Fresh Start Accounting

12 Months Ended

Dec. 31, 2020

FRESH START ACCOUNTING

On the Effective Date, the company qualified for and adopted fresh start accounting under the provisions in FASB Topic ASC 852, Reorganizations, as (i) the Reorganization Value of the company’s assets immediately before the date of confirmation was less than the post-petition liabilities and allowed claims, and (ii) the holders of the Old Common Stock received less than 50% voting shares of the Successor. Refer to Note 2 – Emergence From Voluntary Reorganization Under Chapter 11 for the terms of the Plan.

Reorganization Value

Reorganization value, as determined under ASC 820, Fair Value Measurement, represents the fair value of the Successor's total assets before the consideration of liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after a restructuring. The reorganization value was derived from the Successor's enterprise value, which represents the estimated fair value of an entity’s long-term debt and equity. The Successor’s enterprise value, confirmed by the bankruptcy court, was estimated to be within a range of $270.0 million to $380.0 million, with a midpoint of $325.0 million. Based on the estimates and assumptions necessary for fresh start accounting, as further discussed below, the estimated enterprise value was determined to be $317.0 million before consideration of cash and cash equivalents, restricted

cash and outstanding debt at the Effective Date. As a result, the reorganization value was determined to be $726.3 million at the Effective Date, as reconciled below.

We estimated the enterprise value of the Successor using three valuation methods: net asset value (NAV), comparable public company analysis, and discounted cash flow (DCF). The NAV is a looking forward methodology under which future cash flows are discounted using various discount rates depending on reserve category. Similarly, DCF projects future cash flows which are discounted at rates above and below the company’s estimated weighted average cost of capital. The comparable public company analysis is based on the enterprise values of selected public companies with operating and financial characteristics comparable to the company. Under this methodology, certain financial multiples that measure financial performance and value are calculated for each selected company and then applied to imply an estimated enterprise value of the company.

The following table reconciles the enterprise value to the estimated fair value of the Successor's equity at the Effective Date (in thousands):


Enterprise value	$	559,205
Less: Fair value of noncontrolling interest	(242,200)
Enterprise value of Unit interests	317,005
Plus: Cash and cash equivalents	25,482
Plus: Restricted cash	7,458
Less: Fair value of capital leases	(4,622)
Less: Fair value of debt (including the fair value of current debt)	(148,000)
Fair value of Successor equity	$	197,323

The following table reconciles the enterprise value to the reorganization value of the Successor’s assets as of the Effective Date (in thousands):


Enterprise value	$	559,205
Plus: Cash and cash equivalents	25,482
Plus: Restricted cash	7,458
Plus: Current liabilities (excluding the fair value of capital leases and current debt)	86,897
Plus: Long-term asset retirement obligation	22,415
Plus: Other long-term liabilities (excluding long-term asset retirement obligation)	24,886
Reorganization value of Successor assets	$	726,343

Although we believe the assumptions and estimates used to develop the Enterprise Value and the Reorganization Value were reasonable and appropriate, different assumptions and estimates would materially impact the analysis and our resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require significant judgment.

Valuation Process

Oil and Natural Gas Properties

Our oil and natural gas properties are accounted for under the full cost accounting method. We determined the fair value of our oil and gas properties based on the anticipated cash flows associated with our proved reserves and discounted those cash flows using a weighted average cost of capital rate of 13.5%. The discount rate is commonly based on empirical studies of investment rates of return of publicly traded equity securities with investment return and risk characteristics similar to the subject company, which follows a market-based approach. Weighted average commodity prices used in determining the fair value of oil and natural gas properties were $48.98 per barrel of oil, $2.68 per million cubic feet of natural gas and $18.51 per barrel of oil equivalent of natural gas liquids. Base pricing was derived from an average of forward strip prices. Our unproved acreage was determined to have no value due to the capital constraints contained in our debt agreement along with our plans to not drill in our proved reserves cash flows. Our salt water disposal assets were included in the cash flows of the proved reserves forecast, therefore, those values are included in the total value of our proved properties.

Drilling Equipment

The value of our drilling rigs in operation (approximately $37.0 million) was estimated using an income-based approach using discounted free cash flows over the remaining useful lives of the drilling rigs. Anticipated cash flows associated with operating drilling rigs were discounted using a weighted average cost of capital rate of 13.8% for five years with a terminal value at the conclusion of the forecast period.

