<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/XX/
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
COMMISSION FILE NO. 0-20838
CLAYTON WILLIAMS ENERGY, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2396863
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6 DESTA DRIVE, SUITE 3000, MIDLAND, TEXAS 79705
----------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code: (915) 682-6324
NOT APPLICABLE
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /XX/ No / /
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF
NOVEMBER 6, 1996...................................... 7,498,216
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 ................................... 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1996 and 1995 ...... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 ....................... 5
Notes to Consolidated Financial Statements ................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..................... 10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................ 16
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
2
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents ................ $ 1,241 $ 1,303
Accounts receivable:
Trade, net .......................... 845 1,184
Affiliates .......................... 155 738
Oil and gas sales ................... 7,603 6,615
Inventory ................................ 418 505
Other .................................... 635 565
--------- -----------
10,897 10,910
--------- -----------
PROPERTY AND EQUIPMENT
Oil and gas properties, successful
efforts method .......................... 345,904 325,268
Natural gas gathering and processing
systems ................................. 7,637 6,951
Other .................................... 9,526 9,460
--------- -----------
363,067 341,679
Less accumulated depreciation, depletion
and amortization ........................ (278,377) (259,533)
--------- -----------
Property and equipment, net ......... 84,690 82,146
--------- -----------
OTHER ASSETS ................................. 60 105
--------- -----------
$ 95,647 $ 93,161
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable:
Trade ............................... $ 8,219 $ 6,911
Affiliates .......................... 647 346
Oil and gas sales ................... 6,311 4,813
Current maturities of long-term debt ..... 118 11,509
Accrued liabilities and other ............ 1,161 1,048
--------- -----------
16,456 24,627
--------- -----------
LONG-TERM DEBT ............................... 36,522 33,538
--------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.10 per
share; authorized - 3,000,000 shares;
issued and outstanding - none ........... - -
Common stock, par value $.10 per share;
authorized - 15,000,000 shares;
issued and outstanding - 7,490,321
shares in 1996 and 7,409,664 shares
in 1995 ................................ 749 741
Additional paid-in capital ............... 53,264 52,912
Retained deficit ......................... (11,344) (18,657)
--------- -----------
42,669 34,996
--------- -----------
$ 95,647 $ 93,161
--------- -----------
--------- -----------
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
------ ------ ------ ------
REVENUES
Oil and gas sales ......... $ 14,619 $ 9,911 $ 42,136 $ 33,133
Natural gas services ...... 965 777 2,914 4,494
-------- -------- -------- --------
Total revenues ....... 15,584 10,688 45,050 37,627
-------- -------- -------- --------
COSTS AND EXPENSES
Lease operations .......... 3,647 3,245 10,808 10,231
Exploration ............... 236 431 515 863
Natural gas services ...... 792 588 2,363 3,038
Depreciation, depletion
and amortization ......... 5,891 6,201 17,743 20,011
Impairment of property
and equipment ....... - - 1,186 -
General and administrative 728 722 2,399 2,739
-------- -------- -------- --------
Total costs and
expenses ............ 11,294 11,187 35,014 36,882
-------- -------- -------- --------
Operating income
(loss) .............. 4,290 (499) 10,036 745
Interest expense .......... 840 1,233 2,783 4,224
Other income (expense) .... 20 5,949 60 6,198
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES .... 3,470 4,217 7,313 2,719
INCOME TAX EXPENSE ............ - - - -
-------- -------- -------- --------
NET INCOME .................... $ 3,470 $ 4,217 $ 7,313 $ 2,719
-------- -------- -------- --------
-------- -------- -------- --------
Net income per common share ... $ .45 $ .72 $ .96 $ .47
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common
shares outstanding .......... 7,668 5,842 7,588 5,750
-------- -------- -------- --------
-------- -------- -------- --------
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 7,313 $ 2,719
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation, depletion and amortization . . . . . . . . 17,743 20,011
Impairment of property and equipment . . . . . . . . . . 1,186 -
Exploration costs. . . . . . . . . . . . . . . . . . . . 406 807
(Gain) loss on sale of property and equipment, net . . . (21) (5,967)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 335 235
Changes in operating working capital:
