Quarterly Report (10-q)

Date : 11/08/2019 @ 5:44PM
Source : Edgar (US Regulatory)
Stock : Unit Corp (UNT)
Quote : 0.4837  -0.0183 (-3.65%) @ 12:59AM
After Hours
Last Trade
Last $ 0.49 ▲ 0.01 (1.30%)

Quarterly Report (10-q)

FALSESeptember 30, 20192019Q312/3155,531,603TRUEFALSE00007989492,5042,5311.001.005,000,0005,000,000——0.200.20175,000,000175,000,00055,531,60354,055,600—13—6045—47—1,476,0031,183,5715,31325,661——39218,89932,55242,00066,50048.5644.42P5Y4.0—6.000—6.625May 15, 20211,1381,6232,7103,902P3YP3YP3Y————0.8————————————————————————2.90060,0002.90040,0000.65920,0000.62510,0000.26530,0000.27530,0000.45520,00020,0002.633.0359.8002,0004,00061.2551.2572.9250.21530000300002.502.202.806,5159,11211,82918,04011.818.0—11.80—2.430P7Y1.7150.0372.8241,955————241,955—147,598——15,810131,788——173,724—37,191136,533241,955147,598173,724—53,001510,276108,148———3,828104,320—103,688——14,18389,505——133,702—33,363100,339108,148103,688133,702—51,374294,164118,10539,04835,6755,804—198,632396,059205,545171,6425,80451,374727,676———29,899—29,8991661,73713611—1,424153,93859,6842,21835,6921,627248,723———5,232—5,232——112925,938—27,067—627—16—611153,93860,3111,08956,3821,627271,169317,040————317,040—161,489——17,962143,527——232,938—65,012167,926317,040161,489232,938—82,974628,493104,234———3,715100,519—111,121——15,52895,593——185,738—61,297124,44197,79741,92733,4935,759—178,976202,031153,048219,2315,75980,540499,529———28,752—28,7521363149530—575115,1458,75513,80234,4812,434100,787———25,608—25,608——83424,844—25,678———17—17115,1458,75512,96884,9162,43449,518102958—197042—3000002303———230312051,299——2,50455,531,603———55,531,60312051,326——2,53154,055,600———54,055,600—45——45047004701300000130000600000060000—389,553173,72453,001510,276—211,836133,70251,374294,1645,804157,15335,675—198,632—29,899——29,899111571136—14245,793633,074171,50651,374758,9995,793243,5212,2181,627248,72325,938—1129—27,0675,232———5,23216627——61126,483244,1481,0891,627271,1696,52946,552——53,081198,945——198,945—218,899197,5961,089197,318218,088——811—811218,899197,596278197,318218,89900007989492019-01-012019-09-30xbrli:shares00007989492019-10-18iso4217:USD00007989492019-09-3000007989492018-12-31iso4217:USDxbrli:shares0000798949us-gaap:OilAndGasMember2019-07-012019-09-300000798949us-gaap:OilAndGasMember2018-07-012018-09-300000798949us-gaap:OilAndGasMember2019-01-012019-09-300000798949us-gaap:OilAndGasMember2018-01-012018-09-300000798949us-gaap:OilAndGasServiceMember2019-07-012019-09-300000798949us-gaap:OilAndGasServiceMember2018-07-012018-09-300000798949us-gaap:OilAndGasServiceMember2019-01-012019-09-300000798949us-gaap:OilAndGasServiceMember2018-01-012018-09-300000798949us-gaap:NaturalGasGatheringTransportationMarketingAndProcessingMember2019-07-012019-09-300000798949us-gaap:NaturalGasGatheringTransportationMarketingAndProcessingMember2018-07-012018-09-300000798949us-gaap:NaturalGasGatheringTransportationMarketingAndProcessingMember2019-01-012019-09-300000798949us-gaap:NaturalGasGatheringTransportationMarketingAndProcessingMember2018-01-012018-09-3000007989492019-07-012019-09-3000007989492018-07-012018-09-3000007989492018-01-012018-09-300000798949us-gaap:CommonStockMember2019-06-300000798949us-gaap:AdditionalPaidInCapitalMember2019-06-300000798949us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-300000798949us-gaap:RetainedEarningsMember2019-06-300000798949us-gaap:NoncontrollingInterestMember2019-06-3000007989492019-06-300000798949us-gaap:CommonStockMember2019-07-012019-09-300000798949us-gaap:AdditionalPaidInCapitalMember2019-07-012019-09-300000798949us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-07-012019-09-300000798949us-gaap:RetainedEarningsMember2019-07-012019-09-300000798949us-gaap:NoncontrollingInterestMember2019-07-012019-09-300000798949us-gaap:CommonStockMember2019-09-300000798949us-gaap:AdditionalPaidInCapitalMember2019-09-300000798949us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-300000798949us-gaap:RetainedEarningsMember2019-09-300000798949us-gaap:NoncontrollingInterestMember2019-09-300000798949us-gaap:CommonStockMember2018-12-310000798949us-gaap:AdditionalPaidInCapitalMember2018-12-310000798949us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310000798949us-gaap:RetainedEarningsMember2018-12-310000798949us-gaap:NoncontrollingInterestMember2018-12-310000798949us-gaap:CommonStockMember2019-01-012019-09-300000798949us-gaap:AdditionalPaidInCapitalMember2019-01-012019-09-300000798949us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-09-300000798949us-gaap:RetainedEarningsMember2019-01-012019-09-300000798949us-gaap:NoncontrollingInterestMember2019-01-012019-09-300000798949us-gaap:CommonStockMember2018-06-300000798949us-gaap:AdditionalPaidInCapitalMember2018-06-300000798949us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-06-300000798949us-gaap:RetainedEarningsMember2018-06-300000798949us-gaap:NoncontrollingInterestMember2018-06-3000007989492018-06-300000798949us-gaap:CommonStockMember2018-07-012018-09-300000798949us-gaap:AdditionalPaidInCapitalMember2018-07-012018-09-300000798949us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-07-012018-09-300000798949us-gaap:RetainedEarningsMember2018-07-012018-09-300000798949us-gaap:NoncontrollingInterestMember2018-07-012018-09-300000798949us-gaap:CommonStockMember2018-09-300000798949us-gaap:AdditionalPaidInCapitalMember2018-09-300000798949us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-09-300000798949us-gaap:RetainedEarningsMember2018-09-300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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
[Commission File Number 1-9260]
UNT-20190930_G1.JPG
UNIT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-1283193
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)

8200 South Unit Drive,    Tulsa,    Oklahoma    74132   
(Address of principal executive offices) (Zip Code)
(918) 493-7700
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒            No ☐ 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).       Yes ☒            No ☐                                                   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer     Accelerated filer     Non-accelerated filer
Smaller reporting company ☐   Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐        

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐            No ☒         
As of October 18, 2019, 55,531,603 shares of the issuer's common stock were outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock UNT NYSE



TABLE OF CONTENTS
 
    Page
Number
Item 1.
Unaudited Condensed Consolidated Balance Sheets
September 30, 2019 and December 31, 2018
4
Unaudited Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2019 and 2018
6
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 2019 and 2018
7
Unaudited Condensed Consolidated Statements of Changes in Shareholders' Equity
Three and Nine Months Ended September 30, 2019 and 2018
8
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2019 and 2018
10
12
Item 2.
44
Item 3.
69
Item 4.
69
Item 1.
70
Item 1A.
71
Item 2.
73
Item 3.
73
Item 4.
73
Item 5.
73
Item 6.
73
74

