Clayton Williams Energy: Significant Growth Aimed at Oil Production

| About: Clayton Williams (CWEI)

Clayton Williams Energy Inc. (NASDAQ:CWEI) is an oil and gas exploration and production company with focus on Texas, Louisiana, and New Mexico. The Midland, Tex.-based company has a specialized 3-D seismic expertise in finding oil and gas reservoirs. As of December of 2009, it has a total of 33.6 MMboe; 62% is in liquids. Clayton Williams has a market cap of $1 billion.

There was a major change in the objectives of this company in 2009, when it locked in vendor costs for two years, and made a purchase to acquire drilling rigs. It also hedged its business and made strategic purchases.

Clayton Williams has two locations considered to be its holdings: The Permian Basin has year-end reserves of 20 MMboe; is 59% of the company's proved reserves; and contains 188,000 net acres; the Gidding area has 8.7 MMboe; has 26% of proven reserves, and contains over 200,000 acres. The latter location has great potential in the Eagle Ford Shale.

Giddings was drilled vertically in the 1970s, and by the 1990s a progression to horizontal drilling was seen. Clayton Williams has extensive experience in this area, as it has drilled more than 325 gross horizontal wells to date. In 1996, it began doing 3-D seismic readings and found 78Bcf in the Bossier sands. Three new wells were opened in Bossier in 2005, and although this area has been deferred, it still has potential at a later date if or when natural gas prices rebound. It has also drilled three new wells in the Eagle Ford, and is expecting further development in this area.

The Austin Chalk had net production of 3690 BOE in the third quarter of 2010. Well economics are good here, as they have expected 100 Mboe in reserves. Payout is expected in 1.9 years. They have 27 proved locations, with up to 40 possible; net position here is 171,300 acres.

Eagle Ford shale is a coveted area due to the oil reserves. Clayton Williams currently has net 166,400 acres, and three wells drilled and producing, which are 100% working interest. In the fourth quarter of last year it began drilling a fourth.

Three non-commercial wells have been drilled in the Deep Bossier Trend. A net position of 168,800 net acres is held here. This area has been deferred due to low natural gas prices. Clayton Williams is very optimistic on the potential of this area.

8949 BOE is the average net production from third quarter of 2010 in the Permian Basin. There are proven 200 net positions here, with hundreds more probable and possible locations. This location is mostly oil, and accounts for well over half of company production. Clayton Williams Jr. has decades of experience here. He initially started drilling this area for gas, but has changed to oil coincidental with the margin improvement of oil compared to gas.

Andrews County Wolfberry has gross reserves of 133MBoe. Current daily production from this area is 4400 gross and 3280 net Boe. A 2.5 year payout is expected. Clayton Williams is planning an additional 96 wells in 2011.

The Fuhman-Mascho area has 44 wells currently producing. Net production in this area is 747 Boe/d. Clayton Williams has 83% working interest. Expectations of well payout is four months, based on $80 oil and $4.5 gas.

Halley Field has 8,264 net acres. Located in Winkler County, Tex. with over 164 Mmboe cumulative production to date, it has 91 active wells, five of which were drilled last year.

Loco Hills, New Mexico was an acquisition from Conoco (NYSE:COP) in 1986. Payout is expected in 25 months. Gross reserves are 98 Mboe. The company planned 25 wells here from the beginning of Q4 2010 through 2011.

Clayton Williams also has production in South Louisiana. In 3Q 2010, average daily net production was 1788 Boe, with proved reserves of 1.2Mmboe. There are three potential locations. This area has 4% of Clayton Williams proved reserves.

The Whittier Area in California was abandoned by Chevron (NYSE:CVX) in 1991. Before, production here was 900 BOPD. There were significant resources before abandonment: 1,550 acre leases were awarded to Matrix Oil and Clayton Williams. Of the 60 MMboe recovered before it was abandoned, it is estimated that 10 percent of the oil in place is from sandstone and shale rock zones.

In summary, Clayton Williams has a production mix of 62% oil and 38% natural gas. It is planning to continue increasing oil production until gas becomes more profitable. From 2007 to 2009 there was a significant draw down of proven reserves from 48.5 MMBOE to 33.6 MMBOE. It will continue to invest extensively in the Permian Basin and Eagle Ford.

Last year there was a significant uptick in the company's production from the first quarter of last year (13546 BOE to (15777 BOE)) to the fourth quarter of 2010. Oil production made up the majority of increased production.

I think this company's prospects look good going forward. It has continued to take advantage of higher oil prices and continued to hedge up to 2012 to protect to the downside. OIl looks to possibly get support at $86/barrel, and if this happens, many think the price will continue to $100. Although we do not know for sure if natural gas prices will rebound in the short term, if they do Clayton Williams has the ability to significantly increase production.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.