Clayton Williams Energy's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.24.13 | About: Clayton Williams (CWEI)

Clayton Williams Energy, Inc. (NYSE:CWEI)

Q1 2013 Earnings Call

April 24, 2013 11:00 am ET

Executives

Patti Hollums – Director of Investor Relations

Michael L. Pollard – Senior Vice President of Finance, Treasurer and Chief Financial Officer

Mel G. Riggs – Executive Vice President and Chief Operating Officer

Clayton W. Williams – Chairman, President and Chief Executive Officer

Ron Gasser – Vice President Of Engineering

Analysts

Ryan Oatman – SunTrust Robinson Humphrey

Welles Fitzpatrick – Johnson Rice

Irene Oiyin Haas – Wunderlich Securities, Inc.

Sean Sneeden – Oppenheimer & Co. Inc.

Ravi S. Kamath – Global Hunter Securities LLC

Mike Kelly – Global Hunter

Douglas Thompson – Thompson Investments

Adam Michael – Miller Tabak + Co. LLC

Operator

Good day, ladies and gentlemen, and welcome to the Clayton Williams Energy First Quarter 2013 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 this conference is being recorded.

I would now like to introduce our host for today, Ms. Patti Hollums. Ma’am, please go ahead.

Patti Hollums

Good morning and thank you for joining the Clayton Williams Energy first quarter 2013 results conference call. Participating on our call today is Clayton Williams, President and CEO; Mel Riggs, Executive Vice President and COO; and Mike Pollard, Senior Vice President and CFO. And we have Ron Gasser, the Vice President of Engineering with us.

During this call we will discuss our first quarter results that were issued this morning. This call will be recorded and available for replay on our website at claytonwilliams.com. Our call today will consist of a financial presentation given by Mr. Pollard, an overview by Mr. Riggs, and then an operations update given by Mr. Williams. We will then entertain a question-and-answer session for as long as time permits.

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 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 quarterly 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. Mike Pollard. Mike?

Michael L. Pollard

Good morning everyone. Thanks for joining in. We reported a net loss of $41.2 million or $3.39 per share on total revenues of $106.9 million and generated $44.3 million of cash flow from operations during the first quarter of 2013. The net loss included a non-cash pretax charge of $69.5 million to write down the carrying value of our Andrews County Wolfberry assets to their estimated fair value. We will talk about that transaction in just a moment.

Taking a closer look at the quarter, production on a BOE basis was relatively flat at about 15,000 barrels per day. Oil averaged 10,423 per day, gas averaged 18.1 million cubic feet a day, and natural gas liquids averaged 1,611 barrels per day.

Our average oil prices were $91.26 a barrels versus a $100.76 in the first quarter of 2012. Gas averaged $3.31 versus $3.86 and natural gas liquids $32.77 per barrel roughly $45.87 in 2012 quarter.

Production cost including production taxes put all in was $23.26 per barrel which was up about 9% compared to the first quarter of 2012. Excluding production taxes, the average was $19.68 per BOE, up about 14% from the previous quarter, most of the first quarter 2013. Most of the increase is just additional wells, higher cost from new producing wells, has realized discontinued higher cost to field services and this quarter we actually incurred some additional work over in maintenance activity which we’ll touch on shortly in the operations discussion.

Derivatives, we had a loss on several derivatives contracts this quarter of 445,000 versus $4.4 million loss in 2012 period. Our non-cash mark-to-market losses were $6.1 million for the current quarter versus $2.5 million in 2012.

DD&A, our depletion rate was 2,617 per BOE which is up about 20% from the first quarter of 2012, most of that increase in rate was attributable to higher depletions rates in our Andrews County Wolfberry assets. Excluding Andrews County, if you did a pro forma look at rates for the quarter, it would be about $25 a barrel instead of the $26. So, we say, we’re down about $1 a barrel which will make us very consistent with where we ended the year last year.

Looking at the balance sheet, total long-term debt rose to $845 million which was up $35 million for the quarter. That consisted of $495 million outstanding on the revolver and $350 million other senior notes. We had $585 million borrowing base at the end of the quarter and which gave us about $86 million of availability. However, in April, we’re closing the transition for the Wolfberry assets which will provide an additional $99 million of availability and bring in a pro forma amount up to $185 million available as of the end of the quarter.

Dealing with the asset sales, we previously announced this transaction, but in April we agreed to monetize our Andrews Wolfberry assets. We sold 95% of those assets to a financial investor for $314 million, that purchase price obviously was subject to normal and customary closing adjustments. The proceeds were used to pay-down bank debt and we have reduced bank debt $214 million, that basically is paying of about 40% of our revolver balance with only about 13% of our PBT and attributable to those assets at the end of the year. So it’s a very accretive transaction for us.

At closing, the banks will reduce the borrowing base from $585 million down to $470 million and in connection with the release of the collateral. That transaction is scheduled to close today and from deal metric standpoint it works out to be like $14.19 per BOE of proved reserves as of January 1, 2013 and $93,000 per barrel of oil equivalent of net daily production for the first quarter of 2013. And it’s about six times annualized first-quarter EBITDA.

In addition, in April we also had another sale where we sold 75% of the rights down through the base of the Delaware formation in about 12,000 net acres in [Levy County] We saw the purchase price there was $6.8 million and the buyer were curious where all of the drilling and completion costs for our 25% retained interest on six wells, but we retained all of the deep rights, which was our initial target for leasing this actively in the first place. We’ve retained rights to the Bone Springs and the Wolfcamp and but were able to sell the shallow rights and recover almost 75% of our total investment in these and still retaining our target. So we are pleased with that transaction as well.

