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Clayton Williams Energy, Inc. (NYSE:CWEI)

Q2 2014 Earnings Conference Call

July 24, 2014 02:30 PM ET

Executives

Patti Hollums - Director of IR

Mel Riggs - EVP and COO

Clay Williams - President and CEO

Analyst

Irene Haas - Wunderlich Securities

Welles Fitzpatrick - Johnson Rice

Ryan Oatman - SunTrust

Adam Michael - Miller Tabak

Ravi Kamath - Sea Port Group

Andrew Smith - Global Hunter Securities

Andrew Gundlach - First Eagle

Operator

Good day, ladies and gentlemen, and welcome to Clayton Williams Energy Second Quarter 2014 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 call is being recorded.

I would now like introduce your host for today’s conference Director of Investor Relations, Patti Hollums, you may begin.

Patti Hollums

Good afternoon and thank you for joining the Clayton Williams Energy second quarter 2014 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, Vice President of Engineering.

During this call, we will discuss our second 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 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 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. Riggs. Mel?

Mel Riggs

Thanks Patti, thanks to everyone for dialing into this call. Firstly I would like to say we have made significant progress compared to last year this time in the last 12 months we have trended from this company and we are very excited about our future. Our production comparing this quarter to last quarter same period were up 12% but that’s 20% when you pro forma the asset sales that the deals we got done in on the asset sale side and which is up the balance sheet which I'll talk about in a moment.

Oil and natural gas liquids make up 84% of our total production volume and I guarantee we're happy to be selling oil instead of gas. EBITDAX is up 54% to 81.5 million for the second quarter, 158.4 million for the six months period ending June 30, this year compared to 115 million last year and our operating cost are down on a BOE basis about 21%. Looking at the balance sheet, the balance sheet stronger in the second half of 2014, long term debt is down from 640 begin the year with 625.

We have more cash on the balance sheet and at the end of the end at June 30, 2014 we have liquidity of 421 million so our company is well positioned, we can fund our operations and we've been doing so.

Looking at our operations, first of all we have to say and we want to keep reiterating this we believe it, believe me we have over 250,000 acres in to the best oil resource plays in the United States, the Eagle Ford and the Permian.

This acreage position when you back into the exposure, that our shareholders have per thousand acres, per acre whatever we stand way apart from all of our peers. We give our investors, our shareholders the most exposure to these plays and Clayton Williams and his family obviously put their money where their mouth is because they have over 51% of it. So, it’s very important to them also.

I’m going to talk real quick about the Delaware [indiscernible] I'll run through some of the operational results, Clayton is going to come in and talk about -- he is probably going to say, we'll get into more detail and talk about the future too but first of all going through the Delaware Basin, southern Delaware Basin we have three rigs running there have pretty much continually this year. We have drilled now in the Wolfcamp base, 17 horizontal wells that are now producing at least 30 days or more.

The average rate for those 17 wells have been 754 barrels of oil equivalent per day and we believe that’s -- we're modeling actually a lower number or to get to a 40% rate of return so we feel like we are doing great there. We have got a call center control. The last 13 wells that we have drilled in that and Wolfcamp A have averaged 856 BOE per day, those wells produce about 89% liquids.

The current status is one well. We got one well waiting on completing and we got two Wolfcamp As drilling currently. On the Wolfcamp C as we’ve announced earlier, few months ago couple of months ago, we drilled our first Wolfcamp C well. That well for 30 days had a flow rate, average flow rate of 776 barrels of oil equivalent per day. Based on that well, we decided to drill some more. We have two wells that have been drilled. One well is waiting on completion. One has been frac. It’s flowing back now. We don’t have the results unfortunately, which we did but we'll know more about that the Wolfcamp C and we still have a rig drilling in Wolfcamp C right. So we have four wells in the Wolfcamp C pretty quick, we have date on and we feel like there is a lot of potential upside there and the more benches we prove up the more that acreage position really grows because we'll have several targets to go after.