Accounts receivable. . . . . . . . . . . . . . . . . . . (66) 2,068
Accounts payable . . . . . . . . . . . . . . . . . . . . 3,006 113
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 145 (298)
-------- --------
Net cash provided by operating activities. . . . . . . 30,047 19,688
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment . . . . . . . . . . . . (25,252) (15,325)
Proceeds from sale of property and equipment. . . . . . . . 3,525 7,925
-------- --------
Net cash used in investing activities. . . . . . . . . (21,727) (7,400)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt. . . . . . . . . . . . . . . . (8,407) (16,281)
Proceeds from issuance of common stock. . . . . . . . . . . 25 3,810
-------- --------
Net cash used in financing activities. . . . . . . . . (8,382) (12,471)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . (62) (183)
CASH AND CASH EQUIVALENTS
Beginning of period . . . . . . . . . . . . . . . . . . . . 1,303 1,431
-------- --------
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 1,241 $ 1,248
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amounts capitalized. . . . . $ 2,675 $ 4,318
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION
Clayton Williams Energy, Inc. (the "Company"), a Delaware corporation,
was incorporated in September 1991 for the purpose of consolidating and
continuing certain operations previously conducted by affiliates of Clayton
W. Williams, Jr. ("Mr. Williams"). Concurrent with the completion of the
initial public offering of the Company's common stock on May 26, 1993, these
operations were consolidated, and the Company succeeded to most of the oil
and gas properties, exploration and development operations and the natural
gas gathering and marketing operations of Mr. Williams and his affiliates.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and balances
associated with the consolidated operations have been eliminated.
The Company is primarily engaged in the exploration for and development
and production of oil and natural gas in South and East Texas, southeastern
New Mexico and the Texas Gulf Coast.
In the opinion of management, the Company's unaudited consolidated
financial statements as of September 30, 1996 and for the interim periods
ended September 30, 1996 and 1995 include all adjustments, consisting only of
normal recurring accruals, which are necessary for a fair presentation in
accordance with generally accepted accounting principles. These interim
results are not necessarily indicative of the results to be expected for the
year ending December 31, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's 1995 Form 10-K.
2. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
Secured Bank Credit Facility
(matures July 31, 1999):
Revolving loan . . . . . . . . . . . $36,500 $17,000
Term loan. . . . . . . . . . . . . . - 27,825
Subordinated Debt Facility. . . . . . . - -
Other . . . . . . . . . . . . . . . . . 140 222
------- -------
36,640 45,047
Less current maturities . . . . . . . . 118 11,509
------- -------
$36,522 $33,538
------- -------
------- -------
6
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1996
(UNAUDITED)
SECURED BANK CREDIT FACILITY
Effective July 18, 1996, the Company and its banks amended and restated
the secured bank credit facility to combine the term loan and revolving loan
facilities into one reducing revolver facility, the limit of which is
determined by a borrowing base established by the banks. The borrowing base
is subject to a monthly commitment reduction of $1 million beginning July 31,
1996. At September 30, 1996, the adjusted borrowing base was $49 million,
and the outstanding indebtedness under the secured bank credit facility was
$36.5 million, resulting in an availability at that date of $12.5 million.
The borrowing base and the monthly commitment reduction are scheduled to be
redetermined in November 1996 and at least semi-annually thereafter; however,
the Company or the banks may request such redeterminations at any other time
during the year. Any redetermination will be made at the discretion of the
banks. If, at any time, outstanding advances plus letters of credit exceed
the borrowing base, the Company will be required to (i) pledge additional
collateral, (ii) prepay the excess in not more than five equal monthly
installments or (iii) elect to convert the entire amount of the facility to a
term obligation based on amortization formulas set forth in the loan
agreement. The loan agreement requires the Company to pledge its oil and gas
properties to secure advances under the secured bank credit facility.
Based on the terms of the amended loan agreement, no portion of the
outstanding balances at September 30, 1996 is deemed to be a current
liability since the outstanding balances are less than the stated borrowing
base, as adjusted for the monthly commitment reductions scheduled to occur
within the next year. Therefore, current maturities of long-term bank debt,
as set forth in the accompanying consolidated balance sheet, reflect a
reduction of $11.4 million from the comparable balances at December 31, 1995.
