Clayton's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Clayton Williams (CWEI)

Clayton Williams Energy, Inc (NASDAQ:CWEI)

Q3 2013 Earnings Conference Call

October 24, 2013 02:30 PM ET

Executives

Patti Hollums - Director of Investor Relations

Clayton Williams - President and CEO

Mel Riggs - EVP and COO

Mike Pollard - SVP and CFO

Ron Gasser - VP of Engineering

Sam Lyssy – VP of Exploration

Analysts

Welles Fitzpatrick - Johnson Rice

Irene Haas - Wunderlich Securities

Ryan Oatman – SunTrust

Ravi Kamath - Global Hunter

Adam Michael - Miller Tabak

Ipsit Mohanty – Canaccord

Mike Kelly - Global Hunter Securities

Welles Fitzpatrick - Johnson Rice

Sean Sneeden – Oppenheimer

Doug Dyer – Heartland

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Clayton Williams Energy third quarter 2013 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 be given at that time. (Operator Instructions). As a reminder today's conference is being recorded.

It’s now my pleasure to turn the floor over to Patti Hollums. Ma'am, the floor is yours.

Patti Hollums

Good afternoon and thank you for joining our third quarter 2013 results conference call. Participating on our call today is Clayton Williams, President and CEO; Mel Riggs; Executive Vice President and COO; Mike Pollard, Senior Vice President and CFO; and Ron Gasser, VP of Engineering.

We also have several other members of our management team here available for our question-and-answer session. During this call we will discuss our third 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 permit. 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 based on current expectations.

Actual results may differ materially from those expressed or implied by these forward-looking statements because of a 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?

Mike Pollard

Thank you very much for joining us today. We are very pleased with our results that we issued this morning. We’re extremely optimistic about the future of our company and believe that these results are certainly indicative of our optimism. For the quarter we recorded net income of $11 million or $0.90 per share on total revenues of $111 million and generated $71 million of cash flow from operations.

Current quarter and year-to-date results are not comparative to prior periods because of the sale of the 95% of our Andrews Wolfberry assets be it effective April 1. (inaudible) will be providing pro forma results so that it will give you a better accurate assessment of our progress.

Taking a closer look at the quarter, our average daily production on a BOE basis was 13,799 barrels which is up 4% from our 2012 quarter when adjusted for the Andrews sale. Oil averaged 9,674 barrels per day, up 6%. Gas averaged 16,598 Mcf a day, down 17%. Natural gas liquids averaged 1,359 barrels per day, up 58%. As adjusted for the Andrews sale, our oil and gas sales, excluding amortized deferred revenues, was up $20.2 million. Of that, $15.4 million was related to price variances and $4.8 million increase was related to production variances.

Our average oil price was [$103.75] per barrel versus 87.53 which is up 19%. Average gas prices were $3.49 versus $3.42, up 2%. Our production cost as adjusted for the Andrews sale were $20.20 per BOE, which is down 10% from $22.43 for the prior quarter. Excluding production taxes which is basically lifting cost we’re $15.98 per BOE, which was down 15% from $18.83 from the prior quarter. Most of this decrease is due to as we’ve talked about in the past our infrastructure improvements that we’ve done in Reeves County they are continuing to get better cost for coming down as a result of improved efficiency in the field.

On the derivatives, we did have a loss on settled contracts of about $500,000 for the quarter versus about $1.4 million for the preceding quarter. Our non-cash mark-to-market loss was $7.8 million for the current quarter versus $20.5 million for the 2012.

This week that we did add [dues] covering about 1 million barrels of all of our 2014 oil production, that price was fixed as $96.10, that brings us to about 300,000 barrels of all hedge for the remainder of 2013 at a $104.60 a barrel and $1.6 million for 2014 at an average price of $97.30 per barrel and that ranges from $99.30 to $96.10. And then we do have delivered gas 330,000 MMBtu of gas for the remainder of 2013 at a fixed price of $3.34 per MMBtu.

G&A expenses were $10 million this quarter versus $5.8 million in the 2012 quarter. Our cash G&A which excludes non-cash compensation from our APO incentive plans was up only about $800,000 and that was due primarily to some additional professional fee this quarter, but the non-cash G&A during the quarter was $1.2 million versus the credit of $2.2 million in the 2012 quarter. That credit was related to some reversals of some previously provided compensation expense from those APO reward plans which was due primarily to lower commodity price that existed as of September 30, ‘12.

Turning to the balance sheet, our total long-term debt increased $8 million during the current to $673 million, that's $323 million outstanding on the bank revolver and $350 million of senior notes. But on October 1, we completed a $250 million add-on to our existing 7.75% senior notes which were due in 2019. The net proceeds of (inaudible) we used to repay advances on revolver.

On a pro forma basis, we have a bailable on our revolver approximately $290 million and with our cash on hand at September 30, on a pro forma basis our liquidity is about $313 million. In addition, we have about almost $26 million of proceeds during the Andrews County that remain in escrow and will be available we believe in the fourth quarter to be released goods and we will apply that to the revolver to further reduce the outstandings and increase our liquidity.

I think I will stop there at this time and turn it over to Mel.

Mel Riggs

Thanks, Mike. That’s a good report. I think the press release pretty much speaks for itself except when it comes to operational results, but we kind of step back and look at, think about where we are now compared to where we were two, three years ago when down to Delaware Basin. Originally we've got in with a bunch of private companies primarily Chesapeake was in the area but they were inactive and they gave us chance of forming of their acreage. But now we set in control of 77,000 acres right in the heart of the region and we're surrounded by major and large public oil and gas companies.

So that’s been a big boost because there has been a lot more drilling, that’s going to help us get up the learning curve and we feel like we've got great area because of our company there. We also have 24,000 acres up in the northern part of the basin too. I guess the big thing in the press release we talked about the horizontal wells and we've had, we originally drilled 10 horizontal wells in this play targeting mostly a really five different more conventional targets and we have since had pretty dramatic improvement in our results. And what we were able to do and first of all we're sort of targeting the Wolfcamp A bench (inaudible) there were the well direction somewhat and we've also learned a lot the lateral and so we've got our fracs out too also much better.

