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New Unit Corp. chairman says technology keeps drilling attractive in US onshore

Bob Tippee
Editor

Technology keeps the US onshore appealing to oil and gas producers and drilling contractors, says the chief executive of a company active in both businesses.

"You have to look at the US as a marginal mineral industry," says John G. Nikkel, president, CEO, and—as of June 18—chairman of Unit Corp., Tulsa.

Although sensitive to commodity pricing and increasingly focused on small, subtle reservoirs, the US onshore still offers opportunity to companies like 40-year-old Unit.

"There are a whole lot more small, subtle fields than there are large ones," notes Nikkel, who became chairman with the retirement of King Kirchner, a company cofounder.

He's optimistic about the technological progress essential to suppressing costs and identifying subtle targets.

"The technologies that have developed and that will continue to develop add to our knowledge base and help us define and exploit those small prospects economically," he says.

Unit views technologies such as 3D seismic and horizontal drilling not as panaceas but as "arrows in our quiver." Using them requires judgment.

In its role as what Nikkel calls an "exploitation company" and "opportunistic buyer of production," for example, Unit doesn't acquire 3D seismic data for every decision.

It tries to answer this question: "How much information do you need to be comfortable with your decision to drill or complete the well?"

When the company does need 3D data in order to reach that level of comfort, Nikkel says, "We'll definitely buy it or shoot the seismic ourselves."

Key tool: experience
For managing the risks of E&P, which Unit conducts through wholly owned Unit Petroleum Co., "Our primary tool is experience in the area: knowing what we're doing, how we're doing it, and what we've done before."

The company tries to add reserves at the rate of 150% of production and has done so in each of the past 19 years.

"That's about what you can do with cash flow if you keep your finding costs under control," Nikkel says. And he's serious about increasing reserves: "If we're not growing reserves we're eating shareholders out of house and home."

This year the company plans to drill 140-150 wells, compared with 96 in 2002. Its finding costs during the past 3 years averaged $1.15/Mcfe.

While concentrating on development, with a strong tilt toward natural gas, Unit Petroleum does conduct low-risk exploration. As Nikkel puts it, "We look at our production and see what we can do next door."

Gas accounts for more than 90% of Unit Petroleum's reserves of 269.4 bcfe, more than three quarters of it in Oklahoma portions of the Anadarko and Arkoma basins. The company also has production along the Gulf Coast and, since its 2000 acquisition of Tulsa-based Questa Oil & Gas Co., West Texas.

It also holds interests in individual wells in the Rocky Mountains, where, Nikkel says, "We're still looking for the right situation. Basically, we like tight gas. That's probably our forte. So the Rockies is, from our standpoint, an attractive place."

Last year Unit Corp. reported net income of $18.2 million on revenue of $187.7 million, of which $118.2 million came from contract drilling and $68 million from oil and gas production. It also holds a 40% interest in Superior Pipeline Co., an Oklahoma gas-gathering firm.

For this year Unit Petroleum budgeted capital expenditures totaling $65 million for E&P, including $55 for drilling, $8 million for acreage and seismic, and $2 million for acquisitions.

Spending by the wholly owned drilling subsidiary, Unit Drilling Co., will total $35 million this year: $7 million for drill pipe and $28 million for rig maintenance and upgrades.

Unit operated primarily as a drilling contractor until 1979, when it first offered shares to the public.

Fleet growing
The drilling subsidiary now owns 75 rigs. It acquired 20 of them last year from privately owned Cactus Drilling Co. for 7.5 million shares of Unit stock.

Unit Drilling has 7 rigs able to drill deeper than 25,000 ft, 5 to as deep as 25,000 ft, 17 to 20,000 ft, 29 to 15,000 ft, and 17 to less than 15,000 ft. It soon will add a unit to the 20,000 ft depth category when it completes construction of a 1,500 hp diesel electric rig.

Gas targets account for more than 98% of the wells drilled by the company, which has rigs in the Arkoma and Anadarko basins, Texas and Louisiana Gulf Coast, and Rockies.

Unit Petroleum prefers to use Unit Drilling rigs "if everything is equal." But it drills with other contractors' rigs when necessary.

"We'll never take a rig away from a customer to drill a Unit Production well," Nikkel says.

Because the drilling company seldom enters long-term contracts, the producing company often can plan its activity around availability of Unit Drilling rigs.

Unit maintains what Nikkel calls "a Chinese firewall" between its two segments to ensure confidentiality of third-party drilling results.

And to be fair to other working-interest owners, the producing company makes certain it pays competitive rates when it uses Unit Drilling services.

"That's something we watch very, very closely," Nikkel says. "The working interest owner may be a customer the day after tomorrow."

The drilling company's fleet has grown through acquisition and will continue to do so if rigs suited to its role as a medium to deep-drilling contractor become available.

"We're always looking," Nikkel says. "To the degree that we can find other opportunities that fit our drilling niche, we're very desirous of doing something else."

Nikkel manages through decentralization. The manager of each of the drilling company's six divisions has financial and contractual authority.

"They have to solve their own problems," Nikkel says. "We do much the same thing on the E&P side," where operations are managed out of Houston as well as the Tulsa headquarters.

Nikkel points out that most drilling contractors "at one time or other have been in the oil and gas business, maybe not as directly as we are."

For a contractor, oil and gas production sustains cash flow during slumps in drilling activity.

While production and drilling revenues follow similar business cycles, largely in line with oil and gas prices, Nikkel says, "The amplitudes of the cycles are not as great (for production) as they are on the drilling side."

Cycles and safety
When Nikkel joins nearly everyone else in the upstream oil and gas industry in expressing concern about price swings, therefore, he does so from a dual perspective. And he's clear about his concern.

"The cycles are the worst things for us," he says. "With payroll being 60% of our costs, we can't keep people on when the business goes down."

Periodic layoffs erode the average experience levels of rig crews, hampering efficiency and intensifying concerns about safety.

"On a rig, it's not a matter whether you stub a finger, it's whether you lose a hand," Nikkel says.

The remedies are training, which Nikkel deems best conducted in the workplace, and further advances in technology, about which he is as optimistic for drilling as he is with E&P.

"To me," he says, "the industry on both sides has been a total series of new inventions, new innovations, that have allowed us to move in the direction that we've moved."



Career Highlights

John G. Nikkel joined Unit Corp. in 1983 as president and a director. He became CEO in 2001 and chairman in June. He cofounded Nike Exploration Co. in 1982 and serves as president and director.

Employment
From 1976 until January 1982, Nikkel was an officer and director of Cotton Petroleum Corp., becoming president in 1979. He earlier worked for Amoco Production Co. for 18 years. His last position with Amoco was division manager for the Denver division.

Education
Nikkel holds a bachelor of science degree in geology and mathematics from Texas Christian University, Fort Worth, Tex.


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