All outstanding balances on the secured bank credit facility may be
designated, at the Company's option, as either "Base Rate Loans" or
"Eurodollar Loans" (as defined in the agreement), provided that not more than
two Eurodollar traunches may be outstanding at any time. Base Rate Loans
will bear interest at the fluctuating Base Rate plus a Base Rate Margin
ranging from 0% to 1/2% per annum, depending on levels of outstanding
advances and letters of credit. Eurodollar Loans will bear interest at the
LIBOR rate for a fixed period of time elected by the Company plus a
Eurodollar Margin ranging from 1.25% to 2% per annum. At September 30, 1996,
the Company's indebtedness under these facilities consisted of $500,000 of
Base Rate Loans at a rate of 8.6% and $36 million of Eurodollar Loans at a
rate of 7.2%.
In addition, the Company pays the banks a commitment fee equal to 1/2%
per annum on the unused portion of the revolving loan commitment. Interest
and fees are payable quarterly, and all outstanding principal and interest
will be due July 31, 1999.
SUBORDINATED DEBT FACILITY
In June 1995, the Company obtained a commitment from the Agent bank in
its secured bank credit facility to loan the Company up to $5.5 million under
a subordinated debt facility which provides for interest at a minimum rate of
14.25% per year, plus certain commitment fees, with interest payable monthly
and principal payable at maturity on July 31, 1998. The commitment
originally expired on December 31, 1995, but was extended to December 31,
1996. The entire amount of the facility may be prepaid without penalty or
premium at any time prior to maturity, but only if the Company obtains the
7
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1996
(UNAUDITED)
approval of the lenders in the secured bank credit facility. The Company
does not plan to utilize this subordinated debt facility prior to its
expiration.
3. FORWARD SALE TRANSACTIONS
The Company accounts for forward sale and put option arrangements as
hedging activities and, accordingly, gains and losses are included in oil and
gas revenues in the period the hedged production is sold. Included in oil
and gas revenues during the nine months ended September 30, 1996 are net
losses from these activities totaling $1,154,000 (comprised of losses of
$1,297,000, partially offset by gains of $143,000). None of the Company's
future oil or gas production is subject to hedging arrangements at the
present time.
4. STOCK COMPENSATION PLANS
In March 1996, the Company granted non-qualified options to purchase
121,500 shares of common stock to certain of its employees under the 1993
Stock Compensation Plan ("1993 Plan"). The options, which have an exercise
price of $3.25 per share (market value at date of grant), are exercisable at
a rate of 25% per year and expire seven years from the date of grant. In
June 1996, the Company amended the 1993 Plan to increase the number of shares
reserved for issuance thereunder from 298,200 shares to 898,200 shares.
In May 1995, the Company's Board of Directors adopted two stock
compensation plans, one for selected officers and one for outside directors
of the Company. These plans permit the Company to pay all or part of
selected executives' salaries and all outside director's fees in Common Stock
in lieu of cash. During the nine months ended September 30, 1996, the
Company issued Mr. Williams 60,245 shares of Common Stock in lieu of cash
compensation aggregating $289,716, and issued 10,002 shares to three outside
directors in lieu of cash compensation aggregating $45,000. Subsequent to
September 30, 1996, the Company issued Mr. Williams an additional 5,598
shares and issued an aggregate of 1,579 shares to three outside directors in
lieu of cash compensation aggregating $78,641.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." SFAS 123 establishes a fair value method and
disclosure standards for stock-based employee compensation arrangements, such
as stock compensation and stock option plans. As allowed by SFAS 123 the
Company will continue to follow the provisions of Accounting Principles Board
Opinion No. 25 for such stock-based compensation arrangements, and will
disclose the pro forma effects of applying SFAS 123 for 1995 and 1996 in its
1996 annual financial statements. Such pro forma effects on results of
operations for 1995 and the nine month period ended September 30, 1996 are
not expected to be significant.
5. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based on the weighted average
number of common and common equivalent shares, if dilutive, outstanding
during each period. Common stock equivalents were not included in the
computation of net income per share in the 1995 periods since the effect was
anti-dilutive.
8
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1996
(UNAUDITED)
6. SALE OF ASSETS
In January 1996, the Company sold its rights to the Buda and Georgetown
formations under approximately 28,000 net acres in Robertson County, Texas
for $3.5 million. Certain leases covered by the sale must be extended during
1996 and the Company estimates that it will be required to spend, in the
aggregate, approximately $550,000 in this effort. The Company also granted
the purchaser the option to acquire additional Buda and Georgetown rights
under approximately 36,000 net acres in Burleson County, Texas, which option
was subsequently released by the purchaser. The net proceeds were used to
repay indebtedness on the secured bank credit facility, resulting in an
increase in funds then available for borrowing of $2.9 million. No gain or
loss was recognized on the sale.