At this point, I think, I will turn it over to Mel, and we will take questions on financials later.

Mel G. Riggs

Thank you, Mike. That’s a good report. Last time we were on a call like this, back in February we talked about our plan for the year and our first goal for the year was to reduce short-term debt and strengthen our liquidity position and we’ve done that now with – now we talked about a plan with the divesting Andrews, the Wolfberry area. Instead of selling it out, well I think we’ve made a better deal, we got a good price for the monetization of 95% of that. We got a really good partner with a lot of capital behind me and to help develop further and we kept upside in this property. So we are very pleased with that.

The other thing to point out here is we sold acreage involved in that, it represents about 4% of the Company’s total kind of what we call growth acreage. So we’ve given up very little of our picture upside in our resource place with the Eagle Ford and Wolfbone areas. So that was really a positive event. We also have reduced our rig count and right now three of our rigs operating for the company and that’s helped us grow within cash flow, getting closer. We’ve had one rig running over in Reeves holding our acreage in the Wolfbone, one in Andrews and one over the Eagle Ford and thus maintained our position.

Of course we would like to ramp up later on and we will.

We also laid out plan to explore a JV partner for Reeves County, Wolfbone area, that’s underway. We know that within a year or so we will have to get about 5 rigs. And so we are starting that process, we’ve had a couple of meetings and we’re moving forward there. Again we got to find the right partner, if we don’t we do have a plan B for working through to determine how we can hold the bulk of our acreage with may be less rigs. So that’s underway. So that will take some time, but we are working it. So we’re working through the plan we laid out back in February.

We also have an East Permian acreage position over in (inaudible) and we have 37,000 acres at Wolfberry and client potential, we have some Wolfberry wells at boarding drill there and we are at that property in the market right now and again if we don’t get to that prospect, we have got plans on how we can hold it together with some minimal drilling and also maybe drilling from other companies in the area.

Over in Eagle Ford, very sad about this, we’ve had one rig as everyone knows, we have been talking about this for a while. One rig drilling in the area we think we have over 100,000 acres perspective. We have now drilled successive wells in four different counties and we have got six to seven wells I believe producing at this point in time, we can recap that in little more detail later, but we have got seven wells now producing, but again in four different counties. They were big acreage position.

We will be starting our first well and a very important well for us will be in (inaudible) county where we have a substantial amount of acreage. That well was spread I believe at the end of this month. So it will be another test. So we think we’re inventory rich over there. We have 100 wells potentially to drill, big part of our company’s future. As you know, Clayton Williams has been in that area since 1974, so it’s been - we call it a gift that keeps on giving, so we are all proud of it.

We also have a couple of things we haven’t talked that much. We do have some unconventional plays. We have got a shallow oil play up in Oklahoma where we can drill very low cost wells. It can have a lot of potential and then we also have a project back in California we have been working on for several years, trying to get permits to drill, but we are going to be able to start an exploration, but very old legacy California field that produced over 60 million barrels in its history and we were trying to drill three wells back to back late December.

Again these were unconventional oil top opportunities. So we are excited with where we are. We are pleased we got our Andrews still done and that’s a big step and we are going to stick to this plant and like we told you what we are going to do and with that I am going to turn it over to Clay.

Clayton W. Williams

Thank you, Mel. Welcome. So let me go back to the Giddings Eagle Ford. We have potential 700 to 800 wells to drill, but under our legacy Austin Chalk. At this point, they are very likely to be commercial. But they are going to play initially at Austin Chalk that takes lots of frac, so these wells are substantially lower, they are very good floats and they are still reasonable payout. We are very well in the payout, but as we watched it, as much it’s encouraging, might be a little more time, but not for sure. We discount one rig running there for the remainder of the year, but we got submit other well potential.

Come with me to the East Permian; it’s shallower, good reserves, we’ve drilled 22 wells and we are happy with that. We have additional drilling, but it’s not a core area, but so major play for many other independent like they have been. We got a lot of work to do. We might consider divestiture, if we are offered enough money.

Let me come to the Delaware Basin, which is as it gets our March, April. We still have 85,000 acres, it’s right over (inaudible) most in rigs in Loving. We have potential to earn up to 25,000 more to format region. We have drilled 85 oil rigs to-date, mostly vertical. We got a very large horizontal potential. We are targeting the bone springs and Wolfcamp with some bailout in the Delaware sand. We are moving to two rig program in June and three rigs in October. We have over 400 potential locations on 160 acres, some area that we’ll probably drill down to 80. We have built 84 miles of pipeline and it is place and operating. So we have one location in North Levy county.

We have talked about the Eagle Ford. In the Permian, we have other scattered acreage in small provinces, maybe not worth mentioning that but very – so we will find negative, but we have other work to do in the Delaware Basins.

So with that I will open it for questions and hand over it.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ryan Oatman from SunTrust.

Ryan Oatman – SunTrust Robinson Humphrey

Hi guys, good morning.

Clayton W. Williams

Good morning, Ryan.

Ryan Oatman – SunTrust Robinson Humphrey

On this Wolfberry sale, can you talk about how this deal came to pass and why this structure was most attractive to the sellers than the buyer?

Mel G. Riggs

(inaudible),

Ryan Oatman – SunTrust Robinson Humphrey

Your Andrews County.

