Unit Corporation History

Company Perspectives:

Unit Corporation is a diversified energy company engaged, through its subsidiaries, in the exploration for and production of oil and natural gas, the acquisition of producing oil and natural gas properties and the contract drilling of onshore oil and natural gas wells.

Key Dates:

1963:

The company is founded by King Kirchner and Don Bodard.

1979:

The company arms its production unit and goes public.

1981:

The company's stock begins trading on the New York Stock Exchange.

1986:

The business is reorganized as Unit Corporation.

1997:

Bodard dies.

2003:

Kirchner retires as chairman.

Company History:

Unit Corporation is a publicly traded Tulsa, Oklahoma, energy company with two complementary business segments. A subsidiary, Unit Drilling Company, maintains a fleet of 88 onshore rigs, mostly used for the production of natural gas and primarily serving customers in the Gulf Coast, midcontinent, and Rocky Mountain regions. Unit's exploration and production subsidiary, Unit Petroleum Company, often relies on its sister drilling operation in its exploration and production efforts. Unit concentrates on natural gas projects in the Anadarko and Arkoma basins, located in Oklahoma and Texas. The company owns proved reserves of 294.5 billion cubic feet of natural gas reserves and 7.84 million barrels of oil, and operates or owns an interest in more than 3,300 wells. Because customers of the drilling unit may be competitors of the production unit, Unit maintains what it calls a "Chinese firewall" between the operations. Results of third parties' drilling efforts are kept confidential, and the producing unit is charged competitive rates when using Unit's drilling rigs. This two-sided approach to the oil and gas business offers a number of advantages. The production arm can plan its activities around the availability of Unit drilling rigs, which are only contracted out on a short-term basis. Moreover, the two units provide diversity: When one business is in a down cycle, the other is generally able to keep Unit prosperous. When both units are thriving, Unit has proven to be a highly profitable concern.

Kirchner and Bodard: Acquiring Unit Drilling in 1963

Unit Corporation was cofounded by King Pouder Kirchner and Don Bodard in 1963 when they purchased Unit Drilling Company from Woolaroc Oil Company and moved the operation from Bristow, Oklahoma, to Tulsa. Born in 1927 in Kansas City, Missouri, Kirchner was named after his grandfather, Harry Pouder, an oilman who during his amateur boxing days received the nickname "King." While growing up on a farm near Perry, Oklahoma, Kirchner became aware that the truly prosperous farmers had oil and gas wells on their properties--unlike his family's spread. His interest in the business was further sparked by visits to his grandfather in Tulsa, which was an oil boom town of the period. His grandfather traded oil and gas well properties and introduced Kirchner to the city's famous oil tycoons. The young man was determined to become involved in the industry despite the warnings of his grandfather and father, who believed the best days of the business were in the past. In 1950 Kirchner earned an engineering degree from Oklahoma A&M University, and following a two-year stint in the Army, earned a second degree at the University of Oklahoma. In 1954 he went to work for Unit Drilling as a petroleum engineer. He became partners with Don Bodard, and the two men co-signed bank notes to borrow the $150,000 needed to buy Unit Drilling. Unit's corporate parent, Woolaroc, was founded by John Phillips, the nephew of Frank Phillips, founder of Phillips Petroleum Company.

Unit Drilling consisted of just three drilling rigs and three employees when Kirchner, serving as both CEO and chairman, relocated the operation to the Petroleum Club Building in downtown Tulsa. From the outset, Kirchner was determined to take a conservative approach to the business and maintain debt at a manageable level. Another bedrock principle he would repeat over the years was "Hire people who know more than you do." According to Kirchner's recollections, the company drilled around 30 wells and took in less than $10,000 in the first year. Demand was strong enough, however, to justify the addition of four more rigs in 1964, purchased from Falcon Seaboard Drilling Company. Unit Drilling remained a seven-rig operation for the next decade. It was not until 1974, in response to an increased demand for its services, that the company bought four more rigs from Leaben Drilling Company.