7. IMPAIRMENT OF PROPERTY AND EQUIPMENT
During the quarter ended June 30, 1996, the Company revised its estimates
of proved oil and gas reserves attributable to one undeveloped location in
the Texas Gulf Coast area. As a result, the Company recorded a provision for
impairment of property and equipment of $1.2 million in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets."
8. INCOME TAXES
Although the Company recorded net income of $7.3 million for financial
reporting purposes during the nine months ended September 30, 1996, no
provision for income tax expense is required since the Company has net
operating loss carryforwards of approximately $32 million available to offset
any taxable income generated by the Company during 1996. A valuation
allowance against these net operating loss carryforwards was recorded at
December 31, 1995.
9. CHANGES IN AUTHORIZED CAPITAL
In October 1996, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock from 10,000,000
shares to 15,000,000 shares and to authorize the issuance of 3,000,000 shares
of preferred stock, $.10 par value per share, on terms and preferences to be
determined by the Board of Directors.
10. OFFERING OF COMMON STOCK
In October 1996, the Company filed a registration statement with the
Securities and Exchange Commission for an offering of 1,250,000 shares of
Common Stock (the "Offering"). Proceeds from the Offering, if consummated,
will be used initially to reduce the Company's outstanding indebtedness under
the secured bank credit facility.
9
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 1996
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company's primary focus has historically been its horizontal drilling
program in the Cretaceous Trend (the "Trend") which extends from South Texas
through East Texas, Louisiana and other southern states and includes the
Austin Chalk formation. Oil and gas production in the Trend is generally
characterized by a high initial production rate, followed by a steep rate of
decline. In order to maintain or expand its oil and gas reserve base, the
Company must find and develop or acquire proven reserves sufficient to
replace those being depleted through current production.
The Company's operational focus for the remainder of 1996 and 1997 will
be the continued drilling of Austin Chalk wells on a lease block (the "North
Giddings Block") which the Company has assembled in the updip area of the
Giddings Field in east central Texas. In addition, the Company believes,
based on initial 2-D seismic surveys, that a portion of the North Giddings
Block is on-trend with the Cotton Valley pinnacle reef play. Successful
wells have been drilled in the Cotton Valley formation approximately 24 miles
northeast of the North Giddings Block. The Company has planned an
exploration project in three phases (the "Cotton Valley Exploratory Project")
to explore for potential reserves in this formation. The first phase is a
proprietary 3-D seismic survey covering portions of the North Giddings Block.
The second phase is the interpretation of the seismic data to delineate any
drilling opportunities in the Cotton Valley formation. The third phase would
be the exploratory drilling of any delineated prospects. To date, the
Company has committed to conduct a seismic survey covering approximately
20,000 acres in Robertson County at a cost of approximately $3.1 million,
including interpretation. The Company anticipates that the survey will be
completed during the first quarter of 1997 and that the resulting data will
be interpreted during the second quarter of 1997. The Company may conduct
additional surveys covering other portions of the North Giddings Block. The
Company's ability to drill any delineated prospects will depend upon the
availability of capital and other factors that may be beyond its control.
The following table sets forth certain operating information of the
Company for the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
------ ------ ------ ------
OIL AND GAS PRODUCTION DATA:
Oil (MBbls)..................... 521 422 1,601 1,376
Gas (MMcf)...................... 1,367 1,737 4,183 5,377
MBOE(1)......................... 749 712 2,298 2,272
AVERAGE OIL AND GAS SALES PRICES(2):
Oil ($/Bbl)..................... $21.19 $16.89 $19.76 $17.40
Gas ($/Mcf)..................... $ 2.62 $ 1.63 $ 2.48 $ 1.70
OIL AND GAS COSTS ($/BOE PRODUCED):
Lease operations................ $ 4.87 $ 4.56 $ 4.70 $ 4.50
Oil and gas depletion........... $ 7.59 $ 8.45 $ 7.46 $ 8.51
General and administrative...... $ 0.97 $ 1.01 $ 1.04 $ 1.21
NET WELLS DRILLED:
Horizontal wells................ 4.0 3.0 17.2 18.5
Vertical wells.................. - - 1.1 -
- ---------------
(1) Gas is converted to barrel of oil equivalents (BOE) at the ratio of six Mcf
of gas to one Bbl of oil.
