(By Balaseshan) Brean Murray, Carret & Co. analyst Raymond Deacon initiated coverage of Unit Corp. (NYSE:UNT) with a "Buy" rating and $56 price target.
Deacon said Unit's integrated structure is unique among companies its size and the company's recent Mid-Continent acquisition highlights management's strategy of leveraging the synergies between its E&P, Contract Drilling and Midstream segments to provide diversified paths to value accretion.
In the analyst's view, the company's E&P segment provides the most immediate path to value accretion through de-risking catalysts in the Marmaton (OK) and Mississippi Lime (KS) plays, while contract drilling provides a relatively stable source of free cash for redeployment into the other segments.
Deacon said Unit is highly leveraged to NGLs, which make up about 20% of Unit's production stream and provide more than 50% of its midstream revenues, and he therefore views recent weakness in NGL pricing as a buying opportunity given the shares' compelling valuation.
The analyst believes that Unit's recent Mid-Continent acquisition appears accretive to shareholders, based solely on the properties' risked resource potential, with midstream growth providing another $100+ million of upside by year-end 2014.
Deacon estimates that the 25,000 Granite Wash acreages in the acquisition have 649 Bcfe of risked resource potential worth $732 million ($15.24/share) versus a purchase price of $617 million. Positive results from Unit's first test well on its 75,000 net acres in the Mississippi Lime play could be a catalyst during the second quarter call in August.
On June 14, Apache (NYSE:APA) announced a 580,000 acre entry into the play that overlaps Unit's leases, with plans to begin drilling in July. Encana (NYSE:ECA) unveiled 360,000 net acres on June 16, planning 2 rigs in 2012. The analyst thinks Unit's properties could be worth about $11/share or more if the play works.
Deacon said results from Unit's first extended lateral Marmaton well show an 81% improvement in reserves for a 55% increase in well costs. Unit expects to test this design more widely, with 3 more wells in 2012 and plans more in 2013; if production and reserves increase by 75%, he estimates $5/share in upside to net asset value if the design works on 50% of Unit's acreage.
The analyst said sharply increased capital spending and visible third-party volume growth in Unit's midstream segment, Superior Pipeline, hint at increasingly independent trajectory for the segment that could culminate in value capture through a spin-off or asset sale as early as 2013.
Unit increased midstream capex 182% year/year in 2012; Deacon projects 15% growth in total throughput volumes in 2012. If this rapid growth continues, he thinks Unit will look to asset sales, a JV, or an MLP to give this division more affordable access to capital than the integrated company.
UNT is trading down 0.08% at $38.64 on Tuesday.