Mel G. Riggs

Right. We are two different paths. We had a broker hired to sell the 100% to sell property up right. We also ran a different parallel path of looking for a potential partner here and what we are trying to do really is – there is upside potentially in a feature both at oil price, horizontal technology in the area in the Midland basin is starting to play some horizontal work done. We just feel like if we could hang on at this property over the long haul and have the opportunity to back in if we get the rights returned, there are some parameter set and with that as experienced before in the past, we have done similar type of transactions and so they work. And we felt like we have got a fair, a good price for the asset for the monetization, so it’s just – there is lot of synergies to doing it this way.

Ryan Oatman – SunTrust Robinson Humphrey

Sure, I mean, absolutely, selling it for almost 30% above PV-10 was certainly surprising to me. And then I wanted to shift to guidance, is there any changes that we should expect in terms of improve unit cost that type of thing with this Wolfberry monetization complete?

Michael L. Pollard

Hi, Ryan this is Mike. We will be putting up guidance in a couple of weeks, but I will give you some upfront numbers. Back on the production on a pro forma basis, given the sale of Andrews it will put us at about 12,600 BOE per day. We are still standing with our guidance estimate pro forma of about 13,000 to 15,000 a day for the year because we expect to continue to grow over certainly exactly about the Eagle Ford a number of wells that we are drilling there are going to – we believe will ramp-up by the end of the year through our adjusted guidance of somewhere between 13,000 BOE to 14,000 BOE per day.

No significant change, I don’t think in pro forma basis pulling Andrews out the rates were similar. Depletion though, we should see a drop from the first quarter of 2013 from $26 a barrel down to probably in the $25 a barrel on a pro forma basis and then our interest expense obviously will come down some as we probably pay $200 million down on the revolver.

Ryan Oatman – SunTrust Robinson Humphrey

Great, that’s very helpful. Thank you, guys. And then just one final one from one; capital spending for this quarter, looks like it came in around $74 million, how do you expect that to trend in the coming quarters considering the ramp in Delaware Basin activity?

Michael L. Pollard

Again, we will give you little more details in a couple of weeks, but now I wouldn’t expect it to drop any or we are going to drop some cost back, Andrews sale, we are going to pull out probably $10 million to $12 million there for the last half of the year for our share of drilling in Andrews. But as Mel was mentioning, there is a few other, we are starting to drill in Oklahoma, we are starting to drill in California, we are seeing additional just more Permian basin activity in our (inaudible) group of assets. So I think we are going to see – we are at about 230 as of now, it’s probably going to stay at that level or maybe creep a little bit higher over the rest of the year.

Ryan Oatman – SunTrust Robinson Humphrey

Okay, great. Thank you. That’s it from me.

Michael L. Pollard

Sure.

Mel G. Riggs

Thank you.

Clayton W. Williams

Primarily in a general sand we have over 1000 locations, 1000 wells to drill in commercial areas where we already have production, but we got a lot of work to do. For an oil company, that’s a very positive sign. We have now reduced debt, cash flow, while we go ahead and drill it. So like same rate of other wells to drill in Eagle Ford, that’s good payout. It’s $8 a barrel closure to the market than the Permian, $4 in Btu and $4 in closure to the market. So that’s still our core area. There we still have a lot of work to do there. We have continued to expand in Permian with the drill we have talked about. We do have some we think are exciting well to drill at Oklahoma which are short payout and very good economics, we are just starting on that. We feel pretty good about ourselves and please ask the question that you feel as good as we do.

Michael L. Pollard

Next question?

Operator

Thank you. And our next question comes from the line of Welles Fitzpatrick from Johnson Rice.

Welles Fitzpatrick – Johnson Rice

Good morning.

Michael L. Pollard

Hi, Well.

Welles Fitzpatrick – Johnson Rice

Can we get an update on the longer data at Eagle Ford wells. I think the bovine you guys put out there on the 4Q call was 200,000 barrel EURs. It sounded like at IPAA, maybe that was moving up a little bit. Is that a correct interpretation?

Mel G. Riggs

Yeah, that’s correct. Production has flattened a little bit there. So on the one well that we have in the center of our acreage and that’s kind of our model well. Of course, the wells on either end are better than that and we think we understand the reasons for that. So we’re still keeping our model a little bit above 200,000. We feel real confident that today’s price and costs, we’re in a three year payout, 30% rate of return program there.

We just want to get a few more data points out there and then we’ll be ready to kick that off and run forward.

Clayton W. Williams

I might add to the word cost, we were the original bitumen pricing, the cost of drilling completion whether, now we’re seeing it not only stabilizing but the costs are easy in some areas. So we see that and that of course will help our economy. Thank you.

Welles Fitzpatrick – Johnson Rice

So, is the $6 million still sort of the targeted well cost in the near term across the 100,000 acreage?

Mel G. Riggs

Our last well, I think we got down for $5.5 million. We’re drilling them faster and we’re seeing frac pots get a little bit cheaper. So our target currently is $5.5 million.

Welles Fitzpatrick – Johnson Rice

And across the seven wells, are you guys still pretty confident from the chemical signature of the oil that there’s no contribution from either the Chalk or the Buda in there?

Mel G. Riggs

We really don’t know the answer to that yet. We have seen communication when we do frac with Buda wells that offset us and with Chalk wells that offset us. But it goes away as the fracture heals. So that’s really our main indicator as well as the composition that we think that we’re pretty well isolated in the Eagle Ford here.