You can see the results in the press release, in the press release we talked about the wells are also getting better and better. Our sixth well which has been little over 10 days average over 900 barrels a day during that period of time, so we feel like we're doing, we've made a big leap there and so we’re very excited about our position at Wolfcamp A potential. We’re seeing also though at the same time because of other activity, we’re seeing other zones, the Wolfcamp C for example that bench and also the second Bone Spring is looking promising. So with all the development going, all the drilling going on out there, we’re going to learn more and we’re going to put up a lot more value we believe.

Shipment across to the Eagle Ford and (inaudible) say we’re not the one in mention a county. We’re not a pure Permian player and we like that. We think it’s better to have, we like our position in both the Permian and the Eagle Ford. And there is very positive things about both of them that we think adds up to a much better company for us long-term.

We have over 100,000 acres we think is Eagle Ford perspective, we’ve actually been growing that quite a bit pretty significantly, we’ll talk about that in the future, but we've been adding to our position good leasing.

There are, it’s a legacy area for us, Clayton has been there since he was, I think he was born, in 1974 he will talk more about that in a moment, I’m going to steal his banner on that. But it’s in our own backyard we’re drilling underway just hundreds of Chalk wells.

We have had less of a learning curve there that’s simple we’re drilling one, targeting one zone. Even though there are other play concepts in development in that area, we’re trying to hear it from, you know the industry is going to hear about it more and there is a more talk about there is other things going on the bid and so forth, but our focus is Eagle Ford.

We’ve drilled eight wells in our main block and we've done better with the wells as we've drilled them with the average cost of around 5.5 million. And the last well we completed averaged 870 barrels over a 30 day period just came to about 40,000 barrels down a couple of months. So we’re very pleased with that program.

And due to this high yield offering we did, add-on to our senior notes, we’ve got the liquidity now to go back and go back to start-up a drilling program there. Again we’ve got a rig starting and we’ll play at another soon too. So we are excited about it, we feel like the company growth will go quicker there because we can complete wells, drill and complete wells much quicker there than nobody in the Permian.

We still have some learning to do there from the standpoint of should we go single pad multi-well, differ frac and those kind of concepts, there is a lot of things there to come, but right now we are just pleased to be able to start-up a rig again and drill. So for all among other things looking really positive, there are things to consider though obviously we’ve got to pud-up the Wolfcamp A liability on the rest of our acreage, there will be some step outs to do that. So that’s coming up and we feel good about what we’ve got so far.

We also are very exposed to oil. We are drilling in liquid-rich areas where our product, our production is over 90% oil. So that tells you and we like oil, we think it’s a great place to be. We did have hedges we’re not going to ever be fully hedged because we believe there is still plenty of uncertainty in the Middle East and other parts of the world. About oil, oil is going to be very volatile from now on. And so but having some hedges will help ensure some cash flow will be very important.

I think the main thing is if you look at our company, you look at our acreage, look who we are and you look at numbers of shares we have outstanding, our shareholders by any metric have more exposure to these plays than any other company out there that’s the main thing. Our job is now is to challenge of how to, it’s a huge opportunity with, and Clayton talked about how many wells, it’s a huge opportunity and we still have to kind of determine how we are going to get the capital to make it happen, but we’re sitting in a great position.

With that I’ll turn it over to Clayton.

Clayton Williams

Why don’t you take financial questions first both you and Mike?

Mel Riggs

Okay. We can entertain questions now. We’d like at this point anything not more but the financial statements and then Clayton will wrap it up.

Clayton Williams

Obviously you can bounce back and forth.

Mel Riggs

Yeah.

Clayton Williams

For financial questions while you’ll focus on the outlook through that time.

Question-And-Answer Session

Operator

Sure, thanks sir. (Operator Instructions) And our first phone question will come from the line of Welles Fitzpatrick with Johnson Rice. Please go ahead. Your line is open.

Welles Fitzpatrick - Johnson Rice

Good afternoon. When you guys are looking forward, CapEx was, how much do you think going forward is going to be spent specially in REITs plus in new zones and kind of tweaking with the completions or do you think you are pretty well zoned in on the Wolfcamp A and maybe you will be a fast follower in the C, B and potentially?

Mike Pollard

Well, we are, our focus is three rigs that holds our acreage together and the Wolfcamp A is the focus, but we have a Wolfcamp C well that’s been completed around the middle of our acreage basically and we’ll offset that well later this year.

Clayton Williams

And I want to add this. Let’s talk more in depth about Delaware Basin. We really believe that our company stretch to accomplish this. We have been leasing in that area for actually $200 an acre. And we have the opportunity to take out test week and we did it. They had many expiring releases. So we were really stressed to be able to hold those leases, actually we had 14 rigs drilled and we reached we have a lot of learning to do, because there are five different basins and they were not all the same, so we're winding up, but first to hold the leases, so we did that basically with about 70 vertical wells, is that right, Mel?

Mel Riggs

Yes.

Clayton Williams

Then as we learned and we drilled through we found that the best (Inaudible) was in upper 53 to the Wolfcamp. So then we started drilling horizontal wells and we are doing very well in that. But we spend a heck a lot of money to do that. Also we were very isolated in that new area. So we built the pipeline, we built 3 pipelines, one to get our oil, one to get our gas, one to take the water from the well and to injection a well, which saves probably $4 a barrel in each case.

So we spent a lot of hedge that money that we didn’t show like the power plant that didn’t show return, but it’s producing efficiency and that's very substantial. So as we move forward, our main objective is to hold the leases and doing so we found a few places that were good and we think the last part of our acreage has not been good so far, but we still have some hope there. But if we really pushed our company to get that acreage all held and get it drilled because now the well costs are around over $5 million. So you can use up a small company's budget pretty quick. I think we've done pretty well, we have got it held and we believe with three rigs going forward, we will keep it held.

