|
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d)
|
|
OF
THE SECURITIES EXCHANGE ACT OF
1934
|
|
OR
|
|
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d)
|
|
OF
THE SECURITIES EXCHANGE ACT OF
1934
|
|
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)
|
Yes
[x]
|
No
[ ]
|
Large
accelerated filer [x]
|
Accelerated filer [ ]
|
Non-accelerated
filer [ ]
|
Yes
[ ]
|
No
[x]
|
Page
|
|||
Number
|
|||
PART
I. Financial Information
|
|||
Item
1.
|
Financial
Statements (Unaudited)
|
||
Condensed
Consolidated Balance Sheets
|
|||
September
30, 2007 and December 31, 2006
|
3
|
||
Condensed
Consolidated Statements of Income
|
|||
Three
and Nine Months Ended September 30, 2007 and 2006
|
5
|
||
Condensed
Consolidated Statements of Cash Flows
|
|||
Nine
Months Ended September 30, 2007 and 2006
|
6
|
||
Condensed
Consolidated Statements of Comprehensive Income
|
|||
Three
and Nine Months Ended September 30, 2007 and 2006
|
7
|
||
Notes
to Condensed Consolidated Financial Statements
|
8
|
||
Report
of Independent Registered Public Accounting Firm
|
18
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial
|
||
Condition
and Results of Operations
|
19
|
||
Item
3.
|
Quantitative
and Qualitative Disclosure about Market Risk
|
37
|
|
Item
4.
|
Controls
and Procedures
|
37
|
|
PART
II. Other Information
|
|||
Item
1.
|
Legal
Proceedings
|
38
|
|
Item
1A.
|
Risk
Factors
|
38
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
38
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
38
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
38
|
|
Item
5.
|
Other
Information
|
38
|
|
Item
6.
|
Exhibits
|
38
|
|
Signatures
|
39
|
September
30,
|
December
31,
|
||||||||
2007
|
2006
|
||||||||
(In
thousands)
|
|||||||||
ASSETS
|
|||||||||
Current
Assets:
|
|||||||||
Cash
and cash equivalents
|
$
|
853
|
$
|
589
|
|||||
Restricted
cash
|
19
|
18
|
|||||||
Accounts
receivable, net of allowance for doubtful accounts of $3,350 at September
30, 2007 and $1,600 at
December 31, 2006
|
165,392
|
200,415
|
|||||||
Materials
and supplies
|
16,932
|
18,901
|
|||||||
Other
|
16,388
|
13,017
|
|||||||
Total
current assets
|
199,584
|
232,940
|
|||||||
Property
and Equipment:
|
|||||||||
Drilling
equipment
|
948,125
|
781,190
|
|||||||
Oil
and natural gas properties, on the full cost
|
|||||||||
method:
|
|||||||||
Proved
properties
|
1,528,655
|
1,330,010
|
|||||||
Undeveloped
leasehold not being amortized
|
66,327
|
53,687
|
|||||||
Gas
gathering and processing equipment
|
110,530
|
85,339
|
|||||||
Transportation
equipment
|
22,400
|
20,749
|
|||||||
Other
|
19,618
|
17,082
|
|||||||
2,695,655
|
2,288,057
|
||||||||
Less
accumulated depreciation, depletion, amortization
|
|||||||||
and
impairment
|
874,069
|
735,394
|
|||||||
Net
property and equipment
|
1,821,586
|
1,552,663
|
|||||||
Goodwill
|
62,808
|
57,524
|
|||||||
Other
Intangible Assets, Net
|
14,960
|
17,087
|
|||||||
Other
Assets
|
14,523
|
13,882
|
|||||||
Total
Assets
|
$
|
2,113,461
|
$
|
1,874,096
|
September
30,
|
December
31,
|
||||||||
2007
|
2006
|
||||||||
(In
thousands)
|
|||||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||||
Current
Liabilities:
|
|||||||||
Accounts
payable
|
$
|
94,439
|
$
|
92,125
|
|||||
Accrued
liabilities
|
43,280
|
52,166
|
|||||||
Income
taxes payable
|
—
|
2,956
|
|||||||
Contract
advances
|
3,231
|
5,061
|
|||||||
Current
portion of other liabilities
|
10,475
|
8,634
|
|||||||
Total
current liabilities
|
151,425
|
160,942
|
|||||||
Long-Term
Debt
|
153,600
|
174,300
|
|||||||
Other
Long-Term Liabilities
|
52,135
|
55,741
|
|||||||
Deferred
Income Taxes
|
397,690
|
325,077
|
|||||||
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,
46,379,233 and 46,283,990 shares issued,
respectively
|
9,280
|
9,257
|
|||||||
Capital
in excess of par value
|
341,744
|
333,833
|
|||||||
Accumulated
other comprehensive income (loss)
|
(129
|
)
|
1,339
|
||||||
Retained
earnings
|
1,007,716
|
813,607
|
|||||||
Total
shareholders’ equity
|
1,358,611
|
1,158,036
|
|||||||
Total
Liabilities and Shareholders’ Equity
|
$
|
2,113,461
|
$
|
1,874,096
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
September
30,
|
September
30,
