Tic-tac-toe, investors want to know: After missing analyst estimates in each of the last two quarters, will Unit Corp (NYSE:UNT) make it three in a row? The driller reports Q2 2007 earnings tomorrow morning.

What analysts say:

  • Buy, sell, or waffle? Only eight analysts follow Unit Corp, but boy, do they like it. The stock gets six buy ratings and two holds.
  • Revenue. On average, analysts are looking for a slight 0.4% rise in sales to $281.6 million.
  • Earnings. Profits are predicted to fall 8% to $1.48 per share.

What management says:
Actions speak louder than words, but words still speak, right? So let's look at what management is saying by both actions and words of late. First up, in last quarter's earnings release, CEO Larry Pinkston observed that Unit had "contract drilling segment utilization of 83% during the first quarter of 2007 [despite] the industry slowdown in drilling activity." He then proceeded to advise that "103 drilling rigs [were] currently under contract (87% of drilling rig fleet)."

That was in May. One month later, Unit Corp announced that it had just purchased a company with nine more drilling rigs, of which "seven of the nine drilling rigs are currently operating under contract, while one drilling rig is being refurbished and should be operational during the third quarter. ... At the close of this acquisition, our drilling rig fleet will total a company-record 128 rigs." The way I figure it, this purchase may depress Unit Corp's utilization down to 86% (if none of last quarter's rigs have been pressed into service), hurting Unit Corp's stock price tomorrow. But if that proves correct, it may offer investors a nice entry point into the stock.

Why? Because of the trend. Look at the numbers within Q1: 83% utilization on average, rising to 87% by the time earnings were reported -- and now we see Unit buying more rigs. Presumably, management isn't doing that because business is going sour (pardon the industry pun), but rather because Pinkston either now sees, or foresees in the future, strengthening demand.

What management does:
Speaking of trends, the trend in profit margins at Unit has been generally up over the last 18 months. Operating margins today are comparable to what customer/competitor Chesapeake (NYSE:CHK) earns, and far superior to the operating margins of peers such as Grey Wolf (NYSE:GW) and Nabors (NYSE:NBR). Granted, Unit's margins have weakened over the last six months. But perhaps this bespeaks short-term troubles that just provide an entry point for investors to earn long-term profits.

Margin

12/05

3/06

6/06

9/06

12/06

3/07

Gross

52.6%

55.0%

56.8%

58.1%

58.5%

57.9%

Operating

38.2%

40.9%

42.6%

43.5%

42.7%

41.3%

Net

24.0%

25.8%

26.9%

27.3%

26.9%

26.1%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Worried that the recent trend in margins could be more than just short-term weakness? Then take heart from the words of Tom Gardner, who (twice) recommended Unit Corp to members of Motley Fool Stock Advisor:

The world's nearly insatiable demand for natural resources has kept prices at near-record levels. This isn't great for us as consumers, but it's a plus for Unit -- the company can charge clients higher day rates for its rigs. Average daily rates inched up to more than $19,000 in the latest quarter. Although commodity prices have softened, we can count on the demand for gas and oil to keep prices in a healthy range.

Don't miss our Foolish interview with CEO Larry Pinkston, available to Motley Fool Stock Advisor subscribers on our website. (Not a member yet? Remedy that with a free, 30-day trial.)

Fool contributor Rich Smith does not own shares of any company named above. Chesapeake Energy is an Inside Value pick. The Fool has a disclosure policy.