TEXT-Fitch affirms Unit Corp's ratings at 'BB'
May 1 - Fitch has affirmed Unit Corporation's (UNT) ratings as follows: --Issuer Default Rating (IDR) at 'BB'; --Senior Unsecured Debt at 'BB'; and --Senior Subordinated Debt at 'BB-'. The Rating Outlook is Stable. Fitch's ratings are based on UNT's debt-light capital structure, the company's history of low leverage, management's conservative financial policies and tests of the company's financial resiliency to stressed commodity prices. UNT just came off its best fiscal year since 2007. E&P production increased 23% in 2011. WTI average prices were up 19.6%; natural gas average prices fell 8.5%. Fleet drilling rig utilization climbed to 61% while day rates increased 24%. Pipeline revenues and services increased 35%. As a result leverage at the end of the year was low, 0.50 times (x) debt/EBITDA, and UNT was able to add reserves equal to twice its production. Fiscal 2012 could turn out somewhat differently, notwithstanding a very good start in the first quarter. Oil prices are still high, but natural gas prices are currently trading between $2.00 and $2.50 per mmbtu compared to an average of $4.00 in 2011, and natural gas represents 60% of UNT's hydrocarbon production. The loss in E&P revenue has not cascaded down into UNT's drilling rig or pipeline businesses. E&P companies have shifted their efforts towards oil and natural gas liquids plays. These projects still need drilling rigs and pipelines to transport hydrocarbons and this illustrates the benefits of UNT's strategic integration of field services with oil and gas production. In 2011 UNT garnered 43% of its revenues and 57% of its operating income from oil and natural gas production. UNT estimates that a $.10 per mmcf change in natural gas would cost the company $4.3 million in pre-tax cash flow using 2011 production and excluding hedges. By extension the fall in natural gas prices could cost UNT just short of $80 million before hedge gains, and by our calculations Fitch estimates that leverage could increase to 0.59 times (x) EBITDA if the current mix of spot and hedged oil and gas prices holds through the end of 2012. Negative FCF of around $80 million is expected with these prices owing to higher cash taxes and an $800 million capital budget. The latter is a reduction from last year but a significant increase in capital for pipeline services which anticipates new and existing processing plant projects and a higher number of well-head connections. UNT's assets are supported by a strong equity base, close to $2.0 billion in market capital, a $250 million unsecured committed revolving credit facility that matures in 2016 and a single senior subordinated $250 million publicly traded note that matures in 2021. The revolver, which could be upsized, is governed by a borrowing base currently valued at $600 million by UNT's lenders. Specific financial tests within the revolver include a 1.0:1.0 current ratio and a maximum long-term debt/EBITDA ratio of 4.0:1.0. At the end of March, $65.8 million was drawn under the revolver. The senior subordinated notes are guaranteed on a subordinated basis by the same material subsidiaries guaranteeing the revolver. The notes subject 'restricted' payments and additional debt to an EBITDA/interest incurrence test of 2.25x for so long as the notes are not rated 'investment grade'. UNT's debt at the end of 2011 was $3.42 per proved reserve barrel. Debt per flowing barrel was just over $9,000. Both are favorable statistics in comparison to peer E&P companies. UNT also has a favorable three-year reserve replacement history equal to 166% of production. In Fitch tested stressed oil and gas price scenarios, UNT emerges with a weaker but still strong leverage profile with ample liquidity to make adjustments to its operating business lines. We do not foresee leverage exceeding 1.5x EBITDA in the worst of pricing scenarios. Additional information is available at 'www.fitchratings.com.' The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research --'Corporate Rating Methodology' (Aug. 12, 2011); --'Rating Oil and Gas Exploration and Production Companies' (Aug. 5, 2011) . Applicable Criteria and Related Research: Corporate Rating Methodology Rating Oil and Gas Exploration and Production Companies
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