Going over to Eagle Ford, three rigs, we just added a third rig at the end of June despite its first well, so we don’t really have any -- didn’t really have any impact on the quarter, but we have drilled a total of 15 wells that have produced at least 30 barrels a day on average. And the average rate has been 514 barrels of the oil equivalent per day. These wells are spread over three counties and as you got to remember, this acreage position spans almost I think in excess of around 50 miles. So as our Chief Geologist says, we're drilling with 15 wells we got well space on the 10,000 acre spacing. We're not playing closed LNG here. We spent -- in the second quarter, we tested some of the outer edges of our acreage to the South and Lee County, and open Burleson County we have three wells. We are learning. This is again, it’s not closed LNG we’re not drilling -- we’re drilling to prove up this acreage.

And so there is going to be variable results. If you look at the 50 mile swath of acreage, there is no way the rock is all going to be the same. It’s going to vary. We’ve got some learning to do on how to complete those wells, but the good news is that we have made -- we’re making profitable wells. We’re producing oil from one end to the other. Right now we have, the best area appears to be Burleson County where we have 10 wells. Time will tell, but it’s beating the other two areas but we still have a lot to -- we still have a lot to do there. And we feel like we will vastly improve our completions and we’re seeing also offset operators that are having some success in for example Lee County with the bigger frac jobs. Typically, what we’re seeing in the whole area is that companies are pumping almost twice the amount of sand than we are. So we got some room to improve we believe, but where our focus is to make money though. We are trying not just to spend a lot of money drilling wells and get a half low rate.

We look at the economics, we’re going after rate of return and so we have a model that we’re trying to use and we will adjust it. We're not going blindly just drill away ahead and do it one way. We will make changes just as we did over in the Reeves area in the Delaware basin. So good news is its all working. As we said out earlier on in this area, we thought we could prove up maybe 100,000 acres, but now we have wells across a bigger area. We may prove up, we can -- we have more acreage than we even dreamed we would build a drill for the Eagle Ford, time will tell. And I think we’ll get into the questions later on and talk about some of the things we intend to do to, some things we’ll be trying over in the Eagle Ford to get a better recovery factor out of that rock.

Basically, we're really -- I guess in summary, we’re far from being what I would characterize being in development mode. At the same time, we are drilling profitable wells and we’ve proven up acreage in both areas. And I really believe that where we're positioned now when we look forward to 2015 specially adding a rig into the Eagle Ford it will help if we add another rig to the Reeves area later on this year. We’ll be really setting the company up for some really dramatic growth in 2015.

With that, I’ll turn it over to Clay.

Clay Williams

Well, thank you, Mel. That’s good. Let’s start back to Eagle Ford a little bit. The Eagle Ford is laid down in the ocean and our acreage is at the same horizontal well level over this 140 miles. We're listed on the same subsea level believe it or not with the proper level when we list it Austin Chalk. Our Austin Chalk acreage basically is well and in many cases then we’re drilling the Eagle Ford directly under the Austin Chalks and generally using the same roads in some of the well path to save a little money upfront from the forefront. My wife gave me a dirty look. I must have said something wrong. She said no.

Anyhow, it’s pretty much home based though. We have a market. We have been selling the oil from Austin Chalk in this area for many-many years, so we know the buyers were comfortable. One thing we don’t have we had in Austin Chalk, we don’t have natural gas to speak out, so we don’t have any [indiscernible] gas, but the wells are proper and reasonable pay us and I would repeat this our least play is over 140 miles in length and generally 10 miles to 12 miles in width. And we have leased 140,000 acres which we believe is on -- it is on the trend. We believe it has very good chance producing that’s Robertson, Burleson and Lee County. And we probably have a few -- basically we have a few things to learn about completion.

The last 15 wells have averaged 514 barrels of oil and gas, mostly oil. We’ve got three rigs run in that area. We expect to drill about 30 wells by a year and we do have a potential on our acreage which we leased on the same trend for 800 or 900 wells in the future. We got to get chance. Let’s go to Delaware. The Wolfcamp is again the play in the Delaware basin that we’re falling. Well, over 80,000 acres. We’ve built over 100 wells in Reeves County. Many were vertical wells, so that we shifted all to horizontal which is much more profitable. The last 13 horizontal wells and their acreage blocks and they’re scattered more or less throughout, is averaged 856 barrels a day.

One thing I would add is we’re still in the learning curves so we think we'll have better results in the next -- and so that many wells in the future. That’s in the A and C. The C is seems to be where we would probably think looks the best. But there are several intervals; even I can tell from A to C that there is other intervals between A and C. So we have some formation in between. There will be some good fall back here. 3 rig problem, might be 4 rigs by year end and we will follow to drill 12 to 20 wells by year end with a remaining potential of 400. You may recall, we’ve built a pipeline for water, oil and natural gas and we’re not flaring any gas. Water injection is already happening, and the oil has gathered to a central location [indiscernible].