|
|||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||
(In
thousands except per share amounts)
|
||||||||||||
Revenues:
|
||||||||||||
Contract
drilling
|
$
|
157,769
|
$
|
182,461
|
$
|
472,403
|
$
|
519,799
|
||||
Oil
and natural gas
|
95,231
|
91,238
|
277,680
|
267,518
|
||||||||
Gas
gathering and processing
|
32,784
|
25,638
|
99,321
|
72,840
|
||||||||
Other
|
551
|
557
|
842
|
2,894
|
||||||||
Total
revenues
|
286,335
|
299,894
|
850,246
|
863,051
|
||||||||
Expenses:
|
||||||||||||
Contract
drilling:
|
||||||||||||
Operating
costs
|
77,951
|
78,595
|
228,967
|
238,021
|
||||||||
Depreciation
|
14,793
|
13,403
|
41,192
|
38,089
|
||||||||
Oil
and natural gas:
|
||||||||||||
Operating
costs
|
23,101
|
21,560
|
69,701
|
58,854
|
||||||||
Depreciation,
depletion and amortization
|
32,297
|
27,557
|
92,367
|
76,780
|
||||||||
Gas
gathering and processing:
|
||||||||||||
Operating
costs
|
28,275
|
22,216
|
87,171
|
63,734
|
||||||||
Depreciation
and amortization
|
2,858
|
1,637
|
7,752
|
4,019
|
||||||||
General
and administrative
|
5,355
|
4,630
|
15,784
|
12,998
|
||||||||
Interest
|
1,797
|
1,228
|
5,167
|
3,235
|
||||||||
Total
expenses
|
186,427
|
170,826
|
548,101
|
495,730
|
||||||||
Income
Before Income Taxes
|
99,908
|
129,068
|
302,145
|
367,321
|
||||||||
Income
Tax Expense:
|
||||||||||||
Current
|
11,152
|
26,442
|
53,498
|
89,741
|
||||||||
Deferred
|
24,695
|
21,361
|
54,538
|
46,585
|
||||||||
Total
income taxes
|
35,847
|
47,803
|
108,036
|
136,326
|
||||||||
Net
Income
|
$
|
64,061
|
$
|
81,265
|
$
|
194,109
|
$
|
230,995
|
||||
Net
Income per Common Share:
|
||||||||||||
Basic
|
$
|
1.38
|
$
|
1.76
|
$
|
4.19
|
$
|
5.00
|
||||
Diluted
|
$
|
1.37
|
$
|
1.75
|
$
|
4.16
|
$
|
4.98
|
Nine
Months Ended
|
|||||||||
September
30,
|
|||||||||
2007
|
2006
|
||||||||
(In
thousands)
|
|||||||||
Cash
Flows From Operating Activities:
|
|||||||||
Net
income
|
$
|
194,109
|
$
|
230,995
|
|||||
Adjustments
to reconcile net income to net cash
|
|||||||||
provided
by operating activities:
|
|||||||||
Depreciation,
depletion and amortization
|
141,968
|
119,422
|
|||||||
Deferred
tax expense
|
54,538
|
46,585
|
|||||||
Other
|
3,792
|
5,843
|
|||||||
Changes
in operating assets and liabilities
|
|||||||||
increasing
(decreasing) cash:
|
|||||||||
Accounts
receivable
|
35,023
|
(4,840
|
)
|
||||||
Accounts
payable
|
(24,497
|
)
|
(27,424
|
)
|
|||||
Material
and supplies inventory
|
1,969
|
(9,044
|
)
|
||||||
Accrued
liabilities
|
(14,066
|
)
|
(9,139
|
)
|
|||||
Contract
advances
|
(1,830
|
)
|
5,129
|
||||||
Other
– net
|
(1,627
|
)
|
(7,928
|
)
|
|||||
Net
cash provided by operating activities
|
389,379
|
349,599
|
|||||||
Cash
Flows From (Used In) Investing Activities:
|
|||||||||
Capital
expenditures
|
(344,524
|
)
|
(299,312
|
)
|
|||||
Cash
paid for acquisitions
|
(38,500
|
)
|
(53,820
|
)
|
|||||
Proceeds
from disposition of assets
|
3,866
|
5,865
|
|||||||
Other-net
|
(388
|
)
|
(241
|
)
|
|||||
Net
cash used in investing activities
|
(379,546
|
)
|
(347,508
|
)
|
|||||
Cash
Flows From (Used In) Financing Activities:
|
|||||||||
Borrowings
under line of credit
|
144,600
|
183,200
|
|||||||
Payments
under line of credit
|
(165,300
|
)
|
(183,100
|
)
|
|||||
Proceeds
from exercise of stock options
|
659
|
726
|
|||||||
Tax
benefit from stock options
|
—
|
290
|
|||||||
Book
overdrafts
|
10,472
|
(3,548
|
)
|
||||||
Net
cash used in financing activities
|
(9,569
|
)
|
(2,432
|
)
|
|||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
264
|
(341
|
)
|
||||||
Cash
and Cash Equivalents, Beginning of Period
|
589
|
947
|
|||||||
Cash
and Cash Equivalents, End of Period
|
$
|
853
|
$
|
606
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||||
September
30,
|
September
30,
|
||||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||||
(In
thousands)
|
|||||||||||||||
Net Income
|
$
|
64,061
|
$
|
81,265
|
$
|
194,109
|
$
|
230,995
|
|||||||
Other Comprehensive Income,
|
|||||||||||||||
Net
of Taxes:
|
|||||||||||||||
Change
in value of
|
|||||||||||||||
derivative
instruments
|
|||||||||||||||
used
as cash flow
|
|||||||||||||||
hedges
(net of tax
|
|||||||||||||||
of
$(52), $(62),
|