Clayton W. Williams

Let me add a little bit of geography there. The Chalk at limestone sits on top of the Eagle Ford shale and Eagle Ford under that. That shale of several 50-60 feet, pretty well isolates the two. But unless you had a big fracture where there are some coming through and communicating both. Those are real – they’re not in communication. But the exception is sometimes they do. Now deal with that.

Mel G. Riggs

That’s right.

Welles Fitzpatrick – Johnson Rice

Okay. Perfect and one last one. Can you remind me, did the prior guidance include the impact of the casinghead gas accounting shift that you guys have this quarter?

Mel G. Riggs

No, it did not. The new guidance, we really does have our numbers for that.

Welles Fitzpatrick – Johnson Rice

Okay, perfect. That’s all I have. Thanks so much.

Mel G. Riggs

Okay.

Operator

Thank you. And our next question comes from the line of Irene Haas, Wunderlich Securities.

Irene Oiyin Haas – Wunderlich Securities, Inc.

Hey, good morning, everybody. I was expecting that Clayton would have something really fantastic in his back pocket. So can you give us a little more color on your shallow oil play in Oklahoma and also what are you doing in California, maybe a little more color on which formation you’re after as such and such things?

Clayton W. Williams

Let me give a little color. When I gamble out of my back pocket, I get in trouble. So I’ve go to get to the front pocket. In Oklahoma, we’ve been in the play for almost two years. We also have special acreage. We did preliminary work. Then we’ve done a 3D. We have at least 20 proven locations inside systematically to drill. We expect that hopefully there will be more we’re doing an additional suit.

So Oklahoma is becoming maybe a secondary area for us compared to the Eagle Ford. But the wells are shallower; they’re very good pay outs, got good reserves. So they economics are really, really good.

We’re well underway and we can see some future there of course. We’ve not seen anything as we go forward to do some progress. So we’re very hopeful about Oklahoma. The economics are real good. The reserves are true for Austin – gives the feeling this sink was last, a little bit southwest of the old Telsa oilfields. So you’re in an oil country. We’re excited about that. But it’s not a major part of our business.

Mel G. Riggs

And it’s not a shale, Irene. It’s a conventional play.

Irene Oiyin Haas – Wunderlich Securities, Inc.

And which county are you in?

Clayton W. Williams

I don’t remember that as well.

Mel G. Riggs

We’re also trying to keep a little – this is kind of a tat, quite about now we’re not. We still had been leasing, we don’t and disclose all of our. I don’t want to give you all the information, okay.

Irene Oiyin Haas – Wunderlich Securities, Inc.

California?

Mel G. Riggs

California, it’s – this is south eastern Los Angeles. There is a major fault that runs through there and you’ll see a series of big old fields, old fields that stack up against it. And actually what we’re going to be doing is going into an area that produce about 60 million barrels of about 1300 acres. We have a lease from the city – suburbs of LA as it owns the royalty there. That’s one of the reason we’d probably even going to do this.

We’ve been working on this for several years. We’ve had the benefit of being able to study roughly 400 wells that drilled different sound starting as shallow as 300 feet on down. And we built a subsurface model, kind of the 3D model now and so we can tell which sands were completed in and which ones weren’t. And so this might seem primarily as the target, there is shallow oil – very sizable shallow oil deposit at about 1500 feet, it’s heavier oil. But that won’t be our initial target. We’re going to drill three wells. They own 70% of this project and it could be substantial from the standpoint of booking a lot of reserve sand and barely material. I think this works; well we think it’s going to work.

Irene Oiyin Haas – Wunderlich Securities, Inc.

And also I guess in that particular part of the world, you probably shouldn’t have any problem selling your oil at sort of a premium, right, I would imagine.

Mel G. Riggs

Yeah, right now I’m in California. But always you can change. But the heavy oil is going for roughly the same price as the sweet oil. So refineries are geared up to run that kind of oil. And so that is a benefit this time, really. The oil we’re targeting in the (inaudible) sand is really 30 or better gravity oil well. It’s really heavy.

Irene Oiyin Haas – Wunderlich Securities, Inc.

And then how much running room do you have?

Mel G. Riggs

As far as California?

Irene Oiyin Haas – Wunderlich Securities, Inc.

Yeah, drilling locations?

Mel G. Riggs

We’re going to limited somewhat on the psyche. This isn’t a daily part of Los Angeles, but there aren’t any relating homes, really close by. But it’s – we’ll probably have the 50 to 100 wells probably somewhere in that range of the kind.

Irene Oiyin Haas – Wunderlich Securities, Inc.

How (inaudible) reserve per well?

Mel G. Riggs

Pardon me?

Irene Oiyin Haas – Wunderlich Securities, Inc.

Reserve for well, targeted…

Mel G. Riggs

I’d really not get into that right now. It’s now; we know that 60 million barrels were produced there. They had different zones. We think there’s a tremendous amount of oil in place there. And the deeper wells are – it’s not being explored probably much below that 4500 feet, but we don’t have any seismic. We don’t have data that, we don’t know what’s deeper and so our target – work around 1500 feet down to about 45,000. But there also will be some days. There’s obviously moderate sales component to this day.

And the good thing is in the initial work we’re doing, we’re not fracking anything. It’s just conventional.

Irene Oiyin Haas – Wunderlich Securities, Inc.

Got you. Yeah, great thanks.

Mel G. Riggs

Thank you.

Operator

Thank you. And our next question comes from the line of Sean Sneeden from Oppenheimer.

Sean Sneeden – Oppenheimer & Co. Inc.

