David Bastian from Kingdom Capital on $UNTC (podcast #119)

David Bastian from Kingdom Capital discusses his thesis on UNTC (one of my current favorites; it is an illiquid pink sheet stock despite a reasonable market cap, so please be careful / do your own diligence).

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Transcript begins below

Andrew Walker: Hello, welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it means a lot if you could rate, review, subscribe, wherever you're watching or listening. With me today, I'm happy to have David Bastian. David is the CIO over at Kingdom Capital. They've got an active Twitter account. They've got an active Seeking Alpha account, which I really think you should follow. He posts some really interesting ideas, one of which we'll talk about today, but I'll pause there. David, how's it going?

David: Doing well, Andrew. Thanks for having me on today.

Andrew: Hey, thanks for coming on. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone, nothing on this podcast is investing advice. Please, consult a financial advisor. That's always true on this podcast, but today we're going to be talking about a stock that, it's not the smallest stock ever, but it is pretty small, but the bigger thing is it's on the pink sheets. It's relatively illiquid, and everybody should just remember that it comes with extra risk factors. There's an extra liquidity issue. So again, please, not an investing advice. Consult a financial advisor.

Second, I pitch for you, my guest, I've been following you for probably 5 months or so, and you're just banging out one banger idea after another over on Seeking Alpha. Read your Q2 letter. I mean, this is the one that I think I found you from, but there's a ton of other interesting ones we can talk about. WTI, we've talked about some of the other names, but yeah, look, I've just found you to be a great source of ideas. It's been good getting to know you over the past couple of months, and I'm really excited to talk about this one. So, all that out the way, let's turn to the company we're going to talk about. The company is Unit Corp. The ticker is UNTC, a reminder we're on pink sheet stock. So, you can buy and sell it pretty normally, but it is going to be more illiquid. Alternative bushido, what is unit Corp, and why are they so interesting?

David: Sure. Thanks, Andrew. Yeah. So, Unit Corp is an oil and gas company based in Oklahoma. We've got three main segments, so they're a little more diversified than a pure play production company units per segment of their upstream where they do oil and gas and natural gas liquid production from their various wells in Oklahoma. Their second segment, the midstream, where they actually process and move a lot of the natural gas and oil out of their properties and to various refining locations. Lastly, they've got a rig segment where they actually do contracts drilling for other producers to help them open up new wells.

Yeah, I was looking at the sale process for their upstream segment earlier this year they recently terminated. That was one of the things that got me paying attention to it. So now, they've kind of committed to being an operating company here instead of potentially kind of finding up most of their properties here. So yeah, that's a very high level overview. The company's trading about a 500 million dollar market capitalization right now. They're looking at close to 200 million of cash on the balance sheet after a sale they closed in the beginning of July. So, it's about a 300 million enterprise value from where we're trading today.

Andrew: Perfect. I think that's a great overview, and, I think the most important place to start with is the sale process because I know myself personally, and a lot of other people, we got involved here because in January, Reuters runs a report that says, "Hey, Unit Corp is looking to sell themselves." You can actually put out a press release, and if you email the company, they would send you even their sales tax. But the Reuters runs the report that says, "Unit is looking to sell their assets, and they're hoping to fetch around 1 billion dollars for selling their oil and gas assets." Myself, a lot of other people did that math really fast. We said, "Hey Unit's working cap is 500 million dollars. They're looking to sell their oil and gas assets for a billion, and they've got two other assets in there that they can't really be worth negative. So yeah, this is a double on the oil and gas assets, and you get everything else for free."

I think a lot has changed since then, but the biggest, if I just told you that story, the biggest headline change was they came out about a month ago and said, "Hey, we're calling off the sales process. We're just going to be a standalone. We're probably going to return a lot of capital to shareholders," which I'm sure we'll discuss, but if I told you that whole thing, I think my first push back would be, "Cool. Well, they want to run a sales process. Nobody wanted to buy them, overvalued like, maybe a billion is overvalued, maybe it's only 700 million, but they looked at, "Can we get proceeds that are greater than our market cap?" The conclusion, they told the market was, no. So, why is that interesting? I'll pause there.

David: Sure. So, yeah, I think the interesting part, you mentioned that they were sending out the sales tax back in January when they launched the process. They put on estimates, it's the present value of their assets in the upstream segment of the 10% discount rate. It's around 760 million dollars. So that, initial billion dollar estimate, a lot of people looked at that and said, "Oh that's probably optimistic." Like, you and I looked at that and said, "Well even if it's optimistic, there's
plenty of room for that to be optimistic and for me to make money here." That was when oil was trading at 8 dollars a barrel, and natural gas was 5 or so. Since then, we had the Russian invasion of Ukraine and prices have really exploded, so fast forward a little bit, [crosstalk]

Andrew: If I could just hop in there because I follow this up pretty closely. So, the day that they priced, the day that they put their gas deck out, the strip that they used, let's drop 2022 because 2022 prices can fluctuate wildly. This trip that they use oil from 2023 to 2030 was averaging $63 per barrel, and gas was averaging 3.30. As you and I are speaking, oil is averaging $75 per barrel and gas is averaging five dollars, right? So, we are talking an enormous increase in not near short-term energy prices that are in fact, like a short-term squeeze or something. These are long-term strip prices. We're talking about a massive increase.

David: Yes, and that's exactly where the thesis went from, "Hey, this is probably worth a lot. This is worth way more now." It's trip, and if you even go back, all right, well, prices due to about 50 a barrel and three dollar a gas, you're still looking at like, you said, when January is 750 or so, million dollar asset at a 10% discount rate. That's also ignoring future production games they could do in the other two segments of the business.

Andrew: Yep, that's perfect. But I do want to circle back to, if their assets were so valuable, why couldn't they get a bid that was approaching their value or a bid that - we'll talk about the illiquidity and the major shareholder in a second - but a bid that at least got the board say, "Well, we're trading for 500 million. We think we're worth a billion, but we got an 800 million dollar bid, and maybe it just makes sense to take the bird in the hand versus the two in the bush." We can talk about the bankruptcy later. They emerged from bankruptcy two years ago like, this is a home run result for everyone. So, why do you think that sales process didn't workout?

David: Sure. Yeah, I think from what we've been seeing, there hasn't been a lot of M&A in oil and gas in the last few months especially since prices really went up. It seems like both buyers and sellers are sitting on their hands trying to figure out where things are going to settle. Yeah, I think in the chaotic environment like that, you don't really want to be a buyer necessarily. It could work out great for you, but if you bought one, prices were up at 120 and 9, a couple months ago, you'd already be a little worried about what numbers you were paying off those.

