day in the first six months of 2015 increased 11% compared to the first six months of 2014 primarily from an increase in the number of wells connected to our systems between the comparative periods. Processed volumes for the first six months of 2015 increased 20% over the first six months of 2014 due primarily to new wells connected. NGLs sold decreased 21% from the comparative period due to being in ethane rejection mode.

Our Credit Agreement and Senior Subordinated Notes

Credit Agreement. On April 10, 2015, we amended our Senior Credit Agreement (credit agreement) previously scheduled to mature on September 13, 2016. The amended credit agreement now has a maturity date of April 10, 2020. The amount we can borrow is the lesser of the amount we elect (from time to time) as the commitment amount or the value of the borrowing base as determined by the lenders (currently $725.0 million), but in either event not to exceed the maximum credit agreement

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amount of $900.0 million. Our current elected commitment amount is $500.0 million. We are charged a commitment fee ranging from 0.375 to 0.50 of 1% on the amount available but not borrowed. The fee varies based on the amount borrowed as a percentage of the amount of the total borrowing base. To date, for this new amendment, we paid $2.6 million in origination, agency, syndication, and other related fees. We are amortizing these fees over the life of the credit agreement.

The current lenders under our credit agreement and their respective participation interests are:
Lender
 
Participation
Interest
BOK (BOKF, NA, dba Bank of Oklahoma)
 
17
%
Compass Bank
 
17
%
BMO Harris Financing, Inc.
 
15
%
Bank of America, N.A.
 
15
%
Wells Fargo Bank, N.A.
 
8
%
Comerica Bank
 
8
%
CIBC
 
8
%
Toronto Dominion (New York), LLC
 
8
%
The Bank of Nova Scotia
 
4
%
 
 
100
%

The borrowing base amount–which is subject to redetermination by the lenders on April 1st and October 1st of each year–is based primarily on a percentage of the discounted future value of our oil and natural gas reserves. We or the lenders may request a onetime special redetermination of the borrowing base between each scheduled redetermination. In addition, we may request a redetermination following the completion of an acquisition that meets the requirements in the credit agreement.

At our election, any part of the outstanding debt under the credit agreement may be fixed at a London Interbank Offered Rate (LIBOR). LIBOR interest is computed as the sum of the LIBOR base for the applicable term plus 1.75% to 2.50% depending on the level of debt as a percentage of the borrowing base and is payable at the end of each term, or every 90 days, whichever is less. Borrowings not under LIBOR bear interest at the prime rate specified in the credit agreement that cannot be less than LIBOR plus 1.00%. Interest is payable at the end of each month and the principal may be repaid in whole or in part at any time, without a premium or penalty. At June 30, 2015 and July 24, 2015, borrowings were $280.5 million and $289.7 million, respectively.

We can use borrowings for financing general working capital requirements for (a) exploration, development, production, and acquisition of oil and gas properties, (b) acquisitions and operation of mid-stream assets, (c) issuance of standby letters of credit, (d) contract drilling services, and (e) general corporate purposes.

The credit agreement prohibits, among other things:

the payment of dividends (other than stock dividends) during any fiscal year over 30% of our consolidated net income for the preceding fiscal year;
the incurrence of additional debt with certain limited exceptions; and
the creation or existence of mortgages or liens, other than those in the ordinary course of business and with certain limited exceptions, on any of our properties, except in favor of our lenders.

The credit agreement also requires that we have at the end of each quarter:

a current ratio (as defined in the credit agreement) of not less than 1 to 1; and
a leverage ratio of funded debt to consolidated EBITDA (as defined in the credit agreement) for the most recently ended rolling four fiscal quarters of no greater than 4 to 1.

As of June 30, 2015, we were in compliance with the covenants in the credit agreement.

6.625% Senior Subordinated Notes. We have an aggregate principal amount of $650.0 million, 6.625% senior subordinated notes (the Notes). Interest on the Notes is payable semi-annually (in arrears) on May 15 and November 15 of each

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year. The Notes will mature on May 15, 2021. We incurred in connection with the issuance of the Notes $14.7 million of fees being amortized as debt issuance cost over the life of the Notes.