So in both cases, we see over 1,200 potential location. We have potential infrastructure in place to [indiscernible] oil gas and water. We have good markets in both cases, for oil and natural gas, and we have injection wells where we can dispose the water more efficiently.

We are happy with where we are. Interest is low, so a large part of our prices are own borrowed money. So the low interest rates make up a big difference, which is one reason for drilling within our physical capabilities, but I think we are.

With that I ask a question and I would say, Ron Gasser is here and Sam Lyssy is there. So we can take technical questions if you like. And if possible, let’s stay on track with mail in our [indiscernible] for financial. Gasser is here for technical. Thanks for tuning in.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Irene Haas of Wunderlich Securities. Your line is now open.

Irene Haas - Wunderlich Securities

My question for you guys is that you are probably one of those first movers in this Wolfbone play and you’ve drilled more than 100 wells today and you are still running around with a tiny little inventory of 400 locations. So I kind of want to ask you, when would you guys care to kind of address this spacing issue, once we obviously -- probably you got room for improvements and as you have mentioned, you have got Wolfcamp A and C working. And will then each of the Wolfcamp zone which you kind of actually expect multiple benches and all likely stuff and do you have a Bone Spring also play sort of superimposed on the Avalon base.

Ron Gasser

Yes, Irene. We talked about this last time. 400 well count basically comes from our 66,000 net acres that we have out there divided by 160 acres per well. So that’s the spacing. We’ve yet to test anything for smaller spacing taking it down to 80s. Clayton believes it's going to get down to 80 at some point in time. We have not done any work yet because we are still drilling to earn and hold acreage, and that’s our main priority out there right now.

As far as the benches go, we have second bone, third bone, Wolfcamp A, B and C, that are all perspective. And as you know we’ve done several Wolfcamp A, that seems to be the most profitable to this point, but we just completed our first Wolfcamp C and we’ve got three others in the work to see how it’s doing. And some other people have done second bone and third bone in and Wolfcamp B intervals. We’ve just yet to get to that, just because of where we are in our development mode. So yes, we still have all that potential there and at some point we'll start -- with our completion of the Wolfcamp C wells we'll start booking Wolfcamp C puds, and we'll just start growing that way and add more locations as we go.

Irene Haas - Wunderlich Securities

And when do you think you are actually have a good idea of what you might have captured, because it really kind of -- we are still early in the whole exploration story yet, even after three years. So you think it’s going to be another year or two before you really kind of have a more realistic tally of your drilling inventory?

Mel Riggs

Well, Irene, as we get the results of these four Wolfcamp Cs, we’re going to know a lot about the C and then we can go live. Like Ron said, we’ve drill at good locations there. To us -- we don’t feel like we need to put out a number. We already have 400 locations that's going to take us a long time to drill and there's just no need to speculate on a bunch of different potential zones. We believe there is going to be a lot there, but it does not -- we don’t see the need to that.

Clay Williams

I would only add, that when we leased we had geological reasons for buying the leases. So far there is nothing that has killed it as a whole.

Mel Riggs

We like it. I will say that. We like the area a lot and we tend drill it.

Operator

Our next question comes from Welles Fitzpatrick of Johnson Rice. Your line is now open.

Welles Fitzpatrick - Johnson Rice

It looks like and maybe I am reading this data wrong, but it looks like the most recent three Wolfcamp A results were a little bit shorter than the prior 10 that you guys had released. Is that true, were those a little bit on the lower end of the range?

Mel Riggs

Yes, they were. We had -- there is land issues obviously when you are drilling these horizontals in the way we are orienting -- the orientation of the wells. Ron would you address that the length and…

Ron Gassser

Yes, we calculate the length, completed length from the top perf to the bottom perf, and you are exactly right. The last three are probably about 1,000 foot shorter, or 700 to 1,000 foot shorter in completed length than the previous several wells we’ve done. And that’s simply land driven. From where we needed to drill a well to a hold the acreage to what was available to drill the lateral with.