If you're buying here today, you could end up looking really good or really bad. But the volatility day-to-day here is high enough that when I had spoken with the company, I got the impression that there was just a very significant bid asked gap as it were on properties right now. A lot of companies being unwilling to pay prices that might end up looking bad in a very quick time frame. They want to see some more stability first.

Andrew: Yep. No, that [crosstalk]

David: So, I guess, long story-short is you're not just seeing anyone who wants to pay the TV10 values in this environment.

Andrew: That's my take as well, and UNTC is not the only company that has tried to engage in some asset sales, asset swaps that has told me, "Hey, we brought these assets." I'm not saying that they're the best assets in the world, but they're certainly not the worst assets in this world. We brought an average assets to the market said, "Hey, here's these assets, and here's the PV 10, and would we take PV12?" So, PV10 is their present value of the cash flows is just kind of 10%. Would we have taken PV12 so just kind of to offset? Maybe, but every bid we got was like PV20 plus a discount to the curb, right?

So, if oil is at 80, they were pretending oil was at 70, and bidding that a 20% discount, and they were like, "Look at -", At those prices, we just think we'd be giving them away for free. Like we can't do that, and again, that's what, I think UNTC found and I've talked to several oil and gas companies who have run into similar issues. So, I think it is pretty credible and it kind of makes sense, right? If you are better and natural gas was three and now you're getting us to pay gas at known prices, it's a little talk to think that gas is going stay around there.

David: Yeah, and that's where I really appreciated the company started hedging their production. If they had that was left floating around $100 oil and nine dollar gas. So, I think they looked at this as, "We'll make some cash here and then reassess kind of, as time goes on and actually develop these assets.

Andrew: Yeah, I agree, and for those who are listening too, maybe a week ago, I think, David and I actually started messing around and decided to do the UNTC podcast on the heels of it, but a week ago they came out with, "Hey, here's our preliminary Q2 results. Here's the balance sheet. We started buying shares back again, and you know we're going to talk about share buyback at some point. But I think all of that was great, but the thing that I was really positive on was, they'd stopped their hedging process completely late last year, early this year while they ran the sales process. Once they called the sales process off, they started hedging again, and prices were obviously, very high over the summer. So, they were getting crude oil hedges done at $104.95 per barrel.

They got some nat gas that's just done at nine dollars per MBT or whatever it is. I've written about this on the blog frequently. There are so many companies that were hedging when gas was three dollars last year, and now that gas is nine, they're not hedging, and you're like, "Hey, you can either hedge or not hedge." But what I don't want you to do is hedge when things are bad and then not hedge when things are good. It was nice to see them go right back in the market and start hedging again. I'll pause there unless you add anything, comment. Do I miss anything?

David: Yeah. No, I think that's a great point, and just those relatively small oil and gas hedges for the next 9 to 12 months at about 70 million dollars of revenue. They're going to do just from those hedges. So, I think one other aspect of that is that you saw their realization on gas and Q2 dropped a little bit versus Henry Hub. So, traditionally, they get a slight discount to where gas is trading just based off of being able to move it and contact time, and things like that. So, I also like the fact that hedging at nine kind of remove some of the risk from where they're going to realize. I mean, all right, we hedge at nine whatever, we're going to get nine dollars.

So, they're definitely be risking the situation. I mean, as we talked about earlier the enterprise Value right now is around 300 million dollars. So, walking in 70 million worth of revenue when your production cost is six dollars a barrel of energy, it's pretty much 100% margins when you're selling it at 100. So yeah, I think that being able to do that selectively, and then you sit down next spring and say, "All right, what where's the strip at? Let's hedge a little bit more." I think it makes it a very safe investment versus some of these head hedge producers that I think are maybe more popular in a rising price environment. They get killed on the way down.

Andrew: Yep. I hear that 'cause I've written about it. We were just talking about it. There are so many unhedged producers that if you run the strip, they look so undervalued right now. But you are taking strip risk, and I personally don't know a good way to hedge strip risk, especially on that gas. I don't know a good way to hedge that out unless you are a producer. The nice thing about a producer, like UNTC that's hedging and they're doing it when prices are high is that risk starts to evaporate. Anyway, we've talked about the sales process, which I think is question number one on anyone's mind, she's new to the story and it's just diving the story.

But I want to step back. My first question I always like to ask is, we're going to dive deep these losses up. We already drove deep in some things, but look, market is a really competitive place. Even for an illiquid stock like UNTC, this is a 5-600 million dollar market company. Like a lot of people get getting here. When I talk to oil and people, many of them do know this company. This used to be a much bigger, more liquid publicly traded company. So, this can be found if people
are looking for it. So, market's a public place. What is the market missing that you're seeing, that I'm seeing, that makes UNTC a competitive, a compelling investment that will generate risk-adjusted outlook going forward?

David: That's a great question. Yeah. So, I think, like you mentioned, it is on the pink sheets. People are aware of it, but it's definitely harder to get a position in, in terms of the trading volume. One of their legacy holders out of the bankruptcy process, Prescott Group owned over a third of the outstanding shares. There are two other holders that have about a 15% position. So, over half the stock does not trade. So, there definitely are people who would want to take a position in this where getting the shares, if you go to the daily volume, sometimes a thousand, two thousand share range. It is tough to get in and out of, and for those that want to maintain some liquidity, this might be the name for them.

For a fun like us, where we're managing about 5 million dollars, liquidity is still such that if we want to do is blow out of position in the day, we have to probably realize the loss. It may not be substantial, but that definitely create some risk around trading the stock versus you don't get much much smaller than we are when it comes to being able to get in and out of stuff like this. So, I understand that. We have a longer term for in case we're willing to bear some liquidity risk in exchange for what we see is undervalued stock. But if you wanted to go out, and I think one of the best comparable stocks on this is SandRidge Energy, that's also based in Oklahoma and has pretty similar profile production.

If you want to go invest in that, you'd be able to get in and out. You get an options change because you can use to hedge or you're risking the stock, if you want to buy puts on your position, Unit doesn't have that. It has some pretty concentrated ownership. So, I think that's one of the risks. People don't like the hedges because it does remove some of the upside. If gas goes to $20 next week, it's not going to see much of that. We could layer into new hedges, but [crosstalk]

David: No, I'm 100% with you. People don't like the hedges and see liquid, but you mentioned SandRidge, and I know a lot of people who think SandRidge is very interesting. I've looked at it. I've done the math on it. Yeah, if gas stays here, it's going to be really interesting, but you're exposed to the gas down side. Like, I do feel like SandRidge actually, because it is such a pure play, it is so unhedged and it is cash rich, I do think SandRidge trades like, it's probably the most expensive on a market to market basis of any of the energy companies I know.