Hi good morning. Thank you for taking the question.

Mel G. Riggs

Good morning, Sean.

Sean Sneeden – Oppenheimer & Co. Inc.

Probably you have your entrance accounting deal in hand. Can you explain about what the next step might be on the domestic…

Clayton W. Williams

Sean, speak a little loud. We’re not hearing.

Sean Sneeden – Oppenheimer & Co. Inc.

Sorry, guys. Can you hear me?

Mel G. Riggs

Hey, a little bit, but that’s okay. Could you repeat the question, we’ll try to…

Sean Sneeden – Oppenheimer & Co. Inc.

Just now that you have your Andrews county deal in hand, can you talk a little bit about what you might think in that step is on the deleveraging front. Is that really going to be JV or what else are you kind of looking at in terms of worrying about your balance sheet.

Mel G. Riggs

Yeah, we’ve got two things in the work side now, the JV and leaves potentially again, did I get the right partner at right price. And then the other one is, is the Permian asset that we have or built some more wells, drill the client well. It’s in the market right now. And we’ll see where we come out on that. Those are the two things that are out there right now.

Sean Sneeden – Oppenheimer & Co. Inc.

Okay. And you kind of based on your own internal plans, let’s say this year event that was giving?

Mel G. Riggs

That was definitely both on them will be this year if it happens. I mean, I think these Permian will know pretty quickly that JV will take more time, as we’re dealing with companies that across the Pacific Ocean or Atlantic Ocean or there are issues or logistics in getting people here to make, support. But they’ll take time and we’re going to be very selective and very methodical about that.

Sean Sneeden – Oppenheimer & Co. Inc.

I think you guys said you currently have one rig running in Reeves right now. Do you want to ramp-up the five or six over time? Can you give me a sense of what sort of timelines you guys are thinking about?

Mel G. Riggs

We’ll have one rig. The plan currently is that one rig until the middle of June, we’ll go to two and then in September, I believe we step up to three. And then we’ll be at four by year end. And then early first quarter next year, we’ll get to five and probably maintain that level for the foreseeable future.

Clayton W. Williams

I would argue with that only is that we had 14 rigs, actually 16 or 17 one-time to hold that thing particularly in rig counting, now that's done we have the acreage that we’ve talked about Oklahoma, East Texas, even California is a less apart, a lot of work to do in the Austin Chalk, so we have a lot of wells to drill. I would like to drill them in some foreseeable future, so we're going to have to get more rigs than we are talking about to the well apart on a timely basis.

So financiers always govern what we drill, we’ve made the sale in Andrews County to reduce debt, we've reduced 40% of our debt, we’ll probably do another sale in the meantime. Cash flow, we have only development drilling that over, that's the fact we know but except for Oklahoma it’s pretty well proven stuff. So we will drill and escalate as the process show us and reserves show us, but I can tell you that we have a lot of drilling to do in economic areas and our financiers are determining the speed of drilling more than the quarter reservers, but I can tell you we can withdraw a large amount of drilling to do and we look forward to drill it and I hope I live long enough because I’ll drill. Next question?

Mel G. Riggs

In other words, he wants to speed up a little bit.

Clayton W. Williams

Mel, that’s right, we’ve been too slow.

Operator

Thank you. Our next question comes from the line of Ravi Kamath from Global Hunter.

Michael L. Pollard

Hey, Ravi. Good morning.

Ravi S. Kamath – Global Hunter Securities LLC

Guys, a couple questions, couple of house keeping, just curious – your income statement what was in the other revenues of $2.29 million and other income of $1.9 million?

Michael L. Pollard

Just a moment, let me see if that is. The $2.29 million I believe included and we also included other operating revenues, we include various gains on sales of asset, many things that happen from time to time. I don’t have that details in front of me, I apologize.

Ravi S. Kamath – Global Hunter Securities LLC

I can hang you back to you on that though.

Michael L. Pollard

Sure.

Ravi S. Kamath – Global Hunter Securities LLC

And the $1.9 million other income? There were $4.94 million

Michael L. Pollard

Yes that’s right other income, I would get you detail on that as well.

Clayton W. Williams

Okay, go ahead.

Ravi S. Kamath – Global Hunter Securities LLC

Okay great. And then on the Loving County transaction, just wanted to clarify, was that $6.8 million is that the upfront cash?

Michael L. Pollard

Yes.

Ravi S. Kamath – Global Hunter Securities LLC

Okay. And…

Michael L. Pollard

Upfront cash and then the carry will be on top of that, I think there is $750,000 per well penalty basically if they fail to drill the obligation well so that equate that to about $4.5 million of additional value.

Ravi S. Kamath – Global Hunter Securities LLC

Got it, and in what formation are – what are the shallower formations?

Mel G. Riggs

Delaware.

Clayton W. Williams

Really (inaudible) came in as a Delaware series.

Ravi S. Kamath – Global Hunter Securities LLC

Got it. And then on the Wolfberry sale I think you guys talking the lease about the potential for the general partner of interest increasing just wanted – after the partner get some return, can you kind of elaborate on how that’s going to work?

Mel G. Riggs

In the partnership agreement, there are pre-defined rates of return the if we’re in the limited partnership that we get a larger interest. Basically it’s going to go from 5% less than 50% but we are kind of keeping the deal terms a little bit (inaudible), but there will be an increase, substantial increase in equity and 12% return on the rates to return we’re looking for on the – we are about over 300 million of drilling to do in this project over the next few years and the rates of return we are targeting are in the 25% to 30% rate. We think we can get to that cliff and get up over.