(2) Includes effects of hedging transactions.
10
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995
REVENUES
Oil and gas sales increased 47% from $9.9 million in 1995 to $14.6 million
in 1996 due primarily to a 23% increase in oil production, a 25% increase in oil
prices (net of hedging losses), and a 61% increase in gas prices. These
benefits were offset in part by a 21% decline in gas production. Production
from wells completed subsequent to September 30, 1995 accounted for
approximately 42% of total oil production for the 1996 period, which more than
offset the effects of steep production declines from previously existing Trend
wells.
Revenues from natural gas services increased 24% from $777,000 in 1995 to
$965,000 in 1996 due primarily to additional revenues generated in 1996 related
to a gas plant and three gathering systems acquired during 1996, and offset in
part by a reduction in revenues attributable to the sale of the Company's two
principal gas gathering and processing systems in August 1995.
COSTS AND EXPENSES
Lease operations expenses increased 13% from $3.2 million in 1995 to $3.6
million in 1996 while production on a BOE basis increased 5%, resulting in an
increase in lease operations expenses on a BOE basis from $4.56 per BOE in 1995
to $4.87 per BOE in 1996. Such increase was due primarily to higher production
taxes resulting from a 47% increase in oil and gas sales.
Although exploration costs were relatively insignificant during each of
the three month periods ended September 30, 1995 and 1996, the Company
expects exploration costs to increase significantly during 1997 due to the
initiation of the Cotton Valley Exploratory Project. To date, the Company
has committed to spend approximately $3.1 million to conduct and evaluate a
3-D seismic survey covering approximately 20,000 acres in the North Giddings
Block. In addition, the Company may conduct additional surveys covering
other portions of the North Giddings Block and may drill one or more
exploratory wells on any prospects which result from such surveys. Because
the Company follows the successful efforts method of accounting, the
Company's results of operations may be adversely affected during any
accounting period in which such costs are incurred and expensed.
Depreciation, depletion and amortization ("DD&A") expense decreased 5% from
$6.2 million in 1995 to $5.9 million in 1996 due primarily to a 10% decline in
the Company's average depletion rate per BOE, offset in part by a 5% increase in
BOE production. Under the successful efforts method of accounting, costs of oil
and gas properties are amortized on a unit-of-production method based on
estimated proved reserves. The lower depletion rate is attributable to a
combination of higher proved reserves from newly completed wells and lower
depletable costs resulting from the impairment of certain producing properties
in October 1995 and June 1996 pursuant to Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets" ("SFAS
121"). As a result, the average depletion rate declined from $8.45 per BOE in
1995 to $7.59 per BOE in 1996.
Costs of natural gas services increased 35% from $588,000 in 1995 to
$792,000 in 1996 due primarily to additional costs incurred in 1996 related to a
gas plant and three gathering systems acquired during 1996, and offset in part
by a reduction in costs attributable to the sale of the Company's two principal
gas gathering and processing systems in August 1995.
INTEREST EXPENSE AND OTHER
Interest expense decreased 30% from $1.2 million in 1995 to $840,000 in
1996 due primarily to lower average levels of indebtedness on the Company's
secured bank credit facility and, to a lesser extent, lower average interest
rates. The average daily principal balance outstanding on such facility during
the third quarter of 1996 was $38.0 million compared to $50.4 million in 1995.
The effective annual interest rate on bank debt during the 1996 quarter was 9.0%
compared to 10.2% in 1995. Proceeds from the sales of assets in August 1995 and
January 1996 and the sale of Common Stock through a shareholder rights offering
in September 1995, which aggregated approximately $15 million, were used to
reduce bank indebtedness.
