Rating Update: Stock Rating C-Neutral (9/30/19)-Unit Corp (UNT).

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BUSINESS

Unit Corporation, together with its subsidiaries, operates as a diversified energy company in the United States. The company operates through three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream. The Oil and Natural Gas segment acquires, explores, develops, and produces oil and natural gas properties. It operates approximately 6,500 wells; and has a reserve base of 150 million barrels of oil equivalent primarily in Oklahoma and Texas. The Contract Drilling segment is involved in the contract drilling of onshore oil and natural gas wells for its own account, as well as for a range of other oil and natural gas companies, primarily in the Rocky Mountain and Mid-Continent regions. It has 96 drilling rigs in its fleet. The Mid-Stream segment buys, sells, gathers, processes, and treats natural gas for third parties and for its own account.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be below the cost of capital, UNT is expected to be a modest Value Eraser.

Unit has a current Value Trend Rating of C (Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Unit has a very high Appreciation Score of 98 but a very low Power Rating of 0, triggering the Neutral Value Trend Rating.

Unit’s stock is selling well below targeted value. The current stock price of $3.38 compares to targeted value 12 months forward of $23.
Unit’s very high appreciation potential results in an appreciation score of 98 (only 2% of the universe has greater appreciation potential.)
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Unit has a Power Rating of 0. (This very low Power Rating indicates that Unit only has a better chance of achieving attractive investment performance over the near to intermediate term than 0% of companies in the universe.)
Factors contributing to this very low Power Rating include: recent price action has been extremely unfavorable; is currently in an unfavorable positi; and the trend in Unit’s earnings estimates has been unfavorable in recent months.

INVESTMENT PROFILE

Unit’s financial strength is poor. Financial strength rating is 3.
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Relative to the S&P 500 Composite, Unit Corp has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that UNT is higher risk. High expected growth is a positive for Unit. Relative weaknesses include: low historical profitability, low financial strength, low historical growth, and high earnings variability. Unit’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. UNT has unusually low market capitalization.

CURRENT SIGNALS

Unit’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

Unit’s current technical position is mixed. The stock price is in a 0.9 month up move. The stock has appreciated 34.3% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average. Unit’s stock price decline is extreme and the stock appears oversold.

ALERTS

Unit Corp (NYSE: UNT). Modest negative changes in fundamentals have recently occurred. Negative developments: significant quarterly sales deceleration occurred, and the consensus estimate for December, 2020 decreased significantly. Positive development: significant quarterly earnings acceleration occurred.
The stock is currently rated C.
Unit Corp (NYSE: UNT) stock closed at $0.03 on 9/30/19 after a major increase of 11.1%. However, below average trading volume at 70% of normal accompanied the advance. The stock has declined -9.1% during the last week and has been extremely weak relative to the market over the last nine months.

CASH FLOW

In 2018, Unit generated a very significant increase in cash of +$5.8 million (+820%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$225.8 million. Non-operating sources contributed +$9.5 million (+4% of EBITDA). Cash taxes contributed +$25.3 million (+11% of EBITDA). Re-investment in the business amounted to -$114.8 million (-51% of EBITDA). On a net basis, debt investors received -$230.6 million (-102% of EBITDA) while equity investors furnished +$90.6 million (+40% of EBITDA).
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Unit’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Unit Corp Peer Group. In most years, Unit was in the second quartile and top quartile. Currently, Unit is slightly above median at +4% of EBITDA (+$9.5 million).

Unit’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Unit Corp Peer Group as well. In most years, Unit was in the top quartile and second quartile. Currently, Unit is upper quartile at +11% of EBITDA (+$25.3 million).

Unit’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Unit Corp Peer Group. In most years, Unit was in the second quartile and top quartile. Currently, Unit is above median at -51% of EBITDA (-$114.8 million).

Unit’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Unit Corp Peer Group. In most years, Unit was in the second quartile and top quartile. Currently, Unit is lower quartile at -102% of EBITDA (-$230.6 million).

Unit’s Equity Investors, %EBITDA has enjoyed a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Unit Corp Peer Group. In most years, Unit was in the second quartile and top quartile. Currently, Unit is upper quartile at +40% of EBITDA (+$90.6 million).