The other thing though there is a lot of professional (Inaudible) so they have continues drilling tough releases. So that keeps us roughly really on above. We established an office in [Vegas] have ground floor communications, (Inaudible) did an excellent job. So we're happy with it. With the wells are $2 million is still flat and now I’m going to turn it back, but any other questions on the Delaware or the Wolfcamp because that’s more critical to us and I want to go through the Eagle Ford later.

Mike Pollard

Welles, can we get through the question and answer?

Welles Fitzpatrick - Johnson Rice

Yeah, absolutely. I guess just one follow-up and you all kind of hit on it. But obviously there is a big step change as far as what sort of your ex-divestiture pro forma growth rate was, was that a huge jump in capital I guess. I guess my question would be, can we expect that type of capital efficiency going forward? Can we expect those kind of quarter-over-quarter growth rates in that low-to-mid single-digit range given what your spending is or....

Clayton Williams

Let me interrupt you to say I will address that in some depth at my conclusion. And there is many problems we’re not prepared to or able to focused on it. But that was now remain in the mechanics of the Delaware Basin and I will forget to answer your question.

Welles Fitzpatrick - Johnson Rice

I appreciate it sir. I'll just hop back in. Thank you.

Mike Pollard

Yeah, thanks Welles.

Operator

Thank you sir. The next phone question here will come from the line of Irene Haas with Wunderlich Securities. Please go ahead. Your line is open.

Irene Haas - Wunderlich Securities

Yeah. Mike the question is, now you have in your hands two really good place, I mean look at the Eagle Ford these are the good rates for the relatively short road that we have the go through. And how are you going to finance both plays, are you going to keep both of them, how many rigs of fees and all that?

Mel Riggs

Okay. Running our plans are to hold the acreage together and we've got plan to and that well’s bee cash flow at least 100 million. I won’t get too much in the guidance, we’re going to update that with all the team too probably. But we've got three rigs land upto drill in the Wolfbone that holds that acreage in arrangement of the form out, we’ve got nine or so wells left to finish up the form out with Shell. And over in the Eagle Ford we’ll run up to two rigs and combined those two rigs we are spending over 300 million a year.

So when we get the capital going forward and to do more that is a big question. Clayton?

Clayton Williams

That's a same question, I would ask you to please work on the financials then I will have a summary that will probably bring it ahead, these concerns you are seeing. Now basically how we’re going to get the money to drill everything we’ve got, that's a really good question. But first financials and then we’ll get into the more details of the drill in production.

Mel Riggs

Yeah. It’s hard for us to say standby for the news.

Irene Haas - Wunderlich Securities

Okay.

Mel Riggs

Okay.

Operator

Okay. I’d like to go ahead and give the call back over to Mr. Williams.

Clayton Williams

We are already for that, alright, okay. We've talked about the Delaware Basin. We made a big stretch, stretched our county but now we have it and with three rig drilling we can continue to develop it. We've talked about stretch we’ve made, we talked about we've had some low income investments in the pipeline, we have 70 wells that were marginally commercial as we try to find out the areas in the new hands of the property. We will tell you now that we have probably 50% of the acreage as evaluated and we’re calling a big part of that productivity. There is some to the west side that we are not sure yet.

We still have some exploration to do on the west. It’s in the field outlined, we don’t think there is high risk, but there will be a few mistakes out there. So it’s not a perfect drill, but right now when we are cash short, we are not going to drill any exploration at all, so we will try to renew those leases rather than spend a big money in the well.

Now I am going to take you, and we can come back to have questions on this. I want to take you to the Eagle Ford this is a legacy acreage there. I bought my first lease in the Gainey Field it was a Chalk field in 1974, that’s 36, or 37 38 years. This is a single play and I will tell you the Chalk was at 8,000, under the Chalk is Eagle Ford shale and then under Eagle Ford shale is the Eagle Ford.

I don’t think we expect some of the 20,000 barrel a day well here about, but we’ve had some wells come in after a frac at 800 barrels a day. It is commercial. We see that as a two and half year payout. Let me go back to Delaware. We see that as a two and half year payout.

So in the Eagle Ford -- why do I say that, we have drilled 12 wells, horizontal wells we’ve now drilled over, nearly 900 horizontal wells we are as good as horizontal drill as anybody out there, because we’ve had a world of experience. So now over the 100 plus miles it’s a length of our block we’ve drilled 12 wells scattered more or less through the block tested as best we can they all made wells when we drilled a couple of wells that we didn’t complete properly were marginal but now we are giving a full flag, we’re comfortable but that that’s a one pay, it’s pretty simple plus the Eagle Ford is $3 better than the Permian because it’s sweet whereas the Permian is sour, plus where $3 closure, as good as done. So we have certain price advantage. In addition and Eagle Ford all are road were pretty much build for the Chalk driven, great batteries and interesting things. So we have some economic segment because we are just drilling deeply in the same oil field. So we call that complex.

When I go forward, we have and let’s get back to your financial question. We have over 1,200 locations proven, to an old man proven. And we probably have several others but they are in the exploration plays, 1,200 location. Now come with me on this, the three rigs and the Delaware holding longer, they’ll all be all alone and two rigs in the Eagle Ford. We will -- and I set a three year target and three years we will still -- and that the rate of completion and fracing we will still have in three years 1,038 wells left to drill. If we only drill at this rate of five rigs continue, we will still have over 500 proven locations to drill.

So your question is right, on the market, the first question, that how we’re going to get this done. Well, I have had before in my carrier and that there are several ways partially borrowing money up to our capability and I will tell you people, I’ve borrowed money a lot of times in one year I paid 21% interest for drilling well. And not commission, my bank will pay you a commitment. We have always made it up right more or less selective that's where we are now. So we will drill the 5 rigs going forward. We’ve tried to sell, we sold Andrews County for a couple of hundred million, paid down some debt. We need a partner, if we can find one at Texas. I'm pretty picky about partner.

