Clayton Williams Energy's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.20.14 | About: Clayton Williams (CWEI)

Clayton Williams Energy, Inc. (NASDAQ:CWEI)

Q4 2013 Earnings Conference Call

February 20, 2014 2:30 PM ET

Executives

Patti Hollums – Director, IR

Mel Riggs – EVP and COO

Clayton Williams – Chairman, President and CEO

Ron Gasser – VP, Engineering

Michael Pollard – SVP - Finance, Treasurer and CFO

Analysts

Irene Haas – Wunderlich Securities

Ryan Oatman – SunTrust Robinson Humphrey

Adam Michael – Miller Tabak

Doug Dyer – Heartland Advisors

Operator

Good day, ladies and gentlemen, and welcome to the Clayton Williams Energy Fourth Quarter 2013 and Year-End 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 be given at that time. (Operator Instructions)

As a reminder this conference is being recorded. I would now like to hand the conference over to Patti Hollums. Ma’am, please go ahead.

Patti Hollums

Good afternoon and thank you for joining the Clayton Williams Energy fourth quarter and year-end 2013 results conference call. Participating on our call today is Clayton Williams, President and CEO and Mel Riggs; Executive Vice President and COO. Also joining us today is 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 fourth quarter and year-end 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 brief overview given by Mr. Riggs and then an operations update presented by Mr. Williams. We will then entertain a question-and-answer session for as long as time permits.

Before we begin please be advised that our remarks and answers to your questions include statements that we believe to be forward-looking statements. All statements that relate to future results are forward-looking statements that are based on our current expectations. Actual results may differ materially from those expressed or implied by these forward-looking statements because of 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. Riggs. Mel?

Mel Riggs

Thanks, Patti. I have got a few comments and then I will let Clayton speak. First of all I want to talk about the fourth quarter results and focus on the fourth quarter because I think that quarter represents better where we are as a company right now as we transition to 2014.

First of all we had $6.4 million net income for the quarter, cash flow was $61 million, EBITDAX $71 million and our production increased 8% versus the third quarter of last year. So we got a nice production bump in the fourth quarter and we will get into that on why and what happened. That production also exceeded the high end of the range of our fourth quarter last year’s guidance, about by 3%.

We also had operating cost coming down some as the sale of the Andrews property and the Reeves infrastructure, the savings taking into math, so right now we got lot better margin per barrel and per Mcf. The things that we tried to do in 2013, one of the biggest thing for us was liquidity. We want to strengthen the balance sheet. We entered 2013 with limited liquidity and so our plan was to do something about that and we have. We replaced a lot of short term debt with long term debt about some time on that. We monetized Andrews property which we have talked about several times in the past for $250 million we still operate it, still running rigs, so three rigs with our partner GE Capital.

In the fourth quarter we sold 11 county property that had limited production and mainly just some leases we got 35 million, so all in all with all this happening we more than tripled our liquidity. We went from $132 million to almost $400 million at the end of the year. So we are certainly in great shape and we are really very proud of the things we got done last year. We have taken our debt down to 21%, total debt is down $640 million that’s down 21% and a long term debt-to-EBITDAX an important ratio for all of us has improved from 3.4 to 2.5 times so we are very pleased there.

We also have other plans in the work. We have got couple of other deals pending, we have not closed that but we plan to close in the next 45 days or so to add additional liquidity to our balance sheet, and we do have a deep – we have to remember we now have a deep base of owner properties so we got other opportunities here to raise more capital if we like in 2014 and forward.

Some other things we want, another thing we wanted to share was to really crack the code from the drilling standpoint on the Wolfberry and Eagle Ford, I think we have done that to some degree. We are still in early stages but we have done, we have improved our wells over the last several months there dramatically. Our production I guess a testament to that is our production grew by 8% compared to 2012 and we replaced 526% of our 2013 production. So we had great success in our drilling program and that was a pretty limited program compared to that we are stepping up some this year.