Welles Fitzpatrick - Johnson Rice

And so then is it safe to assume that they are probably towards the lower end of the 65 to 85 completed well cost range?

Ron Gassser

You know, you don’t save that much. Yes, it’s towards the lower end, but you save a little bit on sand and drilling wells, there is not that much savings once we get down there and get everything all in. And that’s one thing we are trying to do in both of our plays, is put more sand in the ground. And we’re working towards getting that done.

Welles Fitzpatrick - Johnson Rice

And then shifting to the Eagle Ford; it looks like the last couple of wells, were Lee and Robertson. If I remember correctly, it gets a little bit thinner in Lee in Robertson; the shale is up a bit. Can you talk about what you saw on those wells and when you might get back there and do some more drilling around it? If I remember, in the third quarter you are planning on going back to Burleson?

Ron Gassser

Yes, and if you recall, basically we have got -- we did work across the entire acreage from Burleson, Robertson down in the Lee, to do the in-plays oil, and they are all real similar. We started off saying, there are going to be variabilities because of the distance between the rock. That’s just going to be there. So we have been trying to frac everything and complete it pretty much the same so we could see the variabilities and then react to that. And what we've seen is that, in Lee County, yes, they came on a little bit lower than expected, but we're getting a little bit less decline too, and maybe a little more water with the flow back. And we’re still trying to figure all that out. We don’t have anything done yet. But we are watching our competitors and we are seeing that they’re doing longer laterals and putting away twice amount of sand, and every once in a while they recently hit a home run. So we’re thinking if we go back in the Lee County that will be the first thing we try, it’s the longer lateral with double the sand. One thing I can tell you is we are happy with our economics in both plays, we'd like the two to three year payout in the 40% rate of return category and we are going to continue to develop with that as well as make one change at a time to see what works in different areas. We are adjusting our completion methods.

Welles Fitzpatrick - Johnson Rice

If I could sneak one last one in, is there any field levels scuttlebutt around that Atlantic ABC stack test that I believe they were doing, call it a quarter ago.

Ron Gassser

Well the last we heard is that there was no communication in between the A, B and the C. When they fraced them they didn’t see any communication and when they flowed them back they had different pressures and different rates. So that’s the last we've heard. And it’s hard to pull, what they’re doing off of public data, but we’re extremely interested in that also.

Operator

Our next question comes from the line of Ryan Oatman of SunTrust. Your line is now open.

Ryan Oatman - SunTrust

A couple of quick ones for me on the model here; in mid-May, you guys provided guidance of approximately 16,000 to 17,000 barrels of oil equivalent per day. Can you describe your comfortable level with that guidance and then also the capital program of 419?

Michael Pollard

This is Mike Pollard, Ryan. We are working on them now. We are going through and re-looking at all the existing wells as well as our curves for the future wells and we will have that guidance information available, hopefully within 10 days.

Ryan Oatman - SunTrust

Okay, that’s helpful there. And then on the expense side, I mean obviously a nice improvement there as well in terms of purging in at operating expense. Is it safe to say that that’s a good number for us to use moving forward kind of the 2Q and permit that we saw.

Michael Pollard

One of the factors is, your traditional repairs and maintenance, and those are very hard to estimate when they will occur. And this happened to be a fairly low quarter for that type of activity. I would not assume that we would stay in this $13, $50 range for the rest of the year but we still are comfortable in that $14 to $15 range.

Ryan Oatman - SunTrust

Okay, that’s helpful and then one, final one for me and I will hop back in the queue I mean on the G&A front, clearly a non-cash move this quarter looking at kind of first quarter and fourth quarter last year is that kind of a better number for us to use moving forward or is kind of this quarter’s 2Q better indication of what that looks like moving forward?

Mel Riggs

Yes, we'll have that own guidances as well but this was an usual quarter reserves added to the Delaware group as well as the Eagle Ford, new well reserves plus just improved pricing and reserves came up just caused quite a bit of additional future estimated cash flow from those projects, which is great for the investors and it happened and so like the Delaware it’s fully bested and so we have to any change in the period has to flow all the way into the P&L that quarter.

So, it’s very dynamic in hard it is but it is non-cash.

Ryan Oatman - SunTrust

I got you, what you are saying is that non-cash charge that uplift we saw was reflective of the better economics and the better outlooks for the wells that you are seeing right now.