So at some point, we will; number one, have added cash flow from the wells we’re bringing on not where you come in, they won't stay at 800 barrels a day, we all know it, but they are going to be good flows in the Eagle Ford, we had a well come on in Reeves County this morning up to 700 barrels a day. So we’re getting better and better results all the time, because we’ve finally learned in the learning curve in Reeves County and Wolfcamp they have been pretty downstream. But now we feel like we've figured out the bulk of it.

So here we are, we've got surplus proven good locations, they are all held by production. But it requires these rigs to keep continues drilling of rig.

So as we go forward into the future, we may find someone that we said would partner. We might sell our part to the partner and in that case we go forward that way. If the worst happens and we continue doing this and sometime it will happen and it will add reserves and grow the company to the 5 rigs which are at reserves particularly now that we’ve learned the completion method. Here we had some [ducky] wells in Eagle Ford till we learn how to frac it. We have now learned the Delaware and so we're focused on that. We also have other properties. We will soon probably located in other parts of the basin, but we feel probably we need to sell those or partners those to be able to put our money in these two main properties which are bigger than us. Did I cover that?

Unidentified Analyst

Well. Yeah, you did it.

Clayton Williams

All right. So let’s talk about, many of you have asked where you are going to get the money to do this. Well, main thing as if you have got good prudent properties held by production, there is always something to do it and if you drill dry wholes there are not much market for the saltwater. Next question now.

Operator

Sure, thanks sir. (Operator Instructions). All right, our next phone question will come from Ryan Oatman with SunTrust. Please go ahead. Your line is now open.

Ryan Oatman - SunTrust

Hi. Good afternoon everybody.

Clayton Williams

Yes sir.

Mel Riggs

Thanks Ryan.

Ryan Oatman - SunTrust

I was just wondering if you could walk through the individual well economics as you now see whether it’s per county or just the Eagle Ford broad strokes versus Delaware Basin. I mean it certainly seems like these well results have improved from when we last spoke on the conference call about three months ago.

Clayton Williams

Yeah. Ron Gasser, our Chief Engineer does the work. We would present this work to the bankers, so we're on the same page. Ron, take it.

Ron Gasser

Yeah. Nothing has really changed in our development economics. And we kind of had this model continually, we just really haven’t put the numbers out there because it’s still a very competitive land environment, even though we have a lot of this summon up, this just makes our job harder on the lending. The economics with our drilling complete costs and we run our economics at $90 oil and 3.50 gas, are very similar. We’re seeing about 2.5 year payout and about a 30-plus rate of return on both development economics in both areas, and I am talking about the Wolfcamp A in Reeves County and then our Eagle Ford wells in Burleson and Four Corners area.

Now obviously with the Eagle Ford, our latest well being as strong as it is. I could walk that up and get a lot better economics, but we’re currently drilling out there. And when I get more data and I feel more comfortable that that's what we’re going to see, then we will walk our economic self and I get pushed internally to do that, but we stay relatively conservative. We want to hit what we put out there to say we can do it. If anything we want to be a little bit below what we think we’re going to get. So our current, I really haven’t changed our model and I think both plays are economically the same, but I will tell you my gut feel is that the Eagle Ford is less risky than what's going on in the Permian.

Mel Riggs

Well, I will add to that, I think Ron hit well. We have a model for both areas. The big difference is the Eagle Ford cost for a lot less, but there is no gas. Over in the Wolfbone we have higher cost, we have gas, I just can’t make the difference returns basically the same though. So what we’re doing here is we’ve got this model and we’re not going to -- we run our company based on the model and what else more like Ron said more well data, we’ll change the model.

Clayton Williams

I’d like to bring (inaudible) Sam Lyssy. There was something about the Eagle Ford, like Wolfcamp, something about the oil in place and that type of thing.

Sam Lyssy

Thank you, Clayton. We've done volumetrics on the Wolfcamp in the Permian Basin. And if you compare the Wolfbone to the Eagle Ford volumemetrically you are looking at a column that is some 3,500 feet gross with oil in place numbers around 400 million barrels of oil per section.

Clayton Williams

Say that again.

Sam Lyssy

400 million barrels of oil per section. If you compare that to the best Eagle Ford sand with our Corners County, it’s some six or seven times more in place. Now these as Clayton mentioned earlier our history has been drilling vertical wells, identifying which of these zones contain the most. Once we did that, we begin drilling horizontal and the first one of those zones are Wolfcamp A and Reeves County is a one we are targeting. There are many other horizontal opportunities out there that we will test in the future that could realize multiple horizons versus the one that you see in the Giddings area.

Clayton Williams

I would like to add to that so this is kind of we’re fighting to hold, you got a particular Bone Springs play we’re by passing that. You got the A Wolfcamp you see and you may have something and in the bottom (inaudible) ramp that’s a bottom zone. There is at least four and sometime you will see (inaudible) so there is so much oil in place. The problem being though that is this not economic maybe some 10 or 20 years from now you go back and get the other.

So our objective today is hold the acreage where the most economic possible production but we will have that acreage and maybe it would be like some day it maybe like our legacy production at Eagle Ford shale that becomes look lot more. So that’s why I want you all to hear that because I think technology changes things over some years and 10 years from now where there maybe another play in the Eagle Ford and area that we will go back for then. So that’s the one reason we stretch because (inaudible) how many 400 million barrels in place, we like to get 5% but if you did it’s good.

Ryan Oatman - SunTrust

Just a real quick, and I am still correct using a $5.5 million well cost over in the Eagle Ford and then see (inaudible) to the south of in Reeves well cost 8.5 to 10.5, is that kind of in the same ballparks for you guys or are you lower than that?

Mel Riggs

No, we are going to probably in refri but we’re going to have little longer lateral, so we are going to go from 6.5 to 8 in Wolfbone and still 5.5 over in Eagle Ford correct.

Ryan Oatman - SunTrust

Okay, thank you.