1

Forward-Looking Statements

This report contains “forward-looking statements” – meaning, statements related to future events within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included or incorporated by reference in this document that addresses activities, events or developments we expect or anticipate will or may occur, are forward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts,” and similar expressions are used to identify forward-looking statements. This report modifies and supersedes documents filed by us before this report. In addition, certain information we file with the SEC will automatically update and supersede information in this report.
These forward-looking statements include, among others, things as:

the amount and nature of our future capital expenditures and how we expect to fund our capital expenditures;
prices for oil, natural gas liquids (NGLs), and natural gas;
demand for oil, NGLs, and natural gas;
our exploration and drilling prospects;
the estimates of our proved oil, NGLs, and natural gas reserves;
oil, NGLs, and natural gas reserve potential;
development and infill drilling potential;
expansion and other development trends of the oil and natural gas industry;
our business strategy;
our plans to maintain or increase production of oil, NGLs, and natural gas;
the number of gathering systems and processing plants we plan to construct or acquire;
volumes and prices for natural gas gathered and processed;
expansion and growth of our business and operations;
demand for our drilling rigs and drilling rig rates;
our belief that the final outcome of legal proceedings involving us will not materially affect our financial results;
our ability to timely secure third-party services used in completing our wells;
our ability to transport or convey our oil or natural gas production to established pipeline systems;
impact of federal and state legislative and regulatory actions affecting our costs and increasing operating restrictions or delays and other adverse impacts on our business;
the possibility of security threats, including terrorist attacks and cybersecurity breaches, against, or otherwise impacting our facilities and systems;
our projected production guidelines for the year;
our anticipated capital budgets;
our financial condition and liquidity (including our ability to refinance our senior subordinated notes);
the amount of debt may limit our ability to obtain financing for acquisitions, make us more vulnerable to adverse economic conditions, and make it more difficult for us to make payments on our debt;
the possibility that covenants in our credit agreement or the indentures governing our outstanding notes may limit our discretion in the operation of our business, prohibit us from engaging in beneficial transactions, or lead to the accelerated payment of our debt;
the number of wells our oil and natural gas segment plans to drill or rework during the year; and
our estimates of the amounts of any ceiling test write-downs or other potential asset impairments we may have to record in future periods.
These statements are based on assumptions and analyses made by us based on our experience and our perception of historical trends, current conditions, and expected future developments, and other factors we believe are appropriate in the circumstances. Whether actual results and developments will conform to our expectations and predictions is subject to several risks and uncertainties, any one or combination of which could cause our actual results to differ materially from our expectations and predictions, including:
the risk factors discussed in this document and in the documents (if any) we incorporate by reference;
general economic, market, or business conditions;
the availability of and nature of (or lack of) business opportunities we pursue;
demand for our land drilling services;
changes in laws or regulations;
changes in the current geopolitical situation;
risks relating to financing, including restrictions in our debt agreements and availability and cost of credit;
2

risks associated with future weather conditions;
decreases or increases in commodity prices;
putative class action lawsuits that may result in substantial expenditures and divert management's attention; and
other factors, most of which are beyond our control.
You should not place undue reliance on these forward-looking statements. Except as required by law, we disclaim any intention to update forward-looking information and to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after this document to reflect unanticipated events.
3

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30,
2019
December 31,
2018
  (In thousands except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 612    $ 6,452   
Accounts receivable, net of allowance for doubtful accounts of $2,504 and $2,531 at September 30, 2019 and December 31, 2018, respectively    77,994    119,397   
Materials and supplies 524    473   
Current derivative asset (Note 11) 5,959    12,870   
Income taxes receivable 2,405    2,054   
Assets held for sale (Note 4) 17,299    22,511   
Prepaid expenses and other 12,472    6,602   
Total current assets 117,265    170,359   
Property and equipment:
Oil and natural gas properties on the full cost method:
Proved properties 6,312,461    6,018,568   
Unproved properties not being amortized 282,356    330,216   
Drilling equipment 1,290,222    1,284,419   
Gas gathering and processing equipment 806,862    767,388   
Saltwater disposal systems 69,499    68,339   
Corporate land and building 59,080    59,081   
Transportation equipment 30,088    29,524   
Other 57,431    57,507   
8,907,999    8,615,042   
Less accumulated depreciation, depletion, amortization, and impairment 6,522,621    6,182,726   
Net property and equipment 2,385,378    2,432,316   
Goodwill (Note 2) —    62,808   
Non-current derivative asset (Note 11) 128    —   
Right of use asset (Note 13) 7,315    —   
Other assets 29,823    32,570   
Total assets (1)
$ 2,539,909    $ 2,698,053   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
4

UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - CONTINUED

September 30,
2019
December 31,
2018
  (In thousands except share amounts)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 80,414    $ 149,945   
Accrued liabilities (Note 6) 73,274    49,664   
Current operating lease liability (Note 13) 4,291    —   
Current portion of other long-term liabilities (Note 7) 15,402    14,250   
Total current liabilities 173,381    213,859   
Long-term debt less issuance costs (Note 7) 784,352    644,475   
Non-current derivative liability (Note 11) 107    293   
Operating lease liability (Note 13) 2,800    —   
Other long-term liabilities (Note 7) 96,360    101,234   
Deferred income taxes 91,676    144,748   
Commitments and contingencies (Note 14) —    —   
Shareholders’ equity:
Preferred stock, $1.00 par value, 5,000,000 shares authorized, none issued —    —   
Common stock, $.20 par value, 175,000,000 shares authorized, 55,531,603 and 54,055,600 shares issued as of September 30, 2019 and December 31, 2018, respectively    10,590    10,414   
Capital in excess of par value 644,042    628,108   
Accumulated other comprehensive loss —    (481)  
Retained earnings 534,115    752,840   
Total shareholders’ equity attributable to Unit Corporation 1,188,747    1,390,881   
Non-controlling interests in consolidated subsidiaries 202,486    202,563   
Total shareholders' equity 1,391,233    1,593,444   
Total liabilities(1) and shareholders’ equity
$ 2,539,909    $ 2,698,053   
_______________________
(1)Unit Corporation's consolidated total assets as of September 30, 2019 include total current and long-term assets of its variable interest entity (VIE) (Superior Pipeline Company, L.L.C.) of $24.1 million and $427.4 million, respectively, which can only settle obligations of the VIE. Unit Corporation's consolidated total liabilities as of September 30, 2019 include total current and long-term liabilities of the VIE of $29.4 million and $15.8 million, respectively, for which the creditors of the VIE have no recourse to Unit Corporation. Unit Corporation's consolidated total assets as of December 31, 2018 include total current and long-term assets of the VIE of $40.1 million and $423.3 million, respectively, which can only settle obligations of the VIE. Unit Corporation's consolidated total liabilities as of December 31, 2018 include total current and long-term liabilities of the VIE of $42.8 million and $14.7 million, respectively, for which the creditors of the VIE have no recourse to Unit Corporation. See Note 15 – Variable Interest Entity Arrangements.


