Unit Corporation: The First Dividend Has Arrived

Unit Corporation Announces Its First Special Dividend

A great sign of success in stabilizing cash flows for companies in a turnaround situation is when they announce their first dividend. This could be after a cut to preserve capital or, in the case of Unit Corporation (OTCPK:UNTC), the first dividend after coming out of bankruptcy. The announcement of a $ 10-a-share special dividend is a whopper. While many fret that dividends such as these could take away a big chunk of capital appreciation after capital within the company leaves the stock and into investors’ hands, it should be viewed as a great first step in the turnaround.

Since my previous article on Unit Corporation, the stock has returned 13.7%, edging out the S&P 500 slightly during that period. Over one year, this small-cap has returned more than 90%!

While I do invest in oil stocks when I see something obvious that I like, I buy and hold. This was the case with Exxon Mobil (XOM) back in 2020 when it was trading well under book value. Exxon remains my biggest holding at the time of this article. On the flip side, I would not consider myself an oil and gas expert by any means. I am an avid Joel Greenblatt Magic Formula indexer and tracker. These are the stocks ranked by earnings yield score plus ROIC. The two percentages are added together in the screener to reveal a score, the higher the better.

Unit Corporation continues to screen in the top 30 stocks in the entire stock market according to this metric. Over the value stocks that I sifted through last year using PEG ratios, The Graham Number, or the Greenblatt scores, The Greenblatt Magic Formula stocks have been the most successful. This would include stocks like Nucor (NUE), Moderna (MRNA), and Steel Dynamics (STLD).

Story up until now

The company’s operations are divided into three segments as listed on their most recent 10-Q:

We are primarily engaged in the development, acquisition, and production of oil and natural gas properties, the land contract drilling of natural gas and oil wells, and the buying, selling, gathering, processing, and treating of natural gas. Our operations are all in the United States and are organized in the following three reporting segments: (1) Oil and Natural Gas, (2) Contract Drilling, and (3) Mid-Stream.

• Oil and Natural Gas. Carried out by our subsidiary, Unit Petroleum Company (UPC), we develop, acquire, and produce oil and natural gas properties for our own account. Our producing oil and natural gas properties, unproved properties, and related assets are primarily located in Oklahoma and Texas, and to a lesser extent, in Arkansas, Kansas, Louisiana, and North Dakota.

• Contract Drilling. Carried out by our subsidiary, Unit Drilling Company (UDC), we drill onshore oil and natural gas wells for a wide range of other oil and natural gas companies as well as for our own account. Our drilling operations are primarily located in Oklahoma, Texas, New Mexico, Wyoming, and North Dakota.

• Mid-Stream. Carried out by Superior of which we own 50%, buys, sells, gathers, transports, processes, and treats natural gas for UPC and for third parties. Mid-Stream operations are primarily located in Oklahoma, Texas, Kansas, Pennsylvania, and West Virginia.

I made the point in my previous article that finding small-cap oil companies that have direct and passive ownerships in up, down and midstream segments is a rarity indeed. They have been in business since 1963 and fell on hard times during Covid as many oil and gas companies did. The length of time the company has been around and the lessons that they have learned along the way are other factors that attract me to Unit Corporation.

Magic Formula Number

When using the Magic Formula, I like to not only take the top 30 stocks in the market cap segment I’m interested in and index them, but also make an excel spreadsheet so I can rank them in order myself. I use EBIT/EV for earnings yield and my brokerage numbers on ROIC for the other score. If your brokerage does not provide ROIC data, Joel Greenblatt recommends you use ROA as a proxy. A score over 20 is solid, indicating a possible combination of an earnings yield of 10% and an ROIC of 10% in a perfect scenario. For reference, the stock market average of a P/E of 15 would be equivalent to an earnings yield of 6.6%. To demonstrate, if we have a stock with a TTM EPS of 10 and multiply that by 15 we get $150. On the inverse, we would divide $10 by $150 to get 6.6%.

Looking at the MRQ data for Unit Corporation, let’s first delve into the data for EBIT and Enterprise Value:

Current EBIT is $267.124 million for the trailing twelve months. The other input is enterprise value:

With an Enterprise Value of $452 million, we divide our EBIT of $267.124 million by the EV of $452 million to get an earnings yield of 59%. While the Little Book That Beats The Market teaches us to use EPS/SP, the screener itself verifiably has a few stocks with low to negative EPS, but positive EBIT and EBITDA. This way we can still screen for companies that may have write-offs hiding earnings. In the case of Unit Corporation, there is not a huge divergence between the two.