In the Delaware basin we have 80,000 acres and plus we now have another 5,000 acres due to farm out we have in Reeves. We targeted the Wolfcamp A as you know we have said before we had first nine horizontals at an average peak rate of 30 day rate of 680 barrels a day. The last five wells in that group of nine, actually averaged 886 and we have made some changes there. We are targeting the Wolfcamp play as an unconventional instead of a conventional target.

We’ve got cross lateral drilling going on, there were [intention] change, we have been open hole logging wells and which have improved frac efficiency dramatically and we are also looking at some longer lateral. So we continue to make improvement there. We are also now drilling the first Wolfcamp C well, and we are keying off a good Wolfcamp C well drilled by a private company in the midst of our acreage.

Over in Eagle Ford, again we have massive position, 185,000 acres mostly held by production. We’ve drilled 10 horizontals so far, average 30 days, peak rate 562 barrels a day, 97% of the production there is oil. I failed to mention back on the Delaware 88% of our production area is liquid oil or NGLs.

Our drilling campaign calls for targeting the Eagle Ford of 5 million to 6 million we think we have a very economic play going there, very, very excited about and Clayton will touch on that, it’s a legacy position that we put together many years ago and really this is kind of the second egg for both for Clayton in both the Delaware basin and in this Giddings area. This shows if you stick around long enough a lot of things can happen. So it’s very exciting to see that happen for him because he stuck it out. We have been through a lot ups and down over the years and he held on these positions and now we get capitalized by turning these areas into bigger assets.

Talking about 2014 real quick, we are stepping up the pace versus 2013 on the drilling side. We do have a five rig production. We got three rigs running over in Delaware. We got two in the Eagle Ford currently. The CapEx will be split pretty evenly. We have a $177 million in the Permian area, $156 or so in the Eagle Ford, so total CapEx or drilling complete budget of about $332 million and company’s total drilling plate of $336 million. So 99% of what we are doing we’re very, very focused on these two areas and you can tell by the CapEx we’re going to – we got 1% going elsewhere. So most of the money is going into the two areas being developed.

Our guidance, we put out earlier but I’ll just reiterate a couple of things. One we are projecting with this drilling pace a production growth of about 16% to 17% that will help to beat that but we feel pretty good about that at this point in time. We also will have lower operating cost going forward, we should have that coal prices stay and gas prices stay at these levels or similar levels we will have better margins than what we have had in the past.

So the money that we spend on infrastructure, the sell-off of Andrews which is Wolfberry property had a lot of [business], it was an older property too, we have been drilling for several years. We should have better margins now going forward on oil and gas we produce.

Also we have 2.2 million barrels of oil hedged this year at weighted average price of $96.83. That represents half of the – a little less than half of the oil what we expect to produce in 2014, but we did have a quite a bit of cash flow hedged, a good part of our CapEx budget is now hedged.

On the gas side we are not hedged at all. We are enjoying this run up in gas prices, Mother nature’s being very kind to us it’s putting coals in the right places and so we are very pleased at this point in time, on our hedge on natural gas side. So all-in-all, all this I’ve said, I have been around working for 29 years, about 25 in oil and gas companies and I don’t think I have been more optimistic than as I sit here today. It’s almost kind of hard to control. I got to kind of calm down a little bit.

We don’t want to – we got to be careful and believing in our own BS here but we feel good about – I think the results have proven themselves out so far. We still got to do a good job drilling, execution in the field is going to be critical and likely we have guys in the company, I think they were in the company before Clayton even started the company. They have been around for long time and so they move slower but they get a lot done. So we are real pleased with that.

And with that I think I will just let Clayton take over from here.

Clayton Williams

Very good. I want to talk a little bit about more the people. We last year celebrated in the Giddings area, we had 72 people that have been in that one area working for me for over 20 years. Now in 25 years we have about 95, that have been 20 years. I think it is important that when you look at our company, we have a stability, we are able maintain the same people that know their job, know their work and still more efficient in training new people off hand. And I am particularly proud of it.