The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

5

UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three Months Ended Nine Months Ended
  September 30, September 30,
  2019 2018 2019 2018
  (In thousands except per share amounts)
Revenues:
Oil and natural gas $ 78,045    $ 111,623    $ 241,955    $ 317,040   
Contract drilling 37,596    50,612    131,788    143,527   
Gas gathering and processing 39,798    57,823    136,533    167,926   
Total revenues 155,439    220,058    510,276    628,493   
Expenses:
Operating costs:
Oil and natural gas 35,364    32,139    104,320    100,519   
Contract drilling 28,796    32,032    89,505    95,593   
Gas gathering and processing 28,493    43,134    100,339    124,441   
Total operating costs 92,653    107,305    294,164    320,553   
Depreciation, depletion, and amortization 70,214    63,537    198,632    178,976   
Impairments (Note 2) 234,880    —    234,880    —   
General and administrative 10,094    9,278    29,899    28,752   
(Gain) loss on disposition of assets   231    (253)   1,424    (575)  
Total operating expenses 408,072    179,867    758,999    527,706   
Income (loss) from operations   (252,633)   40,191    (248,723)   100,787   
Other income (expense):
Interest, net (9,534)   (7,945)   (27,067)   (25,678)  
Gain (loss) on derivatives 4,237    (4,385)   5,232    (25,608)  
Other, net (622)     (611)   17   
Total other income (expense) (5,919)   (12,324)   (22,446)   (51,269)  
Income (loss) before income taxes (258,552)   27,867    (271,169)   49,518   
Income tax expense (benefit):
Deferred (50,763)   6,744    (53,081)   12,380   
Total income taxes (50,763)   6,744    (53,081)   12,380   
Net income (loss) (207,789)   21,123    (218,088)   37,138   
Net income (loss) attributable to non-controlling interest (903)   2,224    811    4,586   
Net income (loss) attributable to Unit Corporation $ (206,886)   $ 18,899    (218,899)   32,552   
Net income (loss) attributable to Unit Corporation per common share (Note 5):
Basic $ (3.91)   $ 0.36    $ (4.14)   $ 0.63   
Diluted $ (3.91)   $ 0.36    $ (4.14)   $ 0.62   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

6

UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
Three Months Ended Nine Months Ended
  September 30, September 30,
  2019 2018 2019 2018
  (In thousands)  
Net income (loss)   $ (207,789)   $ 21,123    $ (218,088)   $ 37,138   
Other comprehensive income (loss), net of taxes:  
Unrealized loss on securities, net of tax of $0, ($13), $0, ($60) —    (38)   —    (179)  
Reclassification adjustment for write-down of securities, net of tax of ($45), $0, ($47), $0 487    —    481    —   
Comprehensive income (loss)   (207,302)   21,085    (217,607)   36,959   
Less: Comprehensive income (loss) attributable to non-controlling interest   (903)   2,224    811    4,586   
Comprehensive income (loss) attributable to Unit Corporation   $ (206,399)   $ 18,861    $ (218,418)   $ 32,373   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

7

UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended September 30, 2019
Shareholders' Equity Attributable to Unit Corporation
Common
Stock
Capital in Excess
of Par Value
Accumulated Other Comprehensive Income (Loss) Retained
Earnings
Non-controlling Interest in Consolidated Subsidiaries Total
(In thousands except per share amounts)
Balances, June 30, 2019 $ 10,590    $ 638,769    $ (487)   $ 741,001    $ 203,359    $ 1,593,232   
Net loss —    —    —    (206,886)   (903)   (207,789)  
Reclassification adjustment for write-down of securities, net of tax of ($45)) —    —    487    —    —    487   
Total comprehensive loss (207,302)  
Activity in employee compensation plans ((5,313) shares) —    5,273    —    —    30    5,303   
Balances, September 30, 2019 $ 10,590    $ 644,042    $ —    $ 534,115    $ 202,486    $ 1,391,233   

Nine Months Ended September 30, 2019
Shareholders' Equity Attributable to Unit Corporation
Common
Stock
Capital in Excess
of Par Value
Accumulated Other Comprehensive Income (Loss) Retained
Earnings
Non-controlling Interest in Consolidated Subsidiaries Total
  (In thousands except per share amounts)
Balances, December 31, 2018 $ 10,414    $ 628,108    $ (481)   $ 752,840    $ 202,563    $ 1,593,444   
Cumulative effect adjustment for adoption of ASUs (Notes 1 and 12)
—    —    —    174    —    174   
Net income (loss) —    —    —    (218,899)   811    (218,088)  
Reclassification adjustment for write-down of securities, net of tax of ($47)) —    —    481    —    —    481   
Total comprehensive loss (217,607)  
Distributions to non-controlling interest —    —    —    —    (918)   (918)  
Activity in employee compensation plans (1,476,003 shares) 176    15,934    —    —    30    16,140   
Balances, September 30, 2019 $ 10,590    $ 644,042    $ —    $ 534,115    $ 202,486    $ 1,391,233   



The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
8

Three Months Ended September 30, 2018   
Shareholders' Equity Attributable to Unit Corporation
Common
Stock
Capital in Excess
of Par Value
Accumulated Other Comprehensive Loss Retained
Earnings
Non-controlling Interest in Consolidated Subsidiaries Total
(In thousands except per share amounts)
Balances, June 30, 2018 $ 10,414    $ 622,120    $ (65)   $ 811,781    $ 199,404    $ 1,643,654   
Net income —    —    —    18,899    2,224    21,123   
Other comprehensive loss (net of tax of ($13)) —    —    (38)   —    —    (38)  
Total comprehensive income 21,085   
Transaction costs associated with sale of non-controlling interest —    (49)   —    —    —    (49)  
Activity in employee compensation plans ((25,661) shares) —    4,675    —    —    —    4,675   
Balances, September 30, 2018 $ 10,414    $ 626,746    $ (103)   $ 830,680    $ 201,628    $ 1,669,365   

Nine Months Ended September 30, 2018   
Shareholders' Equity Attributable to Unit Corporation
Common
Stock
Capital in Excess
of Par Value
Accumulated Other Comprehensive Income (Loss) Retained
Earnings
Non-controlling Interest in Consolidated Subsidiaries Total
  (In thousands except per share amounts)
Balances, December 31, 2017 $ 10,280    $ 535,815    $ 63    $ 799,402    $ —    $ 1,345,560   
Cumulative effect adjustment for adoption of ASUs —    —    13    (1,274)   —    (1,261)  
Net income —    —    —    32,552    4,586    37,138   
Other comprehensive loss (net of tax of ($60)) —    —    (179)   —    —    (179)  
Total comprehensive income 36,959   
Contributions —    102,958    —    —    197,042    300,000   
Transaction costs associated with sale of non-controlling interest —    (2,303)   —    —    —    (2,303)  
Tax effect of the sale of non-controlling interest —    (24,300)   —    —    —    (24,300)  
Activity in employee compensation plans (1,183,571 shares) 134    14,576    —    —    —    14,710   
Balances, September 30, 2018 $ 10,414    $ 626,746    $ (103)   $ 830,680    $ 201,628    $ 1,669,365   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.


