SUPERIOR INVESTMENT

12 Months Ended

Dec. 31, 2022

Variable Interest Entity Arrangements [Abstract]

On April 3, 2018, we sold 50% of the ownership interest in Superior to SP Investor Holdings, LLC (SP Investor), a holding company jointly owned by OPTrust, and funds managed and/or advised by Partners Group, a global private markets investment manager. Superior is governed and managed under the Amended and Restated Limited Liability Company Agreement (Agreement) and Amended and Restated Master Services and Operating Agreement (MSA). The MSA was between our wholly-owned subsidiary, SPC Midstream Operating, L.L.C. (the Operator), and Superior. As the Operator, we provided services, such as operations and maintenance support, accounting, legal, and human resources to Superior for a monthly service fee of $0.3 million. Superior's creditors have no recourse to our general credit. Unit is not a party to and does not guarantee Superior's credit agreement. The obligations under Superior's credit agreement are secured by, among other things, mortgage liens on certain of Superior’s processing plants and gathering systems.

Distributions. The Agreement specifies how future distributions are to be allocated among Unit Corporation and SP Investor (the Members). Distributions from Available Cash (as defined in the Agreement) were generally split evenly between the Members prior to December 31, 2021, when the three-year period for Unit's commitment to spend $150.0 million (Drilling Commitment Amount) to drill wells in the Granite Wash/Buffalo Wallow area ended. The total amount spent by Unit towards the Drilling Commitment Amount was $24.6 million. Accordingly, SP Investor will receive 100% of Available Cash distributions related to periods subsequent to December 31, 2021 until the $72.7 million Drilling Commitment Adjustment Amount (as defined in the Agreement) is satisfied.

The following table presents the distributions paid by Superior to each of the members during the years ended December 31, 2022 and 2021:


Date	Recipient	Amount
2022
October 31, 2022	SP Investor	$16.2 million
July 29, 2022	SP Investor	$13.9 million
April 29, 2022	SP Investor	$10.5 million
January 31, 2022	Unit Corporation	$9.5 million
January 31, 2022	SP Investor	$9.5 million
2021
October 29, 2021	Unit Corporation	$7.0 million
October 29, 2021	SP Investor	$7.0 million
July 30, 2021	Unit Corporation	$3.8 million
July 30, 2021	SP Investor	$3.8 million
April 30, 2021	Unit Corporation	$12.3 million
April 30, 2021	SP Investor	$12.3 million

Superior also paid distributions to SP Investor of $11.1 million in January 2023 which reduced the remaining Drilling Commitment Adjustment Amount to $20.9 million.

Sale Event. After April 1, 2023, either Member may initiate a sale process of Superior to a third-party or a liquidation of Superior's assets (Sale Event). In a Sale Event, the Agreement generally requires cumulative distributions to SP Investor in excess of its original $300.0 million investment sufficient to provide SP Investor a 7% internal rate of return on its capital contributions to Superior before any liquidation distribution is made to Unit. As of December 31, 2022, liquidation distributions paid first to SP Investor of $335.2 million would be required for SP Investor to reach its 7% Liquidation IRR Hurdle at which point Unit would then be entitled to receive up to $335.2 million of the remaining liquidation distributions to satisfy Unit's 7% Liquidation IRR Hurdle with any remaining liquidation distributions paid as outlined within the Agreement.

On February 21, 2023, we entered into a letter agreement (the “Letter Agreement”) with SP Investor under which the Company has agreed to sell all of its 50% ownership interest in Superior for $20.0 million. The Letter Agreement provides that SP Investor will pay Unit $12.0 million at closing and $8.0 million in deferred proceeds to be paid no later than 12 months from closing, subject to Unit's satisfaction of certain ongoing covenant obligations and other customary conditions.