The fair value of our non-operating drilling rigs, and other related drilling equipment (approximately $26.5 million), was valued using a market-based approach with varying ranges of economic obsolescence rates to adjust for the impact of the oil and gas downturn.

Land and Building

Our corporate headquarters building in Tulsa, Oklahoma was completed in May 2016 and resides on approximately 30 acres. To determine its fair value, we used a market-based approach based on comparable tenant rates in our area.

Gas Gathering and Processing Equipment, Transportation Equipment, and Other Property

Gas gathering and processing equipment, transportation equipment and other equipment was valued using a market-based approach estimating what a market participant would pay for similar equipment in an orderly transaction. We used varying ranges of economic obsolescence rates depending on the underlying asset group. For pipelines and right-of-ways, we used a value per acre based on the location of the asset and estimated an average value of $129 per rod. We then applied an economic obsolescence rate of approximately 64% to determine the ultimate fair value.

Unit's Investment in Superior

To determine the net equity value of our investment in Superior, we simulated paths for Superior's total equity value through the expected liquidation date, where we simulated equity value using a Geometric Brownian Motion (GBM). The expected value (i.e., average of all simulations) of each security class was discounted to present value using the concluded risk-free rate to conclude on the respective allocated values.

Consolidated Balance Sheet

The adjustments included in the following Consolidated Balance Sheets reflect the effect of the transactions contemplated by the Plan (reflected in the column "Reorganization Adjustments") and fair value and other required accounting adjustments resulting from the adoption of fresh start accounting (reflected in the column "Fresh Start Adjustments"). The explanatory notes provide additional information with regard to the adjustments recorded, the methods used to determine the fair values and significant assumptions.


	As of September 1, 2020
	Predecessor		Reorganization Adjustments (1)			Fresh Start Adjustments (11)			Successor
ASSETS	(In thousands)
Current assets:
Cash and cash equivalents	$	32,280	$	(6,798)	(2)	$	—		$	25,482
Restricted cash	—		7,458		(3)	—			7,458
Accounts receivable, net	50,621		—			—			50,621
Materials and supplies	64		—			(64)		(12)	—
Current income tax receivable	850		—			—			850
Prepaid expenses and other	13,692		6,382		(4)	(990)		(13)	19,084
Total current assets	97,507		7,042			(1,054)			103,495
Property and equipment:
Oil and natural gas properties, on the full cost method:
Proved properties	6,539,816		—			(6,301,532)		(14)	238,284
Unproved properties not being amortized	30,205		—			(30,205)		(14)	—
Drilling equipment	1,285,024		—			(1,221,566)		(15)	63,458
Gas gathering and processing equipment	833,788		—			(583,690)		(15)	250,098
Saltwater disposal systems	43,541		—			(43,541)		(15)	—
Land and building	59,080		—			(26,445)		(15)	32,635
Transportation equipment	15,577		—			(12,263)		(15)	3,314
Other	57,427		—			(47,469)		(15)	9,958
	8,864,458		—			(8,266,711)			597,747
Less accumulated depreciation, depletion, amortization, and impairment	7,923,868		—			(7,923,868)		(14) (15)	—
Net property and equipment	940,590		—			(342,843)			597,747
Right of use asset	7,476		—			(659)		(16)	6,817
Other assets	24,666		(6,382)		(4)	—			18,284
Total assets	$	1,070,239	$	660		$	(344,556)		$	726,343