9

UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
  September 30,
  2019 2018
  (In thousands)
OPERATING ACTIVITIES:
Net income (loss)   $ (218,088)   $ 37,138   
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, and amortization 198,632    178,976   
Impairments (Note 2)   234,880    —   
Amortization of debt issuance costs and debt discount (Note 7)   1,677    1,645   
(Gain) loss on derivatives (Note 11)   (5,232)   25,608   
Cash receipts (payments) on derivatives settled, net (Note 11)   11,829    (18,040)  
Deferred tax expense (benefit)   (53,081)   12,380   
(Gain) loss on disposition of assets   1,424    (575)  
Stock compensation plans 17,027    17,397   
Contract assets and liabilities, net (Note 3)   (1,930)   (3,671)  
Other, net 2,332    2,835   
Changes in operating assets and liabilities increasing (decreasing) cash:
Accounts receivable 38,821    (10,611)  
Accounts payable (31,606)   (14,867)  
Material and supplies (51)   —   
Accrued liabilities 17,086    16,242   
Other, net 5,730    (2,975)  
Net cash provided by operating activities    219,450    241,482   
INVESTING ACTIVITIES:
Capital expenditures (364,954)   (304,054)  
Producing properties and other acquisitions (3,345)   (769)  
Proceeds from disposition of assets 10,506    25,316   
Net cash used in investing activities    (357,793)   (279,507)  
FINANCING ACTIVITIES:
Borrowings under credit agreement 392,200    71,200   
Payments under credit agreement (254,000)   (249,200)  
Payments on finance leases (2,984)   (2,869)  
Proceeds from investments in non-controlling interest —    300,000   
Employee taxes paid by withholding shares (4,080)   (4,947)  
Transaction costs associated with sale of non-controlling interest —    (2,303)  
Distributions to non-controlling interest (918)   —   
Bank overdrafts 2,285    17,000   
Net cash provided by financing activities    132,503    128,881   
Net increase (decrease) in cash and cash equivalents   (5,840)   90,856   
Cash and cash equivalents, beginning of period 6,452    701   
Cash and cash equivalents, end of period $ 612    $ 91,557   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.


10

UNIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED

Nine Months Ended
  September 30,
  2019 2018
  (In thousands)
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid (net of capitalized)
$ 13,686    $ 14,418   
Income taxes
—    3,600   
Changes in accounts payable and accrued liabilities related to purchases of property, plant, and equipment
40,210    (28,770)  
Non-cash (addition) reduction to oil and natural gas properties related to asset retirement obligations
1,906    8,546   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
11

UNIT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PREPARATION AND PRESENTATION

The unaudited condensed consolidated financial statements in this report include the accounts of Unit Corporation and all its subsidiaries and affiliates and have been prepared under the rules and regulations of the SEC. The terms “company,” “Unit,” “we,” “our,” “us,” or like terms refer to Unit Corporation, a Delaware corporation, and one or more of its subsidiaries and affiliates, except as otherwise indicated or as the context otherwise requires. We consolidate the activities of Superior Pipeline Company, L.L.C. (Superior), a 50/50 joint venture between Unit Corporation and SP Investor Holdings, LLC, which qualifies as a Variable Interest Entity (VIE) under generally accepted accounting principles in the United States (GAAP). We have concluded that we are the primary beneficiary of the VIE, as defined in the accounting standards, since we have the power to direct those activities that most significantly affect the economic performance of Superior as further described in Note 15 - Variable Interest Entity Arrangements.

The condensed consolidated financial statements are unaudited and do not include all the notes in our annual financial statements. This report should be read with the audited consolidated financial statements and notes in our Form 10-K, filed February 26, 2019, for the year ended December 31, 2018.

In the opinion of our management, the unaudited condensed consolidated financial statements contain all normal recurring adjustments (including the elimination of all intercompany transactions) necessary to fairly state:

Balance Sheets as of September 30, 2019 and December 31, 2018;
Statements of Operations for the three and nine months ended September 30, 2019 and 2018;
Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018;
Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2019 and 2018; and
Statements of Cash Flows for the nine months ended September 30, 2019 and 2018.

Our financial statements are prepared in conformity with GAAP, which requires us to make certain estimates and assumptions that may affect the amounts reported in our unaudited condensed consolidated financial statements and notes. Actual results may differ from those estimates. Results for the nine months ended September 30, 2019 and 2018 are not necessarily indicative of the results we may realize for the full year of 2019, or that we realized for the full year of 2018.

Certain amounts in this report for prior periods have been reclassified to conform to current year presentation. There was no impact to consolidated net income (loss) or shareholders' equity.

Accounting Changes - Recent Accounting Pronouncements - Adopted

As of January 1, 2019, we adopted Leases - Topic 842 (ASC 842) using the modified retrospective method and the optional transition method to record the adoption impact through a cumulative adjustment to equity. Results for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior periods are not adjusted and continue to be reported under the accounting standards in effect for those periods. This new lease standard is explained further in Note 9 – New Accounting Pronouncements.

The additional disclosures required by ASC 842 have been included in Note 13 – Leases.

As of September 30, 2019, we adopted Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment to simplify the measurement of goodwill. The amendment eliminates Step 2 from the goodwill impairment test. This new standard is explained further in Note 9 – New Accounting Pronouncements.

NOTE 2 – IMPAIRMENTS

Oil and Natural Gas Properties

Full cost accounting rules require us to review the carrying value of our oil and natural gas properties at the end of each quarter. Under those rules, the maximum amount allowed as the carrying value is called the ceiling. The ceiling is the sum of
12

the present value (using a 10% discount rate) of the estimated future net revenues from our proved reserves (using the unescalated 12-month average price of our oil, NGLs, and natural gas), plus the cost of properties not being amortized, plus the lower of cost or estimated fair value of unproved properties in the costs being amortized, less related income taxes. If the net book value of the oil, NGLs, and natural gas properties being amortized exceeds the full cost ceiling, the excess amount is charged to expense in the period during which the excess occurs, even if prices are depressed for only a short while. Once incurred, a write-down of oil and natural gas properties is not reversible.

We determined the value of certain unproved oil and gas properties were diminished (in part or in whole) based on an impairment evaluation and our anticipated future exploration plans. Those determinations resulted in $50.0 million of cost being added to the total of our capitalized costs being amortized in the third quarter of 2019. We did not have any in 2018. We incurred a non-cash ceiling test write-down of $169.3 million pre-tax ($127.9 million, net of tax) in the third quarter of 2019. We had no non-cash ceiling test write-downs in the first two quarters of 2019 or for all of 2018.

Goodwill

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Goodwill is not amortized, but is tested for impairment at the reporting unit level at least annually. Our annual goodwill impairment test is performed on December 31. Testing goodwill for impairment is also performed when events indicate a triggering event may have occurred outside of our normal testing period.

During the third quarter of 2019, we determined a triggering event had occurred within our contract drilling reporting unit due to a decline in the number of rigs being used and the overall market performance of the contract drilling industry. As a result, we performed an interim goodwill impairment test as of September 30, 2019. To determine the fair value of this reporting unit, we used the income approach. The income approach estimates the fair value by discounting the reporting unit's estimated future cash flows using our estimate of the discount rate, or expected return, that a marketplace participant would have required as of the valuation date.

