MIDLAND Aug 6, 2015 (Thomson StreetEvents) -- Edited Transcript of Clayton Williams Energy Inc earnings conference call or presentation Wednesday, August 5, 2015 at 6:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Patti Hollums Clayton Williams Energy - Director IR * Mel Riggs Clayton WIlliams Energy, Inc. - EVP, COO, Director * Mike Pollard Clayton Williams Energy, Inc. - CFO * Ron Gasser Clayton Williams Energy, Inc. - VP Engineering * Clayton Williams Clayton Williams Energy, Inc. - Chairman, President, CEO ================================================================================ Conference Call Participants ================================================================================ * Wells Fitzpatrick Johnson Rice - Analyst * Ryan Oten Cowen - Analyst * Neal Dingmann SunTrust - Analyst * Andrew Smith Global Hunter Securities - Analyst * Sean Sneeden Oppenheimer - Analyst * Vedran Vuk Wunderluch Securities - Analyst * Mo Dahhane Northland Capital - Analyst * Stephen Carpel Credit Suisse - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. Welcome to the Clayton Williams Energy second quarter 2015 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference is being recorded. Patti Hollums, you may begin, ma'am. -------------------------------------------------------------------------------- Patti Hollums, Clayton Williams Energy - Director IR [2] -------------------------------------------------------------------------------- Thanks, Kevin. Good afternoon and welcome to the Clayton Williams Energy second quarter 2015 results conference call. During this call we will discuss our second quarter results and guidance that were issued yesterday afternoon. Our slide presentation and conference call will be recorded and available for replay on our website at www.claytonwilliams.com. Our call today will consistent of a Company overview presented by Mr. Mel Riggs, President, and then a financial update presented by Mr. Michael Pollard, CFO. We will then entertain a question-and-answer session for as long as time permits. Also present today and participating in our Q&A we will have Mr. Clayton Williams, Chairman and CEO, Ron Gasser, VP of Engineering, John Kennedy, VP of Drilling, Sam Lyssy VP of Exploration and Greg Welborn, VP of Land. Before we begin, please be advised that our remarks and answers to your questions include statements that we believe to be forward-looking statements. All statements that relate to future results are forward-looking statements that are based on our current expectations. Actual results may differ materially from those expressed or implied by these forward-looking statements. Because of the number of risks and uncertainties affecting our business, including those discussed in our quarter and annual SEC filings and in the cautionary statements contained in our press release and on our website. With that being said, I will turn the call over to Mr. Riggs. Mel? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [3] -------------------------------------------------------------------------------- Thank you all for joining us on this call. I'm going to go to Slide 3. We have some slides. Hopefully you can see them. If you can't, I'll try to explain them, that way you'll see them, anyway. So we have on Slide 3, we talk about our second quarter highlights and our major strategy. We began this year focused on capital discipline due to this very challenging environmental process. We did not borrow any money in the second quarter. We ended the quarter with a little bit over $350 million of liquidity, so we're in pretty good shape in there. Mike will get more into that in a moment. We've held all of our acreage together. Ten months into this down turn we've held all of our acreage together. We're in good shape there. And our resource plays and our production has held up much better than we expected, also, which is very good news to us. So we feel very strong about where our bolster our belief in our reserves and our base production. Earlier in the quarter oil prices had recovered somewhat. We formulated a plan to put two rigs back to work and that was after getting our well cost down 30% to 40%. We thought we could make very good returns at $60 a barrel. Similar to what we were making last year when oil was $90. We did put two rigs to work, one over in Reeves and then in the Eagle Ford in Lee county. Those Riggs are currently running. What's happened since then, oil prices have collapsed again, caught everybody again by surprise. We don't want to knee jerk here. We're going to keep the rigs going for the time being. And watch what's happening here, but we'll we may have to adjust at some point. We'll see. We have also focused on cutting costs. We've cut a lot of overhead. We talked about at the end of the first quarter, the pretty dramatic G&A cuts we made. We've also worked on production expenses throughout all of our properties across our fields. That's ongoing. We are in the process of coming up with a plan to maintain liquidity. This could be a challenging period of time for some time to come. We all know that. The landscape for oil is a big question mark right now. We are trying to come up with a plan that is not dilutive to our shareholder base and so we have been very actively involved in talking to private equity, to put together capital to go forward drilling. Obviously, we'd like to see a little higher oil operations. We are making money with the rigs we're running now but not the type of returns we'd like to see ultimately. Our plans in talking to private equity has been very well received. That's an ongoing process. But at the same time we do realize in this price environment which may persist for a while, it's the reality, and we're, again, 10 months into it, we have too much debt at this point in time for this price environment. And even though we have our bonds don't mature until 2019, we're working on plans to deal with that now. And so I think you'll see our plans will be now not only to continue down the path and look for partners for drilling but also look at selling non-core assets, getting more focused on selling assets to start raising cash. And that's starting now. We'll focus on getting our debt reduced over the next year or so. We, again, have sold some assets this year, roughly we've had proceeds of about $35 million at this point. We've got some offers on some Permian properties we're evaluating but we're going to get more aggressive on that strategy. Going to Slide 4, operations, just to remind everybody what we have, we're in the two best basins in the United States. Our resource