Last month, Rich Smith was able to grab some time with Larry Pinkston, CEO of two-time Motley Fool Stock Advisor recommendation Unit (NYSE:UNT). Facing sizable competition from BP (NYSE:BP) and Grey Wolf (NYSE:GW), Unit's CEO talks about energy independence, the cyclical oil and gas industry, and Unit's 10 million barrels of proven reserves. 

Rich Smith: Larry, first off, please tell us a little bit about your businesses.

Larry Pinkston: We are an integrated energy company made up of three growing subsidiaries. Unit Drilling is our contract drilling segment, Unit Petroleum is our exploration and production (E&P) segment, and Superior Pipeline is our mid-stream segment that focuses on natural gas gathering and processing. Unit was founded in 1963 as a three-rig drilling company. Unit Drilling now has 128 onshore, domestic drilling rigs. Unit Petroleum has 476 Bcfe of proved reserves and owns a gross interest in over 7,000 wells. Superior Pipeline has in excess of 600 miles of pipeline and 37 different gathering systems. Unit has been a listed company on the New York Stock Exchange since 1981, and is a listed company within Standard & Poor's 600 Small-Cap and 1,500 Super Company Indices.

RS: Contract drilling is your biggest business, generating 60% of revenues and nearly two-thirds of pre-tax profit. I understand that you do drilling work for companies such as Chesapeake (NYSE:CHK), ONEOK (NYSE:OKE), and ConocoPhillips (NYSE:COP). But you also compete with these firms, don't you? How does that work?

LP: These two segments run totally independent of each other and always have. Information from one segment is not shared with the other segment. We purposefully stay away from any conflict of interest situations and our long-term customers know that.

RS: In 1979, Unit became concerned that the contract drilling business was a bit too volatile. Your company began diversifying into oil and gas exploration to smooth out its earnings. Today, contract drilling is your fastest-growing business. Was it a mistake to diversify away from drilling? Might Unit be even more profitable today if it had focused on just one business and deployed all of its capital in investing in that one business?

LP: No, historically that would not be the case, and we believe the opposite is true. Our contract drilling side has not always been the more profitable player. During cycles where the demand for drilling rigs has been down, we've been able to supplement our earnings through the E&P segment by increasing our oil and natural gas reserves and production. By being a diversified company, one segment can typically help make up for a weakness in the other. Overall, we have been profitable since 1990.

RS: In 2003, you were charging $8,000 a day to rent out your drilling rigs. Last year, the rates averaged $17,600. Assuming that oil and gas is a cyclical industry, and that you expect today's prices to moderate at some point in the future, can you sketch out for us what a "typical" cycle looks like?

LP: Each cycle has had its own reasons and durations. We believe this cycle really began in 2000 and will last for several more years. This cycle has been created because of a true supply-and-demand crunch. All previous cycles have been created by regulated supply changes. On the crude oil side, originally it was the Texas Railroad Commission that regulated oil production, then it was OPEC. On the natural gas side, FERC regulated until the mid-80s how natural gas was produced and which pipeline's natural gas could be delivered to. The current cycle has not been created by the regulation of supply. We will see dips in commodity prices within this cycle -- dips that are created by interruptions on the demand side [warm winters, cool summers, etc.], but these dips will be short-lived. We believe this is what we are currently experiencing as a result of the very mild winter in 2006. However, the overall cycle has not changed, just a temporary softness.

RS: Your earnings releases and SEC filings provide a lot more information on your business. In fact, it's the nature of such beasts that they often provide so much information that an investor isn't always sure what's most important. Put yourself in the shoes of that individual investor for a moment. What one or two numbers should we focus on to gauge the health of your business?

Current Stock Advisor subscribers can read the full text of our interview with Larry Pinkston by clicking here. Not yet a subscriber? Click here for a free 30-day trial, which gives you access to the rest of the interview as well as all the companies David and Tom Gardner like for new money.

Rich Smith does not own shares of any company mentioned. ONEOK is a Motley Fool Income Investor recommendation. The Motley Fool has a disclosure policy.