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Unit Doubles Granite Wash Acreage in Noble Deal

Unit Petroleum Co. is doubling its Granite Wash core area acreage with a deal to pay $617 million to Noble Energy Inc. for oil and natural gas properties in western Oklahoma and the Texas Panhandle.

The properties include Noble's interest in about 900 producing wells on 84,000 net acres. Net production on April 1 was nearly 60 MMcfe/d and net proved reserves were 250 Bcfe, according to Noble. Production consists of 65% natural gas, 27% natural gas liquids and 8% oil. According to Unit, that translates to 44 million boe of proved reserves with estimated average daily net production of 10,000 boe.

The properties are primarily in the Granite Wash, Cleveland and Marmaton plays, Unit said. "The acquisition will add approximately 25,000 net acres to Unit Petroleum's Granite Wash core area in the Texas Panhandle with significant resource potential and would include 617 potential horizontal drilling locations," the company said. "The subject acreage is characterized by high working interest and operatorship, and 95% of the subject acreage is held by production. Unit will also receive two gathering systems as part of the transaction." The deal has an effective date of April 1, 2012 and is expected to close in September.

"This is an important growth step for Unit and represents a unique opportunity that benefits all three of our business segments," said parent Unit Corp. CEO Larry Pinkston. "For our upstream business segment, it will more than double our acreage in the Granite Wash Texas Panhandle core area, a highly prolific liquids-rich fairway in the Anadarko Basin. We plan to accelerate the drilling activity in the acquired properties over the next 12-18 months using seven rigs from our contract drilling segment, and we plan to operate the acquired gathering systems and, as appropriate, replace existing third-party processing contracts beginning in 2015. We anticipate that this acquisition will immediately be accretive to cash flow and to earnings beginning in 2013. It will also provide us with additional inventory of drilling opportunities that will allow us to significantly grow our production in the Anadarko Basin focused on oil- and liquids-rich gas targets."

Unit intends to finance the acquisition with long-term debt and increase commitments under its credit facility from $250 million ($600 million borrowing base) up to $750 million ($800 million borrowing base). In addition, $200-300 million of upstream assets may be sold. At the end of last year Unit owned 116 million boe of reserves, primarily in the Anadarko and Arkoma basins, and operated or owned an interest in more than 8,600 wells. Reserves are 81% proved developed, according to the company.

Noble COO David Stover said the sale is part of his company's plan to divest noncore assets to allocate resources to high-growth areas. "Furthermore, it will provide additional flexibility in the implementation of our international program and the acceleration of the horizontal oil play in the DJ [Denver-Julesburg] Basin," he said.

Unit also provided an operations update last week and said second quarter 2012 production is estimated to be 3.35 million boe, an increase of 12% from the prior year period and up 2% over the first quarter of 2012. Unit said it expects a ceiling test writedown during the second quarter of about $118 million ($73 million after tax) due to lower commodity prices.

In the Marmaton play in Beaver County, OK, net production for the second quarter increased about 46% over the first quarter. "Of significance during the second quarter is the completion of Unit's first extended lateral horizontal Marmaton well, which is producing from approximately 9,500 feet of lateral," Unit said. The well had first oil production in mid April and produced 50,000 boe in the first 69 days, which is an average of 725 boe/d. In the Granite Wash net production for the second quarter from operated wells increased 20% compared to the first quarter of 2012.

In the company's contract drilling segment, the estimated average number of drilling rigs used in the second quarter was 76.6, an increase of 5% over the second quarter of 2011, and a decrease of 6% from the first quarter of 2012. Preliminary per day drilling rig rates for the second quarter of 2012 averaged $20,119, an increase of 7%, or $1,258, over the second quarter of 2011, and an increase of 1%, or $281, over the first quarter of 2012.

In the midstream segment, second quarter estimated gathered volumes were 302,143 MMBtu/d and estimated processed volumes were 177,143 MMBtu/d, an increase of 58% and 95%, respectively, over the second quarter of 2011 and an increase of 20% and 14%, respectively, over the first quarter of 2012. Both are all-time quarterly highs, the company said. Natural gas liquids and natural gas prices during the second quarter of 2012 decreased approximately 55% and 50%, respectively, from the second quarter of 2011 and decreased approximately 40% and 21%, respectively, from the first quarter of 2012, Unit said.

A new gas gathering system and processing plant in Noble and Kay counties in Oklahoma, known as the Bellmon system, was completed and began operating late in the second quarter. The system initially consists of 10 miles of 12- and 16-inch diameter pipeline with a 10 MMcf/d gas processing plant that is to be upgraded to a 30 MMcf/d turboexpander processing plant in the fourth quarter.

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