Unit Corp. (NYSE: UNT) plans to buy fellow Tulsa-based producer PetroCorp Inc. (Amex: PEX) for about $190 million in cash and stock, beefing up the company's existing E&P division, Unit Petroleum Co., with the addition of 55 billion cu. ft. of proved reserves, located primarily in the Midcontinent and on the Gulf Coast regions. Earlier this year, PetroCorp sold its Canadian subsidiaries to an affiliate of Enerplus Resources Fund (NYSE: ERF) for about US$112 million, which allowed it to retire all its existing debt and have US$33.5 million left over. That deal prompted PetroCorp to consider a sale. "They were too small to stay out there as a public company," says Larry Pinkston, Unit Corp. executive vice president, treasurer and chief financial officer. Unit had 269.4 billion cu. ft. of reserves at year-end 2002, primarily in the Anadarko and Arkoma basins. Pinkston says he likes PetroCorp's development potential in South Texas and its established production in Oklahoma. Unit is not at the point where it would consider splitting its E&P group and its drilling group into separate entities, Pinkston adds. "In our minds, we still need critical mass, and primarily on the E&P side." The PetroCorp deal gives Unit about 340 billion cu. ft. of gas equivalent in reserves. The company would like to be in the 600-billion-cu.-ft. range before it contemplates a split. Yet it does not have definite plans to divide, he adds. "It's not a goal, but it's an option we'd like to have at some point in time." Unit's drilling company has 75 rigs operating in the Anadarko and Arkoma basins, in the Rockies and on the Texas and Louisiana Gulf Coast, and one more is under construction. It would like to have closer to 100 rigs before it would consider forming a separate drilling company, Pinkston says. Allen Brooks, an analyst with CIBC World Markets, says Unit is currently undervalued because of its dual (drilling and E&P) businesses. "In comparing Unit's current valuation with other U.S. land drillers, the valuation discount is obvious," he says. "Today, Unit is trading at 15 times our 2004 earnings-per-share estimate of $1.40, representing a 21% valuation discount to the land-driller average 2004 consensus multiple of 22 times." He adds, "In this case, the sum of the parts may be greater than the whole." Brooks estimates the price at $1.40 per thousand cu. ft. equivalent of reserves. PetroCorp traded as high as $14 the day the deal was announced. The previous day, it had closed at $11.15. An allocation of the purchase price is about $101 million to working capital, $78 million to proved reserves and $11 million to undeveloped leasehold and partnership interests. It is anticipated that the deal will be immediately accretive to Unit's earnings and cash flow per share. After the deal was announced, Unit was trading up 5 cents from its previous-day close of $20.91. Brooks' price target is $25. Meanwhile, Unit is undergoing a leadership change. King Kirchner, a company founder, planned to retire as chairman Aug. 1, on the company's 40th anniversary. He will remain on the board. John G. Nikkel, Unit president and chief executive officer, will succeed Kirchner as chairman. Nikkel will give up his role as president to Pinkston. -Jodi Wetuski
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