Moving into Production in 1979

Because the drilling business was prone to deep cycles, Unit Petroleum Company was formed in 1979 to become involved in production, which was less volatile than drilling. The drilling and exploration units were then packaged under Unit Drilling & Exploration Co. and taken public, its shares traded on an over-the-counter basis. The basic concept, which the company has called turning iron into oil, called for cash flow from the drilling operation to be invested in the production side, which started modestly enough. In the beginning Unit Petroleum had just two billion cubic feet of natural gas reserves and 12 operational wells. Also starting in 1979, Unit Petroleum, acting as managing partner, formed limited partnership drilling programs to fund its activities.

Unit benefited from steep increases in the price of natural gas and oil in 1980, which resulted in a high demand for contract drilling rigs. To keep pace, Unit bought five rigs from Barrett Drilling Company. Unit was so prosperous that in 1981 its stock began trading on the New York Stock Exchange. At this point Unit had 28 rigs in its fleet and had a market capitalization of $168 million. But the boom would soon come to an end. Kirchner recognized that the market was beginning to tighten in 1981-82, and the company took immediate steps to cut costs to the bone in order to weather the coming storm. Kirchner even slashed his own salary by two-thirds and sold off the company plane, 30 company cars, and other equipment deemed unnecessary. Kirchner did not, however, reduce headcount, preferring instead to retain his experienced people by giving them a chance to stay on by accepting reduced salaries. Given the plight of other energy companies, many of which went bankrupt, keeping a job at a lower salary was an enticing offer. The down cycle in oil and gas proved to be deep and enduring. According to Oklahoma City's Journal Record, Unit was "one of the 20 biggest losers on the stock market between 1982 and 1986, falling 92.5 percent during that period." Nevertheless, Unit was able to survive, mostly due to Kirchner's conservative fiscal approach that limited debt.

In 1986 the business was reorganized. Limited partnerships in drilling programs that Unit sponsored from 1980 to 1983 were acquired in exchange for stock in a new company--Unit Corporation--incorporated in Delaware in September 1986. In all, six partnerships agreed to the stock swap--but the partners in a 1979 program rejected the offer, leaving that partnership intact. When all the maneuvering was finished, Unit Corporation became the parent of Unit Drilling and Exploration Company, replacing it on the New York Stock Exchange. Two years later, in 1988, the structure would be modified further, resulting in the company's current operating units: Unit Drilling Company and Unit Petroleum Company.

Business slowly began to pick up in the late 1980s. The company drilled only 22 wells in 1986, but that number would more than double to 46 wells in 1987. Moreover, the company's stock rebounded in 1987, regaining about 16.7 percent of its price. Revenues slowly improved as well, growing from $26.4 million in 1986 to $28.9 million in 1987 and $31.6 million in 1988. Although the company was still losing money, the hemorrhaging had stopped. The company lost $35.6 million, mostly due to writedowns, in 1987. A year later the net loss would total just $1.6 million.

Unit experienced steady improvement during the early years of the 1990s and was able to add significantly to its reserves. In 1990 the company acquired Roundup Resources, Inc. for $1.3 million, as a result doubling its proved reserves and bolstering Unit's presence in the Texas Panhandle region, which was an important area of concentration. In 1994 Unit took a major step in its development, acquiring producing properties in Louisiana, New Mexico, Oklahoma, and Texas, allowing the company to enter the Permian Basin in east Texas and the Gulf Coast regions. A regional office in Houston also was added. Unit added to its drilling fleet in 1995, paying $4.2 million for Willis Drilling Co. Inc., a subsidiary of Di Energy Inc. At the same time, the company's production subsidiary continued to add to the reserves, which in 1995 reached the 120 billion cubic feet level. As a result of these developments and improving financial results, Unit once again hit the radar screens of investors, and several research analysts began to tout the stock.

Cofounder's Death in 1997

Unit maintained its growth through the second half of the 1990s. In 1997 the company added ten drilling rigs by acquiring privately owned Hickman Drilling Company in a cash and stock deal valued at nearly $24 million. But 1997 also marked the passing of one of Unit's cofounders, Don Bodard, who died in September at the age of 77. Unit added to its rig fleet in 1999 by acquiring 13 diesel-electric deep drilling rigs from Parker Drilling Company at a cost of $40 million in cash and stock worth more than $8.1 million. This transaction also allowed Unit to enter a new market, the Rocky Mountain region. It was paid for by a secondary offering of stock that netted $50.4 million. Despite a drop in commodity prices in 1999, Unit was able to increase revenues to $97.5 million, compared with $93.3 million in 1998, although net income dropped off, from $2.2 million in 1998 to $1.5 million in 1999.