|||||||||||||||
$(566)
and $161)
|
(122
|
)
|
(106
|
)
|
(1,026
|
)
|
273
|
||||||||
Reclassification
-
|
|||||||||||||||
derivative
settlements
|
|||||||||||||||
(net
of tax of $(93), $(87),
|
|||||||||||||||
$(269)
and $(158))
|
(121
|
)
|
(148
|
)
|
(442
|
)
|
(267
|
)
|
|||||||
Comprehensive Income
|
$
|
63,818
|
$
|
81,011
|
$
|
192,641
|
$
|
231,001
|
Nine
Months Ended
|
|||||||
September
30,
|
|||||||
2007
|
2006
|
||||||
Options
Granted
|
28,000
|
33,000
|
|||||
Estimated
Fair Value (In Millions)
|
$
|
0.6
|
$
|
0.8
|
|||
Estimate
of Stock Volatility
|
0.33
|
0.38
|
|||||
Estimated
Dividend Yield
|
—
|
%
|
—
|
%
|
|||
Risk
Free Interest Rate
|
5.00
|
%
|
5.00
|
%
|
|||
Expected
Life Based on
|
|||||||
Prior
Experience (In Years)
|
5
|
3
to 7
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||
September
30,
|
September
30,
|
||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
Shares
Granted
|
409,932
|
—
|
415,432
|
—
|
|||||||||
Estimated
Fair Value (In Millions)
|
$
|
17.6
|
$
|
—
|
$
|
17.9
|
$
|
—
|
|||||
Percentage
of Shares Granted
|
|||||||||||||
Expected
to be Distributed
|
89
|
%
|
—
|
89
|
%
|
—
|
|||||||
Weighted
|
||||||||||
Income
|
Shares
|
Per-Share
|
||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||
(In
thousands except per share amounts)
|
||||||||||
For
the Three Months Ended
|
||||||||||
September
30, 2007:
|
||||||||||
Basic
earnings per common share
|
$
|
64,061
|
46,382
|
$
|
1.38
|
|||||
Effect
of dilutive stock options
|
||||||||||
and
restricted stock shares
|
—
|
249
|
(0.01
|
)
|
||||||
Diluted
earnings per common share
|
$
|
64,061
|
46,631
|
$
|
1.37
|
|||||
For
the Three Months Ended
|
||||||||||
September
30, 2006:
|
||||||||||
Basic
earnings per common share
|
$
|
81,265
|
46,241
|
$
|
1.76
|
|||||
Effect
of dilutive stock options
|
||||||||||
and
restricted stock shares
|
—
|
203
|
(0.01
|
)
|
||||||
Diluted earnings per common share
|
$
|
81,265
|
46,444
|
$
|
1.75
|
2007
|
2006
|
|||||||
Options
|
61,000
|
33,000
|
||||||
Average
Exercise Price
|
$
|
59.67
|
$
|
61.40
|
Weighted
|
||||||||||
Income
|
Shares
|
Per-Share
|
||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||
(In
thousands except per share amounts)
|
||||||||||
For
the Nine Months Ended
|
||||||||||
September
30, 2007:
|
||||||||||
Basic
earnings per common share
|
$
|
194,109
|
46,361
|
$
|
4.19
|
|||||
Effect
of dilutive stock options
|
||||||||||
and
restricted stock shares
|
—
|
259
|
(0.03
|
)
|
||||||
Diluted
earnings per common share
|
$
|
194,109
|
46,620
|
$
|
4.16
|
|||||
For
the Nine Months Ended
|
||||||||||
September
30, 2006:
|
||||||||||
Basic
earnings per common share
|
$
|
230,995
|
46,223
|
$
|
5.00
|
|||||
Effect
of dilutive stock options
|
||||||||||
and
restricted stock shares
|
—
|
206
|
(0.02
|
)
|
||||||
Diluted
earnings per common share
|
$
|
230,995
|
46,429
|
$
|
4.98
|
2007
|
2006
|
|||||||
Options
|
61,000
|
29,500
|
||||||
Average
Exercise Price
|
$
|
59.67
|
$
|
62.29
|
Drilling
Rigs
|
$
|
39,326
|
|||
Spare
Drilling Equipment
|
1,613
|
||||
Drill
Pipe and Collars
|
7,784
|
||||
Trucks
|
1,551
|
||||
Other
Vehicles
|
190
|
||||
Yard
and Office
|
846
|
||||
Goodwill
|
5,285
|
||||
Deferred
Income Taxes
|
(18,095
|
)
|
|||
Total
Consideration
|
$
|
38,500
|
September
30,
|
December
31,
|
||||||
2007
|
2006
|
||||||
(In
thousands)
|
|||||||
Revolving
Credit Facility,
|
|||||||
with
Interest at September 30, 2007 and
|
|||||||
December
31, 2006 of 6.4%
|
$
|
153,600
|
$
|
174,300
|
|||
Less
Current Portion
|
—
|
—
|
|||||
Total
Long-Term Debt
|
$
|
153,600
|
$
|
174,300
|
|||
|
.
|
the
payment of dividends (other than stock dividends) during any fiscal
year
in excess of 25% of the company’s 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, on any of the company’s property, except in
favor of the company’s lenders.
|
|
.
|
consolidated
net worth of at least $900 million;
|
|
.
|
a
current ratio (as defined in the Credit Facility) of not less than
1 to 1;
and
|
|
.
|
a
leverage ratio of long-term debt to consolidated EBITDA (as defined
in the
Credit Facility) for the most recently ended rolling four fiscal
quarters
of no greater than 3.50 to 1.0.