Consolidation. From April 3, 2018 to March 1, 2022, we treated Superior as a variable interest entity (VIE) because the equity holders as a group (Unit Corporation and SP Investor) lacked the power to control without the Operator. The Agreement and MSA gave us the power to direct the activities that most significantly affect Superior's operating performance through common control of the Operator. Accordingly, Unit was considered the primary beneficiary and consolidated the financial position, operating results, and cash flows of Superior.

Effective March 1, 2022, the employees of the Operator were transferred to Superior and the MSA was amended and restated to remove the operating services the Operator was providing to Superior. There was no change to the monthly service fee for shared services. The power to direct the activities that most significantly affect Superior's operating performance is now shared by the equity holders (Unit Corporation and SP Investor) rather than held by the Operator. Superior no longer qualifies as a VIE subsequent to these amendments and we no longer consolidate the financial position, operating results, and cash flows of Superior as of, and subsequent to, March 1, 2022.

We subsequently account for our investment in Superior as an equity method investment using the hypothetical liquidation book value (HLBV) method, which is a balance sheet approach that calculates the change in the hypothetical amount Unit and SP Investor would be entitled to receive if Superior were liquidated at book value at the end of each period, adjusted for any contributions made and distributions received during the period. We recognized no equity earnings from our investment in Superior during the year ended December 31, 2022.

Estimated Fair Value of Equity Method Investment in Superior. As of the Emergence Date, in conjunction with fresh start accounting under ASC Topic 852, Reorganizations, the estimated fair value of the net equity attributable to Unit's ownership interest in Superior was $14.8 million. Since then, Unit has received cumulative distributions from Superior of $32.6 million, which were recognized as net income attributable to Unit under the HLBV method. As of March 1, 2022, upon deconsolidation of Superior, the fair value of our retained equity method investment in Superior was estimated at $1.7 million. To estimate this fair value, we simulated paths for Superior's total equity value through the potential sales process initiation date using a Geometric Brownian Motion. The expected value (i.e., average of all simulations) of each security class was then discounted to present value using the relevant risk-free rate. The simulations reflect forecasted future cash distributions as impacted by the Drilling Commitment Adjustment Amount described above, as well as the future liquidation preference of each investor in a potential Sale Event also as described above. We consider this a Level 3 measurement within the fair value hierarchy as the discounted simulation models require the use of significant unobservable inputs.

We recognized a $13.1 million loss on deconsolidation during the three months ended March 31, 2022 as the difference between the $1.7 million estimated fair value of our retained equity method investment in Superior as of March 1, 2022 and Superior's net equity attributable to Unit's ownership interest prior to deconsolidation.

Superior Balance Sheet Disclosure. The amounts below reflect the Superior balance sheet accounts, without elimination of intercompany receivables from and payables to Unit, consolidated in our consolidated balance sheets as of December 31, 2021 which was the last reporting date as of which we consolidated the financial position of Superior:


	December 31, 2021
	(In thousands)
Current assets:
Cash and cash equivalents	$	17,246
Accounts receivable	42,628
Prepaid expenses and other	1,263
Total current assets	61,137
Property and equipment:
Gas gathering and processing equipment	274,748
Transportation equipment	2,801
	277,549
Less accumulated depreciation, depletion, amortization, and impairment	53,792
Net property and equipment	223,757
Right of use asset	3,485
Other assets	2,226
Total assets	$	290,605

Current liabilities:
Accounts payable	$	34,010
Accrued liabilities	5,292
Current operating lease liability	1,450
Current portion of other long-term liabilities	1,548
Total current liabilities	42,300
Long-term debt	19,200
Operating lease liability	2,036
Total liabilities	$	63,536

Affiliate Activity. UPC's oil and natural gas revenues with Superior totaled $67.1 million and $48.0 million during the years ended December 31, 2022 and 2021, respectively. UPC's gas gathering and processing expenses with Superior totaled $2.7 million and $3.3 million during the years ended December 31, 2022 and 2021, respectively. Portions of this activity was eliminated for the periods during which Superior was consolidated by Unit.