11
<PAGE>
Other income decreased from $5.9 million in 1995 to $20,000 in 1996. In
August 1995, XCEL Gas Company, a general partnership in which the Company
owned a 77% interest, sold its interest in a gas gathering system, and the
Company sold its 43% interest in the El Campo gas processing system, for
aggregate net proceeds of $7.7 million, resulting in a combined gain on sale
of property and equipment of $6.0 million, net to the Company.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995
REVENUES
Oil and gas sales increased 27% from $33.1 million in 1995 to $42.1 million
in 1996 due primarily to a 16% increase in oil production, a 14% increase in oil
prices (net of hedging losses), and a 46% increase in gas prices. These
benefits were offset in part by a 22% decline in gas production. Production
from wells completed subsequent to September 30, 1995 accounted for
approximately 37% of total oil production for the 1996 period, which more than
offset the effects of steep production declines from previously existing Trend
wells.
Revenues from natural gas services decreased 36% from $4.5 million in 1995
to $2.9 million in 1996 due primarily to the sale of the Company's two principal
gas gathering and processing systems in August 1995, and offset in part by
additional revenues generated in 1996 related to a gas plant and three gathering
systems acquired in 1996.
COSTS AND EXPENSES
Lease operations expenses increased 6% from $10.2 million in 1995 to $10.8
million in 1996 while production on a BOE basis increased 1%, resulting in an
increase in lease operations expenses on a BOE basis from $4.50 per BOE in 1995
to $4.70 per BOE in 1996. Such increase was due primarily to higher production
taxes resulting from a 27% increase in oil and gas sales.
Although exploration costs were relatively insignificant during each of
the nine month periods ended September 30, 1995 and 1996, the Company expects
exploration costs to increase significantly during 1997 due to the initiation
of the Cotton Valley Exploratory Project. To date, the Company has committed
to spend approximately $3.1 million to conduct and evaluate a 3-D seismic
survey covering approximately 20,000 acres in the North Giddings Block. In
addition, the Company may conduct additional surveys covering other portions
of the North Giddings Block and may drill one or more exploratory wells on
any prospects which result from such surveys. Because the Company follows the
successful efforts method of accounting, the Company's results of operations
may be adversely affected during any accounting period in which such costs
are incurred and expensed.
DD&A expense decreased 12% from $20.0 million in 1995 to $17.7 million in
1996 due primarily to a 12% decline in the Company's average depletion rate per
BOE. Under the successful efforts method of accounting, costs of oil and gas
properties are amortized on a unit-of-production method based on estimated
proved reserves. The lower depletion rate is attributable to a combination of
higher proved reserves from newly completed wells and lower depletable costs
resulting from the impairment of certain producing properties in October 1995
and June 1996 pursuant to SFAS 121. As a result, the average depletion rate
declined from $8.51 per BOE in 1995 to $7.46 per BOE in 1996.
The Company recorded a provision for impairment of property and equipment
of $1.2 million during the second quarter of 1996 in accordance with SFAS 121.
General and administrative expenses decreased 11% from $2.7 million in 1995
to $2.4 million in 1996. Beginning in March 1994, the Company reduced its
overhead by implementing certain cost reduction measures, including the closing
of its San Antonio office, the elimination or reduction of certain professional
services, and the control of personnel costs through staff and wage reductions
and employee benefit cost controls. The full impact of these measures was
realized during the third quarter of 1995.
Costs of natural gas services decreased 20% from $3.0 million in 1995 to
$2.4 million in 1996 due primarily to the sale of the Company's two principal
gas gathering and processing systems in August 1995, and offset in part by
additional costs incurred in 1996 related to a gas plant and three gathering
systems acquired in 1996.
12
<PAGE>
INTEREST EXPENSE AND OTHER
Interest expense decreased 33% from $4.2 million in 1995 to $2.8 million in
1996 due primarily to lower average levels of indebtedness on the Company's
secured bank credit facility and, to a lesser extent, lower average interest
rates. The average daily principal balance outstanding on such facility during
the 1996 period was $39.7 million compared to $55.3 million in 1995. The
effective annual interest rate on bank debt during the 1996 period was 9.5%
compared to 10.3% in 1995. Proceeds from the sales of assets in August 1995 and
January 1996 and the sale of Common Stock through a shareholder rights offering
in September 1995, which aggregated approximately $15 million, were used to
reduce bank indebtedness.