Mel Riggs

We just like to get better, better reserves, obviously we go longer, so over in Wolfbone.

Ryan Oatman - SunTrust

Okay, but for the ones that were reported those well costs of course for the 6.5?

Mel Riggs

Yes, I believe so, those wells except there may be a last one or two or little bit longer, quite a bit, but most reason the best well was longer and so it was $8 million well.

Clayton Williams

Let me add some about longer lateral, we know it’s very capable, but the longer that lateral is because people are on the building rigs. We get at 10,000 feet there is a lot more chance that something will file up in the operations, and so you are just guessing the cost of the vertical whole, it is not too much, I like to control 5000 or 6000 feet when we get the way up there.

So that’s right you are trading the cost of vertical whole for more link and you may get bigger wells, but you got to get in same recover feet drill more (inaudible), that’s the debate going on in our (inaudible).

Ryan Oatman - SunTrust

Thank you.

Operator

Our next question in the phone queue will come from Ravi Kamath with Global Hunter. Please go ahead, your line is open.

Ravi Kamath - Global Hunter

Guys, a couple of questions. One for the 3 rig program, should we assume that there will be drilling of horizontal wells in Reeves County?

Mel Riggs

Yes, horizontal.

Ravi Kamath - Global Hunter

Okay. And the 5 rig program for 2014, what kind of CapEx are you talking about?

Mike Pollard

We will be putting that guidance Ravi at same time as our 10-Q. We're working through on those numbers right now and we'll provide that through guidance, if that's alright.

Ravi Kamath - Global Hunter

(Inaudible) natural gas and so guys to give any kind of prediction zone only the production or the separate CapEx?

Ravi Kamath - Global Hunter

Yes.

Mike Pollard

I am going to tell you we are now making better wells in Delaware basin, in the Wolfcamp and we were flourished and if we weren't we will be quick.

Ravi Kamath - Global Hunter

And then a question on the Reeves County joint venture, can you kind of update us on are you kind of back and away from that or what, can you kind of provide an update on that?

Mike Pollard

Well, I mean it's still ongoing, there is no news to report. The only news is things done a lot better, so the value is going up.

Ravi Kamath - Global Hunter

Got it. Okay. Thanks guys.

Operator

Our next phone question will come from Adam Michael with Miller Tabak. Please go ahead, your line is open.

Adam Michael - Miller Tabak

Hey, good morning guys. I wanted to shift back to the Eagle Ford if I could, I know that now I think you mentioned the [Budas] and other potential zone there and I wanted to just kind of see what your thoughts of the Buda potential especially up in Robertson County and what's going on there?

Mel Riggs

We're not really focused on that and I appreciate you bringing that today with some of the information you have but we're really not running our focus on the Eagle Ford.

Clayton Williams

We've been in the play 30-odd years so we're pretty familiar with itself.

Mel Riggs

In Robertson County, the Buda is hit and missed proposition. Our history in the Buda has been those kind of results, therefore we're not going to pursue it at this time.

Adam Michael - Miller Tabak

Okay. And then if I could also on the Eagle Ford that I think Mr. Williams touched a little bit about the infrastructure is kind of in place and I just wanted to get a sense for I know a lot of money was spend into building out infrastructure over in the Delaware. How good is infrastructure in that Giddings area and what needs to be built for full developmental program there?

Clayton Williams

In the regional play I built a very expensive natural gas system where the gas company clay down gas. That’s definitely was obviously ended up with the energy transfer, so we have gas outlets there that are connecting to all wells will be a very easy connection there. So we should not be better playing but the Eagle Ford has a lot less gas which surprise us some.

Adam Michael - Miller Tabak

Right now on average just quite 95% oil in our well.

Clayton Williams

Also I said the road we've built for the Chalk we're using those road location. We're holding that along ways. There is (inaudible) so we’re saving a good bit of money on the pads in some cases and a good bit of money on the road the gas system there.

Mel Riggs

That’s a good point. One other thing just came up yesterday Sam Lyssy brought this up. We have a good water in both of our areas both in the Wolfbone out in West Texas, it’s a lot different than a lot of the areas in West Texas where water is going to be more and more of an issue basically as we get into more wells, the density drilling, more activity, the water problem will be there, we’re not having that over in Reeves and over in Eagle Ford we've got good water. So we’re really got two good areas that we can get bids in there.

Adam Michael - Miller Tabak

Okay, guys. I’ll jump back in queue. Thank you.

Clayton Williams

Thank you.

Operator

Thank you, sir. Our next follow-up question will come from Irene Haas with Wunderlich Securities. Please go ahead, your line is now open.

Irene Haas - Wunderlich Securities

Hey just kind of taking a look at your Delaware Basin, your inventory, on your power point you still save 400 potential locations using 160 acres spacing, those sort of look like more vertical. So have you kind of revised your outlook now that you’ve drilled some 70 vertical well and 18 horizontals? And second question is just seems like you have so much more sort of infrastructure advantage in the Eagle Ford which you consider selling the Reeves County asset entirely and cash in then focus on the Eagle Ford?

Clayton Williams

Well, we consider that, are considering it, but I haven’t reached a position and ask, we’re going to ramp our selling. So my choice would be, and we’ve put some of this on the market, you may know waiting for an offer. So this is going to be hard to make us feel kind of lose our reserves in place, our 700 barrel of oil of a way learned the drilling, we’re through the learning curve. So we’re through the rough part, there is time to enjoy drilling those production wells which we’ve got enough information production history and we upsize and got lot of size where we’re now happy with it. But I told you, we stretched our company to hold those leases. We’ve been drilling the well so fast, which we had through the hold the leasing. We have, we would have been better if we have more time to learn it many way, but as we done that, we wouldn’t have the leases today, it’s still like a trade off.

So if I sold something my choice would be to sell a fourth of it maybe a half and where we still retain the position that gave us some jump start money to accelerate our drilling a little bit, but more impart with acreage. And let me add one (Inaudible) there are a lot of people out in this basin and they can’t make a play because they don’t have acreage. We have the acreage and it’s going to be hard for me to turn the motion of it.