The production business was bolstered in 2000 by the acquisition of Questa Oil and Gas Co., financed by a stock exchange. As a result, Unit's proved reserves reached 240.7 billion cubic feet. With the help of the Questa acquisition and unusually high oil and natural gas prices, Unit was able to achieve record results in 2000, posting total revenues of $201.3 million, almost double the previous year's results. In addition, the company enjoyed net income of $34.3 million.

In 2001 the drilling fleet was expanded once again, bringing the total to 55 rigs. It was also in July 2001 that Kirchner stepped down as CEO, although he retained the chairmanship until August 2003. Replacing him as chief executive--and eventually as chairman--was the company's president, John Nikkel, a seasoned executive as well as a trained geologist. He had been with Unit since 1983, when he was named the president and a director. Prior to his tenure at Unit, he had worked 18 years for Amoco Production Company, rising to the level of Division Geologist for the Denver division. In 1976 he cofounded Nike Exploration Company, and from 1979 until 1983 he served as president and a director for Cotton Petroleum Corporation. Working under Kirchner for nearly 20 years, Nikkel was already wedded to the conservative approach that had served the company well for so many years. It was due to these principles that Unit was able to continue to grow during 2001, a year in which the economy slowed, the United States suffered terrorist attacks, and the weather was unseasonably warm. All of these factors created a difficult environment for many energy companies. Nevertheless, Unit was able to improve total revenues to $259.2 million and net income to $62.8 million.

Unit's drilling fleet grew to 75 rigs following the August 2002 acquisition of assets from Cactus Drilling Company in exchange for 7.5 million shares of stock, worth an estimated $133 million. The company was eager to drill more wells but its activity was curtailed somewhat by partners concerned about the state of the economy and fluctuating commodity prices. All in all, Unit enjoyed what management described as an acceptable year in 2002: revenues of $187.7 million and net income of $18.2 million. In 2003, the company would experience a year more in keeping with the results of 2001. Revenues reached record levels, to $302.6 million, and net income rebounded to $50.2 million.

Unit's steady expansion continued in 2003 when it paid $35 million in cash for Serdrilco Incorporated and subsidiary Service Drill Southwest LLC. The deal added 12 drilling rigs under contract in the Anadarko Basin in the Texas Panhandle, as well as a 12-truck moving fleet and other equipment. It also increased Unit's drilling fleet to 88 rigs. Unit also made a significant purchase on the production side, paying $182 million in cash and stock to acquire PetroCorp in early 2004. PetroCorp was another Tulsa company, and one that Unit's management had been eyeing for several years. PetroCorp brought with it 40.26 billion cubic feet of natural gas and 2.74 million barrels of oil, its properties located in the Mid-Continent and Gulf Coast regions and nicely complementing Unit's current holdings. PetroCorp was simply too small to compete efficiently, and by adding it to the fold Unit was now much stronger and ready to take on larger competitors.

Principal Subsidiaries: Unit Drilling Company; Unit Petroleum Company.

Principal Competitors: BP p.l.c.; Grey Wolf, Inc.; Nabors Industries Ltd.

Further Reading:

• Robinson, Robin, "Unit Corp. Eyes Long-Term Improvement," Journal Record, May 10, 1988.
• Russell, Ray, "King Kirchner Builds Royal Legacy," Tulsa World, September 10, 2003, p. E1.
• Tippee, Bob, "Unit's Nikkel: US Onshore Drilling Remains Attractive," Oil & Gas Journal, August 4, 2003, p. 29.
• "Tulsa, Okla.-Based Oil-Drilling Firm Focuses on New Assets, Low Debt," Daily Oklahoman, October 28, 2001.

Source: International Directory of Company Histories, Vol.63. St. James Press, 2004.

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