Other income decreased from $6.2 million in 1995 to $60,000 in 1996. In
August 1995, XCEL Gas Company, a general partnership in which the Company
owned a 77% interest, sold its interest in a gas gathering system, and the
Company sold its 43% interest in the El Campo gas processing system, for
aggregate net proceeds of $7.7 million, resulting in a combined gain on sale
of property and equipment of $6.0 million, net to the Company.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's primary financial resource is its oil and gas reserves. In
accordance with the terms of the secured bank credit facility, the banks
establish a borrowing base, as derived from the estimated value of the Company's
oil and gas properties, against which the Company may borrow funds as needed to
supplement its internally generated cash flow as a source of financing for its
capital expenditure program. Product prices, over which the Company has very
limited control, have a significant impact on such estimated value and thereby
on the Company's borrowing availability under the secured bank credit facility.
Within the confines of product pricing, the Company must be able to find and
develop or acquire oil and gas reserves in a cost effective manner in order to
generate sufficient financial resources through internal means to complete the
financing of its capital expenditure program.
The following discussion sets forth the Company's current plans for capital
expenditures in 1996 and 1997, and the expected capital resources needed to
finance such plans.
CAPITAL EXPENDITURES
During the remainder of 1996 and in 1997, the Company plans to focus its
efforts in the North Giddings Block. During the nine months ended September 30,
1996, the Company completed 17.2 net wells in the North Giddings Block and plans
to drill an additional 7 net wells in this area during the remainder of 1996.
In addition, the Company is also actively acquiring additional acreage and
extending the terms of existing leases in the North Giddings Block.
The Company's capital expenditures are expected to be approximately $33
million in 1996, of which $25 million was incurred in the first nine months
of 1996. In response to favorable oil prices and drilling results, the
Company intends to accelerate its drilling program by contracting for a third
drilling rig beginning in December 1996. At this increased level of drilling
activity, the Company plans to incur capital expenditures of approximately
$42 million during 1997. In addition, the Company has committed to spend
approximately $3.1 million in 1997 to conduct and evaluate a proprietary 3-D
seismic survey covering a portion of its acreage in connection with the
Cotton Valley Exploratory Project and may conduct additional surveys covering
other portions of the North Giddings Block. Substantially all of the planned
future activity is discretionary. This allows the Company to make
adjustments to its level of capital and exploratory expenditures based upon
such factors as the availability of capital resources, product prices and
drilling results. Thus, if the Company's ability or desire to conduct the
planned activities is diminished or
13
<PAGE>
enhanced by any of these factors, the Company can modify its capital
expenditures accordingly. The Company's current policy is to limit its
annual Cotton Valley Exploratory Project expenditures to not more than 25% of
its planned annual capital expenditures. However, the Company may modify
this policy depending upon certain factors, including the Company's financial
position, exploratory drilling success, technological advances, drilling
activities conducted by third parties and current and anticipated product
prices.
The Company does not have any specified amounts of capital expenditures
designated for acquisitions of proven properties in 1996 and 1997. However, the
Company plans to actively seek and evaluate acquisition opportunities and will
commit only to those acquisitions which the Company can adequately finance
through internal and external sources.
CAPITAL RESOURCES
OFFERING OF COMMON STOCK
In October 1996, the Company filed a registration statement with the
Securities and Exchange Commission for an offering of 1,250,000 shares of Common
Stock (the "Offering"). Proceeds from the Offering, if consummated, will be
used initially to reduce the Company's outstanding indebtedness under the
secured bank credit facility.
SECURED BANK CREDIT FACILITY
The Company had $12.5 million of funds available to it under the secured
bank credit facility at September 30, 1996, before the application of any net
proceeds to be derived from the Offering. The banks' loan commitment
currently reduces by $1 million each month. The Company intends to use its
borrowing capacity under the secured bank credit facility, together with
internally generated funds, to (i) finance its 1997 planned capital
expenditure program and (ii) conduct and evaluate one or more proprietary 3-D
seismic surveys as a part of the Cotton Valley Exploratory Project.
WORKING CAPITAL AND CASH FLOW
During the nine months ended September 30, 1996, the Company generated cash
flow from operating activities of $30.0 million and received proceeds from the
sale of assets of $3.5 million. During the same period, the Company spent $25.3
million on capital expenditures and repaid $5.7 million on the term loan
facility. The residual cash flow of $2.5 million was primarily used to reduce
the amount of indebtedness outstanding on the revolving loan facility.