Irene Haas - Wunderlich Securities

Got you. How about the inventory, do you look at it differently now, it sounds like a horizontal thing?

Mike Pollard

Well, we are sticking by our 400 locations right now time will tell we think there may be a lot more there because of the stack pay situation. So right now 400 we think that’s more than we can get drilled in the next.…

Clayton Williams

Let me add. The vertical wells what got us in trouble and then we started horizontal that’s been our ball game, we are good at it. We start drilling we found immediate vertical wells identify and understand the rock then when we started doing that and then one of the things we did we had some fracs that we couldn’t hit the rock the sand away. Well now we’ve taken to run in an open hole through a five or six feet and then when we frac that, we [portrait] cement portrait and we are getting the fracs away overtime and that’s been our secret, but we didn’t learn that.

As far as we have that learning curve and now we’re drilling subsequent horizontal wells that are all turning out about the same. Some day when that’s all developed then we’ll worry about some of the other zones. There are other zones that will produce which slowed all from several up, but the key is to make money and try not to go -- for the learning.

Irene Haas - Wunderlich Securities

All right, Clay. Thank you.

Operator

Thank you, ma’am. Our next question in queue come from Ipsit Mohanty with Canaccord. Please go ahead. Your line is open.

Ipsit Mohanty - Canaccord

Hey, good afternoon, guys. Thanks for taking my call. My first question is for Ron. Ron, what are the [URCS] in the Wolfcamp and the Eagle Ford piece?

Ron Gasser

Our model shows that Wolfcamp A to be 300,000 barrels of oil and about 400 million cubic feet of gas. And then our Eagle Ford is about 250,000 barrels of oil and about 90 million cubic feet of gas.

Ipsit Mohanty - Canaccord

Thank you. And then you have talked about infrastructure in the Delaware and the Eagle Ford. How do you NOE cost going forward? Are they, did you are seeing trending down?

Ron Gasser

Well, you did see us trending down this quarter and yes, we do see it trending down. We will be giving again a little more clarity on that when we put out guidance. But...

Clayton Williams

Let me tell you one reason we’ve built the water [land]. When these frac-based wells are using water, 100,000 barrels plus, Ron?

Ron Gasser

Yes.

Clayton Williams

That’s a lot of water and when you calculate it, it goes $4 a barrel it’s likely away, Clayton’s measured dollars. So right after that we are saving that $4, when is that $40,000 available or (inaudible) goes in the pipe and you take down over to our sales. So we were able to build a pipeline all three to save us money now and we are more efficient now than anybody there because we are able to (inaudible) lot more.

Ipsit Mohanty – Canaccord

Got you. Just to be sure, Mel do we expect any guidance on the, you have given out a year-end number of 13.6 to 14.2 MBOE per day for your full year. Do we see a revision of that?

Mel Riggs

Yes, we are revising that.

Mike Pollard

That's coming

Mel Riggs

That's coming.

Ipsit Mohanty - Canaccord

Thank you. And my last to Clayton knowing how well you know the area is extend in laterals the way to go about in the deep, is there any issue to that or would you see that economic or would you stay with the medium size or the shorter laterals?

Ron Gasser

Yeah. This is Ron. We're currently comfortable with what we're doing. We like the economics of what we're drilling. We're watching and seeing what other people are doing, we are not tied to the 500 foot lateral. But once we get further than that, we'll have to change our pipe size and the numbers go up dramatically. And if other people have better success, more economic success going along our laterals and we see that happening and we will sure change over and do that, but we're comfortable with the 2.5 you pay out and 30% rate of return.

Clayton Williams

And one thing I would add to that regard, I forgot. In Eagle Ford, I'd say there is probably 18 to 20 offsets up and down the 300 are inflammation for us. The same has happened in the Delaware. There is offset operators around us and we learned what they have done it's kind of standard information. So that they have just make some decisions and some people have helped us to hike a lot of, drill a lot of wells out, I would make this redevelop it, that just gave us comfort on our Southeast and because it's a big, it's difference in the overall, it's a big old stereographic trap. And facing the sand and the rock tray from time to time that's been well it didn't go and I want to develop here another what we like about the Wolfcamp A is it has been stable everywhere so far. And so we have a comfort in it.

Ipsit Mohanty - Canaccord

Thank you

Mike Pollard

Thank you for your questions. Appreciate it.

Ipsit Mohanty - Canaccord

Thank you.

Operator

Thank you sir. Our next phone question comes from Mike Kelly with Global Hunter. Please go ahead. Your line is open.

Mike Kelly - Global Hunter Securities

Hey guys, good afternoon.

Mike Pollard

Hey Mike.

Mike Kelly - Global Hunter Securities

Looking at slide 19 of your most recent presentation, this is one that shows the well locations of what you drilled in the Eagle Ford so far. And it looks like you got a lot of data points that stretch across three to four different counties here. And just want to get your thoughts on really the consistency of what you’re seeing there in terms of results that you’re seeing a sweet spot?

Mike Pollard

Hey Mike, I’ll let Sam Lyssy, our Exploration Manager dig that. And again Sam has been living with this area since the late 80, 1990 back when a lot of this put together in the Austin Chalk.

Sam Lyssy

Mike. Thank you for the question. Keep in mind as Clayton mentioned, he’s in this part of the world since 1974 so we have a vast and I will call it vast volume of vertical wells penetrating the Eagle Ford formation across our position. In addition to that we've done volume metric work to supplement the petrophysical understanding of the Eagle Ford.

We've taken two cores whole cores in the Eagle Ford. And in addition to that we've done some resistivity mapping across our position. And to answer your question that we feel the 100 foot target interval in the Eagle Ford is fairly consistent across our entire position.