Unit’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Unit Corp Peer Group. In most years, Unit was in the third quartile and second quartile. Currently, Unit is at the upper quartile at +3% of EBITDA (+$5.8 million).
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Unit’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Unit Corp Peer Group. In most years, Unit was in the lower quartile. Currently, Unit is lower quartile at +1%.

PROFITABILITY

Unit’s return on equity has eroded very significantly since 2010 accelerating very sharply after the 2017 level.
This very significant erosion was due to very strong negative trend in pretax operating return and strong positive trend in non-operating factors.
The productivity of Unit’s assets declined over the full period 2009-2019: asset turnover has experienced a minor downtrend.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend that accelerated very sharply from the 2017 level.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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Unit’s return on equity is lower quartile (-5.1%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is lower quartile (-3.2%) reflecting asset turnover that is at median (0.28X) and lower quartile pretax margin (-11.1%).
Tax “keep” rate (income tax management) is substantially below median (80.6%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at median (2.01X).

GROWTH RATES

Overall, Unit’s growth rate has slowed considerably in recent years.
Unit’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -4.1% per year. (More recently it has been 8.1%.)

Total asset growth has been -2.0% per year. (More recently it has been -8.5%.)

Annual E.P.S. growth has been -0.9% per year.

Equity growth has been -5.0% per year.
No consensus growth rate forecast is available for Unit.
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Relative to the Unit Corp Peer Group, Unit’s historical growth measures are erratic. E.P.S. growth (-0.9%) has been above median. Total asset growth (-2.0%) has been below median. Revenue growth (-4.1%) has been below median. Equity growth (-5.0%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Unit’s stock price performance has been volatile and significantly below market. Between November, 2008 and September, 2019, Unit’s stock price fell -88%; relative to the market, this was a -96% loss. Significant price moves during the period: 1) August, 2018 – September, 2019: -87%; 2) July, 2016 – February, 2017: +117%; 3) February, 2016 – June, 2016: +190%; 4) November, 2015 – February, 2016: -70%; 5) April, 2015 – September, 2015: -68%; and 6) June, 2014 – March, 2015: -59%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -87.0% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through September, 2019 of -87.0% is lower quartile relative to Unit Corp Peer Group.

Current 5-year total return performance of -43.5% is lower quartile relative to the S&P 500 Composite.
Through September, 2019, with lower quartile current 5-year total return of -43.5% relative to S&P 500 Composite, Unit’s total return performance is lower quartile relative to Unit Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, UNT’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.

Relative to Unit Corp Peer Group, UNT’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Unit has a major value gap compared to the median. For UNT to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.22X to 2.39X. If UNT’s ratio of enterprise value/revenue were to rise to 2.39X, its stock price would be higher by $17 to $20.
For UNT to achieve upper quartile valuation relative to the Unit Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.22X to 2.72X. If UNT’s ratio of enterprise value/revenue were to rise to 2.72X, its stock price would increase by $21 from the current level of $3.38.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be below the cost of capital, UNT is expected to be a modest Value Eraser.
Unit’s current Price Target of $23 represents a +594% change from the current price of $3.38.
This very high appreciation potential results in an appreciation score of 98 (only 2% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 98, the low Power Rating of 0 results in an Value Trend Rating of C.
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Unit’s current Price Target is $23 (+4% from the 2018 Target of $23 and +594% from the 09/30/19 price of $3.38). This plateau in the Target is the result of a +12% increase in the equity base and a -7% decrease in the price/equity multiple. Each of the Value Drivers contributed to this decline in the price/equity multiple. The forecasted increase in growth has a slight negative impact on the multiple. The forecasted increase in cost of equity also has a slight negative impact as did the decline in return on equity.
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PTR’s return on equity forecast is 4.5% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2010 and 2018. The current forecast is well below the 2011 peak of 11%.

PTR’s growth forecast is 7.0% — above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well above the 2017 low of 0%.

PTR’s cost of equity forecast is 6.4% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is steady at the 2012 peak of 7.8%.
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At Unit’s current price of $3.38, investors are placing a negative value of $-20 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 4.6% versus a cost of equity of 5.2%.
PTR’s 2020 Price Target of $23 is based on these forecasts and reflects an estimated value of existing assets of $13 and a value of future investments of $10.

About John Lafferty 77056 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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