Now, that's not saying much, but it probably like is the closest to their fair value of the PV10. I think I'm just talking a little bit out of, but I think I would stand by that. I'm kind of looking at this simple, my lap. You mentioned one of the key things I think about UNTC, Prescott, who owns over a third of the company, after the buybacks, they probably own about 40% of the company. Look, I don't know how much they're running, but if I did the math on their last 13F and everything, I think UNTC is like a mammoth position. You've got to remember UNTC - we can talk about the bankruptcy in a second - emerged from bankruptcy. I think they got their stock, the loans and the stocks like a 10x since then. So, it was a big position that 10x, it's not like they're kind of a UNTC - if I'm right on their AUM - they're kind of like a UNTC book with a couple of other things on the side.

So, this is a huge position for them, and I think the thing a lot of people wonder is, what is Prescott do because if they're going to try and sell on the open market, they're going to crush the stock. I know for me, I always thought they might want to take a bid in the process they just ran. Even if it wasn't quite full value, just because they looked and said, "Hey, this is so much of our book. We owned 40%. The only way we get out is a sale. So, even if we're selling for 70% of fair value, if realizes a mark above where the stock is currently trading, let's just take that get the cash and redeploy it." So, I think they're really critical here. I just want to hear how you think they
interact with the company? What their plans are?

David: Sure. Yeah, and I'd be honest, I've not talked to Prescott. I do not know what their intents are with the business. So, any serious comments there, it's just going to be speculation. My impression is that they had a pretty big loss on the bonds going into the bankruptcy process and their stake there. That they, like you said, they've done great on the stock coming out of that. They are one of the reasons that hedges exist as much. In my perspective is that they're trying to add in as much as they can to derisk the situation. I think one issue that will run into here is that, there's a lot of net operating losses at Unit Corporation that came through that bankruptcy process, which allowed them to avoid paying taxes at this time, and where the business to be sold or where Prescott trip over the 50% ownership threshold. Those then allowed will be put in jeopardy.

So, I think that there is an aspect where they're kind of content to sit tight right now and maximize the value by not doing anything. Once those NOLs are out of the way, once they've been used up from the income they're generating right now, I think that that would maybe open the door for them to do something else. But the most value right now at Unit is realized by having those and not tripping any or change the control positions and causing those net operating losses to go away.

Andrew: Perfect, and just one more quick question on Prescott. Prescott has a member on the board right? I'm sure Prescott has a member on the board and the board knows Prescott owns 35-40 % of them, whatever. But do just to confirm like, do you think Prescott, when the company ran this process looked to the bids and said, "Hey, we'd rather stand alone than hit any of these bids." Do you think Prescott kind of blessed that strategy and said, "Yeah, you're right. We can make a lot more money even though this is a mammoth position, we're all in. Let's pursue our strategy."?

David: It seems like they would have. I'd be surprised if they were strongly opposed to rejecting the bids and moving forward, and then they did it anyways, given their ownership stake. So, presumably, this is with their blessings and they believe that they can maximize value this way. So, I think we will see how that goes. I think it seems like Unit was in a bit of a crossroads here where they have the upstream sale process it was ongoing. We haven't gotten into the Mid-Stream yet, but their partner on the Mid-Stream can force to sale of that asset early 2023. So, the company was kind of looking at, depending on what bids we get here, we can kind of sit down and say, "Here's what we think Mid-Stream worth. Here's what we got on Upstream." Then we have this rigs business that probably doesn't make sense to remain a company on its own.

So, we can either kind of just look at breaking this up and selling everything, and use a pile of money we have left, or we can choose to run this as a operating business. It seems like their choices then is to operate this business and go generate cash flow that way. They think they can end up with a bigger pile of money in the end doing that.

Andrew: Perfect. Let me ask one more question on the upstream sale process and then we'll probably move on to valuing upstream and valuing all the other segments. But I do want to ask more question. So, as part of the sale process, UNTC said, "No, we're not going to sell upstream," but they did sell one piece of the business and that was their Gulf Coast assets and their Gulg Coast assets at - when they were marketing this, so January 11th, they said the PV10 for these upstream assets was 69 million dollars, and as I talked about earlier, PV10 is way up since then because gas prices are overpriced. So, everything has risen so much higher and they ended up selling the Gulf assets. They said, "Hey, we're not selling all the upstream, but we are selling our Gulf assets."

If I remember correctly, they sold them for 69 million dollars, but they also sold the Gulf Stream assets - I keep saying Gulf - they sold the Gulf Coast assets with an effective sales date of April 1st. They're going to close that July 1st. So, all the cash flows from April 1 to July 1 will go to the buyer, not to the seller, right? That is going to be a lot of cash flow because again, gas prices were going parabolic especially in April, April-May, a little less June, but they were way higher. So, they sold them for, I think it was 64 million was the price they sold the Gulf Assets for. No, it was 54 million. They sold them for less than PV10 and PV10 had gone up a ton. They sold, it's less than the headline number because there's three months cash flow in there. So, it's 56 million was the number. I'm looking at the right spot now.

So, I just want to ask, 56 million headline number actually less than that when you factor in the cash flow and that's to discuss the PV10, and an even bigger discount, once you factor all that in. Long-winded way of saying, "Should we look at those Gulf assets and say, "Oh, maybe these assets aren't even close to as attractive i was thinking. Nobody sells us for PV10, but they probably just sold the Gulf assets for PV18. Maybe these are PV18 assets.

David: That's a great question, and I think that is - as you mentioned one of the other overhanging people are looking at based on question what the value is here. We've gone through the sales deck, the gulf assets are their highest decline assets that they had. They're also the only non-core assets when you look at where their other properties are located. The Gulf assets are not central to Oklahoma. They're on the Southeast Coast of Texas. The type of wells that they have on the Gulf are, I would say, at higher decline, and they're, again, this is me as a generalist understanding them, but essentially, they're a kind of well they can buy at any moment as opposed to being a more conventional slow decline well that you would run into, and a lot of other drilling regions. So, they're not as attractive as an assets.

In terms of my personal perspective on what Unit is looking at here, is that they want to do some more development. They mentioned in their Q2 updated. They want to drill some more wells, but my understanding is they were not going to do it in the Gulf Coast region. It's given, its non-core, it's not what they're focused on, and they are very high decline well. So, the production was dropping about 30% a year there. So, the present value is skewed to the now. They said there's a lot of cash flow that came out of them in the second quarter. It won't be they're going forward, but the company is getting some cash and able to deploy towards developing their other properties and towards returning it to shareholders.