Looking at the company as a whole we have a large proven acreage position both in the Eagle Ford and the Delaware basin. We more than replaced our reserves and one thing that we have improved drilling and particularly filled our completion practices and it shows in better wells and more efficient production. Today we have five rigs working, two in Eagle Ford and three in Delaware. We run a lot more than that but that’s what our cash flow is. We are basically drilling off cash flow. We still have an upside to this about 1,200 proven locations remaining to be drilled in our future.

I will tell you at the rate we are drilling that’s 50 years of drilling? I hope we will manage to accelerate our drilling program in different ways that we have not yet come to fruition but we really would benefit and shareholders will benefit if we can develop this acreage faster.

In the Eagle Ford now we have over 110 areas. We have drilled 10 horizontal Eagle Ford wells in the main block over 140 miles, we have drilled one at each end, so we are in the middle, they are consistent and we believe that it’s pretty well proven up. We’re using large multi-stage fracs, their consistency, the rock is the same. So that’s the one thing that makes us believe that we can – that we will have a very large development over 140 mile because in that same interval of rock is the same and consistent and consistency is what really let us to get on in the play, we have in the Eagle Ford for 900 wells located generally under 900 [jock] that we drilled at this place, have three rigs running there.

Delaware basin, we have 87 acres there. We’ve drilled 99 wells to-date. Some of you may remember we had a farm out from Chesapeake and we drilled 70 vertical wells to be able to hold that acreage which we now pretty well held. We have drilled 29 horizontal wells and at this point I think that we will be drilling nearly everything there horizontal. We are drilling lower Wolfcamp in the middle and then we have drilling horizontal in one area in the Wolfcamp but other parts of the Wolfcamp and one of the formation above it, we may have additional horizontal drilling.

I can’t predict but in summary we have been up to three or four horizontal wells per unit and few more and few less but we have round up drilling that there is a lot of drilling to be done in Reeves county on our acreage and we are happy with the results.

We have three rigs drilling there in the out we have four other potential locations from one interval and we may have more intervals and we may have – I am not thinking but we have got a lot more wells to drill in these three different horizons. The other thing we have done that I am very pleased with we have 70 miles of pipeline system in place and operating. That’s gas pipeline, water disposal line and oil transfer. So all our product goes all the way to the end result which we did that early. We spent $60 million doing it but now payday is here.

So we are very happy with our achievements. We see a bright future with a lot of drilling to be done and where we see the future is improved because through experience we have learned how to do everything best and we have passed I think most of the learning curve. We have now paid the bills and we are going forward.

With that we will take your question and we are having a good time. Questions?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Irene Haas from Wunderlich Securities.

Irene Haas – Wunderlich Securities

Hi. Good afternoon. I have a question on your Wolfbone project. As you mentioned you have multi zone, so can you elaborate a little bit more as a Wolfcamp A, B, perhaps C are you seeing any second bone spring in your property?

Clayton Williams

I will ask you to repeat that slowly. I don’t hear well but Ron you take it.

Ron Gasser

I am going to take this. Recent success has been in the Wolfcamp A. We are currently like two days away from TD Wolfcamp C test and as Mel mentioned there are a couple of Wolfcamp C tests in the middle of our acreage on another operator’s acreage that we’ve been watching. So we feel now we have Wolfcamp A pretty much established and we know where it’s going to be productive and what we’re going to get out of it. We’re testing Wolfcamp C and we’re also looking at Bone Spring like the third bone and there is some second Bone Springs across our acreage that we believe is going to be productive.

We’ve seen a second Bone well to the South of us and we’re talking about testing the third Bone so we can prove that up across our acreage.

Irene Haas – Wunderlich Securities

This is fantastic and then if I may a second question pipeline, your pipeline facility that you spent so much money building and all that stuff it’s really kind of working well now. Do you have any intention to take on third-party type production and make some money or perhaps monetize it at some point?

Mel Riggs

Okay. Right now our client ordered us to fill this pipe line up with their own product. And we are not looking to monetize the pipeline at all at this point in time.