Getting on my brokerage to screen for ROIC results, the company is currently averaging 24.54% for the fiscal year. Add the two together and you get a score of 83.54. While one popular value writer, Tobias Carlisle has tried to throw shade at Greenblatt’s screener, saying that it shows companies at the top of their cycle which may be the worst time to buy, I haven’t seen that to be the case amongst stocks that are not in the large or mega-cap categories.

Debt

With $179.06 million in cash on the balance sheet and almost no debt, this balance sheet is enviable. With $18 in cash per share mrq, the $10 payout per share would still leave the company with $80 million in cash and only $7.03 Million in debt. These are great numbers if the trend continues into the future.

Dividend

Information about the special dividend can be found on the most recent 8-K SEC filing:

On January 5, 2023, Unit Corporation (the Company) issued a press release announcing the declaration of a special cash dividend of $10.00 per share and has approved a quarterly cash dividend policy beginning in the Company’s second quarter. The special dividend will be paid on January 31, 2023, to shareholders of record as of the close of business on January 20, 2023. The initial quarterly dividend will be $2.50 per share to be paid on a date in the Company’s second quarter that is yet to be determined. Subsequent quarterly dividends will be issued on a variable rate per share basis as determined by the Company. The special and quarterly cash dividends will be funded by cash on the Company’s balance sheet.

A $10 dividend for holders of this stock from the reorganization till now is massive. The stock was initially listed at $7 a share, so the $10 dividend would be more than a 100% return on capital. Even at today’s price of $62 a share, the return is over 16%. The $2.50 quarterly dividend also mentioned if sustained would maintain a 16% yield at current prices. These future quarterly payments will be variable, so we’ll need to watch the free cash flow. At today’s performance benchmark, it doesn’t look like a difficult task.

A TTM estimate of Unit Corporation’s free cash flow sits at $139.9 million. A $2.5 a share quarterly dividend with 10.05 million shares outstanding is a $25.125 million dividend liability per quarter or $100 million per annum. This would be a payout ratio of 71%. Looking at the previous numbers, it seems the company is satisfied with around $30 million in free cash flow available to expand the business and service debt. Anything above that might be available for a dividend payment.

Catalysts

As many commenters in the community have pointed out, an up-listing from pink sheets to one of the major exchanges would be a boon. While the company has only existed in its current form since 2021, a market cap that gets pushed above the $1 Billion mark may be a good point to consider footing the cost and applying to up-list. The liquidity in the equity and the ability to sell debt if needed would be helpful. However, oil and gas is currently a money printer, with most businesses able to self-sustain on very little debt. The cost to up-list, including legal fees and other costs associated with the bank that handles the IPO, might be a tad too early. The per-share value is certainly high enough, but the need from a business perspective versus a shareholder perspective is not there yet.

Risks

The cratering of oil and gas prices is an issue for any company in this sector. Prices have already come down quite a bit from their highs:

Using WTI crude as a proxy average for oil and natural gas prices, we can see the prices leveling off considerably, returning to February 2022 prices. Looking at UNTC’s March 22 EBIT of $58 million versus the next quarter, when oil&gas prices were the highest, resulted in $68 million in EBIT for the June 30 2022 quarter. We can expect uneven results unless some assets are sold to produce greater income. I would expect EBIT to be somewhere below $60 million and above $50 million a quarter at today’s prices for oil and gas.

The near-term risk of further price declines still does not seem to be there. Soon, China travel and commerce will be back to normal and OPEC has hinted at production cuts, although the December 22 numbers tell a different story.

Conclusion

I still like and own this stock. With little debt and a high conversion rate of EBITDA to free cash flow, the start of dividend payments looks promising. Being that the company has almost no debt to service, a 70+% payout is not out of the question for the foreseeable future. This is one of the cheapest oil and gas plays. The company itself doesn’t reveal a whole lot about management’s projections or have frequent news releases. We as investors have to rely on the numbers. At 4 X earnings and a quarterly dividend that could result in almost a 16% per annum payout, the stock is a buy at these levels.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.