I think they knew they weren't going to be developing these properties if they kept them. So, better to get something for them now and focus on their core operations. Again, my perspective, I would have liked to see a higher price, but I'm not sure that the property is as good as it might seem from first glance.

Andrew: Perfect. That makes total sense. Just on upstream, so, we've talked about the past. We've talked about the valuation here. I do want to talk a little bit about the future. Gas, as you and I are speaking, eight to nine dollars for 2023, it's over five, maybe six dollars. At those levels, I don't think there's a single natural gas field in the United States that it wouldn't be economic to drill and produce gas, right? Especially, a lot of UNTC stuff is not as low cost as like an EKG or something, but it's going to be very profitable at those levels. So, the most frequent question I get - and they're, honestly, I have struggled the most with is, "Hey, can they increase production next year, right? Can they increase drilling? Can they go on a drilling spree?" Could we be thinking, "Oh, this is a company, could production go up 8% next year? Could they increase production 20% over the next 3 years? Do they have the acreage? Can they drill? What are their plans for [inaudible] there?

David: Yeah. So again, circling back to their sales back, they indicated there is significant opportunity to increase production from their acres. They owned their own drilling rigs so, they have an opportunity to do that in-house. If they see it as being higher return than trying to contract those out to other producers. So, they have a lot of optionality there. I think the most interesting part of that optionality is that because they have this midstream asset that again, I mentioned this looking to likely be sold next year, they can drill acres connected to that asset to help increase the value of the drill put on the midstream prior to that sales process. So, I think they have a very interesting matrix there of being able to potentially use their own drill, drilling rigs to drill their own acres to increase their own midstream asset valuation. Kind of have a rising tide lifts all those.

I am not an expert in exactly what they're going to produce out of some of these new wells. I'm looking at it as if they were to not drill another well from here until eternity, I think I'm going to make more than my investment back here, and I see some upside from being able to produce more. But I'm not sure if they're going to be very aggressive on that front. Again, given the understanding about relatively conservative capital allocation strategy, I think they're going to try and identify the best opportunities. Again, they mentioned in their Q2 update that they have, on inventory, they want to drill. I just don't think it's going to be a particularly aggressive growth program that you might see from some other producers.

Andrew: Yep, and you just so what you're saying like these aren't the lowest of client assets ever, but I believe the blended, especially once you take the Gulf Coast assets out, which as you said, were declining pretty quickly. I think the blended average of their decline is around 10% for all of their assets. It may be [crosstalk]

David: That'd be 10 to 12, yeah.

Andrew: Yeah. It was 12% before. It was harder than that before they sold Gulf, but without Gulf, 10-12, whatever, but that's not a crazy decline curve that's reasonably low on the scale of things. If you run, 10% decline at this strip on these numbers, you're going to make a decent bit of money. I think we might circle back to oil and gas in a second. I actually have other questions to ask in-depth, but I do want to move to the other two segments because those are key segments. They're certainly not worth as much as oil and gas, but there could be a lot of upsides, either of them. So, I think the place that makes the most sense to start is, you just mentioned, they own their own rigs, right? They own, it's what, 17 boss rigs, which are new generation rigs, and I think they are on 7 or 8 old generation rigs, which are kind of a little more spec.

But, if you're following oil and gas right now, you know there's a huge demand for equipment, right? A lot of equipment got mothballed with prices as you said, with prices where they are, it's really economic to drill. Rates for rigs are going up really quickly. So, when you look at the last 12 months, for their rig segment, you see, what is it? I've got LTM as of Q1. So, this is a little stale, but LTM, as of Q1 [crosstalk] was 14 million. But their new rigs that they're leasing are going to be coming in at like $30,000 per day versus like 17,000 last year. So, you're going to see profits ramp up here really quickly. I've kind of thrown it all out there already, but I want to ask you, on the rigs where do you see the cash flow going from rigs? Where do you see the value? If you want to add anything to, I am sorry, I just said the whole outlook, but if you want to add anything to that, I'd love to hear it, as well.

David: No, that's a great overview. Yeah, so I think first if you just go look at the Boss rigs that they have on their own. As you mentioned, these are valuable rigs. They're pretty high spec. They're new. Shortly before everything really started imploding here in 2020, those rigs, if you go listen to HNPs call, they'll tell you that rigs like that, should be doing around 30,000 a day. It current contracting rate. It's in Q2, Unit did 21,300. So right now, I'm seeing almost 40% or so, upside to those races as the year progresses. Hopefully by the beginning of 23, we'll be seeing around 30,000 running through that segment.

So, if you do the quick math on on 30,000 running through rigs versus the current 21. I mean, they did about 33 million of contract drilling revenue in Q2, and so you give that another bump. You'll be looking at hopefully somewhere in the 40 to 45 million range of quarterly revenue there from expense side. They had about 26 million in Q2. So, on one hand, is going to be inflation pressure there. But on the other hand, there's also some activation cost and they've been getting those up and going in the 1st quarter, 2nd quarter. So, cautiously optimistic, that number is going to go up
with inflation about as much as he's going to go down. Do the one-time cost dropping out. So, we end up in a place where they're doing 40 to 45 million of quarterly revenue from rigs and their costs around 25 million, then they could be doing more than 50 million a year of rig cash flow between, now and somewhere around middle of 23.

Andrew; So, you said 50 million of dollars of cash flow between now and somewhere in 2023.
I don't have huge quibbles with that number. I think I might be a little lower, but we're starting to split hairs and small changes in day rates because day rates dropped literally straight through to the bottom line. It's so, I think that's right, but let's talk like 10 million shares outstanding right here, right? You just said 50 million of cash flow. We can do that math really easy. That's $5 per share value on a $58, stock price, but we're kind of talking about right now, rigs are really in demand. We're kind of talking peak earnings level. So, how do you look at the valuation for rigs? Because it's something I've struggled with right? Like, what's a mid-cycle earnings number? These things are just feel like mid-cycle earnings number? These things are just still like mid-cycle earnings number where I was going to have a great cash flow of number. What do you think?

David: Yeah, I think that's a great question. So, I think first, if you look at the cost of going out in trying to build one of these high spec rigs right now, we could fight over the exact number, but it's probably in the neighborhood of 30 million dollars, give or take. If you want to get a new one right now, you'd be looking at something in that ballpark. So, if you take that time 17 Boss rigs, you're looking at a new build cost here of over 400 million dollars to try and replicate what they currently have.

