Unit Corp. (NYSE:UNT) generated interest from several hedge fund managers during the last quarter of 2013, with Israel Englander of Millennium Management, David Dreman of Dreman Value Management and John Overdeck and David Siegel of Two Sigma Advisors purchasing its shares. Other investors in the energy company include Chuck Royce of Royce & Associates (who is its largest shareholder, owning 6.9 million shares or a 14% stake), Cliff Asness of AQR Capital Management, and David Shaw of D E Shaw.
Unit Corp. (NYSE:UNT) is a $3.1 billion market cap diversified energy company engaged in the exploration for and production of oil and natural gas, the acquisition of producing oil and natural gas properties, the contract drilling of onshore oil and natural gas wells, and the gathering and processing of natural gas. The stock had a strong run recently, returning 28% over the past month and a half after reporting strong 4Q13 results and positive forward guidance in late February. In addition, in early December, Steven Klinsky’s New Mountain Capital disclosed owning 2.6 million shares of Unit, or a 5% stake (making the fund its sixth largest shareholder), with intentions to discuss with management changes to the company’s corporate and board structures, capital allocation and management compensation as well as options to maximize the value of its midstream (pipeline) division. Given the high valuations that Master Limited Partnerships (MLPs) have garnered from the equity markets, we believe a possible divestiture of its midstream business into a separately traded MLP could be a potential positive catalyst.
Unlike many of its peers that focus on Exploration and Production (E&P), drilling or pipelines, Unit Corp. (NYSE:UNT) operates across all three stages of the energy cycle, which has historically resulted in a conglomerate discount relative to its pure play peers from a valuation perspective. Despite Unit’s higher margin and return metrics and history of superior reserve growth and replacement, not to mention the recent rally in its shares, the stock still trades at a forward EV/EBITDA multiple of 4.9X versus 5.9X for peers. Investors may have come to the conclusion that separating Unit’s businesses into two or three independent entities would be the most expeditious way to unlock shareholder value, given the market’s receptivity to companies focused on their core operations. Management had already disclosed the potential sale of $100 million in non-core assets during 2014, following $382 million of similar sales over the previous three years. New Mountain and other hedge fund managers may want more drastic action; based on their actions, they could already be positioning for such an event in the near future.