Based on the projected discounted cash flows, we recognized a goodwill impairment charge of $62.8 million, pre-tax ($59.7 million, net of tax) which represents the total goodwill previously reported on our condensed consolidated balance sheets.

Long-Lived Assets

Due to the triggering event within the contract drilling reporting unit, we performed a recoverability test of long-lived assets within the segment. Based on the results of the undiscounted projected future cash flows of the asset group, the undiscounted projected future cash flows of the asset group exceeded the group's carrying value as of September 30, 2019 and therefore no long-lived asset impairment was recorded for the group.

NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Our revenue streams are reported under three segments: oil and natural gas, contract drilling, and mid-stream. This is how we disaggregate our revenue and how we report our segment revenue (as reflected in Note 16 – Industry Segment Information). Revenue from the oil and natural gas segment is from sales of our oil and natural gas production. Revenue from the contract drilling segment comes from contracting with upstream companies to drill an agreed-on number of wells or provide drilling rigs and services over an agreed-on period. Revenue from the mid-stream segment is derived from gathering, transporting, and processing natural gas and NGLs and selling those commodities. We sell the hydrocarbons (from our oil and natural gas and mid-stream segments) to other mid-stream and downstream oil and gas companies.

Oil and Natural Gas Revenues

Certain costs—as either a deduction from revenue or as an expense—are determined based on when control of the commodity is transferred to our customer, which would affect our total revenue recognized, but will not affect gross profit. For example, gathering, processing, and transportation costs included as part of the contract price with the customer on transfer of control of the commodity are included in the transaction price, while costs incurred while we are in control of the commodity represent operating costs.

13

Contract Drilling Revenues

We have evaluated the mobilization and de-mobilization charges due under our outstanding drilling contracts. The impact of those charges to the financial statements was immaterial. As of September 30, 2019, we had 19 contract drilling contracts with terms ranging from one month to almost three years.

Most of our drilling contracts have an original term of less than one year. The remaining performance obligations under the contracts with a longer duration are not material.

Mid-stream Contracts Revenues

Revenues are generated from fees earned for gas gathering and processing services provided to a customer. The typical revenue contracts used by this segment are gas gathering and processing agreements. These tables show the changes in our mid-stream contract asset and contract liability balances during the nine months ended September 30, 2019:

Contract Assets Amount
(In thousands)
Balance at December 31, 2018
(1)
$ 13,164   
Amounts invoiced in excess of revenue recognized (165)  
Balance at September 30, 2019
(1)
$ 12,999   
_______________________
1.At December 31, 2018, total contract assets are included in prepaid expenses and other and other assets of $0.3 million and $12.9 million, respectively, in our Consolidated Balance Sheet. At September 30, 2019, total contract assets included prepaid expenses and other and other assets of $5.0 million and $8.0 million, respectively, in our Condensed Consolidated Balance Sheet.

Contract Liabilities Amount
(In thousands)
Balance at December 31, 2018
(1)
$ 9,882   
New contract 60   
Revenue included in beginning balance (2,155)  
Balance at September 30, 2019
(1)
$ 7,787   

______________________
1.At December 31, 2018, total contract liabilities are included in current portion of other long-term liabilities and other long-term liabilities of $2.9 million and $7.0 million, respectively, in our Consolidated Balance Sheet. At September 30, 2019, total contract liabilities included current portion of other long-term liabilities and other long-term liabilities of $2.9 million and $4.9 million, respectively, in our Condensed Consolidated Balance Sheet.

Included below is the fixed revenue we will earn over the remaining term of the contracts and excludes all variable consideration to be earned with the associated contract.
Contract Remaining Term of Contract October - December 2019 2020 2021    2022    2023 and Beyond    Total Remaining Impact to Revenue   
(In thousands)  
Demand fee contracts 3-9 years $ 646    $ (3,775)   $ (3,501)   $ 1,382    $ 36    $ (5,212)  

NOTE 4 – DIVESTITURES

Oil and Natural Gas

We sold $2.2 million of non-core oil and natural gas assets, net of related expenses, during the first nine months of 2019, compared to $22.3 million during the first nine months of 2018. These proceeds reduced the net book value of our full cost pool with no gain or loss recognized.

14

Contract Drilling

In December 2018, we removed 41 drilling rigs and other equipment from service. We estimated the fair value of the 41 drilling rigs based on the estimated market value from third-party assessments (Level 3 fair value measurement) less cost to sell. Based on these estimates, we recorded a pre-tax non-cash write-down of approximately $147.9 million. During the first nine months of 2019, we sold four of these drilling rigs and some of the other equipment to unaffiliated third parties. The proceeds of those sales, less costs to sell, was more than the applicable $5.2 million net book value resulting in a gain of $0.5 million. The remaining drilling rigs and equipment will be marketed for sale throughout the next twelve months and remain classified as assets held for sale. The net book value of those assets is $17.3 million.

NOTE 5 – EARNINGS (LOSS) PER SHARE

Information related to the calculation of earnings (loss) per share attributable to Unit Corporation is as follows:
Earnings (Loss)
(Numerator)
Weighted
Shares
(Denominator)
Per-Share
Amount
  (In thousands except per share amounts)
For the three months ended September 30, 2019
Basic loss attributable to Unit Corporation per common share $ (206,886)   52,950    $ (3.91)  
Effect of dilutive stock options and restricted stock
—    —    —   
Diluted loss attributable to Unit Corporation per common share $ (206,886)   52,950    $ (3.91)  
For the three months ended September 30, 2018
Basic earnings attributable to Unit Corporation per common share $ 18,899    52,068    $ 0.36   
Effect of dilutive stock options and restricted stock
—    1,072    —   
Diluted earnings attributable to Unit Corporation per common share $ 18,899    53,140    $ 0.36   

Because of the net loss for the three months ended September 30, 2019, approximately 20,000 weighted average shares of stock options and restricted stock were antidilutive and were excluded from the earnings per share calculation above.

The following table shows the number of stock options (and their average exercise price) excluded because their option exercise prices were greater than the average market price of our common stock:
Three Months Ended
  September 30,
  2019 2018
Stock options 42,000    66,500   
Average exercise price $ 48.56    $ 44.42   


Earnings (Loss) (Numerator) Weighted Shares (Denominator) Per-Share Amount
(In thousands except per share amounts)
For the nine months ended September 30, 2019   
Basic loss attributable to Unit Corporation per common share $ (218,899)   52,814    $ (4.14)  
Effect of dilutive stock options and restricted stock —    —    —   
Diluted loss attributable to Unit Corporation per common share $ (218,899)   52,814    $ (4.14)  
For the nine months ended September 30, 2018   
Basic earnings attributable to Unit Corporation per common share $ 32,552    51,951    $ 0.63   
Effect of dilutive stock options and restricted stock —    808    (0.01)  
Diluted earnings attributable to Unit Corporation per common share $ 32,552    52,759    $ 0.62   
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Because of the net loss for the nine months ended September 30, 2019, approximately 185,000 weighted average shares of stock options and restricted stock were antidilutive and were excluded from the earnings per share calculation above.