Clayton W. Williams

A little bit of geologist, there will be Wolfcamp underlies the entire Permian base that have different process or different changes in the rock by enlarge we have those acreage across the Permian Basin that we can tell you there is a good chance of Wolfcamp producing on the fair amount, it is stratigraphy there’s little to take here to top up production. So we can’t tell you today exactly where we have produced, but we can tell you there is a good chance that a lot of acreage we will produce from the Wolfcamp. Now the key is will it be commercial production. I will tell you, you can produce oil everywhere, but will it produce out where you can make money. And some areas that we have will. But it’s stratigraphy, so we’ve got the plan we did, future drilling will tell us that.

Ravi S. Kamath – Global Hunter Securities LLC

All right, and you guys are continuing to be the operator?

Clayton W. Williams

Yes, we are.

Ravi S. Kamath – Global Hunter Securities LLC

Okay. And then last question just thinking about the increase in the rig count in Reeves County, any sense for what each rig implies in terms of kind of CapEx per rig and no CapEx per rig?

Mel G. Riggs

That varies based on horizontal versus vertical drilling. And so if you just kind of split it, I mean kind of say we then even that out while we’re looking at 6.5. We’re doing about half and half, so the vertical wells right now is $3.25 million and they take about 30 days to drill. In the horizontals, we’re about $6.5 million and they take about 60 days to drill.

Clayton W. Williams

From the thermal geology, there are several plays and lower play is the Wolfcamp. The bottom phases of that, that’s the main objective. My opinion of the Wolfcamp shale, we carry it all and then you have different places up even to the Delaware sands. So, and that changes over that big area. So our plans are that we will learn the good areas, the bad areas for each interval. And some part, we’ll get some surprises. Some will produce what we didn’t expect. And there will be some areas as some are expected and then produce. But it is an economic area. We’re glad we own it and we leased it for a purpose what we can do now, we have held the book, this area by production. So it’s got an inventory, if you would. Good question.

Ravi S. Kamath – Global Hunter Securities LLC

Yeah, it is and I thank you if you just kind of run the back of the envelope. It’s probably roughly about with 5 rigs and they are running if I’m looking about $20 million of CapEx a month. I mean, summed on average, so $240 million to $250 million a year would be the…

Clayton W. Williams

Well, I’m not -- Reeves County, we have fairly a 100 square miles leased. We know there are six formations that produce. We’re still learning what wells produce. I’m glad we have it. But it is very difficult to tell you exactly how much we will produce and how economically. But we’re happy we have it. We’re continuing that. We’re also happy on these expansion trials. We’ll the book was held by production, that will take men and resource – one or two who are ready to throw more money at it.

Ravi S. Kamath – Global Hunter Securities LLC

The last question, any plans to increase your Eagle Ford rig count?

Clayton W. Williams

I didn’t hear that.

Mel G. Riggs

Not before year end. We’re still capitally constrained and trying to get our balance sheet in order and trying to firm up our reserve number there. But I know Clayton wants to go faster. So early next year, we’ll probably start picking up more rigs.

Clayton W. Williams

Yeah, we got a word, my entire 57 years in the oil business, capital constrained.

Ravi S. Kamath – Global Hunter Securities LLC

All right, great. Thanks guys. I appreciate it.

Mel G. Riggs

Thank you, [Ravi]. Thank you.

Operator

Thank you. Our next question comes from the line of Mike Kelly from Global Hunter.

Mike Kelly – Global Hunter

Hi guys. Thanks for taking my question.

Mel G. Riggs

Thank you, Mike.

Mike Kelly – Global Hunter

I would like to dig in the Reeves County a little bit more and we get on the CapEx, there Ravi just said that. But maybe you can just talk about what your read-through was for this recent comp stock, Rosetta deal and it really – what’s the value that you can attribute to your acreage based on that? Just how do you want to address that?

Mel G. Riggs

Well, I think, I mean like that Eagle area. We looked at that way back through. When Eagle was selling in comp stock value, we liked like that area. It’s been a good area. It’s just -- as is the J. Cleo Thompson are which now we believe OXY is operating in. And so I mean we’ve got some -- our acreage is in the same area. I’ll let Ron kind of take it from here. Go ahead.

Ron Gasser

But if you look at the production in the acreage metrics that they broke out on the Rosetta deal, we could easily – our position could be in the $950 million range. And recall that, when Eagle flipped at the comp stock, they broke out the infrastructure. And we have the pipeline associated; three pipelines associated with that that has easily a $250 million value there. So really it’s a big number, we’re happy that it happened. It proved up what we believe is the value of this area and that’s why we continue to work hard to hold and maintain and earn more acreage in this area.

Mel G. Riggs

Yeah, if you notice what’s going on there, it’s the smaller companies are exiting and you’re getting larger companies coming in whether it’s Shale or Rosetta, Concho is there and are pretty big, Wyoming. We’re seeing a shift. I think that tells you that this is a great area to be in and…

Clayton W. Williams

Let me add to it. We have over 100 square miles. It’s geographically south of the (inaudible). We -- actually our acreage just surrounds this comp stock. We don’t think ours is all as good as the comp stock. But we have a large position, we have longer term leases, we have the book held by production. We’ve got a lot of work to do there, but we also have a lot of work to do across the legendary – would often talk, Loving County. So we’ve got a lot to have by production. We’re raising our money to develop that.