|
September
30,
|
December
31,
|
||||||
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|||||
Plugging
Liability
|
|
$
|
30,762
|
|
$
|
33,692
|
|
Workers’
Compensation
|
|
|
22,646
|
|
|
22,157
|
|
Separation
Benefit Plans
|
|
4,248
|
|
3,516
|
|
||
Deferred
Compensation Plan
|
|
|
2,969
|
|
|
2,544
|
|
Gas
Balancing Liability
|
|
|
1,080
|
|
|
1,080
|
|
Retirement
Agreement
|
|
|
905
|
|
|
1,386
|
|
|
|
|
62,610
|
|
|
64,375
|
|
Less
Current Portion
|
|
|
10,475
|
|
|
8,634
|
|
Total
Other Long-Term Liabilities
|
|
$
|
52,135
|
|
$
|
55,741
|
|
Nine
Months Ended
|
|||||||
2007
|
2006
|
||||||
(In
Thousands)
|
|||||||
Plugging
Liability, January 1:
|
$
|
33,692
|
$
|
22,015
|
|||
Accretion
of Discount
|
1,326
|
1,091
|
|||||
Liability
Incurred
|
1,274
|
2,835
|
|||||
Liability
Settled
|
(1,382
|
)
|
(156
|
)
|
|||
Revision
of Estimates
|
(4,148
|
)
|
6,061
|
||||
Plugging
Liability, September 30
|
30,762
|
31,846
|
|||||
Less
Current Portion
|
1,678
|
643
|
|||||
Total
Long-Term Plugging Liability
|
$
|
29,084
|
$
|
31,203
|
Commodity
|
Quantity
|
Price
|
Underlying
Commodity Price
|
Ethane
|
623,868
gal./month
|
$
0.6225
|
OPIS
Ethane Conway
|
Propane
|
396,690
gal./month
|
$
1.1475
|
OPIS
Propane Conway
|
Propane
|
396,690
gal./month
|
$
1.15
|
OPIS
Propane Conway
|
Iso
Butane
|
61,782
gal./month
|
$
1.2625
|
OPIS
Iso Butane Conway
|
Iso
Butane
|
61,782
gal./month
|
$
1.2975
|
OPIS
Iso Butane Conway
|
Normal
Butane
|
163,632
gal./month
|
$
1.2975
|
OPIS
Normal Butane Conway
|
Normal
Butane
|
163,632
gal./month
|
$
1.27
|
OPIS
Normal Butane Conway
|
Natural
Gasoline
|
411,012
gal./month
|
$
1.7375
|
OPIS
Nat. Gas Conway In-Well
|
Natural
Gas
|
107,710
MMBtu/month
|
$
7.00
|
IF
PEPL Natural Gas
|
Natural
Gas
|
107,710
MMBtu/month
|
$
7.04
|
IF
PEPL Natural Gas
|
First
Contract:
|
||||
Production
volume covered
|
10,000
MMBtu/day
|
|||
Period
covered
|
March
through December of 2007
|
|||
Prices
|
Floor
of $6.00 and a ceiling of $10.00
|
|||
Underlying
commodity price
|
Centerpoint
Energy Gas Transmission Co.,
|
|||
East
– Inside FERC
|
||||
Second
Contract:
|
||||
Production
volume covered
|
10,000
MMBtu/day
|
|||
Period
covered
|
March
through December of 2007
|
|||
Prices
|
Floor
of $6.25 and a ceiling of $9.25
|
|||
Underlying
commodity price
|
Centerpoint
Energy Gas Transmission Co.,
|
|||
East
– Inside FERC
|
Contract:
|
|||
Production
volume covered
|
10,000
MMBtu/day
|
||
Period
covered
|
January
through December of 2007
|
||
Prices
|
Floor
of $6.00 and a ceiling of $9.60
|
||
Underlying
commodity price
|
Centerpoint
Energy Gas Transmission Co.,
|
||
East
– Inside FERC
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||||
September
30,
|
September
30,
|
||||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||||
(In
thousands)
|
|||||||||||||||
Revenues:
|
|||||||||||||||
Contract
drilling
|
$
|
169,780
|
$
|
196,953
|
$
|
503,580
|
$
|
550,428
|
|||||||
Elimination
of inter-segment
|
|||||||||||||||
revenue
|
12,011
|
14,492
|
31,177
|
30,629
|
|||||||||||
Contract
drilling net of
|
|||||||||||||||
inter-segment
revenue
|
157,769
|
182,461
|
472,403
|
519,799
|
|||||||||||
Oil
and natural gas
|
95,231
|
91,238
|
277,680
|
267,518
|
|||||||||||
Gas
gathering and processing
|
40,042
|
29,045
|
112,908
|
83,303
|
|||||||||||
Elimination
of inter-segment
|
|||||||||||||||
revenue
|
7,258
|
3,407
|
13,587
|
10,463
|
|||||||||||
Gas
gathering and processing
|
|||||||||||||||
net
of inter-segment revenue
|
32,784
|
25,638
|
99,321
|
72,840
|
|||||||||||
Other
(1)
|
551
|
557
|
842
|
2,894
|
|||||||||||
Total
revenues
|
$
|
286,335
|
$
|
299,894
|
$
|
850,246
|
$
|
863,051
|
|||||||
Operating
Income (2):
|
|||||||||||||||
Contract
drilling
|
$
|
65,025
|
$
|
90,463
|
$
|
202,244
|
$
|
243,689
|
|||||||
Oil
and natural gas
|
39,833
|
42,121
|
115,612
|
131,884
|
|||||||||||
Gas
gathering and processing
|
1,651
|
1,785
|
4,398
|
5,087
|
|||||||||||
Total
operating income
|
106,509
|
134,369
|
322,254
|
380,660
|
|||||||||||
General
and administrative
|
|||||||||||||||
expense
|
(5,355
|
)
|
(4,630
|
)
|
(15,784
|
)
|
(12,998
|
)
|
|||||||
Interest
expense
|
(1,797
|
)
|
(1,228
|
)
|
(5,167
|
)
|
(3,235
|
)
|
|||||||
Other
income - net
|
551
|
557
|
842
|
2,894
|
|||||||||||
Income
before income
|
|||||||||||||||
taxes
|
$
|
99,908
|
$
|
129,068
|
$
|
302,145
|
$
|
367,321
|
|
(1)
|
Includes
a $1.0 million gain recognized in the first quarter of 2006 from
insurance
proceeds on the loss of a drilling rig from a blow out and fire in
January
2006.
|
|
(2)
|
Operating
income is total operating revenues less operating expenses, depreciation,
depletion and amortization and does not include non-operating revenues,
general corporate expenses, interest expense or income
taxes.
|
• Financial Condition
|
• Results of Operations
|
• New Accounting
Pronouncements
|
• the prices we receive for our natural gas production and, to
a lesser extent, the prices we receive for our oil
production;
|
• the quantity of natural gas and oil we
produce;
|
• the demand for and the dayrates we receive for our drilling
rigs; and
|
• the margins we obtain from our natural gas gathering and
processing contracts.
|
• contract drilling carried out by our subsidiaries Unit
Drilling Company and its subsidiaries Unit Texas
Drilling,
|
L.L.C.
and Leonard Hudson Drilling Company;
|
• oil and natural gas exploration, carried out by our
subsidiary Unit Petroleum Company; and its subsidiaries;
and
|
• mid stream operations (consisting of natural gas buying,
selling, gathering, processing and treating) carried
out
|
by
our
subsidiary Superior Pipeline Company,
L.L.C.