Mel Riggs

That’s correct.

Operator

Thank you, our next question comes from the line of Adam Michael of Miller Tabak. Your line is now open.

Adam Michael - Miller Tabak

Hi, guys thanks for taking my questions. I’m going to start with the financial one, as far as hedging goes when the last time we did a conference call I think the curve was much lower and now I’m looking at 2015 I see prices in the mid to upper 90’s, what are your current thoughts on hedging and how do you play into proceeds like with oil hedges going forward?

Mel Riggs

Well we talked about this all the time and I think Clay is going to tell you he going to go to bar later and he is going to have an answer. But basically we think it’s still too early, I think with everything is going on we are really -- where we are with the balance sheet, our debt levels, we are really not that, I mean we don’t really feel the -- we are not compelled to have to hedge. We feel like that there is a lot of uncertainty still out there and there is a lot of potential upside. Clayton will take your view.

Clay Williams

If you look at the record we have done a pretty good job hedging and sometime in the past we can better foresee maybe what’s going. Today you have a reasonably stable situation in the Mid-East and we don’t anticipate because who knows what more trouble or interruption from oil flow yet these figures today have the supply and demand is determining newly altogether now the price of oil that production is roughly 95 million barrels a day, the demand is nearly that much, you are on a tide line so any interruption will make a substantial jam but as it is and things don’t change, we are pretty happy with the price of oil today and it lets us look forward, we'll say this, we believe that there is more potential for the price of oil to go up a price of ore to go up and really go down. While I’m pleased it is just a factor there is supply and demand, so we are producing pretty well worldwide all we can. Well that's healthy I think, it’s healthy to be in our business but hedging does not take any of that into account so we think would be a mistake to hedge, we did pretty good in hedging in the past when you had some future upside but now, you are almost future and negative profit in the hedging. So, I just don’t see any reason for doing it. Next?

Adam Michael - Miller Tabak

Okay, and if I can do one follow up question. I think I caught of hint of possibly adding a fourth rig in the Delaware Basin later this year and when I look at the capital structure of the company it’s completely different than it was even a year ago, you probably have one of the stronger balance sheets out there so we are just kind of wondering when do we hit the accelerator a little bit harder and put some more rigs to work?

Mel Riggs

That’s what we're doing. We are doing that in the Eagle Ford with a third rig that will spend one rig there $75 million of capital. We are talking about a fourth rig in Reeves later on, it won’t be a big it won't have an impact on guidance or anything like that other than maybe a little cost at the end of the year. We are going into 2015, we are clearly going to be spending a lot more money on the drilling side than we are spending today which we believe will translate in to a lot more production growth, reserve growth and then we also will continue to look at rationalizing assets, we have done that already that’s one reason our balance sheet is strong, we have been able to selloff different assets, they weren’t strategic, we are going to continue to look at that too and to raise other capital if we needed.

Operator

Thank you, our next question comes from Ravi Kamath of Sea Port Group. Your line is now open.

Ravi Kamath - Sea Port Group

Hey guys, good quarter. Couple of questions one, I know at one point you had your Glasscock and Sterling counties, you are considering that for sale and I guess given the recent Diamondback acquisition where a chunk of the acreage was in Glasscock county where they did a pretty nice acreage multiple, one was wondering if you would reevaluate selling that acreage and secondly, where does your acreage in Glasscock where is it versus the sometime bang is acquired? Thank you.

Mel Riggs

First of all I believe it was [indiscernible] acreage we are pretty fast east of the acreage they acquired, so I am not sure how comparable that is. Ron, do you want to comment?

Ron Gasser

Yes, we were east.

[Multiple Speakers]

Mel Riggs

That acquisition from what I understand, that acquisition is west of our acreage and so I don’t know if -- we’re still evaluating that area. We still have production there. We have Wolf area production. We have held it to certain point here. We don’t have plans on how to do a lot of drilling there. Yes, I mean, we plan on selling that acreage at some point.

Ravi Kamath - Sea Port Group

Secondly on the 100,000 acreage in the Eagle Ford, can you maybe just ballpark break that down by the three main counties Robertson, Lee, and Burleson?

Mel Riggs

Yes, you got that?

Ron Gasser

Yes, it’s actually 173,000 acres.

Mel Riggs

It’s great. This is a great well, but [indiscernible] our land operation.