Unfortunately, we have so much. We’re waiting on others. Since that’s somebody else. But we’ve got a lot of work to do there. We don’t know the extent of the quality of production because it varies from area to area. We’re happy we got it. We’re not turning that flip, so we want to keep it. We hope to drill a lot of wells there.

Mike Kelly – Global Hunter

And that’s really what I’m trying to grapple with here is, the comp stock. Yeah, just paid about $1 billion of value on that acreage if you get a similar type metric on it. If there is anyway that you could give me some help on how you think we should think about this from the value in a potential sale or JV here, I’m all ears. And then maybe you could talk about plan B, now that you brought out and said if we don’t go the JV route, what is the plan B, because that is a pretty healthy CapEx?

Mel G. Riggs

Well, obviously, we’re not going to do JV unless we get a big number. And that is, you don’t know what that is going to be, it shifts, it changes our plan. But right now, we think that we have a very variable asset based on the metrics from whether it’s OXY steel with (inaudible) or the Rosetta deal or whatever. So we want a big number. and if we don’t get it and we are working on a plan, our land apartments analyzing the leases and we’ll figure out how to hold it with the lesser rig count or we may believe some fringy acreage goal that’s always an option. We’re going to keep the best of it, even if we have to run less rigs.

Clayton W. Williams

I would like to add, we’re not a broker, we didn’t buy to sell.

Mel G. Riggs

Right.

Clayton W. Williams

We do acquisition to drill and produce. Sometime we make mistakes, sometime we drill well, sometime we sell a part of it, but there are up to six produced hydrocarbons there. To answer this part, we hope to keep enjoying development, but it’s not ready, is not a consistent across the fixed base. so as we drill, we more make it like similar or better, some rigs, so we are going rather cautiously there, consistent, but there's a lot of oil and gas in 12 months and it’s all do south of take that and (inaudible) my grandfather was in a gunfight many years ago at the (inaudible), and its grandfather room has got some tough...

Mel G. Riggs

I wouldn't be here, when they get, I'd ask the board, anyway, 1986. Sort of thinking correct for the activity that’s going on out there, there are horizontal wells being drilled to east service, and to the south of it and BHPs to the west of it. So if you’re trying to tie-in how good our acreage is, we believe that it’s in the same ballpark as all the other deals that have happened out there.

Clayton W. Williams

We have a lot of acreage both here and in south of Pegasus and Wolfberry, we have scattered apartment and we have the major position in Eagle Ford and East Texas. We have a lot of work to do, a lot of drilling to do, even if we go to California, which is kind of front, but it’s interesting because that’s a crude reserve, so we are in an important position, but so far and also unfortunate we have more things to do than we have money, so we are raising it and trying to put our money where we believe are the best places. We would always do that, but we’re always trying to.

Mike Kelly – Global Hunter

That’s right, that's good.

Clayton W. Williams

Next question?

Mike Kelly – Global Hunter

All right.

Operator

Thank you. Our next question comes from the line of Douglas Thompson from Thompson Investments.

Douglas Thompson – Thompson Investments

Good morning.

Clayton W. Williams

Good morning.

Douglas Thompson – Thompson Investments

You guys have mentioned work hours, could you give a your color on that on what all happened, how it impacted costs for the quarter and what impacts might it be for production?

Mel G. Riggs

And one of the big ones, drivers was Andrews County where we had grown a bunch of rates that added early and put the wells on production all at the same time and we looked at one day and made all failed it, about the same time, because we had lowered originally when we have put on top, we put them way down deep and it was kind of an experiment.

In Andrews County, we would complete them upon and after that pumped up, we would lower the funds and we try to save money by going lower. We looked at one day; we had 400 barrels a day of production that was down, because of rod parts and pump values.

So we did jump on it and we had to get some contract stuff out there and we probably spent more money than we normally would have just trying to fix that problem, but it was profitable to do that. And then we have all of the top list royalty properties right across the Permian Basin and we have very confident engineers working on that on a regular basis. And we’re seeing some very good work being done and some increases in production. those guys really don’t get a lot of limelight here, but if it makes a difference in the company and while you don’t see it directly on the balance sheet, it sort of stable up our basic line and…

Clayton W. Williams

(Inaudible) already purchased.

Mel G. Riggs

Well, we have over 2000 wells that we operate.

Clayton W. Williams

And for large areas of Permian, so when you have things held by production sometimes pleasant surprises can hold somebody else through, there’s a pay up to hold or sometimes later. It’s nice as long even in our portfolio.

Douglas Thompson – Thompson Investments

Okay. And is this type of program going to be an ongoing program and has this been factored into the guidance, so this might be a little bit of extra.

Mel G. Riggs

Well that increase that we saw in the first quarter, we think it’s kind of an anomaly. We have a lot of values of one point, but we have seen an increased too, I mean our guys or my production superintendent commented this morning and said, he gets letters regularly talking about 10% increases in prices, which is what you see in boom time.

So we will see probably a little bit of increase on these whole properties as we operate them, but I don’t think it’s going to be as big as what happened to us this quarter.

Douglas Thompson – Thompson Investments

Okay. Getting back to the Eagle Ford, I thin you mentioned in the last presentation, if that goes well, there was about 580 barrels of oil over 30 days, if I can say it correctly?

Mel G. Riggs

Yeah.

Douglas Thompson – Thompson Investments

Can you talk about some of the other IPs in the latest wells?