The Notes are subject to an Indenture dated as of May 18, 2011, between us and Wilmington Trust, National Association (successor to Wilmington Trust FSB), as Trustee (the Trustee), as supplemented by the First Supplemental Indenture dated as of May 18, 2011, between us, the Guarantors, and the Trustee, and as further supplemented by the Second Supplemental Indenture dated as of January 7, 2013, between us, the Guarantors, and the Trustee (as supplemented, the 2011 Indenture), establishing the terms and providing for issuing the Notes. The Guarantors are all of our direct and indirect subsidiaries. The discussion of the Notes in this report is qualified by and subject to the actual terms of the 2011 Indenture.

Unit, as the parent company, has no independent assets or operations. The guarantees by the Guarantors of the Notes
(registered under registration statements) are full and unconditional, joint and several, subject to certain automatic customary releases, are subject to certain restrictions on the sale, disposition, or transfer of the capital stock or substantially all of the assets of a subsidiary guarantor, and other conditions and terms set out in the Indenture. Any of our subsidiaries that are not Guarantors are minor. There are no significant restrictions on our ability to receive funds from any of our subsidiaries through dividends, loans, advances, or otherwise.

Before May 15, 2016, we may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make whole” premium, plus accrued and unpaid interest, if any, to the redemption date. On and after May 15, 2016, we may redeem all or, from time to time, a part of the Notes at certain redemption prices, plus accrued and unpaid interest. If a “change of control” occurs, subject to certain conditions, we must offer to repurchase from each holder all or any part of that holder’s Notes at a purchase price in cash equal to 101% of the principal amount of the Notes plus accrued and unpaid interest, if any, to the date of purchase. The 2011 Indenture contains customary events of default. The 2011 Indenture also contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to incur or guarantee additional indebtedness; pay dividends on our capital stock or redeem capital stock or subordinated indebtedness; transfer or sell assets; make investments; incur liens; enter into transactions with our affiliates; and merge or consolidate with other companies. We were in compliance with all covenants of the Notes as of June 30, 2015.

Capital Requirements

Oil and Natural Gas Segment Dispositions, Acquisitions, and Capital Expenditures. Most of our capital expenditures for this segment are discretionary and directed toward future growth. Our decisions to increase our oil, NGLs, and natural gas reserves through acquisitions or through drilling depends on the prevailing or expected market conditions, potential return on investment, future drilling potential, and opportunities to obtain financing under the circumstances involved, all of which provide us with flexibility in deciding when and if to incur these costs. We completed drilling 33 gross wells (21.85 net wells) in the first six months of 2015 compared to 85 gross wells (53.16 net wells) in the first six months of 2014. Total capital expenditures for oil and gas properties on the full cost method for the first six months of 2015, excluding a $6.0 million reduction in the ARO liability, totaled $167.6 million. Total capital expenditures for the first six months of 2014, excluding a $15.4 million reduction in the ARO liability, totaled $355.0 million.

Currently we plan to participate in drilling approximately 50-60 gross wells in 2015 and our total estimated capital expenditures (excluding any possible acquisitions) for this segment are approximately $308.5 million. Whether we can drill the full number of wells planned depends on several factors, many of which are beyond our control, including the availability of drilling rigs, availability of pressure pumping services, prices for oil, NGLs, and natural gas, demand for oil, NGLs, and natural gas, the cost to drill wells, the weather, and the efforts of outside industry partners.

Contract Drilling Segment Dispositions, Acquisitions, and Capital Expenditures. In December 2014, we removed from service 31 drilling rigs, some older top drives, and certain drill pipe no longer marketable under the current environment and based on estimated market value from third party assessments (Level 3 fair value measurement), we recorded a write-down of approximately $74.3 million pre-tax. During the first quarter of 2015, we sold one of these drilling rigs to an unaffiliated third party. The proceeds of this sale, less costs to sell, exceeded the $0.3 million net book value of the drilling rig resulting in a gain of $7,900. During the second quarter we decided to place the remaining 30 drilling rigs and most of the equipment for sale in an auction to be held during the third quarter. Any equipment not sold at the auction will be sold within the next twelve months. As a result, these assets have been classified as assets held for sale. Since December, the estimated fair value of the drilling rigs and other assets has declined based on the estimated market value from similar auctions. Based on these estimates, we recorded an additional write-down of approximately $8.3 million pre-tax during the second quarter. The proceeds from the sale of these assets, less costs to sell, is expected to be approximately $12.6 million.