Ron Gasser

And you've got about 95,000 in Burleson, 35 in Robertson and about 28 in Lee County.

Ravi Kamath - Sea Port Group

Is that gross or net?

Ron Gasser

Net.

Mel Riggs

It’s net.

Ravi Kamath - Sea Port Group

Okay. How much was Lee I am sorry?

Ron Gasser

28.

Ravi Kamath - Sea Port Group

Okay 95, 35, and 28, okay great. And then last one, can you talk about, what’s your services cost? Are you seeing any inflation in overall existing each of the basins?

Mel Riggs

Well, one problem we have is our subsidiary disk are drilling they are trying to raise the drilling cost on us, but we’re going to back [Indiscernible] Chairman of the Board can handle that one, let Ron talk about everything else.

Ron Gasser

Yes, we’re seeing a little creep coming up and we expected it. Recently, there is sand [indiscernible] tightening up a little bit, but we're working on our way around that, but we are seeing a little bit of creep in our cost and we fully expected to see that. That's likely of the price oil its supply and demand driven, so we’re in a boom time. So we expect to see some of that at different points.

Ravi Kamath - Sea Port Group

And what are your current well cost in the horizontal Eagle Ford and the horizontal Wolfcamp?

Ron Gasser

Yes, our Eagle Ford 100% right now, our AFE is for 5.725 million and for our longer laterals in Reeves County we are at 8.5 million. And for our shorter laterals which are just straight up and down in section line we’re at 6.5 million drilling complete.

Operator

Thank you, our next question comes from Andrew Smith of Global Hunter Securities. Your line is now open.

Andrew Smith - Global Hunter Securities

Guys, in Reeves County, are you planning to drill at Bone Spring well this year or just going to stick with the well?

Mel Riggs

We have been talking about it but I don’t -- I think right now, we deferred that. I mean we’ve drilled the Bone Springs. We leave behind deeper zones. The play doesn’t make right now.

Clay Williams

One thing I would add to that only that we have made several penetration goes to the Bone Springs on all our Wolfcamp wells, so we are gaining information, it is being logged as we drill -- we’re logging through for the deeper problem. Our deeper opportunity so at some point we'll be able to sit down and look at existing wells and outline what we think is by far than most realistic outline they maybe several Bone Springs white fields and maybe even Cherry Canyon somewhere. But when we’ve drilled, when we developed our Wolfcamp we’ll be able to look at our logs and there is a lot more we don’t know about to shallow horizons and we know they are after, there is just missed later one.

Andrew Smith - Global Hunter Securities

It is perspective and we’ll get to it later.

Operator

Thank you. Our next question comes from the line of Andrew Gundlach of First Eagle. Your line is now open.

Andrew Gundlach - First Eagle

If my numbers are correct, I believe your recent Eagle Ford wells had a slightly lower IP than previously and you might have addressed this in an earlier question about and with respect to the thinner and shallower areas in the counties that you were going, but my question was why and if it had to do with your delineation strategy as you cut off other competitors that are coming into the counties where you are?

Mel Riggs

Well, as far as the rate goes, we had one in Robertson that was lower than the average and two in Lee that were lower than the average and they are totally two different thicknesses of the Eagle Ford. So that maybe not be the reason why we are not making a little more water in Lee county and maybe frac water we are testing it and maybe mixing with the Chalk. We are not sure we’re still trying to figure that out. But still the wells with those rates are still economic. They are not actually economic as our model and where as I mentioned, we think we’re seeing less of a decline with the lower initial rate. So the reserves currently are not that lower than the higher initial rate once that fall harder. We think it’s a function on how we complete them. We think that we can learn from this and change our completion methods in different areas because one size -- one think we knew going in one size won’t fit off and we’re learning as we go and that’s why we think we got the lower initial rates but we're pretty confident that we can change our methods and get back to the target of the 2 to 3 or payout in the 40% rate of return economic.

Clay Williams

I might add to that, but this is over 140 miles in link they are probably going to be similarities that change and some may come and go so as we gather information, there will be some areas we like better than some others. We are not that far along but it’s nice to have 200 square miles of leases and we are drilling the length of it, so we are still as Mel said so aware of the learning curve, we are about a third of the way up and we got a lot more to learn but from a happy standpoint they are all commercial wells at this point.