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
Percent
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
(In
thousands except percent amounts)
|
|||||||||
Working
Capital
|
|
$
|
48,159
|
|
$
|
96,760
|
|
|
(50
|
)%
|
Long-Term
Debt
|
$
|
153,600
|
$
|
145,100
|
6
|
%
|
||||
Shareholders’
Equity
|
|
$
|
1,358,611
|
|
$
|
1,074,561
|
|
|
26
|
%
|
Ratio
of Long-Term Debt to Total Capitalization
|
|
|
10
|
%
|
|
12
|
%
|
|
(17
|
)%
|
Net
Income
|
|
$
|
194,109
|
|
$
|
230,995
|
|
|
(16
|
)%
|
Net
Cash Provided by Operating Activities
|
|
$
|
389,379
|
|
$
|
349,599
|
|
|
11
|
%
|
Net
Cash Used in Investing Activities
|
|
$
|
(379,546
|
)
|
$
|
(347,508
|
)
|
|
9
|
%
|
Net
Cash Used in Financing Activities
|
$
|
(9,569
|
)
|
$
|
(2,432
|
)
|
|
293
|
%
|
|
|
September
30,
|
|
September
30,
|
|
|
Percent
|
|
||
|
|
2007
|
|
2006
|
|
|
Change
|
|
||
Oil
Production (MBbls)
|
|
|
1,260
|
|
|
1,062
|
|
|
19
|
%
|
Natural
Gas Production (MMcf)
|
|
|
32,507
|
|
|
32,350
|
|
|
—
|
%
|
Average
Oil Price Received
|
|
$
|
54.90
|
|
$
|
57.18
|
|
|
(4
|
)%
|
Average
Oil Price Received Excluding Hedges
|
|
$
|
54.90
|
|
$
|
57.18
|
|
|
(4
|
)%
|
Average
Natural Gas Price Received
|
|
$
|
6.30
|
|
$
|
6.28
|
|
|
—
|
%
|
Average
Natural Gas Price Received Excluding Hedges
|
|
$
|
6.24
|
|
$
|
6.28
|
|
|
(1
|
)%
|
Average
Number of Our Drilling Rigs in Use During
|
||||||||||
the
Period
|
|
|
98.4
|
|
|
109.8
|
|
|
(10
|
)%
|
Total
Number of Drilling Rigs Available at the End
|
||||||||||
of
the Period
|
|
|
128
|
|
|
116
|
|
|
10
|
%
|
Average
Dayrate
|
$
|
18,858
|
$
|
18,442
|
2
|
%
|
||||
Gas
Gathered—MMBtu/day
|
|
|
221,943
|
|
|
245,435
|
|
|
(10
|
)%
|
Gas
Processed—MMBtu/day
|
|
|
47,432
|
|
|
27,226
|
|
|
74
|
%
|
Gas
Liquids Sold—Gallons/day
|
115,781
|
57,840
|
100
|
%
|
||||||
Number
of Active Natural Gas Gathering Systems
|
|
|
36
|
|
|
37
|
|
|
(3
|
)%
|
Number
of Active Processing Systems
|
7
|
7
|
—
|
%
|
|
.
|
the
payment of dividends (other than stock dividends) during any fiscal
year
in excess of 25% 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, on any of our property, except in favor
of
our lenders.
|
|
.
|
consolidated
net worth of at least $900 million,
|
|
.
|
a
current ratio (as defined in the Credit Facility) of not less than
1 to 1,
and
|
|
.
|
a
leverage ratio of long-term debt to consolidated EBITDA (as defined
in the
Credit Facility) for the most recently ended rolling four fiscal
quarters
of no greater than 3.50 to 1.0.
|
Payments
Due by Period
|
||||||||||||||||||
Less
|
||||||||||||||||||
Contractual
|
Than
1
|
2-3
|
4-5
|
After
5
|
||||||||||||||
Obligations
|
Total
|
Year
|
Years
|
Years
|
Years
|
|||||||||||||
(In
thousands)
|
||||||||||||||||||
Bank
Debt (1)
|
$
|
198,702
|
$
|
9,395
|
$
|
19,584
|
$
|
169,723
|
$
|
—
|
||||||||
Retirement
Agreements (2)
|
905
|
727
|
178
|
—
|
—
|
|||||||||||||
Operating
Leases (3)
|
3,904
|
1,504
|
2,091
|
309
|
—
|
|||||||||||||
Drill
Pipe, Drilling Rigs and
|
||||||||||||||||||
Equipment
Purchases (4)
|
13,337
|
13,337
|
—
|
—
|
—
|
|||||||||||||
Total
Contractual
|
||||||||||||||||||
Obligations
|
$
|
216,848
|
$
|
24,963
|
$
|
21,853
|
$
|
170,032
|
$
|
—
|
|
(1)
|
See
the previous discussion in Management Discussion and Analysis regarding
our bank credit facility. This obligation is presented in accordance
with
the terms of the credit facility and includes interest calculated
at the
September 30, 2007 interest rate of 5.6% including the effect of
the
interest rate swap related to $50.0 million of the outstanding
debt.
|
|
(2)
|
In
the second quarter of 2001, we recorded $1.3 million in additional
employee benefit expense for the present value of a separation agreement
made in connection with the retirement of King Kirchner from his
position
as Chief Executive Officer. The liability associated with this expense,
including accrued interest, is paid in monthly installments of $25,000
which started in July 2003 and will continue through June 2009. In
the
first quarter of 2004, we acquired a liability for the present value
of a
separation agreement between PetroCorp Incorporated and one of its
previous officers. The liability associated with this agreement is
paid in
quarterly installments of $12,500 through December 31, 2007. In the
first
quarter of 2005, we recorded $0.7 million in additional employee
benefit
expense for the present value of a separation agreement made in connection
with the retirement of John Nikkel from his position as Chief Executive
Officer. The liability associated with this expense, including accrued
interest, is paid in monthly installments of $31,250 which started
in
November 2006 and will continue through October 2008. These liabilities
as
presented above are undiscounted.