	As of September 1, 2020
	Predecessor		Reorganization Adjustments (1)			Fresh Start Adjustments (11)			Successor
LIABILITIES AND SHAREHOLDERS’ EQUITY	(In thousands)
Current liabilities:
Accounts payable	$	27,354	$	6,382	(4)	$	—		$	33,736
Accrued liabilities	36,990		(4,115)		(5)	—			32,875
Current operating lease liability	4,643		—			(669)		(16)	3,974
Current portion of long-term debt	124,000		(123,600)		(6)	—			400
Current derivative liabilities	5,089		—			—			5,089
Warrant liability	—		—			885		(17)	885
Current portion of other long-term liabilities	11,201		3,743		(7)	16		(18)	14,960
Total current liabilities	209,277		(117,590)			232			91,919
Long-term debt	16,000		131,600		(6)	—			147,600
Non-current derivative liabilities	766		—			—			766
Operating lease liability	2,760		—			11		(16)	2,771
Other long-term liabilities	61,393		(3,220)		(4) (7)	(14,409)		(18)	43,764
Liabilities subject to compromise	762,215		(762,215)		(8)	—			—
Deferred income taxes	4,466		—			(4,466)		(19)	—
Commitments and contingencies
Shareholders’ equity:
Predecessor preferred stock, $1.00 par value, 5,000,000 shares authorized, none issued at December 31, 2019	—		—			—			—
Predecessor common stock, $0.20 par value, 175,000,000 shares authorized, 55,443,393 shares issued as of December 31, 2019	10,704		(10,704)		(9)	—			—
Predecessor capital in excess of par value	650,153		(650,153)		(9)	—			—
Successor preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued at September 1, 2020	—		—			—			—
Successor common stock, $0.01 par value, 25,000,000 authorized, 12,000,000 issued at September 1, 2020	—		120		(8)	—			120
Successor capital in excess of par value	—		197,203		(8)	—			197,203
Retained earnings (deficit)	(818,679)		1,215,619		(10)	(396,940)		(20)	—
Total shareholders’ equity attributable to Unit Corporation	(157,822)		752,085			(396,940)			197,323
Non-controlling interests in consolidated subsidiaries	171,184		—			71,016		(21)	242,200
Total shareholders' equity	13,362		752,085			(325,924)			439,523
Total liabilities and shareholders’ equity	$	1,070,239	$	660		$	(344,556)		$	726,343

Reorganization Adjustments

(1)Reflects accounts recorded as of the Effective Date, including among other items, settlement of the Predecessor's liabilities subject to compromise, cancellation of the Predecessor's equity, issuance of the New Common Stock and the Warrants, repayment of certain of Predecessor's liabilities and settlement with holders of the Notes.

(2)The table below details the company’s uses of cash, under the terms of the Plan described in Note 2 – Emergence From Voluntary Reorganization Under Chapter 11 (in thousands):


Funding of the professional fees escrow account	$	(7,458)
Proceeds from Exit credit facility	8,000
Payment of debt issuance costs on the Exit credit facility	(3,225)
Payment of professional fees	(3,943)
Payment of accrued interest payable under the Predecessor credit facility	(172)
Changes in cash and cash equivalents	$	(6,798)

(3)Represents the reserve for professional fee escrow of $7.5 million.

(4)Represents the reclassification of other long-term assets related to deferred compensation to prepaid expenses and other assets as the deferred compensation payout must be paid within 12 months from the date of emergence under the Plan. Simultaneously, the current portion of deferred compensation liability was reclassified from other long-term liabilities to accounts payable.

(5)Represents the payment of the DIP facility interest of $0.2 million and professional fees for $3.9 million.

(6)Represents the transition of the DIP Credit Agreement and the Predecessor Credit Agreement of $124.0 million into the Exit Facility and issuing an additional $8.0 million of borrowings under the Exit Credit Agreement.

(7)Represents the reclassification of the short-term portion of the separation benefit liabilities from non-current to current liabilities which was offset by the increase in non-current portion of liabilities.

(8)Settlement of liabilities subject to compromise and the resulting net gain were determined as follows (in thousands):


Liabilities subject to compromise before the Effective Date:
6.625% senior subordinated notes due 2021 (including accrued interest as of the petition date)	$	672,369
Accounts payable	1,179
Employee separation benefit plan obligations	23,394
Litigation settlements	45,000
Royalty suspense accounts payable	20,273
Total liabilities subject to compromise	762,215
Separation settlement treatment	(6,905)
Successor Common Stock and APIC(1) issued to allowed claim holders	(175,521)
Successor Common Stock and APIC for disputed claims reserve	(11,936)
Gain on settlement of liabilities subject to compromise	$	567,853

(1) Balance excludes the Successor Common Stock and APIC of $9.9 million to the 5% Equity Facility which was not a liability subject to compromise.

(9)Represents the cancellation of Old Common Stock.

(10)Represents the cumulative impact to Predecessor retained earnings of the reorganization adjustments described above.

Fresh Start Adjustments

(11)Reflects accounts recorded as of the Effective Date for the fresh start adjustments based on the methodologies noted below.

(12)Represents the reclassification of materials and supplies to proved properties.

(13)Represents the write off of the Predecessor's unamortized debt fees related to the DIP facility.