Andrew: Let me just pause you right there. So, I don't disagree with any of that math. I've heard it from them. I've heard it from others who I have talked to. I don't disagree with any of that math, but you do have the issue of depreciation, right? So, these rigs, I think, the last one they built was 2018 and some of them are earlier than that, if memory serves. So, these have been gently used. I'm sure they're getting lots of TLC and everything, but you said that 400 million number, which again, 10 million shares outstanding that's $40 per share. That's massive. Combine that with the cash on the balance sheet, and you're basically getting upstream, and midstream for free, but we haven't factored in that depreciation. So, how would you say these nicely use rigs would kind of compared to that new build cost?

David: Yeah, and that's where I would ballpark that if they want to go fire-sale it tomorrow. I mean, I haven't seen much transacting on the high specs stat. I don't think anyone's really trying to sell it rigs right now going into like, what you said, is probably going to be a very interesting cash flow cycle. Again, if you use 15 million, you still end up getting pretty close to the remaining enterprise value they have right now after their cash. So, 15 times 17, still get you in pretty good place. If you want to say, they want you went and sold them for half of the new build cost. Might be a little more, might be a little less.

Andrew: Which seems pretty draconian to me. Just again, I am not an expert on to shape these things are in. They've kept it shaped. I think they've got pretty long lives, but 50% of to build cost seems draconian to me.

David: Yeah, and if you go look at independent contract drilling, ICD is a ticker that has a pretty similar rig fleet, and as being value to the couple hundred million. It's kind of tough. It is mostly in equity stub with a lot of debt, but that's an interesting one to look at. If you're trying to track their rates and valuations as well. So, I think there's support out there that it's all you have with your place rig operation here that you can still come up with 200 to 300 million in value. I think just try to sell this current operating unit, and you could argue that is going to do 50 million plus of cash flow in the next 12 to 18 months.

Andrew: I have not looked at ICD, but we'll have to throw our disclosure out a hundred different times because if Bloomberg saw me [inaudible] 50 million market cap with 125 million of debts, there's obviously a lot of risk that comes with that, but that does look pretty interesting because when you combine a lot of leverage with a big upcycle, the cash flow numbers can get juicy pretty quickly, but please I've done no work there. So, everybody go do their own work.

David: Yeah, it's clear. I do not own ICD. It's just an interesting comment.

Andrew: That makes total sense in the contract drilling. Let me ask one other question. Again, we've talked about how Prescott owns a ton here. They looked to you, but didn't sell the upstream division. You've got this drilling segment and you could argue, "Oh, there's synergies. We own drills. We might drill land. There are synergies there, but I think you could also argue you don't need to have drills and upstream under the same segment. That if you want to drill, you can go find the best rate. If you want to be a driller and let yourselves out, you should go find the best rate. Like it just makes total sense to me. Could these segments, question 1-A 1-B, could these segments be split apart? Why do you think the company hasn't pursued that so far?

David: Well, I mean, I think that they are going to be split apart based on, if you read the latest financial, 50% of the midstream segment is owned by Partners group, which is a private equity firm. In May of 2023, they will have the option to force to sale of that segment.

Andrew: Hey, David, sorry, just be clear. I want to talk about drilling and upstream together. I was going to go to midstream and ask you, but I'm just saying, could drilling and upstream be split apart?

David: I think that based on the sales process they just ran, they looked at doing that and decided it was better to keep them together, is the simplest answer I give you.

Andrew: Okay. Makes total sense to me. Hey, you're beating me to my next question, but they have three segments. We talked to about upstream. We talked about drilling. The last segment is Midstream. You started, I'll let you continue there, and I've got some thoughts that I can throw in, but I think you're probably better suited to talk to this to me anyway.

David: Well, we'll see. Yes, the Partners group owns 50% interest in their superior pipeline operating segment. Their ownership interest is a preferred interest, so partners is entitled to a 7% preferred return on their 300 million investment from 2018. They will be hitting the five-year mark on that in April. That's a point where they have the option to force to sales process. So, given that, private equity, generally works with about a five-year holding period for things like this. So, my expectation would be that Partners when they get that option would then look to sell and get their investment back for their LPs. I have not talked to Partners, so I don't know what their intent is, but that's what I would expect.

Based on some industry numbers that I've seen on that. I think if that were to happen, the sales price were pretty close to Partners preferred interest as it stands today. Their 7% hurdle gets them to about a 350 million preferred return right now. Unit disclosed their Q2 cash flow out of superior was about 15 million dollars. So again, if you want to assume we're paying peak earnings there, they're probably not going to get a huge multiple, so 60 million dollars on a 350 million preferred hurdle. You need about a 6x to start getting over that valuation. So, my guess would be looking at midstream, that Partners probably forces the sale next year and that sell is somewhere in the neighborhood of their preferred return, give or take.

Andrew: Yeah. So, I don't disagree with anything you say. What I was going to add on is, I think midstream is the area as I've done more work and gotten to know the company more over the past since whenever I invested in and then it started following it, it's the area I've become most bearish on. When I first started doing this, I did the math you did, and I said, "Oh well, it's midstream assets in a great environment. These tend to go for around 10x is kind of your rule of thumb. I think if you go back to the 2018 deal, I think these were valued at like 10 or 12x. I can't remember exactly, but as I've done more work and kind of seen and gotten to know the assets a little bit better, talk to some people. I think you're right. The difference is material, right?

Because if it's 10x, this is worth $10 per share or something to UNTC. If it's a 6x, it's worth about nothing. I've increasingly come say, "Hey, maybe you'll get a couple of bucks from this, but I don't think there's a lot of equity value there. Would be happy to be proven wrong, but that's where I've come up to, as well. Yeah.

David: No. I think it's an interesting call option. I think that you can't keep in mind that 350 million hurdle is going to go down in the next year as they continue to pay cash retributions back to Partners group. So hopefully, that number is closer to 300 million next year when they force to sale, if they force to sale. If that were to happen, it gives you a little bit more potential for upside here. But I'm not looking at this thing, assuming they're going to go sell it for 500 or 600 million, and that Units going to get a huge return. I think that being sent up here is tough because I think Unit would like to get and try to build this out a little bit and try to add on some more pieces if they could. But I doubt Partners is going to want to take on much more risk in terms of spending some cash to actually go and try and really build a larger asset right before they go into a sales process. So, I don't really expect much movement on that front. It could be wrong. They bought some assets the end of last year at what seemed like a pretty attractive multiple, but we'll see.

Andrew: The only push back that, and again, I do not disagree with that, but only push back to that would probably be, "Hey, again, this deal was done in like 2018, and I think the implied valuation was about 600 million dollars, right? Which would imply UNTC's stake is still worth 300 million. It's like, well, the energy environment's today is a lot better than 2018. Interest rates are actually probably a little lower than 2018 even after this year's run. It's, hey, why wouldn't these be worth at least what they were worth in 2018?