The following table shows the number of stock options (and their average exercise price) excluded because their option exercise prices were greater than the average market price of our common stock:
Nine Months Ended
  September 30,
  2019 2018
Stock options 42,000    66,500   
Average exercise price $ 48.56    $ 44.42   

NOTE 6 – ACCRUED LIABILITIES

Accrued liabilities consisted of:
September 30,
2019
December 31,
2018
  (In thousands)
Employee costs $ 19,373    $ 22,056   
Interest payable 17,483    6,635   
Lease operating expenses 10,069    12,756   
Taxes 9,811    1,378   
Customer prepayments 8,683    —   
Third-party credits 2,611    2,129   
Other 5,244    4,710   
Total accrued liabilities $ 73,274    $ 49,664   
NOTE 7 – LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES

Long-Term Debt

As of the date indicated, our long-term debt consisted of the following:
September 30,
2019
December 31,
2018
  (In thousands)
Unit credit agreement with an average interest rate of 4.0% at September 30, 2019 $ 134,100    $ —   
Superior credit agreement with an average interest rate of 6.0% at September 30, 2019 4,100    —   
6.625% senior subordinated notes due 2021 650,000    650,000   
Total principal amount 788,200    650,000   
Less: unamortized discount (1,138)   (1,623)  
Less: debt issuance costs, net (2,710)   (3,902)  
Total long-term debt $ 784,352    $ 644,475   

Unit Credit Agreement. We have engaged in discussions with the lenders under our Senior Credit Agreement (Unit credit agreement) to enter into an amendment to the Unit credit agreement to, among other things, permit the issuance of new Second Lien Senior Secured Notes (the New Notes), the incurrence of guarantees of the New Notes and the grant of liens securing the New Notes, each of which is currently not permitted under the Unit credit agreement. See Note 18 hereto for a description of our Exchange Offer for the New Notes.

Our Unit credit agreement is scheduled to mature on the earlier of (a) October 18, 2023, (b) November 16, 2020, to the extent that, on or before that date, all senior subordinated notes (the Notes) are not repurchased, redeemed, or refinanced with indebtedness having a maturity date at least six months following October 18, 2023, and (c) any earlier date on which the commitment amounts under the Unit credit agreement are reduced to zero or otherwise terminated. Under that agreement, the amount we can borrow is the lesser of the amount we elect as the commitment amount or the value of the borrowing base as
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determined by the lenders, but in either event not to exceed the maximum credit agreement amount of $1.0 billion. Effective September 26, 2019, our elected commitment amount and borrowing base are both $275.0 million. We are currently charged a commitment fee of 0.375% on the amount available but not borrowed. That fee varies based on the amount borrowed as a percentage of the total borrowing base. Total fees of $3.3 million in origination, agency, syndication, and other related fees are being amortized over the life of the agreement. Under the agreement, we have pledged as collateral 80% of the proved developed producing (discounted as present worth at 8%) total value of our oil and gas properties.

On May 2, 2018, we entered into a Pledge Agreement with BOKF, NA (dba Bank of Oklahoma), as administrative agent to benefit the secured parties, granting a security interest in the limited liability membership interests and other equity interests we own in Superior (which as of this report is 50% of the aggregate outstanding equity interests of Superior) as additional collateral for our obligations under the Unit credit agreement.

The borrowing base amount–which is subject to redetermination by the lenders on April 1st and October 1st of each year–is based on a percentage of the discounted future value of our oil and natural gas reserves. We or the lenders may request a onetime special redetermination of the borrowing base between each scheduled redetermination. In addition, we may request a redetermination following the completion of an acquisition that meets the requirements in the Unit credit agreement. Effective September 26, 2019, our borrowing base was reduced from $425.0 million to $275.0 million.

At our election, any part of the outstanding debt under the Unit credit agreement can be fixed at a London Interbank Offered Rate (LIBOR). LIBOR interest is computed as the LIBOR base for the term plus 1.50% to 2.50% depending on the level of debt as a percentage of the borrowing base and is payable at the end of each term, or every 90 days, whichever is less. Borrowings not under LIBOR bear interest at the prime rate specified in the Unit credit agreement but in no event less than LIBOR plus 1.00% plus a margin. The credit agreement provides that if ICE Benchmark Administration no longer reports the LIBOR or Administrative Agent determines in good faith that the rate so reported no longer accurately reflects the rate available to Lender in the London Interbank Market or if such index no longer exists or accurately reflects the rate available to Administrative Agent in the London Interbank Market, Administrative Agent may select a replacement index. Interest is payable at the end of each month or at the end of each LIBOR contract and the principal may be repaid in whole or in part at any time, without a premium or penalty. At September 30, 2019, we had $134.1 million outstanding borrowings under the Unit credit agreement.

We can use borrowings to finance general working capital requirements for (a) exploration, development, production, and acquisition of oil and gas properties, (b) acquisitions and operation of mid-stream assets up to certain limits, (c) issuance of standby letters of credit, (d) contract drilling services and acquisition of contract drilling equipment, and (e) general corporate purposes.

The Unit credit agreement prohibits, among other things:

the payment of dividends (other than stock dividends) during any fiscal year over 30% of our consolidated net income for the preceding fiscal year;
the incurrence of additional debt with certain limited exceptions;
the creation or existence of mortgages or liens, other than those in the ordinary course of business and with certain limited exceptions, on any of our properties, except in favor of our lenders; and
investments in Unrestricted Subsidiaries (as defined in the Unit credit agreement) over $200.0 million.

The Unit credit agreement also requires that we have at the end of each quarter:

a current ratio (as defined in the credit agreement) of not less than 1 to 1.
a leverage ratio of funded debt to consolidated EBITDA (as defined in the Unit credit agreement) for the most recently ended rolling four fiscal quarters of no greater than 4 to 1.

As of September 30, 2019, we were in compliance with these covenants.

Superior Credit Agreement. On May 10, 2018, Superior signed a five-year, $200.0 million senior secured revolving credit facility with an option to increase the credit amount up to $250.0 million, subject to certain conditions (Superior credit agreement). The amounts borrowed under the Superior credit agreement bear annual interest at a rate, at Superior’s option, equal to (a) LIBOR plus the applicable margin of 2.00% to 3.25% or (b) the alternate base rate (greater of (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) third day LIBOR plus 1.00%) plus the applicable margin of 1.00% to 2.25%. The
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obligations under the Superior credit agreement are secured by, among other things, mortgage liens on certain of Superior’s processing plants and gathering systems. The credit agreement provides that if ICE Benchmark Administration no longer reports the LIBOR or Administrative Agent determines in good faith that the rate so reported no longer accurately reflects the rate available to Lender in the London Interbank Market or if such index no longer exists or accurately reflects the rate available to Administrative Agent in the London Interbank Market, Administrative Agent may select a replacement index.

Superior is charged a commitment fee of 0.375% on the amount available but not borrowed which varies based on the amount borrowed as a percentage of the total borrowing base. Superior paid $1.7 million in origination, agency, syndication, and other related fees. These fees are being amortized over the life of the Superior credit agreement.