Mel Riggs

Yes this isn't time to be pushing the panic button believe me, this is [indiscernible]

Andrew Gundlach - First Eagle

Sorry Mel, I’m not panicking at all, my question was more, were you are drilling these wells as part of your, the last call you talked about accelerating delineation as others come in and I’m just curious if these wells were chosen because of that strategy and are on fringes of what -- of the 130 miles and it is what it is or what it is the drilling strategy today that’s really the question. I’m not panicking at all.

Clay Williams

We probably have several hundreds of leases, several hundreds of different land owners over that period of time so a lot of your drilling goes to meet the requirements of each separate lease. So that has a lot to do and the lease exploration when I say. So, that governs the speed of drilling and so we have many decisions to make and we are drilling those that we think are the best well still have some shorter term leases we feel like it’s prudent to drill them early and it’s hard to really visualize a 140 miles of one block that’s why we have and one thing we will know it won't always be the same over 140 miles. And so, it’s the same formation led down at the same time in the ocean and that gives you a lot of hope of symmetry but there is still going to be some changes at that. And then there sure have been changes in each oil and gas lease so we have to follow those maybe almost first.

Mel Riggs

Yes, Andrew, really it wasn’t due to any kind of outside operator drilling well, we are just trying to understand our acreage, and trying to prove that [indiscernible]. From one end to the other end and like we said there will be variability Clayton explained it pretty well, and we will figured it out we feel like we are going to really figure it out. We think the oil in place is very similar across the acreage is just how do we get what’s the recovery, how do we increase the recovery in each area so.

Andrew Gundlach - First Eagle

Understood. Okay, that’s very good. Then the other question is, actually sorry one other question there, when you say you would like to change your methods, your completion methods and techniques, what specifically are you thinking about changing if you wouldn’t mind commenting on a call?

Mel Riggs

More sand is the first thing we are going to try and then we are going to also do some culture in spacing to see how that effects production so that we can [indiscernible] and fracking them at the same time pretty close to the same time to keep the energy in the rock to see if that affects the productivity. Basically, we feel in certain areas we have got enough wells that we have a baseline decline and then if we start changing a few things we can see how that affects the performance of the completion and so we are going to start changing that and say if we can start optimizing. We have tried a few things with our, we have modeled this and tried what the model says and with limited success so we are starting to do stuff as other operators are doing and increase the sand and the biggest part of that.

Andrew Gundlach - First Eagle

Sure, and one last question, when you say thinner, what is the net pay in these areas relative to the core?

Mel Riggs

Well, I think we go from probably 85 feet in the east down to 30 feet way down south of what we consider paid not the total thickness, but what we consider in the Eagle Ford.

Andrew Gundlach - First Eagle

Okay. Got it, that’s helpful. Alright, and then last call you spoke a little bit about thinking about strategic thoughts around your pipeline, are there any updates to your thoughts as you think about all the assets that you have?

Mel Riggs

Right now our objective is to continue to control and own 100% of that pipeline and we want to fill it up with our own product and that’s the plan right now. We have been approached, we have talked to a lot of different companies that wanted to do stuff and we're just not ready, when you put more oil and natural gas into our rigs system. Clayton, did well back years ago with Clayton gas owners' facility.

Clay Williams

Biggest mistake I ever made was selling my gas pipeline, if I get I am not going to sell those quick.

Andrew Gundlach - First Eagle

I hear you on that Clayton, but in this crazy MLP world of insane valuations, there is a lot of money going around that can just build one that you have to be careful of too.

Mel Riggs

Well I wouldn’t argue that depends, and my experience [indiscernible] but depends on the opportunity where there is some good results and nobody is picking up the reserves as a plan investment time you get it, and I would like to do more of that but we have not seen the opportunity label and we have had some good experience in that and as always try to expand it but there is a lot of people doing it and I can't say anymore on that. I wish I could have more of it.

Mel Riggs

We'll keep an eye on it, see what happens.

Operator

Thank you. And I am not showing any further questions at this time. I would like to turn the call back over to Mr. Williams for any closing remarks.

Clay Williams

Thank you very much. Talk to you next time.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, you may all disconnect. Have a great day everyone.

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Source: Clayton Williams Energy's (CWEI) CEO Clay Williams Q2 2014 Results - Earnings Call Transcript
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