|
|
(3)
|
We
lease office space in Tulsa and Woodward, Oklahoma; Houston and Midland,
Texas; and Denver, Colorado under the terms of operating leases expiring
through January 31, 2012. Additionally, we have several equipment
leases
and lease space on short-term commitments to stack excess drilling
rig
equipment and production inventory.
|
|
(4)
|
Due
to the potential for limited availability of new drill pipe within
the
industry, we have committed to purchase approximately $9.3 million
of
drill pipe and drill collars. We have also committed to
purchase $3.1 million of drilling rig components with 20% or $0.6
million
paid through September 30, 2007. We have committed to purchase
approximately 75 vehicles within the next 9 months for approximately
$1.5
million.
|
Amount
of Commitment Expiration
|
||||||||||||||||||||
Per
Period
|
||||||||||||||||||||
Total
|
||||||||||||||||||||
Amount
|
||||||||||||||||||||
Committed
|
Less
|
|||||||||||||||||||
Other
|
Or
|
Than
1
|
2-3
|
4-5
|
After
5
|
|||||||||||||||
Commitments
|
Accrued
|
Year
|
Years
|
Years
|
Years
|
|||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Deferred
Compensation
|
||||||||||||||||||||
Agreement
(1)
|
$
|
2,969
|
Unknown
|
Unknown
|
Unknown
|
Unknown
|
||||||||||||||
Separation
Benefit
|
||||||||||||||||||||
Agreement
(2)
|
$
|
4,248
|
Unknown
|
Unknown
|
Unknown
|
Unknown
|
||||||||||||||
Plugging
Liability (3)
|
$
|
30,762
|
$
|
1,678
|
$
|
1,851
|
$
|
2,638
|
$
|
24,595
|
||||||||||
Gas
Balancing
|
||||||||||||||||||||
Liability
(4)
|
$
|
1,080
|
Unknown
|
Unknown
|
Unknown
|
Unknown
|
||||||||||||||
Repurchase
|
||||||||||||||||||||
Obligations
(5)
|
Unknown
|
Unknown
|
Unknown
|
Unknown
|
Unknown
|
|||||||||||||||
Workers’
Compensation
|
||||||||||||||||||||
Liability
(6)
|
$
|
22,646
|
$
|
8,070
|
$
|
4,467
|
$
|
1,480
|
$
|
8,629
|
|
(1)
|
We
provide a salary deferral plan which allows participants to defer
the
recognition of salary for income tax purposes until actual distribution
of
benefits, which occurs at either termination of employment, death
or
certain defined unforeseeable emergency hardships. We recognize
payroll
expense and record a liability, included in other long-term liabilities
in
our condensed consolidated balance sheet, at the time of
deferral.
|
|
(2)
|
Effective
January 1, 1997, we adopted a separation benefit plan (“Separation Plan”).
The Separation Plan allows eligible employees whose employment
with us is
involuntarily terminated or, in the case of an employee who has
completed
20 years of service, voluntarily or involuntarily terminated, to
receive
benefits equivalent to 4 weeks salary for every whole year of service
completed with the company up to a maximum of 104 weeks. To receive
payments the recipient must waive any claims against us in exchange
for
receiving the separation benefits. On October 28, 1997, we adopted
a
Separation Benefit Plan for Senior Management (“Senior Plan”). The Senior
Plan provides certain officers and key executives of the company
with
benefits generally equivalent to the Separation Plan. The Compensation
Committee of the Board of Directors has absolute discretion in
the
selection of the individuals covered in this plan. On May 5, 2004
we also
adopted the Special Separation Benefit Plan (“Special Plan”). This plan is
identical to the Separation Benefit Plan with the exception that
the
benefits under the plan vest on the earliest of a participant’s reaching
the age of 65 or serving 20 years with the company. At September
30, 2007,
there were 31 eligible employees to participate in the
plan.
|
|
(3)
|
When
a well is drilled or acquired, under Financial Accounting Standards
No.
143, “Accounting for Asset Retirement Obligations” (FAS 143), we have
recorded the fair value of liabilities associated with the retirement
of
long-lived assets (mainly plugging and abandonment costs for our
depleted
wells).
|
|
(4)
|
We
have recorded a liability for certain properties where we believe
there
are insufficient oil and natural gas reserves available to allow
the
under-produced owners to recover their under-production from future
production volumes.
|
|
(5)
|
We
formed The Unit 1984 Oil and Gas Limited Partnership and the 1986
Energy
Income Limited Partnership along with private limited partnerships
(the
“Partnerships”) with certain qualified employees, officers and directors
from 1984 through 2007, with a subsidiary of ours serving as general
partner. The Partnerships were formed for the purpose of conducting
oil
and natural gas
|
(5) - cont. | acquisition, drilling and development operations and serving as co-general partner with us in any additional limited partnerships formed during that year. The Partnerships participated on a proportionate basis with us in most drilling operations and most producing property acquisitions commenced by us for our own account during the period from the formation of the Partnership through December 31 of that year. These partnership agreements require, on the election of a limited partner, that we repurchase the limited partner’s interest at amounts to be determined by appraisal in the future. Such repurchases in any one year are limited to 20% of the units outstanding. We made repurchases of $7,000, $4,000 and $14,000 in 2006, 2005 and 2004, respectively and have not had any repurchases in 2007. |
|
(6)
|
We
have recorded a liability for future estimated payments related
to
workers’ compensation claims primarily associated with our contract
drilling segment.