Clayton Williams

To be clear, but they feel that at some point as we go further along we may gather third parties to make a profit but at this point it’s totally our product and throughput but there is potential other people may want to use the pipeline and it’s a [plant] addition so we will have some profit, my early businesses were pipeline for profit.

Irene Haas – Wunderlich Securities

Great, thank you.

Mel Riggs

Irene, I would like to add to that we have our crude contract and this pipeline plays into that. Right now the Midland base – Midland Cushing basis different by 10 bucks and so do not – we’re totally indexed to Cushing. So we are getting a big benefit right now from marketing agreement on the pipeline. Thank you, Irene.

Operator

Thank you and our next question comes from the line of Ryan Oatman from SunTrust.

Ryan Oatman – SunTrust Robinson Humphrey

Hi, good afternoon.

Clayton Williams

Hello.

Ryan Oatman – SunTrust Robinson Humphrey

Wanted to speak to these Wolfcamp A wells that you are drilling down here in the Southern Delaware basis, it seems like you guys have taken a little bit different approach may be than some of your peers just south of you, more of the cheaper wells but also a little bit lower first 30 day rates can you talk about how guys see the Wolfcamp A and how you are attacking it and may be how that’s different whether from a geologic perspective or from a drilling and completion perspective than kind of the peers around you?

Mel Riggs

Currently the way we are doing it different from our peers is from a drilling and completion standpoint. Our drilling complete for a 6,500 foot well cross section lateral is about $0.5 million and those are the results that you are seeing there we reported earlier. We are watching what other operators are doing and we’re trying to model how their initial rate stay in, and we are talking about it continually and we are trying to get our models to work. We’re working it to see if we may want to go to longer lateral, bigger pipe and have that larger initial investment.

I can tell you with the results we’re having with our $8.5 million investment we’re very pleased with the payout and rate we are seeing and we’re just going to keep marching forward until we have a better feel that somebody is doing better we sure will change and if we believe we can do better we will change. Right now we think we have the corner on the market and we’re getting a little better payout and greater return than our peers are.

Clayton Williams

I’d like to add on the linked lateral the longer the lateral the more chance of mistake. And verticals are not highly expensive so over the long run there will be mistakes and screw ups and that the further length that you are straying offset the sayings you made in the vertical pipe. And I think it’s everybody has their own opinion. At this point I am comfortable staying with five or six foot lateral and it’s hard to factor in the mistake that happens when you’re eight or nine damn feet out and that’s the balance in my mind while we are drilling the reasonable lateral.

Ryan Oatman – SunTrust Robinson Humphrey

Well, that makes enough sense to me. I mean it sounds very similar to the approach you guys taken on the Eagle Fort asset as well. Any update on the potential monetization of your Delaware basin acreage and leasing interest in it and if that price doesn’t get too far on fair value is that something you would consider looking at on the Eagle Ford asset as well?

Ron Gasser

Well first on the Wolfbone as you know we went through a process last year to explore getting a partner, we did have interest from companies that would like to buy us out go in take over our position. We’re continuing to look but we’ve got – we are talking to some companies about becoming a non-operate partner for a piece of it. But that’s all I would like to say about that right now but there was a dialog but the things we have done in this company over the last, say nine month or so we have – our need to do a deal like that has been less of now.

On the flip side Clayton why don’t want to tell him what you think about the big picture here that you see with the number of wells down here.

Clayton Williams

Actually we don’t have an interest in selling, we have so much to do, and we’ve probably 1,250 future wells to drill are proven, many of these wells are legacy wells that I have drilled in the mid-70s. So we’ve got experienced people, we’ve got good financial. I don’t have any interest in selling that. What would I do with the money, where can you replace the position where your most of the acreage in the entire oilfield is very tightly held and I have no interest in sitting on my ass earning 3% interest.