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During the first quarter of 2015, two BOSS drilling rigs were placed into service for third-party operators. During the second quarter of 2015, three BOSS drilling rigs were placed into service for third-party operators. We have completed our new build program for drilling rigs for 2015 delivery. Some of the long lead time components for three additional BOSS drilling rigs were ordered during 2014 and will be delivered in the next twelve months. Currently, we do not have any contracts to build new BOSS drilling rigs.

Our estimated 2015 capital expenditures for this segment are $99.7 million. At June 30, 2015, we had commitments to purchase approximately $9.1 million for drilling equipment within the next year. We have spent $70.1 million for capital expenditures, including $53.8 million for the BOSS drilling rigs during the first six months of 2015, compared to $74.2 million for capital expenditures, including $39.1 million for the BOSS drilling rigs, during the first six months of 2014.

Mid-Stream Acquisitions and Capital Expenditures. We completed the connection of our Buffalo Wallow gathering system to our Hemphill County, Texas facility and delivered Buffalo Wallow gathered gas to the Hemphill processing facility on January 1, 2015. Our Hemphill facility has a total processing capacity of approximately 135 MMcf per day. During the second quarter of 2015, we added three new wells to this system and had an average throughput volume of 88 MMcf per day.

At our Perkins facility, our total processing capacity is now 27 MMcf per day after completing several projects to upgrade our processing capacity and increase liquid recoveries. During the second quarter of 2015, we connected four new wells to this system.

In the Mississippian play in north central Oklahoma, we continue to connect new wells and increase volumes on our Bellmon system. During the second quarter of 2015, we connected 12 new wells to this system. Our total processing capacity at this facility is approximately 90 MMcf per day from two cryogenic processing plant skids. During the second quarter, we had an average throughput volume of 41 MMcf per day at this facility.  

At our Segno gathering facility located in southeast Texas, we have several upgrade projects in process which will increase our gathering capacity up to 120 MMcf per day. We have completed the installation of additional dehydration equipment at this facility and are in the process of looping a section of pipeline. We are currently acquiring the right of way for the line looping project and expect to begin pipeline construction in the third quarter of 2015. This project is expected to be completed and operational by year end.

In the Appalachian region, we are continuing to expand the Pittsburgh Mills gathering system. We are completing the construction of an expansion project which extends our gathering system into Butler County, Pennsylvania. This project consists of a seven-mile pipeline with a related compressor station and provides us an additional outlet for our gas. The pipeline has been completed and we gathered gas from a new well pad connected to our system in the first quarter of 2015. Construction of the compressor station is underway and will be completed by the time compression services are required. This expansion project will allow us the ability to connect additional well pads scheduled to be drilled in 2015 and 2016.

Also in the Appalachian area, we recently began construction of the Snow Shoe gathering system. This is a new fee-based gathering system which will be located in Centre County, Pennsylvania and will consist of approximately seven miles of 16” and 24” pipeline and a related compressor station. The 16" pipeline is almost complete and we are continuing to work on the installation of the 24" pipeline. Construction is expected to be completed the fourth quarter of 2015. 

During the first six months of 2015, our mid-stream segment incurred $24.3 million in capital expenditures as compared to $16.3 million, excluding $26.5 million for capital leases added during the first six months of 2014. For 2015, our estimated capital expenditures are $68.4 million, excluding acquisitions.


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Contractual Commitments

At June 30, 2015, we had certain contractual obligations including:
 
 
Payments Due by Period
 
 
Total
 
Less
Than
1 Year
 
2-3
Years
 
4-5
Years
 
After
5 Years
 
 
(In thousands)
Long-term debt (1)
 
$
1,212,425

 
$
49,126

 
$
98,253

 
$
377,411

 
$
687,635