Clayton Williams

Let me add to that whenever we drill this county (inaudible) has built 800 horizontal locations across this 100 plus miles in our acreage block. The Eagle Ford was late then next to the Gulf of Mexico with similar position rolling to the waves. So it is a consistent state, because it had the same relative position geologically to the Gulf of Mexico. It is very similar than we've drilled these 12 wells over the length and it’s the same. So we’re doing infill drilling except that probably 10, 12 miles of park, but we've proven it with long laterals and you expect the continuity, when it’s a one-time deal and it has been that way and that’s why it’s exploding.

Mike Kelly - Global Hunter Securities

If I could ask one quick follow-up there, Ron you mentioned that you are getting kind of type curve out there, in that that East Texas Eagle Ford play which should be about 265,000 BOE. And just wondering in that model, what you have factored in for your first month rate and how that stacks up to 537 BOE per day rate that you’ve actually got so far in terms of results of these eight wells?

Mike Pollard

That's it that's what the average is and that's what that first month average is, so it’s right.

Mike Kelly - Global Hunter Securities

Okay.

Mike Pollard

Yeah.

Mike Kelly - Global Hunter Securities

So it’s in line with that type curve?

Mel Riggs

Yes. It’s right on the curve, we’re happy that.

Mike Kelly - Global Hunter Securities

Perfect. Thank you.

Mel Riggs

Thank you, sir.

Operator

Thank you, sir. Next one in question comes from Welles Fitzpatrick with Johnson Rice. Please go ahead your line is now open.

Welles Fitzpatrick - Johnson Rice

Hello, again. I know you are not going to put out guidance or CapEx obviously, but just as far as how much drilling that won’t be targeting the Wolfcamp A and won’t be target in the Eagle Ford that you will be doing going forward. It seems relatively minimal maybe a Wolfcomp C here or there is that accurate?

Mel Riggs

That is accurate we have a few other little smaller projects in different areas, but that is accurate for the most part.

Welles Fitzpatrick - Johnson Rice

Okay. And then…

Clayton Williams

We will be working and have been on maybe selling some of these. We’ve had several smaller discoveries with other operators and so if we can get a good price we’ll probably sell them. We also have some drilling to do there that’s proven, but we feel like if we could get a good price we need to sell the outlined project and put it into the main deal. But there is some things you cannot foresee; if you don’t get a good price, we will hang; if we get a really good price, we’ll sale. And if banks are strongly with us we’ve had a great credit the same banks for years. So we are very comfortable financially.

Then you get asked about the price of oil. I have a more optimistic and here is what I do. There is always a middle way, you’ve had the price, the supply and demand of oil worldwide, there is nearly imbalanced. Many of the times in my career it’s been 10 million, 15 million barrels a day excess production. Now it’s right there in balance because of the growth of the developing world.

Now Israel, Iran; Iran said they are going above Israel; Israel said they are not going to let them do it. So somewhere, sometime that problem has to come to hit. That’s why I have been very hesitant to hedge that in the prices down nearly $10 a barrel in the year out. But that’s why I have taken a position I am scared to hedge very much, because you could hedge and look and when it was 15% overhiked then price would maybe go from 20 back to 10, well that’s a 100%. Well you could see it go to 120, or 130, 140 if you had a honest interruption which has happened before and sometime in the future it will have, we hope not. That is little more that is taken on the hedge, we have a lot of arguments within us. The bankers would like us to hedge it all, now I don’t want to hedge it all, because if that happened you are under water.

Mel Riggs

Next?

Welles Fitzpatrick - Johnson Rice

And then also, so I guess the kind of simplify the moving parts because you are not doing that exploration drilling because you are really focusing on the Eagle Ford. Would it be fair to say that it would be reasonable for someone and an analyst see to project that kind of dollars and growth out that you showed in 3Q forward?

Mel Riggs

Yeah. I think right now that’s where we are.

Clayton Williams

Why don’t you look at the figures? We don’t have enough money to drill our proven stock and there is a lot of well for us to acquire, if we can get that done, so a business man is going to say I have enjoyed been a wildcat, (inaudible) but now we need to focus and getting these things drilled. And now we are proven up with Delaware pretty good. And Eagle Ford is our legacy property it’s I think pretty consistent. But job is to focus on getting that drilled and yes, I will tell you, yes. I hope someday if I live long enough I can get back drill a wildcat somewhere.

Welles Fitzpatrick - Johnson Rice

Well, get there. So thank all so much.

Clayton Williams

Thank you, Welles.

Operator

Thank you, sir. Next questioner in queue is Sean Sneeden with Oppenheimer. Please go ahead. Your line is open.

Sean Sneeden - Oppenheimer

Hi, good afternoon. Thank you for taking the questions. Just in lay of August potentially you are talking about in brief and obviously over $300 million liquidity. How do you think about racing up CapEx next year? And what I mean in the sense is do you feel like you really need to find a partner first before you ever add to your rig count out there or do you feel like you might have the well where thoughts so that would be able to get to that point without any sort deal?

Clayton Williams

We don't have a lot of maneuvering. Well, we've got to have those 3 rigs to continue to hold acreage in the Delaware. And we need two rigs to hold our acreage in the Eagle Ford. We have to do that and we got the cash flow to do it. We are focused on first thing first which is meantime in our acreage is developing all reserves as we did. And if you look at 1,200 wells, there is a whole lot of oil out there, it's not like 10 to 1 we use to have, but it's good solid business and we're comfortable that is proven. So now we just got to execute.

Mel Riggs

Sean, the whole reasoning behind the high yield offering that add to our senior notes was to create the liquidity to run 5 rigs over the next couple of years. And we also have the ability to some smaller asset deal, we get some small divestitures to supplement or bring in some other cash flow to help us cover some other things. So, yeah, we feel really comfortable with the 5 rig program, we’d love to go faster, that's where the partner comes in.

Sean Sneeden - Oppenheimer

Okay. And that I guess that’s kind of my question. But if you wanted to go faster, you feel like you would have to bring a partner in first.

Clayton Williams

Yes.

Mel Riggs

That's correct, yes.