plays. We've got large acreage position in both the Permian and the Giddings area. Primarily our best resource play in the Permian is over in the Delaware Basin in Reeves. We'll get to that in a minute. We've got at least a thousand acres we think that we can drill. We think that's conservative. That doesn't add in potential down spacing in both areas, which could multiply that a couple of times. Again, we did resume drilling with a couple rigs earlier, and we own our rigs and so we do have the flexibility to stop and start as we please. We'd rather not do that but we have to be realistic about whatever the conditions are at the time. Going to Southern Delaware Basin over in Reeves, we've got, again, 66,000 net acres over in this area just south of Pecos, Texas. There's at least five or more producing benches in that region, the stack pays. We've been focused on the Wolfcamp A and Wolfcamp C. The Bone Springs is being developed by some companies. The Wolfcamp D, we've had a company now that has drilled two laterals in the Wolfcamp A, upper and lower, has tremendous potential, there's a huge oil column with 400 million barrels in place so it's a big area. The other players in this area, which when we entered this area in 2010, mostly private companies, and now we have Noble energy to our north, OXY to our northeast and east of us and then Concho to the south. So we've got major players in this area that are spending a lot of capital and that's been helpful to us to further learn how to do a better job here. Going to the next slide, Slide 6, we feel like we've de-risked Wolfcamp A across about two-thirds of our acreage, and the same with the Wolfcamp C. We have the 30-day average, peak 30-day averages are very similar. We fractured two wells that were a carryover from 2014. Those wells are very consistent to what we had in the Wolfcamp A that we to the wells we've drilled previously so have gone from 22 to 24 wells there in the A and then we added another one more well in the Wolfcamp C. That well is a little lower flow rate, as that 600 plus barrels of oil equivalent per day but that well had mechanical issues. We talked about that last year when we were trying to, we had some pipe problems but we got the well fixed and we were able to get it fracked and now it's turning out to be a good well. So we feel good about two-thirds of the acreage at this point in time. We have a rig running right now in kind of the Northwestern part of our acreage to help hold some of that but we're in good shape as far as holding this acreage at this point. Our Wolfcamp A long lateral economics, this is the longest. It's a 6,000-plus lateral with the completed interval being about 5,700 feet, the costs are 6.6, that's versus about 9.5, 9.6 last year. The EURs are at 750,000 MBOEs, 90% liquids. That's less than $12 a barrel finding costs so it's a very strong well. In our guidance we put out, we used an average of 650,000 barrels equivalent for the EURs because we were drilling a mix of longer and shorter laterals depending on the land situation so we have to sort of estimate what kind of, we blended together to come up with that number, and it's just our best guess at the time on what our program will look like. You can see also the production growth in the far right-hand corner over the last two or three years. Going to the next slide, we've got the Giddings area. Again, a very large position in the Eagle Ford Shale and oil window, which is where we want to be. We've got 30 million barrels of oil in place. We've got 170,000 acres, most of it's in Burleson, about 95,000 acres, in Burleson. We estimate at least or over 600 locations in a 160-acre spacing that basically says only 96,000 acres of this area is productive. But we have wells that are in all three of these counties that are shown, wells that are 40 miles apart, so we have de-risked this area substantially, we believe. The Eagle Ford Shale, again, Slide 8, we've got 37 wells with 30-day average, peak average, there's been 480 barrels of oil equivalent per day. Again, one rig running right there in Lee county. Economics for (inaudible) $4 million per well cost, that's down from, what, 6.5 or so last year. The EUR is 250,000 MBOE, so you're looking at planning costs a little over $20 a barrel. We're also considering adding more sand, more (inaudible). We probably have not fracked our wells as aggressively as a lot of the other operators as they're touting bigger reserves here but we've been making money. Our goal was to make money, get a rate of return in this area and that's what we've been able to do. And it's worked pretty much since we started under the current program. We're modeling about 3% recovery of oil in place. Again, we're growing, we grew production. This year because of, really, basically no drilling in 2015 until just recently, and those wells are running right now, we have no new production from those wells. We have kept our production really pretty flat even without the drilling. Our base production has really been flat. We've had a little tale-off in the Eagle Ford just for lack of activity but we know the one thing that's really important here is that we know with these resource plays to recreate these positions, it would be very costly and really probably impossible. It would take billions of dollars. So what we plan to do is fight like hell to hang onto them and we're going to do the best we can. I'll turn it over to Mike now. -------------------------------------------------------------------------------- Mike Pollard, Clayton Williams Energy, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Mel. We'll turn to Slide 10 for the financial overview. We are very pleased with the results of our operations for this quarter. Our production was 16,600 BOE per day. That's 8% higher than the consensus. Our adjusted net loss, non-GAAP, was $12.8 million, that's $1.05 a share loss and that's ahead of the consensus which is $1.16 loss. Our cash flow before changes in working capital was $24.1 million, and that's $1.98 per share, and that was ahead of consensus significantly. Consensus was $1.58 per share. Our EBITDA, which is non-GAAP, was $37 million, which is ahead of consensus, also there, of $32 million. So we're very, very pleased with our results of operations. Our strong production was a driver and what caused production to beat estimates was a combination of incremental production from recently completed wells. Some of those are and there were also some contribution from non operated wells. But then also just improved performance that Mel alluded to in our core areas, and production has held