(14)Reflects a decrease of oil and natural gas properties, net, based on the methodology discussed above, and the elimination of accumulated depletion and amortization. The following table summarizes the components of oil and natural gas properties as of the Effective Date:


	Successor		Predecessor
	Fair Value		Historical Book Value
	(In thousands)
Proved properties	$	238,284	$	6,539,816
Unproved properties	—		30,205
	238,284		6,570,021
Less accumulated depletion, amortization, and impairment	—		(6,305,113)
	$	238,284	$	264,908

(15)Reflects a decrease in fair value of drilling equipment, gas gathering and processing equipment, saltwater disposal systems, land and building, transportation equipment, and other property and equipment and the elimination of accumulated depreciation, based on the methodologies discussed above. The following table summarizes the components of other property and equipment as of the Effective Date:


	Successor		Predecessor
	Fair Value		Historical Book Value
	(In thousands)
Drilling equipment	$	63,458	$	1,285,024
Gas gathering and processing equipment	250,098		833,788
Saltwater disposal systems	—		43,541
Land and building	32,635		59,080
Transportation equipment	3,314		15,577
Other	9,958		57,427
	359,463		2,294,437
Less accumulated depreciation and impairment	—		(1,618,754)
	$	359,463	$	675,683

(16)Reflects the valuation adjustments to the company’s right of use assets, current operating lease liability, and operating lease liability, adjusted for fair value of favorable and unfavorable lease terms, and the revised incremental borrowing rates of the Successor.

(17)Represents the liability for the Warrants using a Black-Scholes-Merton model which uses various market-based inputs including: stock prices, strike price, time to maturity, risk-free rate, annual volatility rate, and annual dividend yield.

(18)Represents the reclassification of the short-term portion of ARO from non-current liabilities to current and the fair value adjustment, which was determined using our fresh start updates to these obligations, including the application of the Successor's credit adjusted risk free rate, which now incorporates a term structure based on the estimated timing of well plugging activity, and resetting all ARO to a single layer.

(19)Represents the adjustments to deferred tax liability as a result of the cumulative tax impact of the fresh start adjustments.

The significant revisions to the carrying value of our assets and liabilities because of applying fresh start accounting resulted in the company increasing its overall net deferred tax asset position on emergence from bankruptcy. Besides the changes in book value, the company has as of the Effective Date, approximately $726.4 million of net operating losses (NOLs) carried forward to offset taxable income in the future years. Approximately $584.2 million of this NOL will expire commencing in fiscal 2021 through 2037. The NOLs of approximately $142.2 million from years ended

after December 31, 2017 have an indefinite carryforward period. The amount of these NOLs which is available to offset future income may be severely limited due to change-in-control tax provisions.

Because of our history of operating losses and the uncertainty surrounding the realization of the deferred tax assets in future years, we have determined that it is more likely than not that the deferred tax assets will not be realized in future periods. Accordingly, we recorded a 100% valuation allowance against our net deferred tax assets.

(20)Represents the cumulative impact of the fresh start accounting adjustments discussed above.

(21)The valuation of the non-controlling interest was calculated by taking an income-based approach in valuing Superior. The value of the non-controlling interest was then determined based on a market-based approach for similar type investments, given the contractual rights of the related parties.

Reorganization Items. As described below in Note 4 – Summary Of Significant Accounting Policies, our Consolidated Statements of Operations for the periods ended August 31, 2020 and December 31, 2020 include "Reorganization items, net," which reflects gains recognized on the settlement of liabilities subject to compromise and costs and other expenses associated with the Chapter 11 proceedings, primarily professional fees, and the costs associated with the DIP Credit Agreement. These post-petition costs for professional fees, and administrative fees charged by the U.S. trustee, have been reported in "Reorganization items, net" in our Consolidated Statements of Operations as described above. Similar costs were incurred during the pre-petition period have been reported in "General and administrative" expenses.

The following table summarizes the components included in "Reorganization items, net" in our Consolidated Statements of Operations for the periods presented:


	Successor		Predecessor
	Four Months Ended		Eight Months Ended
	December 31, 2020		August 31, 2020
	(In thousands)
Gains on settlement of liabilities subject to compromise	$	—	$	(567,853)
Fresh start accounting adjustments	—		401,406
Legal and professional fees and expenses	2,273		15,745
Acceleration of Predecessor stock compensation expense	—		1,431
Exit Facility fees	—		3,225
5% Exit Facility equity fee	—		9,866
Adjustment to unamortized debt issuance costs associated with the 6.625% senior subordinated notes due 2021	—		2,205
Total reorganization items, net	$	2,273	$	(133,975)