Clayton W. Williams

Let me take a little picture, we have well over 100,000 acres, so any miles 120 miles to 130 miles. So, while this is a same formation of very broad area. This is a very instrument portion in the acreage and rig in the Andrews County, slightly down there our whole trend. So we’re encouraged by, we’ll feel better when we will drill on our equity related process, we’re doing that. So while it’s encouraging see Brazos County, we cannot tell you that all area we can bring like Brazos County, but there’s a good chance of well, we haven’t drilled it yet. Also I would tell you that Brazos County is like 700 feet deeper than our spring, so we will have a little bit of pressure a little bit of early flows.

Douglas Thompson – Thompson Investments

Got it.

Mel G. Riggs

The way we look at this, it’s not a well watching deals much as, we look the lever. Only, we’ve had average 30 rise newer from 200 barrels a day up to almost 600 and all that works even the 200, that well works.

So this is going to be a broad, it’s going to get over 100,000 along sort of acreage across multiple counties, and so we’re looking at this sort of a statistical average here over time drilling these wells and we think we got hundreds to drill, I mean this is in the billions of capital to stand over the fleet.

Clayton W. Williams

A little historical look, I drill my first well in the history on 1974 that’s still 30 years we’ve been in the place and we have been on top and I think this is just the next horizon under the Austin Chalk, we had a lot of acreage held by our production, because of that we have held it out from (inaudible). Now, those don’t work.

If you take a look on at our own company, we have so many things to do that we are trying to operate it, a lot of that is held by our production and we’ll get there, particularly we already said we’ll have to get to, but it’s nice to have an inventories like (inaudible) Eagle Ford which underlies the Austin Chalk.

Douglas Thompson – Thompson Investments

Okay, thank you. And just the Wilson County well, I think you said you made attention for eight, that first look, I think some of 140 barrels produced, which is pretty substantial for the time period. Are the other ones looking as good and how many do you think have a (inaudible)?

Mel G. Riggs

We are about drilled up in Wilson County, but we’ve got a little bit of acreage to hold there yet and we will probably drill another one for sure.

Clayton W. Williams

But it’s small compared to our main holding where we have 100,000 acres east of that, but it’s also about 600 feet, 700 feet shower. So we would not tell you to look at Willson County represented, it’s what we have but we may have as good or better or worse, we’ve drilled more – we are yet to drill it, because we’ve got so many places to drill we have given the roles as faster we can.

Douglas Thompson – Thompson Investments

Okay, thank you.

Michael L. Pollard

Thank you.

Operator

And our next question comes from the line of Adam Michael from Miller Tabak.

Adam Michael – Miller Tabak + Co. LLC

Hey, good morning guys. Most of my questions have been answered but I might just ask, I saw (inaudible) last week. He came out and said that they are in Brazos County and they are looking to lease more acreage and I just wanted to kind of get a feel for what are current leases going for out there for Eagle Ford.

Michael L. Pollard

Well, getting obviously more competitive with our own and I don’t even know if they want to talk about that.

Clayton W. Williams

Okay, okay. That’s very much depends.

Adam Michael – Miller Tabak + Co. LLC

Yeah.

Clayton W. Williams

So if you hear about the broadcast and my wife says don’t tell anybody. It was a really good joke that just got canceled. So it depends where you are. If you are in a good trend, it would be more, if we’re off for three, I think it would still been a good joke. Okay, I got it.

Michael L. Pollard

Yeah. It is very competitive, it’s – we had this play for a while. We’ve been filling in holes in our acreage and throwing up deep rise, so we didn’t have things like that, but it’s competitive, so it’s going to get more so, I think now with the activity. I have always hereby taking notice of what we are doing and the other companies are doing over in Brazos, so.

Adam Michael – Miller Tabak + Co. LLC

Is there any potential that the peers still might work? I mean I don’t know if there is any well have been dropped down to the peers, is that something that might be at the right depth where you could have something that is perspective there.

Clayton W. Williams

I’m not following the well as a fair formation, that’s done and it is a trial.

Michael L. Pollard

We have a geologist in here with us right now. He quite answer that question, we don’t’ know unlike we know the answer there.

Clayton W. Williams

Now we have the Austin Chalk, then the Eagle Ford Shale and the Eagle Ford. We are left and we’re not involved. Although we have deep rise, but I don’t about that.

Michael L. Pollard

Obviously our focus is Eagle ford here. This is a multi-paid regional part of the world and we have had wells in the Buda, and Georgetown in the past. So who knows what’s next. But we know one thing the best place to look for (inaudible), kind of where we are, we not only getting to areas and they are great places to look.

Adam Michael – Miller Tabak + Co. LLC

Okay, thanks guys.

Michael L. Pollard

Okay, Thank you.

Operator

Thank you. And we have no further questions in the queue at this time.

Clayton W. Williams

That’s the end of it. Any other questions?

Operator

No, sir. No further questions, I would like to turn the things back to Mr. William for concluding remarks.

Clayton W. Williams

Thank you very much. I can tell you we have from a (inaudible) folks we have got a lot of experience as we sit here. We still sit here optimistically. We have got anchorage over the different areas we described from West Texas to the Gulf Coast and now Oklahoma. We are excited about our future. We are excited about the potential manpower and woman power if we would, we have to explore it. So I’m excited about the future and I just waited 31 years old going forward. That is all I’ve got.

Michael L. Pollard

Okay. Thank you. I appreciate it.

Operator

Ladies and gentlemen thank you for participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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Clayton Williams (CWEI): Q1 EPS of -$3.39. Revenue of $106.8M beats by $13.09M. (PR)