Investors love dividends.
And who would blame them? Dividends are a great form of passive income.
While I love dividends, I love dividend initiations even more.
A dividend initiation occurs when a company pays its first quarterly dividend. And it can be a significant catalyst for a stock.
When a company initiates a dividend, it signals to investors that the company is financially stable and has confidence in its future cash flows. It also unlocks a whole new group of investors (both passive and active) who seek out dividend-paying stocks or who are looking for income-generating investments. This can lead to an increase in buying pressure on the stock, potentially driving up its price.
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One of my favorite stocks today is Unit Corp. It trades over the counter under the symbol UNTC.
It is an energy company that is about to pay a large quarterly dividend.
Unit Corp (UNTC) currently trades at ~44. It announced on January 5 that it will pay a 2.50 dividend in the second quarter.
If you annualize the dividend, it implies a yield of 23%.
Pretty juicy.
So, what’s the catch?
Simply that we don’t know for certain that the dividend will be $2.50 every quarter.
In its press release, Unit Corp wrote “Subsequent quarterly dividends will be issued on a variable rate per share basis as determined by the Company.”
Is it fair to assume a $2.50 per share go-forward dividend?
I think so.
Let’s walk through some math.
Currently, Unit Corp has $118MM of cash on its balance sheet and no debt. On a per-share basis, this works out to $12.26.
In other words, Unit could cover a $2.50 dividend for the next five quarters even if it didn’t generate any positive free cash flow.
But the good news is Unit will generate significant free cash flow in 2023. I estimate $92MM (using current commodity prices and current day rates for drilling rigs).
Let’s take a step back and provide an overview of Unit Corp’s business.
Exploring Unit Corp (UNTC)
Unit Corp is an oil and gas exploration and production company that operates in the United States.
It was founded in 1963 as an oil and natural gas contract drilling company.
The company went bankrupt in May 2020 due to the pandemic-induced plunge in energy prices. It emerged from bankruptcy in May 2021.
Today, Unit has two business segments: Oil and Natural Gas & Contract Drilling.
Oil and Natural Gas Segment
- This is Unit’s traditional “upstream” business.
- This segment explores, develops, acquires, and produces oil and natural gas properties for their account.
- On January 20, 2022, the company announced that it has retained a financial advisor and launched the process to potentially sell all its upstream assets.
- This process was officially terminated in June 2022. I believe the process was called off due to high volatility of oil prices (buyers didn’t want to top-tick energy prices).
- Nonetheless, I believe assets will be monetized piecemeal over time.
- Management has told me “Everything is for sale at the right price.”
Contract Drilling
- This segment owns 14 BOSS drilling rigs.
- It drills onshore oil and natural gas wells for others and for Unit.
- The drilling operations are primarily located in Oklahoma, Texas, New Mexico, Wyoming, and North Dakota.
Both business segments are generating significant free cash flow, yet the company is trading at a price to free cash flow multiple of just 4.6x and an enterprise value to free cash flow multiple of 3.3x.
The stock has pulled back sharply in 2023, but the imminent quarterly dividend initiation will drive shares higher and attract a whole slew of dividend-focused investors.
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