|
Commodity
|
Quantity
|
Price
|
Underlying
Commodity Price
|
Ethane
|
623,868
gal./month
|
$
0.6225
|
OPIS
Ethane Conway
|
Propane
|
396,690
gal./month
|
$
1.1475
|
OPIS
Propane Conway
|
Propane
|
396,690
gal./month
|
$
1.15
|
OPIS
Propane Conway
|
Iso
Butane
|
61,782
gal./month
|
$
1.2625
|
OPIS
Iso Butane Conway
|
Iso
Butane
|
61,782
gal./month
|
$
1.2975
|
OPIS
Iso Butane Conway
|
Normal
Butane
|
163,632
gal./month
|
$
1.2975
|
OPIS
Normal Butane Conway
|
Normal
Butane
|
163,632
gal./month
|
$
1.27
|
OPIS
Normal Butane Conway
|
Natural
Gasoline
|
411,012
gal./month
|
$
1.7375
|
OPIS
Nat. Gas Conway In-Well
|
Natural
Gas
|
107,710
MMBtu/month
|
$
7.00
|
IF
PEPL Natural Gas
|
Natural
Gas
|
107,710
MMBtu/month
|
$
7.04
|
IF
PEPL Natural Gas
|
First
Contract:
|
||||
Production
volume covered
|
10,000
MMBtu/day
|
|||
Period
covered
|
March
through December of 2007
|
|||
Prices
|
Floor
of $6.00 and a ceiling of $10.00
|
|||
Underlying
commodity price
|
Centerpoint
Energy Gas Transmission Co.,
|
|||
East
– Inside FERC
|
||||
Second
Contract:
|
||||
Production
volume covered
|
10,000
MMBtu/day
|
|||
Period
covered
|
March
through December of 2007
|
|||
Prices
|
Floor
of $6.25 and a ceiling of $9.25
|
|||
Underlying
commodity price
|
Centerpoint
Energy Gas Transmission Co.,
|
|||
East
– Inside FERC
|
Contract:
|
|||
Production
volume covered
|
10,000
MMBtu/day
|
||
Period
covered
|
January
through December of 2007
|
||
Prices
|
Floor
of $6.00 and a ceiling of $9.60
|
||
Underlying
commodity price
|
Centerpoint
Energy Gas Transmission Co.,
|
||
East
– Inside FERC
|
Quarter
Ended
|
Quarter
Ended
|
||||||||||
September
30,
|
September
30,
|
Percent
|
|||||||||
2007
|
2006
|
Change
|
|||||||||
Total
Revenue
|
$
|
286,335,000
|
$
|
299,894,000
|
(5
|
)%
|
|||||
Net
Income
|
$
|
64,061,000
|
$
|
81,265,000
|
(21
|
)%
|
|||||
Drilling:
|
|||||||||||
Revenue
|
$
|
157,769,000
|
$
|
182,461,000
|
(14
|
)%
|
|||||
Operating
costs excluding depreciation
|
$
|
77,951,000
|
$
|
78,595,000
|
(1
|
)%
|
|||||
Percentage
of revenue from
|
|||||||||||
daywork
contracts
|
100
|
%
|
100
|
%
|
—
|
%
|
|||||
Average
number of rigs in use
|
100.3
|
110.6
|
(9
|
)%
|
|||||||
Average
dayrate on daywork
|
|||||||||||
contracts
|
$
|
18,470
|
$
|
19,559
|
(6
|
)%
|
|||||
Depreciation
|
$
|
14,793,000
|
$
|
13,403,000
|
10
|
%
|
|||||
Oil
and Natural Gas:
|
|||||||||||
Revenue
|
$
|
95,231,000
|
$
|
91,238,000
|
4
|
%
|
|||||
Operating
costs excluding depreciation,
|
|||||||||||
depletion
and amortization
|
$
|
23,101,000
|
$
|
21,560,000
|
7
|
%
|
|||||
Average
natural gas price (Mcf)
|
$
|
5.77
|
$
|
6.02
|
(4
|
)%
|
|||||
Average
oil price (Bbl)
|
$
|
62.01
|
$
|
59.55
|
4
|
%
|
|||||
Natural
gas production (Mcf)
|
11,206,000
|
11,200,000
|
—
|
%
|
|||||||
Oil
production (Bbl)
|
470,000
|
376,000
|
25
|
%
|
|||||||
Depreciation,
depletion and
|
|||||||||||
amortization
rate (Mcfe)
|
$
|
2.29
|
$
|
2.04
|
12
|
%
|
|||||
Depreciation,
depletion and
|
|||||||||||
amortization
|
$
|
32,297,000
|
$
|
27,557,000
|
17
|
%
|
|||||
Gas
Gathering and Processing:
|
|||||||||||
Revenue
|
$
|
32,784,000
|
$
|
25,638,000
|
28
|
%
|
|||||
Operating
costs excluding depreciation
|
|||||||||||
and
amortization
|
$
|
28,275,000
|
$
|
22,216,000
|
27
|
%
|
|||||
Depreciation
and amortization
|
$
|
2,858,000
|
$
|
1,637,000
|
75
|
%
|
|||||
Gas
gathered – MMbtu/day
|
221,508
|
276,888
|
(20
|
)%
|
|||||||
Gas
processed – MMbtu/day
|
55,721
|
35,124
|
59
|
%
|
|||||||
Gas
liquids sold – Gallons/day
|
137,098
|
71,790
|
91
|
%
|
|||||||
General
and Administrative Expense
|
$
|
5,355,000
|
$
|
4,630,000
|
16
|
%
|
|||||
Interest
Expense
|
$
|
1,797,000
|
$
|
1,228,000
|
46
|
%
|
|||||
Income
Tax Expense
|
$
|
35,847,000
|
$
|
47,803,000
|
(25
|
)%
|
|||||
Average
Interest Rate
|
6.08
|
%
|
6.04
|
%
|
1
|
%
|
|||||
Average
Long-Term Debt Outstanding
|
$
|
182,385,000
|
$
|
131,948,000
|
38
|
%
|
Nine
Months Ended
|
Nine
Months Ended
|
||||||||||
September
30,
|
September
30,
|
Percent
|
|||||||||
2007
|
2006
|
Change
|
|||||||||
Total
Revenue
|
$
|
850,246,000
|
$
|
863,051,000
|
(1
|
)%
|
|||||
Net
Income
|
$
|
194,109,000