Clayton Williams

It's realistic.

Sean Sneeden - Oppenheimer

Right. And then just lastly, I know you talked about hedging on the oil side, but just throw it out there. How do you think about hedging at least on the gas side for next year?

Mel Riggs

Well, the gases contain go, it's a little more attractive, but our production in stream is only 20% gas. So cash flow wise gas is very small to us. And I think right now we actually had hedges in this year and we're out of the money. From the most part, we’ve lost the money on those hedges, that was an old deal. I think right now our plans are just to say…

Clayton Williams

We sold all of our gas position when the gas was seven, well four years, three, four, five years ago that was up right at our Houston office. We've had Houston trying to upgrade there all and they’ve had a tough time there. So if we can find some gas prospects that will pencil that 3.5 we’ll be moving that way. We might have the cash to buy some leases but we don’t have the ability to drill the gas. That makes some way down the line. And so mostly we will be pushing for that because we've got to put some money where we are talking about.

Mel Riggs

Yeah. I think the main thing is we really hedged our gas back in 2008 2010 when we sold out of it, we guess we got out. And right now gas goes to 250, it doesn’t change anything we do. If the gas goes to 450 doesn’t change anything we do. So based on that I think we just let it right and see what happens maybe we’ll get better.

Clayton Williams

Yeah. I understand.

Sean Sneeden - Oppenheimer

Okay. That’s helpful. Thank you very much.

Mel Riggs

Thank you.

Operator

Thank you sir. The next questioner in queue is Doug Dyer with Heartland. Please go ahead.

Doug Dyer - Heartland

Good afternoon everyone.

Clayton Williams

Hey.

Doug Dyer - Heartland

My question is with regard to Reeves County it sounds like you can say that some of it has been proven up enough to call it good enough to be in the development phase, but I did not able to spend money on exploration. So out of that acreage block, how much would you consider to be any development phase and how much still needs exploration?

Clayton Williams

Ron you want to take that?

Ron Gasser

That’s a loaded question. I think our current round of drilling with the wells that we're drilling today will help define for us the extent of the Wolfcamp A, across our block. As far as the zones below and above that is yet to be determined how much money we spend doing that. We are well aware of learning curve. So we’ll take that slow.

Clayton Williams

Let me add how we are attempting to handle, the stuff we had some larger wells on the left side, we didn’t drilled in this Wolfcamp A, but we still have some leases there so our approache is go to the land owner and extend the leases to try to buy sometime as we learn. And what I mentioned earlier other operators, Petrobras, [Telenor] Conoco, Atlantic, Rosetta there is other people drilling. So we are learning from other people as well about what's happening, this is a big area.

Doug Dyer - Heartland

All right thank you very much.

Ron Gasser

Thank you.

Operator

Thank you. Our next on question comes from Irene Haas with Wunderlich Securities. Please go ahead with your question please.

Irene Haas - Wunderlich Securities

Yeah. Very quickly how many days does it take for you to drill a horizontal well in Reeves County similarly the Eagle Ford your drilling days?

Mel Riggs

Yeah. Reeves county rig move to rig move is about 52 days and the Eagle Ford is about 22 days.

Irene Haas - Wunderlich Securities

Okay. Thank you.

Mel Riggs

Thank you.

Operator

Thank you. Next question in queue comes from the line of Ryan Oatman with SunTrust. Please go ahead, your line is open.

Ryan Oatman - SunTrust

Hey. Actually was my question, it’s a good question asked. Another one with this pipeline system in Reeves County is there the potential to monetize that system as opposed to the acreage and what sort of value do you think you could receive for that system out there?

Ron Gasser

Well let me answer this first. I mean brought it by the midstream companies wanting to buy this system, this worth a lot of money and it’s well positioned. But right now we it serves a purpose to carry our well water and natural gas and we going to keep it.

Clayton Williams

I would add this. I bought some land basis for my fortune with a natural gas gathering companies I have done a lot of that. Somewhere in this I had a view that we might be able, once we got out feet on the ground, to start going to other operators and hook up their oil lines, particularly gas, and there is a lot of gas out there. So that’s still a potential for us to extend the gas lines to other areas, some people close operate might want us to hook up to our water line and we save a dollar and maybe make a dollar. So there is potential upside which is why these mid size want to buy us. And so we’re not desperate behind. We have a plan and just go forward that’s the right we are going. And we see what develop not gas is that we won’t sell anything for what I would take now. We go forward, continue to develop and proven something somewhere that’s generally always how it will come along that we like. But we’re not going to give anything late because we’ve worked through damn hard to get it.

Ryan Oatman - SunTrust

Okay, thank you.

Mel Riggs

Thank you.

Operator

Thank you. And that does conclude our time for questions. I like to turn the call back over to Mr. Williams for any additional or closing remarks.

Clayton Williams

I particularly appreciate this gather and particularly this is the first time we didn’t have a lot of finance questions, because you guys are really focusing on the right place, where we are spending the money, how we are going to get the money to drill all these 1,200 locations. So we are focused on it. Are we going to wildcat, no we are not. We can’t do anything but be focus on getting this drilled. And there is a good profit in it, there is 2.5 year payout, when we were drilling rig for this full year payout.

And so we have learned to step into the new world and it’s all about fracking. And we didn’t have fracking, this stage will be shutdown, there is no rock lift that does need to have fraced out of it. But thank you for focusing and understanding the real call, who we are because it’s about developing this fine acreage that we have, the great position that we are determined, no one to hold it, to exploit it. And we are the cheapest horizontal drilling in the country. Why, because we’ve drilled about 900 horizontal wells, we’ve had a lot of practice. What that means, we’ve got good people that know how to do the job. And if you look at the cause for a lot of people (inaudible) come down for our people and it’s good.

So with that I thank you tuning in.

Operator

Thank you, presenters and thank you ladies and gentlemen. Again this does conclude today’s call. Thank you for your participation. And have a wonderful day. Attendees you may now all disconnect.

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