David: I mean, if you're going to look at what midstream assets are trading at right now, I've landed around a six to right multiple being more what the market value is on those. When you try and get into what the actual earnings power, I mean, there's not as much upside on the midstream assets. Its prices go up. It's mostly fixed rates. There were some minimum usage payments that kind of rolled off at the end of the '21 going in '22. So, trying to get an exact trailing 12-month multiple on what's even earnings here is a little tough to nail it down. So, essentially, I want to view it as a zero or close to it to make sure that I'm not taking in a return on that piece that ends up not materializing. I think if I get 200 million dollars out of it, that'd be fantastic, but I'm not expecting that.

Andrew: Well, I think we've talked, we could each segment, I think we've done a pretty nice job hitting each segment. I want to do some of the parts, and then I want to talk about likely capital allocation going forward. But before we hit either, I just want to ask 'cause we talked about a lot here. Is there anything I glossed over you think we should be thinking about harder? Anything we didn't even talk about that you think we should be thinking about?

David: I think we've hit most of the main points. I think, one of the interesting things will be, I didn't talk about this earlier, when it comes to lack of awareness. The company has done essentially nothing on the investor relations front in the last year.

Andrew: That's why we're here for, big guy. That's why we're here for.

David: Yeah. I mean, if you go look at their press releases in the last year, there's been three, maybe. They didn't even put one out with their first quarter earnings release.

Andrew: No, it was so frustrating because I think, if I remember correctly, they barricaded the press release inside of the 10Q. No, they don't do that. I misremember. They just didn't put out a press release, but yeah, it gets pretty frustrating where they're like, "Hey, cash is literally flowing from the ground into our bank accounts." Like yeah, but nobody can see the press release. Nobody knows.

David: Yeah. So, I think you do have to ask kind of who the incremental buyers are on a name like this. I think until the company gets a little bit more investor facing. There's a lot of guys who maybe they look at it, but this isn't something that they would necessarily want to go invest in with a lack of traction. As you and I both know, it's great to find a stock that less people are paying attention to until you buy it, and then you want more people to pay attention to it, and they don't.

Andrew: Well, if you are buyer, that brings us nicely to the next question, capital allocation, right? Because this company has done a fantastic job of repurchasing shares since they emerged from bankruptcy. If I'm just looking at the press release correctly right now, they've got about 10 million shares outstanding. They repurchased about 1.5 million shares since their bankruptcy. So, they started with 11.5, they repurchased 1.5 in 15 months and that's with a pretty liquid stock. By the way, when they were purchasing in the first half of 2021, energy prices weren't anywhere close to where they are now, right? So, they weren't generating anywhere close to as a lot of cash, but capital allocation, 10 million shares now.

We talked about how Prescott owns a lot. There's two other holders who owned a decent bit of this thing. I'm sure they would love to buy more shares, but at some point you start to run into, "Hey, is the stock even liquid enough to buy more shares?" So, they said in their press release for July. They said, "We're evaluating how to return capital." What do you think most likely, are we talking big dividend? Are we talking tender offer? Can they continue doing share repurchases? How do you think they're going to return capital to shareholders or am I wrong in they're saying they're going to do it? They're going to pull the oil and gas thing and say, "Oh actually, we decided to do a lot of M&A."

David: Yeah. I generally, don't get the impression looking at what they've been doing in the last couple of years is buy backs and very conservative capital allocation strategy that we're certainly going to see an M&A spree. But like you said, it's oil and gas so best to be a little bit cautious on that front. My expectation is now, the company is committed to continuing to operate. They're going to manage their Upstream. They're going to manage the rig. They're going to manage the mainstream for as long as they own it. They were on a National Exchange before they went bankrupt. I would not be shocked to see if they tried to uplift off the pink sheets again, and try and actually get a little more investor focused here.

The company hasn't publicly indicated that the next step. I'm just hopeful that, that will be something to look at here. I think it would make a lot of sense. I think that would help with them in terms of investor awareness, incremental buyers. Hopefully, we're reading them closer to a multiple similar appears like SandRridge or other producers in their area. I think at that point, if I was Prescott, I would probably want to start being able to do sell some of my stake. Take some risk off the table, like you said, until it gets valued more in line with some of the other peers and do that substantial asset value that you and I are seeing here. I think they're content to buy back shares and pay a dividend.

There is a bit of an interesting situation that as we talked about with the buyback, they can only buy so much about drilling in a well with the ownership. So, I think the dividend becomes more and more the focus at least here in the short-term. One of the other interesting upside, I guess for the company is it, in the pay out dividends here, there are about 1.8 million warrants outstanding from the bankruptcy process. Those warrants have a $64 give or take. It's like 63.70 strike price. Those warrants are not adjusted for dividends. So, for the company, there's a kind of interesting capital allocation strategy here where they pay a lot of dividends. They kind of reduce the impact of those warrants on future dilution because the warrant will not be adjusted down with the dividends.

Andrew: Am I remembering correctly, that Prescott does not own any warrants?

David: I'm not 100% sure on that. I haven't seen any evidence that they do have warrants, but I believe the warrants were granted to equity holders from the prior bankruptcy. I believe Prescott was focused in the debt, but I'm not 100% sure on that.

Andrew: So, I will just remind everyone. Look, we've talked about how UNTC illiquid stock Pink sheets is risky. Warrants are, you've taken illiquid pink sheets to stock because your warrant, you're basically just getting leverage on it, right? Leverage to the upside and leverage to the downside. And David, identified the one key thing that I look through the warrant stocks. I used in warrants, I do not anymore because I'm with David, I think there's an increasing likelihood of a dividend return of capital. If the dividend is the return of capital, the warrants, to my knowledge, the warrant are not going to get that return. So, I've just looked and said, "Hey, I love the risk-reward of the stock. I think there weren't a probably a risk-reward. But if I love the risk-reward of stock, why miss it because of a dividend or something if I'm in the warrant?

So again, everybody should do their own advice. I think David laid that out really well. I just wanted to lay out a little of my own thinking too. If somebody hears this and hears the sum of the parts that I think we're going to throw out and says, "Oh, warrants, let's get that leverage upside." There's real risk on top of all the rest we've already talked about. So, I just want to disclose that. Want to talk some of the parts in a second, but you started mentioning the NOLs, the taxes and everything. There was a line that I have thought a lot about in that July press release. That pre-announced result said, "Hey, we've been buying back some shares. We're thinking about more shareholder returns, all that.