The Superior credit agreement requires that Superior maintain a Consolidated EBITDA to interest expense ratio for the most-recently ended rolling four quarters of at least 2.50 to 1.00, and a funded debt to Consolidated EBITDA ratio of not greater than 4.00 to 1.00. The agreement also contains several customary covenants that restrict (subject to certain exceptions) Superior’s ability to incur additional indebtedness, create additional liens on its assets, make investments, pay distributions, sign sale and leaseback transactions, engage in certain transactions with affiliates, engage in mergers or consolidations, sign hedging arrangements, and acquire or dispose of assets. As of September 30, 2019, Superior complied with these covenants.
 
The borrowings under the Superior credit agreement will fund capital expenditures and acquisitions, provide general working capital, and for letters of credit for Superior. As of September 30, 2019, we had $4.1 million outstanding borrowings under the Superior credit agreement.

On June 27, 2018, Superior and the lenders amended the Superior credit agreement to revise certain definitions in the agreement.

Superior's credit agreement is not guaranteed by Unit.

6.625% Senior Subordinated Notes. We have an aggregate principal amount of $650.0 million, 6.625% senior subordinated notes (the Notes) outstanding. Interest on the Notes is payable semi-annually (in arrears) on May 15 and November 15 of each year. The Notes mature on May 15, 2021. In issuing the Notes, we incurred fees of $14.7 million that are being amortized as debt issuance cost until maturity.

The Notes are subject to an Indenture dated as of May 18, 2011, between us and Wilmington Trust, National Association (successor to Wilmington Trust FSB), as Trustee (the Trustee), as supplemented by the First Supplemental Indenture dated as of May 18, 2011, between us, the Guarantors, and the Trustee, and as further supplemented by the Second Supplemental Indenture dated as of January 7, 2013, between us, the Guarantors, and the Trustee (as supplemented, the 2011 Indenture), establishing the terms of and providing for issuing the Notes. The Guarantors are most of our direct and indirect subsidiaries. The discussion of the Notes in this report is qualified by and subject to the actual terms of the 2011 Indenture.

Unit, as the parent company, has no significant independent assets or operations. The guarantees by the Guarantors of the Notes (registered under registration statements) are full and unconditional, joint and several, subject to certain automatic customary releases, are subject to certain restrictions on the sale, disposition, or transfer of the capital stock or substantially all of the assets of a subsidiary guarantor, and other conditions and terms set out in the 2011 Indenture. Effective April 3, 2018, Superior is no longer a Guarantor of the Notes. Excluding Superior, any of our other subsidiaries that are not Guarantors are minor. There are no significant restrictions on our ability to receive funds from any of our subsidiaries through dividends, loans, advances, or otherwise.

We may redeem all or, occasionally, a part of the Notes at certain redemption prices, plus accrued and unpaid interest. If a “change of control” occurs, unless the company has exercised its right to redeem all of the Notes, we must offer to repurchase from each holder all or any part of that holder’s Notes at a purchase price in cash equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the date of purchase. As of May 15, 2019, we may redeem the Notes at a redemption price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest on the date of purchase. The 2011 Indenture contains customary events of default. The 2011 Indenture also contains covenants including those that limit our ability and the ability of certain of our subsidiaries to incur or guarantee additional indebtedness; pay dividends on our capital stock or redeem capital stock or subordinated indebtedness; transfer or sell assets; make investments; incur liens; enter into transactions with our affiliates; and merge or consolidate with other companies. We complied with all covenants of the Notes as of September 30, 2019.

We may occasionally seek to retire or purchase our outstanding Notes debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges will
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depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Other Long-Term Liabilities

Other long-term liabilities consisted of the following:
September 30,
2019
December 31,
2018
  (In thousands)
Asset retirement obligation (ARO) liability $ 64,072    $ 64,208   
Workers’ compensation 12,090    12,738   
Finance lease obligations 8,395    11,380   
Contract liability 7,787    9,881   
Separation benefit plans 10,028    8,814   
Deferred compensation plan 6,017    5,132   
Gas balancing liability 3,373    3,331   
111,762    115,484   
Less current portion 15,402    14,250   
Total other long-term liabilities $ 96,360    $ 101,234   

Estimated annual principal payments under the terms of our long-term debt and other long-term liabilities during the five successive twelve-month periods beginning October 1, 2019 (and through 2024) are $15.4 million, $694.0 million, $5.0 million, $6.9 million, and $136.1 million, respectively.

NOTE 8 – ASSET RETIREMENT OBLIGATIONS

We are required to record the estimated fair value of the liabilities relating to the future retirement of our long-lived assets. Our oil and natural gas wells are plugged and abandoned when the oil and natural gas reserves in those wells are depleted or the wells are no longer able to produce. The plugging and abandonment liability for a well is recorded in the period in which the obligation is incurred (at the time the well is drilled or acquired). None of our assets are restricted for purposes of settling these AROs. All our AROs relate to the plugging costs associated with our oil and gas wells.

The following table shows certain information about our estimated AROs for the periods indicated:
Nine Months Ended
  September 30,
  2019 2018
  (In thousands)
ARO liability, January 1: $ 64,208    $ 69,444   
Accretion of discount 1,770    1,829   
Liability incurred 4,325    244   
Liability settled (2,805)   (3,907)  
Liability sold (1,721)   (105)  
Revision of estimates (1)
(1,705)  

(4,778)  
ARO liability, September 30: 64,072    62,727   
Less current portion 3,033    1,451   
Total long-term ARO $ 61,039    $ 61,276   
_______________________ 
1.Plugging liability estimates were revised in both 2019 and 2018 for updates in the cost of services used to plug wells over the preceding year. We had various upward and downward adjustments.

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NOTE 9 – NEW ACCOUNTING PRONOUNCEMENTS

Measurement of Credit Losses on Financial Instruments (Topic 326). The FASB issued ASU 2016-13 which replaces current methods for evaluating impairment of financial instruments not measured at fair value, including trade accounts receivable and certain debt securities, with a current expected credit loss model. The amendment will be effective for reporting periods after December 15, 2019. We are currently evaluating the impact this will have on our consolidated financial statements by reviewing our accounts receivable accounts and our historic credit losses. We do not expect this standard to have a material impact.

Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The FASB issued ASU 2018-13 to modify the disclosure requirements in Topic 820. Part of the disclosures were removed or modified, and other disclosures were added. The amendment will be effective for reporting periods beginning after December 15, 2019. Early adoption is permitted. Also, it is permitted to early adopt any removed or modified disclosure and delay adoption of the additional disclosures until their effective date. This amendment will not have a material impact on our financial statements.

Adopted Standards

Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting. The FASB issued ASU 2018-07, to improve financial reporting for nonemployee share-based payments. The amendment expands Topic 718, Compensation—Stock Compensation to include share-based payments issued to nonemployees for goods or services. The amendment is effective for years beginning after December 15, 2018, and interim periods within those years. This amendment did not have an impact on our financial statements.

We adopted ASC 842 on January 1, 2019, using the modified retrospective method and the optional transition method to record the adoption impact through a cumulative adjustment to equity. Results for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior periods are not adjusted and continue to be reported under the accounting standards in effect for those periods.

The additional disclosures required by ASC 842 have been included in Note 13 – Leases.

Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment. The FASB issued ASU 2017-04, to simplify the measurement of goodwill. The amendment eliminates Step 2 from the goodwill impairment test. The amendment will be effective prospectively for reporting periods beginning after December 15, 2019. We have early adopted this amendment and it did not have a material impact on our financial statements.