|
$
|
230,995,000
|
(16
|
)%
|
|||||
Drilling:
|
|||||||||||
Revenue
|
$
|
472,403,000
|
$
|
519,799,000
|
(9
|
)%
|
|||||
Operating
costs excluding depreciation
|
$
|
228,967,000
|
$
|
238,021,000
|
(4
|
)%
|
|||||
Percentage
of revenue from
|
|||||||||||
daywork
contracts
|
100
|
%
|
100
|
%
|
—
|
%
|
|||||
Average
number of rigs in use
|
98.4
|
109.8
|
(10
|
)%
|
|||||||
Average
dayrate on daywork
|
|||||||||||
contracts
|
$
|
18,858
|
$
|
18,442
|
2
|
%
|
|||||
Depreciation
|
$
|
41,192,000
|
$
|
38,089,000
|
8
|
%
|
|||||
Oil
and Natural Gas:
|
|||||||||||
Revenue
|
$
|
277,680,000
|
$
|
267,518,000
|
4
|
%
|
|||||
Operating
costs excluding depreciation,
|
|||||||||||
depletion
and amortization
|
$
|
69,701,000
|
$
|
58,854,000
|
18
|
%
|
|||||
Average
natural gas price (Mcf)
|
$
|
6.30
|
$
|
6.28
|
—
|
%
|
|||||
Average
oil price (Bbl)
|
$
|
54.90
|
$
|
57.18
|
(4
|
)%
|
|||||
Natural
gas production (Mcf)
|
32,507,000
|
32,350,000
|
—
|
%
|
|||||||
Oil
production (Bbl)
|
1,260,000
|
1,062,000
|
19
|
%
|
|||||||
Depreciation,
depletion and
|
|||||||||||
amortization
rate (Mcfe)
|
$
|
2.29
|
$
|
1.97
|
16
|
%
|
|||||
Depreciation,
depletion and
|
|||||||||||
amortization
|
$
|
92,367,000
|
$
|
76,780,000
|
20
|
%
|
|||||
Gas
Gathering and Processing:
|
|||||||||||
Revenue
|
$
|
99,321,000
|
$
|
72,840,000
|
36
|
%
|
|||||
Operating
costs excluding depreciation,
|
|||||||||||
and
amortization
|
$
|
87,171,000
|
$
|
63,734,000
|
37
|
%
|
|||||
Depreciation
and amortization
|
$
|
7,752,000
|
$
|
4,019,000
|
93
|
%
|
|||||
Gas
gathered – MMbtu/day
|
221,943
|
245,435
|
(10
|
)%
|
|||||||
Gas
processed – MMbtu/day
|
47,432
|
27,226
|
74
|
%
|
|||||||
Gas
liquids sold – Gallons/day
|
115,781
|
57,840
|
100
|
%
|
|||||||
General
and Administrative Expense
|
$
|
15,784,000
|
$
|
12,998,000
|
21
|
%
|
|||||
Interest
Expense
|
$
|
5,167,000
|
$
|
3,235,000
|
60
|
%
|
|||||
Income
Tax Expense
|
$
|
108,036,000
|
$
|
136,326,000
|
(21
|
)%
|
|||||
Average
Interest Rate
|
6.10
|
%
|
5.76
|
%
|
6
|
%
|
|||||
Average
Long-Term Debt Outstanding
|
$
|
175,408,000
|
$
|
121,323,000
|
45
|
%
|
|
•
|
|
the
amount and nature of our future capital expenditures;
|
|
•
|
|
the
amount of wells to be drilled or reworked;
|
|
•
|
|
prices
for oil and natural gas;
|
|
•
|
|
demand
for oil and natural gas;
|
|
•
|
|
our
exploration prospects;
|
|
•
|
|
estimates
of our proved oil and natural gas reserves;
|
|
•
|
|
oil
and natural gas reserve potential;
|
|
•
|
|
development
and infill drilling potential;
|
|
•
|
|
our
drilling prospects;
|
|
•
|
|
expansion
and other development trends of the oil and natural gas
industry;
|
•
|
our
business strategy;
|
||
•
|
production
of oil and natural gas reserves;
|
||
•
|
growth
potential for our mid-stream operations;
|
||
•
|
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; and
|
||
•
|
demand
for our drilling rigs and drilling rig
rates.
|
|
•
|
|
the
risk factors discussed in this report and in the documents we incorporate
by reference;
|
|
•
|
|
general
economic, market or business conditions;
|
|
•
|
|
the
nature or lack of business opportunities that we
pursue;
|
|
•
|
|
demand
for our land drilling services;
|
|
•
|
|
changes
in laws or regulations; and
|
|
•
|
|
other
factors, most of which are beyond our
control.
|
10.2.48
|
Separation
Benefit Plan of Unit Corporation and Participating Subsidiaries as
amended, effective August 21, 2007.
|
15
|
Letter
re: Unaudited Interim Financial Information.
|
31.1
|
Certification
of Chief Executive Officer under Rule 13a – 14(a) of
the
|
Exchange
Act.
|
|
31.2
|
Certification
of Chief Financial Officer under Rule 13a – 14(a) of
the
|
Exchange
Act.
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer
under
|
Rule
13a – 14(a) of the Exchange Act and 18 U.S.C. Section 1350, as
adopted
|
|
under
Section 906 of the Sarbanes-Oxley Act of
2002.
|
Unit
Corporation
|
||
Date: November
1, 2007
|
By: /s/
Larry D. Pinkston
|
|
LARRY
D. PINKSTON
|
||
Chief
Executive Officer and Director
|
||
Date: November
1, 2007
|
By: /s/
David T. Merrill
|
|
DAVID
T. MERRILL
|
||
Chief
Financial Officer and
|
||
Treasurer
|