The luck was this, given the company's growing cash balance, the company is currently updating its calculation of tax earnings and profits. This will be important information, which can be used by the board in implementing any future returns any future plans for return of cash via dividends and distributions in a tax-efficient manner. I think you started to touch on that with NOLs, but because that line is so interesting and so unique, I don't think I've ever seen that in a press release before. I just wanted to ask you about that line in particular.

David: Sure. Yeah, so I think depending on how they choose to do a dividend, whether it's a special with it's an implement regular recurring dividend, you may be aware, well, you are aware that depending on whether dividend is distribution from earning or return to capital, there can be somewhat different tax treatment both for holders of the stock and for the company. So, I'm not a tax expert on that front. So, I will see and refer that one to readers at home can look at that and understand the differences between return of capital and how that might impact their holdings and where they're holding them or attached this image or not the image account. But yeah, my understanding is that, essentially getting to the end of that issue is I think they're going to be paying dividends. Next is the primary focus to return capital. The company does not told me that. I'm just speculating based on the NOLs and what you said, that unique word is in that press release.

Andrew: A hundred percent agree with you, and the nice thing, and this brings a series of the parts. The nice thing is that dividend could be pretty big. For sum of the parts, there's four numbers you need. You need their current cash balance. You need to put them valuation on upstream, evaluation on the drilling rig segment and devaluation on the midstream. I'll go first just because it's really simple. The company disclosed Q2 cash balance as 115. You have to adjust for the Gulf sale for that cash flow from April to June that we talked about, but they'll get at least 30 million dollars from selling Gulf. I think it's going to be a little higher than that, but let's call it 30 million separate [crosstalk] go ahead.

David: I think the press release said 43.7.

Andrew: It's 43.7, but then I think they have to adjust for the Q2 crash. Am I misremembering that?

David: Okay. I thought I was worriying that was the adjustment from the Q2 earnings. I could be wrong.

Andrew: Well, that would be even better. So, let's just use your 44 number. It's not going to make a huge difference. Again, about 10 million shares outstanding so people can knock a dollar forty per share off the numbers if they want to, pretty quickly. If we use that 44 number, corporate cash is let's call it 160 million to make the math really nice and easy. That's $16 per share. So, we've got our corporate cash number settled. That's an accounting metric. I think we can all agree on $16 dollar per. So, that's my number I'm going to give to you. You've got to do the other three numbers down. Let's talk Upstream. What do you think Upstream is worth?

David: Ballpark, I'm still thinking that around a billion dollars here. They didn't sell it for that. They said in January, that's what they wanted. I would guess with where the strip move or what they wanted also move. I don't know for sure where exactly that would land today. But my PV10 number back to the envelope right now, it's around billion dollars. So, they went and sold that for around PV10, if the pricing supports it. I think it's around a billion dollars share.

Andrew: So, to the extent, anybody cares about my thoughts here. I think my PV10 number would be slightly higher. Oh, actually because I'm not interested for Gullf. It would probably be a little bit harder than a billion, but I've generally valued everything just in my personal modeling at 80% of PV 10. I don't think it's worth super splitting hairs over. People can do that or not if they want, but if you use a billion dollars and it's $100 per share, right? If you use the 800 million, it's $80 per share. So, again, we're talking to stock trading under 60. I just wanted to throw that out there, so people could hear because this is one of the ones I actually am really interested in people hearing my thoughts. So, we've got your Upstream number. Let's go and talk about rigs.

David: Rigs, yeah. So, they were to go sell the rigs for asset value tomorrow. I mentioned earlier, I think they would get at least 200 million probably 300 million for that segment. So, 30 bucks a share, 20 bucks a share, pick your number. I think there's a chance they could still get that in a year and cash flow more than 50 million dollars from them in the meantime. So, we can use a placeholder and say 25 a share. If you think that if you start reading the commentary from some of these oil field service operators that are saying they're sold out for 23 already on the rigs, I think that Unit might be able to do upside to that number depending on, again, the pricing environment. We know this whole industry is drill baby drill, even when they try really hard not to. So, yeah, I would say, ballpark 25.

Andrew: I absolutely no disagreement there, and I think I'm with you. I think the valuations
is around 250 million or $25 per share. I'm also with you where I think that's the valuation kind of one year from now and we kind of get one year of like supernormal profits in the meantime, which probably adds another 40-50 million dollars of cash flow to the business. But not worth super splitting hairs over. So, we've now got three segments done. We've got Upstream, which we said was worth about a billion of $100 per share. We've got rigs worth about 250 about $25 per share and we've got the cash acounting value about 15 dollars per share. Last one, and we could probably do this pretty quickly, but midstream, you should throw any value attached to Midstream.

David: Well, summative zero. Again, I think if the sale process goes through they sell for 400 million, Unit may end up getting close to 100 million out of that. It could be five, 50 million, five or ten dollars a share, but my expectation is there's not a ton of upside on this number and less pricing really truly does explode between now and next summer and companies get more comfortable paying a higher multiple on earnings.

Andrew: Perfect. That makes total sense. So, when we just did our math that again, Upstream a billion rigs, 250 cash, 160, net it all out, you've got a sum of the parts that comes out to about $140 per share. My thinking about that right doing that math, right correctly?

David: Yep.

Andrew: Yep. Look, I'm totally with you. It's one of the things I've written several times about how all energy looks quite cheap to me, but one of the things I love about unit is, I think you get the best of both worlds. They're returning capital to shareholders. There's no debt, so you're not looking at something where, "Oh, if prices go down we're in ruins, but if prices stay here, we make a fortune like prices goes down. Yeah, we're sad. But because there's no debt and so much of the balance sheet is in cash, you've got a lot of protection there. You've got extra protection from the hedges, which I'm really encouraged, they started putting hedges on a higher level. Then you've got the rigs, which will really benefit if prices keep going parabolic and there's huge demand to drill. So, I don't know. Anything else you want to talk about there, or do you think we've covered it all?

David: Well, I think that the one thing you mentioned, it does add some convexity here is the buybacks. They bought that almost 2% of the outstanding shares between when they terminated the process in June, and when they put out their press release last week, and I've been there with Q2 preliminary results, to the extent, they're able to continue utilizing that and cutting down the outstanding shares. You start doing the similar math to what you just mentioned on a lower share count and things get pretty interesting. It is worth noting as we've said earlier with the warrants there that if we're kind of doing this $150 a share ballpark over 2 million shares. Yeah, there's a warrant. So, the warrants make it about 12 million right now.

I'd be curious to see if they do a lot of the return via dividends like you said, then the warrants will share less than upside. So, it's kind of a game theory, how much is going to be buyback? How much is going to be dividend? How much is it going to be just getting a multiple on this stock that
looks more like other other peers?