up better, decline rates have been a bit lower than we expected, and so that's all good news and we see that in our production for this quarter. Our oil production accounted for 75% of total production, while NGLs accounted for 9% and natural gas accounted for 16%. Those are pretty much in line with the way we have been positioned over the last couple of quarters. By area, our core shell plays in the Delaware Basin and the Eagle Ford accounted for about half of our total production. As Mel mentioned, we're in an extremely challenging price environment, but still, despite that, our realizations for the quarter improved significantly over the first quarter. Our average realized price for oil was $53.32 per barrel, our realization for gas was $2.58 MCS, and we netted $15.30 per barrel for natural gas liquids. Our lifting costs, which are production costs less the severance taxes, production taxes on our revenues, average $13.02 per BOE. That's down 3% quarter over quarter and down 4% sequentially. G&A expenses, which excludes our non-cash compensation expense attributable to APO reward plans, was $5.5 million, which is down 34% quarter over quarter and 29% sequentially. This fairly radical drop in G&A expense was attributable to lower personnel costs primarily, lower personnel costs, which was the result of the cost cutting measures that we implemented in the first quarter of this year. As Mel mentioned, we suspended drilling early this year to allow time for service costs to adjust to this lower commodity price environment and also just reserve liquidity. As a result, our accrual basis capital expenditures for the second quarter of 2015 totaled $23 million, and that consisted of $17.1 million for drilling and completion and $5.9 million for land costs. For the year-to-date, 2015, our CapEx was $77.6 million, consisting of $62.9 million drilling and completion and $14.7 million for land. A lot of the drilling and completion costs you see this year related to carryover costs from wells that had been spud and were in progress at the end of 2014. We've done completion operations on, I believe, 11 of our wells in our core areas in 2015. And so, you know, that's the carryover cost, even though we haven't been actively drilling until beginning in July we did have a lot of work to do from our 2014 program. And our land costs were spent primarily to renew and extend leases and to keep our acreage intact. Turning to the balance sheet now, we remained focused on maintaining liquidity while we preserved our asset base. At quarter end, bank debt was $147 million, which was the same level as it was at the end of the first quarter, as compared to $105 million at year-end 2014. That leaves us with ample liquidity for the near term and about $359 million. We have scheduled a meeting with our banks for early September. We will go through these semi annual borrowing base re-determination at that time. There will be adjustments we can't speculate at this point what the borrowing base will do, but we will be able to report on that before the end of the third quarter. Looking now at our updated guidance, in July of 2015 we resumed drilling activities at the 2-rig pace that we discussed, one in the Delaware Basin and one in the Eagle Ford. As a result of that, we've increased our CapEx forecast since the last guidance to $134.5 million for the year. We've also increased our production guidance by about 900BOE per day. About half of that 900 BOE per day is attributable to the incremental production that we would expect to achieve from our resumed drilling program, and the other half is tied to production improvements that really contributed to the increase in reported production here for the second quarter. So we're seeing some increase just due to performance. We left our estimates for lifting costs unchanged at $13.50 to $14.50 a barrel. That's the same as it was previously. Even though we're at $13.02 for this quarter, we do expect our cost per BOE to drift upwards some, as production declines, which it will some, in the last half of the year. We also left our estimates for cash G&A expenses unchanged at a range of $26 million to $28 million for the year. Significantly lower than 2014. And we currently have $1.3 million barrels of oil production hedged at an average price of $55.65 per barrel. That will cover production from July through December of 2015. With that, I'll turn the call to the conference operator for our Q&A session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Our first question comes from Wells Fitzpatrick with Johnson Rice. -------------------------------------------------------------------------------- Wells Fitzpatrick, Johnson Rice - Analyst [2] -------------------------------------------------------------------------------- Hey, good morning, or good afternoon, excuse me. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [3] -------------------------------------------------------------------------------- Hey, Wells. -------------------------------------------------------------------------------- Wells Fitzpatrick, Johnson Rice - Analyst [4] -------------------------------------------------------------------------------- For the asset sales, should we look to that being the kind of non Delaware Permian stuff or would you look to cleave off or JV a portion of the big two positions that you might not be able to get to for some time? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [5] -------------------------------------------------------------------------------- Well, I think right now we're going to look at non core both in the Eagle Ford which we've done. We're going to do what we've been doing. We've sold non core in the Permian and non-core in the Eagle Ford. And ultimately, though, we will make sure we get enough capital pay, whatever debts we have, Clayton has always done that, and so we have had some discussions with some companies about potential JV structures in the Delaware Basin and the Eagle Ford, and so that's sort of ongoing. So we'll see. But right now we will be focused on selling non core assets. -------------------------------------------------------------------------------- Wells Fitzpatrick, Johnson Rice - Analyst [6] -------------------------------------------------------------------------------- Okay. Perfect. And then just one more follow-up, the EURs in the Wolfcamp C, are those still in line with the Wolf A, call it 750 at 5700, feet? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [7] -------------------------------------------------------------------------------- Yes, they are. -------------------------------------------------------------------------------- Wells Fitzpatrick, Johnson Rice - Analyst [8] -------------------------------------------------------------------------------- Okay. Perfect. Thanks so much. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [9] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question comes from the Ryan Oten, Cowen. -------------------------------------------------------------------------------- Ryan Oten, Cowen - Analyst [11] -------------------------------------------------------------------------------- Hi, good afternoon. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [12] -------------------------------------------------------------------------------- How are you doing? -------------------------------------------------------------------------------- Ryan Oten, Cowen - Analyst [13] -------------------------------------------------------------------------------- The guidance seems to imply the second half run rated of about $25 million per quarter in capital spending. Was just wondering if you can confirm that and I want to see if that's a decent number for us to think about for 2016 if oil prices kind of stay here and call it 50, 55. -------------------------------------------------------------------------------- Mike Pollard, Clayton Williams Energy, Inc. - CFO [14] -------------------------------------------------------------------------------- Yes, that would be a reasonable rate for 2016, and that is correct, it's running at about $25 million per quarter. And, again, there's land costs in there. You have drilling costs and you have land costs. I think, you know, we certainly will have additional land expenditures as well. -------------------------------------------------------------------------------- Ryan Oten, Cowen - Analyst [15] -------------------------------------------------------------------------------- Okay. That's helpful. And then any color on what production would look like in such a scenario, call it, you know, $100 million all in? -------------------------------------------------------------------------------- Mike Pollard, Clayton Williams Energy, Inc. - CFO [16] -------------------------------------------------------------------------------- No, we haven't released that. I would have you look at the guidance. We have our model wells in there, and they have the first year production that we expect on a gross basis and we also have our respective working and net revenue interest. You can model that out based on that. -------------------------------------------------------------------------------- Ryan Oten, Cowen - Analyst [17] -------------------------------------------------------------------------------- Perfect. That's helpful. You're right, that is our job on the side of the phone here. And then on the operating cost before, you touched on it a bit in the prepared remarks. You guys have done a great job kind of getting those down sequentially here. I wanted to get a sense as to, you know, how much conservatism is in that guidance moving forward? -------------------------------------------------------------------------------- Mike Pollard, Clayton Williams Energy, Inc. - CFO [18] -------------------------------------------------------------------------------- Certainly on the high end a lot. We don't expect to see $14.50 for sure, but that's just a range that we feel, if you hit somewhere in there, we think we're going to beat the street on that. -------------------------------------------------------------------------------- Ryan Oten, Cowen - Analyst [19] -------------------------------------------------------------------------------- And then one last final one for me on the guidance, and I do appreciate the details here, the midstream in drilling services business has swung from a profit last year to a loss this year. If oil prices were to sort of normalize in a $60 to $70 range, do you have a sense as to what sort of profitability we should expect from that business? -------------------------------------------------------------------------------- Mike Pollard, Clayton Williams Energy, Inc. - CFO [20] -------------------------------------------------------------------------------- The midstream, well, I think you would look at this quarter and then just run with that because here's the thing, Ryan. We eliminate all of the inter company gains and losses from that. If we transport our own product, we eliminate that income against the operating costs, you know, under normal GAAP procedures. So unless we're transporting third-party oil, gas, or products, then it's pretty minimal. And right now, I mean, we're always open for a third party but right now we don't have anything planned other than non operators in the area, that's about all we've got that's not ours. And in the drilling of course we drill for ourselves and unless we drill for third parties, you won't see any. Again, those get eliminated. The costs that you're seeing there, since all the rigs are stacked right now except for the two, the cost you see that's been reported and were forecasted are the costs that it takes just to maintain the rigs and keep a bare minimum of crews and keep the assets protected. -------------------------------------------------------------------------------- Ryan Oten, Cowen - Analyst [21] -------------------------------------------------------------------------------- That's helpful color. I'll pop back in the queue. Thank you. -------------------------------------------------------------------------------- Mike Pollard, Clayton Williams Energy, Inc. - CFO [22] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question comes from Neal Dingmann with SunTrust. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust - Analyst [24] -------------------------------------------------------------------------------- Good afternoon, guys. Say, Mel, you mentioned about potentially adding more sand prop and longer laterals, I guess, sort of two ways to look at it. I mean, one, as you mentioned in your prepared remarks, trying to cost cuts in sort of any way possible but obviously you want to try to get the highest economics. Just your thoughts concerning, you know, maybe trying to extend these wells or how you think about that today in this environment? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [25] -------------------------------------------------------------------------------- Ron Gasser is here and I'll let him jump in, too, but we know that we have not put the volume of sand in our frac jobs that other companies have and we look at the public companies, in their data, they show bigger reserves. And so we think that we can probably improve. There's a tradeoff, you know, it's cost versus the increase in reserves potentially and flow rates. As far as the laterals, Ron, why don't you take that? -------------------------------------------------------------------------------- Ron Gasser, Clayton Williams Energy, Inc. - VP Engineering [26] -------------------------------------------------------------------------------- Yeah our plan going forward this year depending on how the well treats, we have guidelines, so we are anticipating pumping 50% more sand on your Eagle Ford wells and to date we've been putting away all the sand that we can into our Reese county wells but with a few changes we expect to put more away and we will place as much profit as we can into the Reeves County wells going forward. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust - Analyst [27] -------------------------------------------------------------------------------- So, Mel, I guess, have you guys looked at, I'm just wondering, I mean, certainly if you just looked at a DCF from your cost today would be a bit hire on that. I don't know if it's just a guess at this point or if you've done an analysis on this to know if you do spend that extra whatever, 10% or 20% on a well, when you'd recognize it, when you'd actually, you know, when that would cash flow back. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [28] -------------------------------------------------------------------------------- Well, cash flows back originally, from what we're seeing. We've also seen some people that have done a lot larger propping placement and we've yet to see the production hang in there. They do come on higher rates initially but we're watching the declines prior to going all-in on a change in our entire frac procedure. We're also doing longer laterals on upcoming wells. So we think that that's going to help our profitability, also. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust - Analyst [29] -------------------------------------------------------------------------------- Okay. And then, you know, Mel, I know a lot of the M&A questions you guys were exploring a lot of things. Just your thoughts on any sort of macro you can talk about just general pricing out there. I mean, we obviously saw, you know, a very high price right in the Midland with RSP. Just wondering again, while Delaware is certainly not in the hard of the Midland, your thoughts about pricing either in that southern Delaware or Reeves county today maybe versus just what it was earlier this year? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [30] -------------------------------------------------------------------------------- Yes, it's changed dramatically. I mean, obviously we've seen, with the Noble Rosetta transaction, I think they put a lot more value on the Delaware Basin. And that acreage is just to the north of us, contiguous to us in the north, and then the deal that was done with WPX coming in and buying RKI. And what I've been told if you really get down to what was really the core resource acreage there, it was a very high price for that particular, and that's a little bit further north. What's happened in the Delaware Basin, same thing that's sort of happened in the Midland basin. We're slowly catching up. It's the maturation process where the basin, if anybody wants in, they've got to buy their way in or if they want more, they got to buy. There's really nothing else to lease that's really in the play that makes sense. That's why we believe if we continue to hold that acreage and drill wells, we're about 40 wells away from being in an HPP position. That's where the real value is driven, when you really have it held. Then that seems to, some of these bigger companies are willing to pay up to get some of these HPPs because they don't have to chase it, they can kind of design their own program and go at their own pace. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust - Analyst [31] -------------------------------------------------------------------------------- Mel, if you want to cut costs and do more pads, remind me, again, just if you look at, you know, your two plays in the southern Delaware or over in Reeves, just on any of that or if you look at Giddings as well, just how much you're able to do, you know, larger pads or, you know, versus holding acreage, how does that play out this year? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [32] -------------------------------------------------------------------------------- When we look at pad drilling, the difference is when we, owning our own rigs, we started at divert levels from a company that does not own its rigs and has to go rent rigs at higher rates, and so the pad drilling what we've seen, it's not quite, it doesn't really do as much for us, really. At this point. It doesn't really give us much of an advantage other than there may be some efficiencies gained in infrastructure and putting in, you know, electricity or whatever, things like that, but we really don't see a huge benefit to pad drilling because we own rigs and we can run them at cheaper rates. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust - Analyst [33] -------------------------------------------------------------------------------- And then just lastly, Mel, you know, like today on the call, talked about a lot about infrastructure. Any issues on your plays there that concerns infrastructure for the remainder of this year into next year? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [34] -------------------------------------------------------------------------------- No, we're on really good shape on infrastructure. We have pipelines as you know over in the Reeves area for gas, water and oil. The other thing about both of our areas, we have a lot of groundwater, both those areas are connected to very strong aqua fir so we can accumulate a lot of water to frac with without a problem. And that is a difference compared to the Midland Basin. There are a lot of issues there. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust - Analyst [35] -------------------------------------------------------------------------------- That makes sense. Thanks, Mel. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- (Operator Instructions). Our next question comes from and Andrew Smith with Global Hunter Securities. -------------------------------------------------------------------------------- Andrew Smith, Global Hunter Securities - Analyst [37] -------------------------------------------------------------------------------- Hey, good afternoon. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [38] -------------------------------------------------------------------------------- Hey, Andrew. -------------------------------------------------------------------------------- Andrew Smith, Global Hunter Securities - Analyst [39] -------------------------------------------------------------------------------- Obviously you're focused on joint ventures, non-core asset sales and working with private equity to reduce that going forward, but would you ever consider selling one of your core areas and focusing on just one area? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [40] -------------------------------------------------------------------------------- Yeah, you know, obviously in a difficult price environment, and we don't know how long this is going to last, but like I said earlier, we're going to make good on our debt. And if we had to sell one area, we could do it. And that would pay the debt. I believe that would pay all of our debt off and I think there's enough demand for the niche here. That's the key with us. We're in good areas, we've got good basins, good positions and so we have a way out if this gets so bad that that's the only. That would be our last resort, I think, but we will do what we had to do. -------------------------------------------------------------------------------- Clayton Williams, Clayton Williams Energy, Inc. - Chairman, President, CEO [41] -------------------------------------------------------------------------------- This is Williams. I might interject this here. In both areas we have a very substantial acreage, and we've developed that largest basin to be able to drill wells on all the leases and, as such, we have a very large infield drilling position. We've not even started that, you know, how much downsizing can we do? Can we first be able to drill wells on our acreage, evaluate it, have production history, now we're ended up with where and how tight could we infield drill. That's been where we're entering the phase where we'll drill some infield experiments and detail how much interference one well makes with the other and what potential, do we have potential infield drilling. At this point we do not know, but we probably have some substantial infield drilling in both areas because they are and were drilled on the maximum space allowed by the Texan railroad commission. We have a lot of upside here. And now is a period of patience and have six or eight months a year production history, we will better then know how to more efficiently conduct our infield drilling. -------------------------------------------------------------------------------- Andrew Smith, Global Hunter Securities - Analyst [42] -------------------------------------------------------------------------------- Just one last one on the potential joint venture, I think you had talked about trying to get something done this year. Is that still the timeline you're thinking? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [43] -------------------------------------------------------------------------------- Yeah, we're working hard right now. We're looking at several different options. As you know, there's some creative things being done with private equity right now with companies, and we're exploring those. We're having a lot of meetings. And like I said it's been well received. I think when people see what we have, it's pretty exciting. And so we're pursuing it hard. We want to make a good deal, though. We don't want to rush. We're not going to do any knee jerk stuff. We're not selling assets on the cheap, trying to get out. -------------------------------------------------------------------------------- Clayton Williams, Clayton Williams Energy, Inc. - Chairman, President, CEO [44] -------------------------------------------------------------------------------- Amen, amen, amen. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [45] -------------------------------------------------------------------------------- We are trying to be smart about what we do and it's going to be well thought out. -------------------------------------------------------------------------------- Andrew Smith, Global Hunter Securities - Analyst [46] -------------------------------------------------------------------------------- Great. Thanks, Mel. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Our next question comes from Sean Snead in with Oppenheimer. -------------------------------------------------------------------------------- Sean Sneeden, Oppenheimer - Analyst [48] -------------------------------------------------------------------------------- Thanks for taking the question. Mel or Mike, you guys both kind of discussed that you're looking to reduce overall debt balances, and with the bulk of your debt being composed of the 7.75 here. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [49] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- Sean Sneeden, Oppenheimer - Analyst [50] -------------------------------------------------------------------------------- It would appear to me that the plan really is to kind of go and use asset sale proceeds or cash from JVs to try of call a portion of bonds or how would that kind of actually work in that sense? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [51] -------------------------------------------------------------------------------- Obviously that would be one option. We're looking at other ways that we might can do some deleveraging transactions. That would be, you know, something we'll just have to look at at the time. -------------------------------------------------------------------------------- Sean Sneeden, Oppenheimer - Analyst [52] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Mike Pollard, Clayton Williams Energy, Inc. - CFO [53] -------------------------------------------------------------------------------- The call premium drops again obviously April 1 down to about under 102, and so that gets obviously cheaper by then and so, you know, it's something we will look at and make a determination as to what's the best way to go. Obviously, the first dollars would go to pay down the revolver, you know, give us more liquidity, and focusing in on senior notes. -------------------------------------------------------------------------------- Sean Sneeden, Oppenheimer - Analyst [54] -------------------------------------------------------------------------------- Okay. That's helpful. And then, you know, maybe just to point of clarification on the asset sale front. You're planning mostly to sell E&P assets not necessarily midstream or some of the pipeline stuff that you guys have, is that right? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [55] -------------------------------------------------------------------------------- That's right. We're not trying to market our pipelines right now. Our pipelines are very important to our operations. And those pipelines get more valuable as we put more product in them so we need to be able to drill wells and fill them up. So we're looking at other assets that aren't necessarily key to our future growth. -------------------------------------------------------------------------------- Sean Sneeden, Oppenheimer - Analyst [56] -------------------------------------------------------------------------------- Okay. That makes sense. And then maybe just kind of lastly for Mel, you kind of mentioned that, you know, if we stay in the current price environment you would consider, or revisit your rig counts? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [57] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Sean Sneeden, Oppenheimer - Analyst [58] -------------------------------------------------------------------------------- How sensitive is that to where we are today? Is it just a function of you need to really allocate money towards drilling? Over 50 or how are you guys kind of thinking about like what's the line in the sand? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [59] -------------------------------------------------------------------------------- Well, the current strip, both at the current strip which is going to be slightly over $50 a barrel, around $50, we make a little money. So we can do it, but it gets back to, we don't want to get in a position where we're destroying capital here, and we need to maintain ligament. So we're going to monitor that and, you know, we'll watch oil prices for a while and see what we think the, what it's going to look like over the next several months. We don't want to start knee jerking back and forth the rigs, though. We've got people involved. We've got two of our best crews that we had, back working. And we'd like to keep the rigs going. And it will help added production and soften any kind of decline curve that we might have from total inactivity. So it's a balancing act and we just have to watch it. And we'll be watching the numbers and making a call on that. -------------------------------------------------------------------------------- Sean Sneeden, Oppenheimer - Analyst [60] -------------------------------------------------------------------------------- Okay. Great. Thank you very much. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- Our next question comes with Wunderlich Securities. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [62] -------------------------------------------------------------------------------- Hello. -------------------------------------------------------------------------------- Vedran Vuk, Wunderluch Securities - Analyst [63] -------------------------------------------------------------------------------- Hi, guys. Just wondering if I could get some more color on the appetite for the non-core acreage and whether you had an estimate of kind of how much you guys get maybe from like several pieces together across a longer period of time, like a year? I know there'll be probably coming in a few chunks but just over a longer period of time, what kind of estimates you guys are thinking about can be raised from the non-core sales? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [64] -------------------------------------------------------------------------------- You know, I don't really know for sure. I don't even believe I want to speculate because it just sort of kind of preps the market for what's coming, but I'd rather not really get, I think it will be material. It may be a series of small transactions or we may put a package together. I'm not sure. That's something that we're looking at right now. -------------------------------------------------------------------------------- Vedran Vuk, Wunderluch Securities - Analyst [65] -------------------------------------------------------------------------------- Okay. Thanks. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [66] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- Our next question comes from Mo Dahhane with Northland Capital. -------------------------------------------------------------------------------- Mo Dahhane, Northland Capital - Analyst [68] -------------------------------------------------------------------------------- Yeah, thanks, good afternoon, guys. Just a quick question for Mel on well costs. I didn't see that number change since Q1 guidance. I'm just curious. We continue to see further decline. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [69] -------------------------------------------------------------------------------- Well, we did. I mean, we thought we could get that level, we believed it and we got there, so it was sort of a little bit of a betting on the (inaudible) and our guidance back then. We were working through that. But I think now we have finalized that with our, mainly on the frac side, to get those, get our costs where they are. -------------------------------------------------------------------------------- Mo Dahhane, Northland Capital - Analyst [70] -------------------------------------------------------------------------------- Okay. Thanks. -------------------------------------------------------------------------------- Operator [71] -------------------------------------------------------------------------------- Our next question comes from Steven Carpel with Credit Suisse. -------------------------------------------------------------------------------- Stephen Carpel, Credit Suisse - Analyst [72] -------------------------------------------------------------------------------- Maybe just talk quickly or maybe understand a bit more on the private equity type deals, JV. Obviously you have stack pay. How do you think about the zones that you would like to target completely for yourself as opposed the zones you would think about putting into a JV? Or maybe that is in entirety? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [73] -------------------------------------------------------------------------------- The private equity capital, they're going to be trying to get the less risky, the less riskier the better, probably. And the one thing we do know is our Wolfcamp A and Wolfcamp Cs are de-risked within a certain, we could draw a circle on the map and say we're de-risked in this area. Those would be the type of locations that we'd probably put into this kind of a deal. And, you know, we still are watching other activities at Wolfcamp B. Like I said earlier, there's a private company out there drilled two laterals in Wolfcamp A one in the upper section and one in the lower. They stacked them, they were stacked and staggered completions. We may do some things like that. We may be on our own but our goal is to drive down the cost of capital as low as we can get it and get wells drilled. We don't want to put, we're not trying to experiment with somebody else's money here. -------------------------------------------------------------------------------- Stephen Carpel, Credit Suisse - Analyst [74] -------------------------------------------------------------------------------- Understood. And then probably this has been beaten up a bunch of times but trying to understand how you think about the balance sheet on, what is the optimal level of debt or I don't know if it's a net debt to cap, if it's a net debt to EBITDA? How are you thinking about that at the first? Maybe the second part of that from a strategic perspective is, how do you think about M&A and just quite frankly merging with somebody to help improving the balance sheet that way as opposed to the asset sales? Thank you. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [75] -------------------------------------------------------------------------------- Let me take that first and I'll let Mike get a little bit more scientific. I would like to have no debt right now in this environment. I want zero debt. Now, that may not be practical right now but that's going to be the goal here. And if we do that, then there's really, there's no reason, we don't have a reason to merge. You know, we need to control our own destiny here. We need to fix our own issues or our own problems. And so I'd like to get to zero debt. Now, what is practical and what we need to just from the standpoint of credit ratings and things like that, I'll let Mike take it. -------------------------------------------------------------------------------- Mike Pollard, Clayton Williams Energy, Inc. - CFO [76] -------------------------------------------------------------------------------- Well, I think since Mel wants it zero, I'm going to say we're going for zero, but if we can achieve that, we would. You know, we ended 2014 at a 2.4 times coverage ratio, I mean leverage ratio. I would think something in this environment, something, you know, around 4 would be, would be what we'd have to try to target, given a reasonable amount of type. We can't get there overnight, but within a reasonable amount of time, target a four times leverage ratio in this environment. -------------------------------------------------------------------------------- Stephen Carpel, Credit Suisse - Analyst [77] -------------------------------------------------------------------------------- And you think you can accomplish that purely on asset sales; you don't need anything beyond that, just to close the loop here? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [78] -------------------------------------------------------------------------------- No, we're going to go down both paths of selling assets and at the same time looking for a drilling partner. And that's either a buy-in, a convention type JV structure, potentially, or it's this kind of drill-co type capital where they put their money up for rate of return and they eventually exit out. And we're going to work both sides of this. -------------------------------------------------------------------------------- Stephen Carpel, Credit Suisse - Analyst [79] -------------------------------------------------------------------------------- Thank you, gentlemen. -------------------------------------------------------------------------------- Operator [80] -------------------------------------------------------------------------------- I'm not showing any further questions at this time. I'd like to turn the call back over to Mel Riggs for closing comments. -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [81] -------------------------------------------------------------------------------- Well, I think we're pretty much covered all the bases, we are concerned about liquidity, we're going to get it fixed and we are happy with our production and we're very pleased we've got all of our acreage, we're sitting in a good spot. I think 10 months into this it's been trying but I think we're in pretty dang good shape, considering. Clayton, do you have anything to add to that? -------------------------------------------------------------------------------- Clayton Williams, Clayton Williams Energy, Inc. - Chairman, President, CEO [82] -------------------------------------------------------------------------------- I'll just conclude that, yes, it's a challenging environment. With our years of experience, we are focused on discipline. Discipline without any forced sale. We have two very good areas. We know them very well with product history. We're going cautiously forward. We're particularly focusing on production efficiencies like in the Permian assets we bought with Southwest Royalty where we can improve functions in some of those platform wells, it's time to do it. We also would remind you that we believe we have many infield locations between the proven production both in Giddings and in Reeves County, so we have a lot of work to do. The first step will be doing some infield wells and then watching production history so we may determine how many of those other locations we might drill, so we're just in the first place of drilling some of the infield and then it will take some production (inaudible) to determine how much liability they have. We've got a lot of place to drill. We've got good people. We've had great experience. And we think it's not all bad out there. We see a lot of opportunities and a lot of work to do and we know how to do it, so we're going forward and we thank you for tuning in. Any more questions? -------------------------------------------------------------------------------- Mel Riggs, Clayton WIlliams Energy, Inc. - EVP, COO, Director [83] -------------------------------------------------------------------------------- That's it. Thank you. -------------------------------------------------------------------------------- Operator [84] -------------------------------------------------------------------------------- Ladies and gentlemen, this will include today's presentation. You may now disconnect and have a wonderful day.
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