Ryan Oatman – SunTrust Robinson Humphrey

Right, no doubt I mean the financial situation has certainly improved. With regards to the Eagle Ford asset can you just remind me the drilling complete cost on that I mean kind of how you feel about delineation of that asset, what you feel like you’ve proved up? And with that all us step back in the queue. Thanks.

Mel Riggs

Thank you Ryan. Go ahead Ron.

Ron Gasser

Yeah Ryan our current SE is about $5.5 million to drill and complete our Eagle Ford wells. We’re getting around anywhere between 5,000 to 6,000 foot lateral with that and we pumped about 6 million tonnes of sand plates for the way on frac. We are continuing to model what we’re doing and we just as we are in the Wolfbone we are in early on in the learning stage. Our analysis says we’re only recovering 3% of the movable oil in place.

We know we can do better than that. We just have to change how we are drilling and completing wells but right now we are very happy with the results we drilled from one end of the asset to the other and had similar type of results. We feel it’s consistent, it’s been modeled we think mapped out we think we’re doing – we have similar type of rock across our entire acreage position and we’ve proven that out with additional drillings.

So we know we can do better. We will improve as time goes but right now we’re pretty happy with the results we’re getting with our investment in our…

Mel Riggs

I mean it’s a learning curve but it’s a very profitable one though this time.

Clayton Williams

And I will talk a minute about the learning curve because we’ve been at the front end of most play and so we continue have to learn and we look at our history, we look at early wells, we drilled, we had mistakes, we learned better, to keep part of the plays and all with to the last two parts of it where you get the benefit of proved drilling and proved frac method and so stayability, longevity I think becoming more and more important and the benefit you have these types of wells what you know they are oil, you know their play but the profitability is the key and each area has its own new nuances and you have to stay with it long enough to do the best job as time goes back which we in that case we are in both of these areas we are pretty well past the learning curve but we continue to improve particularly as it relates to fracking.

The drilling we have been clearly efficient on horizontal drilling, we’ve done probably more than anyone else in the country. With the fracking and [liver] formations we continue to learn and approve those 70%, 80% of the well coast are in the frac and that’s where the results are from. So the frac is where it boils down to.

Ryan Oatman – SunTrust Robinson Humphrey

Thanks for the color.

Mel Riggs

Thank you.

Operator

Thank you. Our next question comes from the line of [Ravi Kamath from The Seaport Group].

Unidentified Analyst

Hey guys, great quarter.

Mel Riggs

Thank you.

Unidentified Analyst

Couple of questions. One, looking at your reserve report, looks like reserve sales were 26.9 million BOE, just wondering what’s in there because the Andrews County I think you guys had talked about previously it was 15.8 million BOE, what else is in the asset sale number?

Michael Pollard

Hi, this is Mike Pollard I will address that. Before we sell the Andrews after December 31 ‘12 and before we sold it in April we identified and booked up a lot more proved undeveloped reserves. They were 40 acre in-fields that had not been previously done and there is some other reserve adds and those added about 11 million, 11 million to 12 million barrels and so it’s 15 or so plus 11 or 12 get you to 27.

Unidentified Analyst

Got it. Great. And then secondly you talked about sales you know you sold some acreage in Levine County for $35 million can you quantify how many net acres that was?

Ron Gasser

That is roughly around 11,000 acres and there was probably 100 barrels a day or less of production.

Unidentified Analyst

Great and then lastly I think in the past year you talked about potentially monetizing some acreage in Sterling and Glasscock County by a number 37,000 net acres, any update on that?

Ron Gasser

We have not really been pursuing that. We have done some limited – continue to drill on the property to hold the acreage and that’s still the plan at this point.

Unidentified Analyst

Okay and I guess one last one what sort of current estimates for EURs in the both in the Eagle Ford and in the Permian basin?

Michael Pollard

Well in the Wolfbone play our EURs are ranging from 400 MBOE to 700 MBOE and in the Eagle Ford we’re anywhere from 200 to 250 MBOE.

Unidentified Analyst

Got it. Great, thanks guys.

Michael Pollard

Thank you, Ravi.