Andrew: It's a great point. When I was doing that quickly, I did not adjust for the warrants. Actually, when we originally started buying this, we didn't even know where the warrants were going to get struck. If you remember that? Because they didn't announce it and settle it. So, late June, I think, and then there was three warrants went publicly traded one day and I wish I had seen it. The first couple of thousand traded for a penny, which was way too cheap because I think now they're trading for $12 or something.

So, yeah, we didn't even know, but what if Unit is worth $1,000 per share, yes, the warrants are really going to matter. If it's worth 140, the warrants are going to matter, but the warrants are struck at 65, which is above today's price. So, cash comes in. It's not like just the straight dilution to 12 but just wanted to point that out. Let's see. Anything else on we should be talking about?

David: I think we've covered the main thing. It's just I feel like you get as you said, the best of both worlds here where as long as companies continue spending on growth and they need their rigs. They're going to fill up their midstream assets with product, their upstream is going to continue to produce. They seem to be committed to hedging it to kind of lock in pretty predictable cash flows on that side. So, even if pricing collapses, they're not going to be a sensitive to [inaudible]. They've got a huge cash balance. They're showing a two-year track record of returning cash to shareholders since they came out of bankruptcy process. So, I think that makes it a stock that really does appeal to the `generalist investor that's touring through energy right now, which could be a blessing or a curse depending on where prices goes from here.

Andrew: I feel seen by that. I want to ask you one more question about that in a second, but let me ask a random question. So, Unit was publicly traded for a long time. They went bankrupt in 2020, and they merged in 2021. Have you read their pre-COVID, pre-bankruptcy filings transcript at all?

David: No. I have not.

Andrew: Okay. It's really not necessary, but it is funny. So, the last conference they did in 2019, this first quote they come out is they say, "Oh hey, we're Unit Corp. We got our start dates back to 1963. We've been here for a very long time. We've seen tons of up and down cycles and we've been able to navigate them all." Six months later, they're filing for bankruptcy, which it's just every time I think about Unit, I think about that quote, and it really tickles me. I did have a non-Unit question I wanted to ask before we have to stop. You've been super generous with your time. I know we're going over, but look, again, I started following you because you heard about Unit. That's how I think I discovered you.

We've swapped thoughts on several energy names and stuff going recently.
I might ask you about WCI in a second, but I was shocked. You're a newer firm. You just coming up a lot of your book, a lot of your focus and energy. So, I just want to ask, do you consider yourself an energy specialist at this point, or is it just, "Hey, we are generalist, but we are just seeing like, with where energy prices are, where the world is right now. There's so much value in energy. That's just where we want to park. That's where we want to put our place, our bets. Does that make sense?

David: Yeah. No. It's very much the latter here. So, I'm not going into this year expecting to be quite as heavily concentrated energy as we've gotten. I was looking at the near term opportunities of cash flow. We definitely have concerns around where we're going as an economy, in terms of our inner recession or going into recession. What's that going to do to energy demand? We've been focused more on the power generation side as opposed to the oil side. So, Unit is kind of the only
really heavy - well, not the only - it's one of the only heavy more oil focus names that I'm invested in. I've got some interesting stuff of them looking at in coal and natural gas, but have been fading or a little bit more due to the recession risk there being a little bit more sensitive. So yeah, I'm not a traditional energy investor. I am a generalist in the space.

So, I, as you said, stealing seen earlier that comment was as much about myself as anything. But.

David: Look, I kind of agree with everything you just said in there. Like, for me, I think lots of stuff in energy are is really interesting. I personally lean towards nat gas heavier things. Unit, obviously, be one exception, but I lean more towards in nat gas and the things just because coal, I do know how cheap. People ask me all the times, "Do you know what cheap coals?" I'm like, "Yes, I can put an Excel model together. I can see LTM numbers versus EB. Thank you very much, but I know how cheap it is but not guess, I just think, "Hey, yeah, you pay up a little bit for it, but I just feel a lot more comfortable with the terminal value, sometimes even the management teams and everything there. But, you know, it's just I was tweeting yesterday refiners, right? Just to choose a completely different energy related sector, PBF printed $10 per share in EPS for Q2. It might have been higher. It might have been 12 after you just do some tasks things. Their stock is at 30 like this is 3 times 1/4 earnings.

I know coal, you find a lot of that, it's like, "Yes, I get the cyclicality. Yes I get the terminal value risk. But like when you're at three times one quarter's earnings, there's a lot that can go wrong. It doesn't take much to juice your whole, to print your whole market cap in three quarters at that point. So yeah, anything else you want to say about being a generalist looking at kind of energy and more commodity focus things?

David: Yeah. No, I think just in general, it's important to try and as you were saying, trying to understand and then we can put these numbers in a model and figure out that they're cheap. So, we try to go in with the assumption that the stock isn't mispriced rather than going in with the assumption that anyone can do the math that I've done on Unit today. So, I don't necessarily look at that and think, "I'm the only person that's figured this out and clearly we found each other partly because of Unit. So, that's a great example of generalist finding each other over energy stock. It does lead one to pause and think, "All right, what are the ways that I get hurt here? If energy prices collapse, what am I looking at?

That's one of the reasons why I get comfortable with names like Unit where I know they have had these in place, and I know there's no substantial asset value here underlying the stock price where some of the other names that have been popular. I keep using SandRidge as an example, but I think I ditched where I throw it on a month or two ago. If you go look at the valuation of their Upstream versus Unit, it makes Unit looks very valuable. So, that's another generalist name that's been popular.

Andrew: Which name is that? Sorry, you cut out for one second when you said the name. Which name were you compared to Unit?

David: SandRidge.

Andrew: SandRidge yeah. Okay. Yeah.

David: Yeah, I think you should look at those, you understand. I think sometimes with these names you can come up with a pair of trades that makes sense. If you're willing to sit in it for a little while and wait till some of the assets converge their valuation. So, we are longer-term oriented and we look at this as an opportunity that we see a lot of these assets as not having fully realized their potential yet, and trading in a multiple that we find too good to pass up. Even if you said you beat it up for some pretty significant aggression with the mean.

Andrew: Makes total sense to me. Well, I had a question on WTI, but yeah, I think this podcast runs long enough and we don't need to get into another super complex, super levered offshore story that time now. So, we'll just have to save that for the next podcast with Dave Bastian. You can find his work at Kingdom Capital on Twitter. I'll include a link to the UNTC CPC route in the show notes. [inaudible] find that. People should give him a follow on seeking help and everything. David, thank you so much for coming on. I'm looking forward to the next one.

David: Thanks, Andrew. Really appreciate it.

[END]