NOTE 10 – STOCK-BASED COMPENSATION

For restricted stock awards and stock options, we had:
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
(In millions)
Recognized stock compensation expense $ 4.5    $ 4.1    $ 13.0    $ 13.6   
Capitalized stock compensation cost for our oil and natural gas properties
0.7    0.6    2.0    1.6   
Tax benefit on stock-based compensation 1.1    1.0    3.2    3.3   
The remaining unrecognized compensation cost related to unvested awards at September 30, 2019 is approximately $18.9 million, of which $2.6 million is anticipated to be capitalized. The weighted average period over which this cost will be recognized is 0.8 of a year.

Our Second Amended and Restated Unit Corporation Stock and Incentive Compensation Plan effective May 6, 2015 (the amended plan) allows us to grant stock-based and cash-based compensation to our employees (including employees of subsidiaries) and to non-employee directors. There are 7,230,000 shares of the company's common stock authorized for issuance to eligible participants under the amended plan with 2,000,000 shares being the maximum number of shares that can be issued as "incentive stock options."

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We did not grant any stock options during either of the three or nine month periods ending September 30, 2019 or 2018. We did not grant any restricted stock awards during either of the three-month periods ending September 30, 2019 or 2018. This table shows the fair value of restricted stock awards granted to employees and non-employee directors during the periods indicated:

Nine Months Ended Nine Months Ended
September 30, 2019 September 30, 2018
  Time
Vested
Performance Vested Time
Vested
Performance Vested
Shares granted:
Employees 927,173    424,070    844,498    362,070   
Non-employee directors 72,784    —    44,312    —   
999,957    424,070    888,810    362,070   
Estimated fair value (in millions): (1)
Employees $ 14.6    $ 7.1    $ 16.2    $ 7.3   
Non-employee directors 0.9    —    0.9    —   
$ 15.5    $ 7.1    $ 17.1    $ 7.3   
Percentage of shares granted expected to be distributed:
Employees 95  % 52  % 95  % 74  %
Non-employee directors 100  % N/A    100  % N/A   
_______________________
1.The performance shares represent 100% of the grant date fair value. (We recognize the grant date fair value minus estimated forfeitures.)

The time vested restricted stock awards granted during the first nine months of 2019 and 2018 are being recognized over a three-year vesting period. During the first quarter of 2019 and 2018, two performance vested restricted stock awards were granted to certain executive officers. The first cliff vests three years from the grant date based on the company's achievement of certain stock performance measures (TSR) at the end of the term and will range from 0% to 200% of the restricted shares granted as performance shares. The second vests, one-third each year, over a three-year vesting period subject to the company's achievement of cash flow to total assets (CFTA) performance measurement each year and will range from 0% to 200%. Based on a probability assessment of the selected TSR performance criteria at September 30, 2019, the participants are estimated to receive 4% of the 2019 and 53% of the 2018 performance-based shares. We expense the CFTA performance award at target or 100%. The total aggregate stock compensation expense and capitalized cost related to oil and natural gas properties for 2019 awards for the first nine months of 2019 was $6.9 million.

NOTE 11 – DERIVATIVES

Commodity Derivatives

We have signed various types of derivative transactions covering some of our projected natural gas and oil production. These transactions are intended to reduce our exposure to market price volatility by setting the price(s) we will receive for that production. Our decisions on the price(s), type, and quantity of our production subject to a derivative contract are based, in part, on our view of current and future market conditions. As of September 30, 2019, these hedges made up our derivative transactions:

Swaps. We receive or pay a fixed price for the commodity and pay or receive a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

Basis/Differential Swaps. We receive or pay the NYMEX settlement value plus or minus a fixed delivery point price for the commodity and pay or receive the published index price at the specified delivery point. We use basis/differential swaps to hedge the price risk between NYMEX and its physical delivery points.

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Collars. A collar contains a fixed floor price (put) and a ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the call and the put strike price, no payments are due from either party.

Three-way collars. A three-way collar contains a fixed floor price (long put), fixed subfloor price (short put), and a fixed ceiling price (short call). If the market price exceeds the ceiling strike price, we receive the ceiling strike price and pay the market price. If the market price is between the ceiling and the floor strike price, no payments are due from either party. If the market price is below the floor price but above the subfloor price, we receive the floor strike price and pay the market price. If the market price is below the subfloor price, we receive the market price plus the difference between the floor and subfloor strike prices and pay the market price.

We have documented policies and procedures to monitor and control the use of derivative transactions. We do not engage in derivative transactions not otherwise tied to our projected production. Any changes in the fair value of our derivative transactions before maturity (i.e., temporary fluctuations in value) are reported in gain (loss) on derivatives in our Unaudited Condensed Consolidated Statements of Operations.

At September 30, 2019, these derivatives were outstanding:
Term Commodity Contracted Volume Weighted Average 
Fixed Price
Contracted Market
Oct'19 Natural gas - swap 60,000 MMBtu/day $2.900    IF - NYMEX (HH)
Nov'19 - Dec'19 Natural gas - swap 40,000 MMBtu/day $2.900    IF - NYMEX (HH)
Oct'19 - Dec'19 Natural gas - basis swap 20,000 MMBtu/day $(0.659)   PEPL
Oct'19 - Dec'19 Natural gas - basis swap 10,000 MMBtu/day $(0.625)   NGPL MIDCON
Oct'19 - Dec'19 Natural gas - basis swap 30,000 MMBtu/day $(0.265)   NGPL TEXOK
Jan'20 - Dec'20 Natural gas - basis swap 30,000 MMBtu/day $(0.275)   NGPL TEXOK
Jan'20 - Dec'20 Natural gas - basis swap 20,000 MMBtu/day $(0.455)   PEPL
Oct'19 - Dec'19 Natural gas - collar 20,000 MMBtu/day $2.63-$3.03    IF - NYMEX (HH)
Oct'19 - Dec'19 Crude oil - swap 2,000 Bbl/day $59.80    WTI - NYMEX
Oct'19 - Dec'19 Crude oil - three-way collar 4,000 Bbl/day $61.25 - $51.25 - $72.93    WTI - NYMEX

After September 30, 2019, the following derivatives were entered into:
Term Commodity Contracted Volume Weighted Average Fixed Price Contracted Market
Jan'20 - Dec'20 Natural gas - three-way collar 30,000 MMBtu/day $2.50 - $2.20 - $2.80    IF - NYMEX (HH)
Jan'21 - Dec'21 Natural gas - basis swap 30,000 MMBtu/day $(0.215)   NGPL TEXOK

The following tables present the fair values and locations of the derivative transactions recorded in our Unaudited Condensed Consolidated Balance Sheets:
    Derivative Assets
    Fair Value
  Balance Sheet Location September 30,
2019
December 31,
2018
    (In thousands)
Commodity derivatives:
Current Current derivative asset $ 5,959    $ 12,870   
Long-term Non-current derivative asset 128    —   
Total derivative assets $ 6,087    $ 12,870   

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    Derivative Liabilities
    Fair Value
  Balance Sheet Location September 30,
2019
December 31,
2018
    (In thousands)
Commodity derivatives:
Current Current derivative liability