Operator

Thank you. Our next question comes from the line of Adam Michael from Miller Tabak.

Adam Michael – Miller Tabak

Hey guys I think a lot of my questions have been answered.

Mel Riggs

Okay, we’ll see then, Adam.

Adam Michael – Miller Tabak

But maybe just one follow-up, it’s – I mean I know you have this pipeline asset. What is it worth? I mean how much oil can you move through it?

Mel Riggs

We have a lot of companies contact us about trying to buy it, do some kind of JV on it, combine it to build plants. I mean I think it’s got a lot of value and if we want to sell our basic critical facility to operate our business right now so we can’t fill it up with other product; it’s for us for swing. We can handle 25,000 barrels a day or something. We have got lot of room.

Clayton Williams

Frankly we’ll have an opportunity to take other people’s product and still edge our out and but we built it for our own use and believe we are little heavy. We are not quite sure how much development we will have particular in lower Wolfcamp for the [inaudible] so we need to determine that before we can save what we need.

Mel Riggs

So right now we are not looking to do anything except fill it out.

Adam Michael – Miller Tabak

Okay and then those last five results in Reeves, the Delaware were just certainly a step up and I am just curious how did you crack the code and what are you doing different to get these great well results?

Mel Riggs

VP of exploration came up with the and we did some micro seismic work and after that we came up with changing our asset. We are going northeast to southwest with our laterals. We have gone the longer lateral without having to change our pipe design and our drilling department has done a great job with getting the laterals a little bit longer and getting the pipe in the ground so we are getting longer laterals and with the logging of the wells we are able to place 100% of our frac way design. So we are still, like I said earlier on in the learning curve we know we can do better but right now we are enjoying the success of the changes that we have made to date.

Adam Michael – Miller Tabak

Thanks, guys. Fantastic finish to the year and I look forward to a big 2014.

Mel Riggs

Thanks, Adam. I appreciate it.

Clayton Williams

Thank you.

Operator

Thank you. And we have time for one more question. Our final question for today comes from the line of Doug Dyer from Heartland Advisors.

Doug Dyer – Heartland Advisors

Hey if I could I would like to expand a little bit on the last question where he was asking about what you are doing with the completion techniques. Are you using any different amounts of sand and what are some of the changes that you will be experimenting with going forward?

Ron Gasser

The main thing that we are looking to change is the amount of profits that we are putting in the ground. We have yet to really push the design. It’s really rough on your completion methods when you do screen out in one of these platform plug laterals. So now that we are getting them away the next step we are going to model increase sand to see if that’s going to pay off and give us increased reserves and production from completions that we are having right now.

We are hesitant to change five or six things at once because you don’t know what worked. So now that we have got this baseline going we are going to start changing one or two things to confirm that what we think is going to happen has happened and we are hoping that more sand and little longer lateral will be more reserves and higher initial rates.

Doug Dyer – Heartland Advisors

All right, I appreciate it. Are you using sand or ceramics?

Ron Gasser

Originally we were using ceramics because of the closure pressures out here but our modeling showed that we didn’t require conductivity that ceramics provide us so we have lessened our frac cost and we are going to resin-coated sand in a majority of this.

Doug Dyer – Heartland Advisors

All right, thank you.

Ron Gasser

Thank you.

Operator

Thank you. And that concludes our question and answer session for today. I would like to turn the conference back to Mr. Williams for any concluding remarks.

Clayton Williams

Looking forward we have a lot of work to do. We have 50 years of drilling in our current schedule we do plan to bring in some form of help, a partner some other form where we can accelerate our drilling. As I said we have 50 years of drilling at our current rate on our proven locations. So somewhere in the future I hope we would telling we’ve got in a partner, refinance and we need to be relatively faster than our current rate. Beyond that I do not know what the need is there and I expect we will get it done. Any other questions?

Mel Riggs

That’s it?

Clayton Williams

Thanks for tuning in. We’ll see you next time. Happy days.

Operator

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

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