The Company's working capital deficit decreased from $13.7 million at
December 31, 1995 to $5.6 million at September 30, 1996 due primarily to a
reduction in current portion of long-term debt. Based upon the initial
borrowing base and scheduled commitment reductions set forth in the secured bank
credit facility, no portion of the outstanding balance on the Company's secured
bank credit facility is deemed to be a current liability at September 30, 1996.
The Company believes that the funds to be available under the secured
bank credit facility following the Offering and cash provided by operations
will be adequate to fund the Company's operations and projected capital and
exploratory expenditures during the remainder of 1996 and 1997. However,
because future cash flows and the availability of borrowings are subject to a
number of variables, such as the level of production from existing wells, the
Company's success in locating and producing new reserves, prevailing prices
of oil and gas, and the uncertainty with respect to the amount of funds which
may ultimately be required to finance the Cotton Valley Exploratory Project,
there can be no assurance that the Company's capital resources will be
sufficient to sustain the Company's exploratory and development activities,
even with the proceeds of the Offering. If such capital resources are
insufficient, the Company may be required to cease or delay such activities.
14
<PAGE>
INFLATION AND CHANGES IN PRICES
Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation did not have a significant effect on the
Company's results of operations during 1996.
The Company's revenues and the value of its oil and gas properties have
been and will continue to be affected by changes in oil and gas prices. The
Company's ability to maintain adequate borrowing capacity and to obtain
additional capital on attractive terms is also substantially dependent on oil
and gas prices. Oil and gas prices are subject to significant seasonal and
other fluctuations that are beyond the Company's ability to control or
predict. In an attempt to manage this price risk, the Company from time to
time engages in hedging transactions.
HEDGING TRANSACTIONS
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to achieve a more
predictable cash flow, as well as to reduce its exposure to price
fluctuations. While the use of these hedging arrangements limits the
downside risk of price declines, such use may also limit any benefits which
may be derived from price increases.
The Company uses various financial instruments, such as swaps and
collars, whereby monthly settlements are based on differences between the
prices specified in the instruments and the settlement prices of certain
futures contracts quoted on the New York Mercantile Exchange ("NYMEX") or
certain other indices. Generally, when the applicable settlement price is
less than the price specified in the contract, the Company receives a
settlement from the counterparty based on the difference. Similarly, when
the applicable settlement price is higher than the specified price, the
Company pays the counterparty based on the difference. The instruments
utilized by the Company differ from futures contracts in that there is not a
contractual obligation which requires or allows for the future delivery of
the hedged products.
Presently, the Company has no open positions in swap, collar or other
financial hedging arrangements. However, the Company may in the future enter
into various hedging arrangements in order to realize commodity prices which
it considers favorable under the circumstances.
FORWARD-LOOKING STATEMENTS
The discussion in this Form 10-Q contains forward-looking statements that
are based on assumptions which, with the passage of time, may prove not to
have been accurate. Those statements, as well as the Company's business and
prospects, are subject to a number of risks including the volatility of oil
and gas prices, the Company's ability to replace short-lived reserves, the
uncertainty of estimates of proved reserves, the availability of capital
resources, the risk of exploratory activities, operating hazards and
uninsured risks, and the ability of the Company to implement its business
strategy. These and other risks are described in various filings made by the
Company which are available from the United States Securities and Exchange
Commission.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 15, 1996, the Company's Second Restated Certificate of
Incorporation, which included amendments to the Certificate, was adopted by
written consent of the holders of more than a majority of shares of the
Company's Common Stock entitled to vote on such matters.
On September 9, 1996, the Company mailed an information statement to
stockholders of record at the close of business on August 14, 1996. At such
date, the Company had 7,486,139 shares of Common Stock outstanding, each
share being entitled to one vote. The action taken required at least a
majority of the shares outstanding and entitled to vote on such matters, and
such approval was obtained by written consent of Clayton Williams
Partnership, Ltd. and CWPLCO, Inc. (collectively, the "Affiliated Holders"),
which owned, in the aggregate, 3,772,009 shares of Common Stock, or 50.4% of
the then-outstanding shares of Common Stock.
The amendments contained in the Second Restated Certificate of
Incorporation (i) increased the number of authorized shares of Common Stock
from 10,000,000 to 15,000,000 and (ii) authorized 3,000,000 shares of serial
preferred stock, $.10 par value per share, allowing the Board of Directors to
establish and issue one or more series of preferred stock on such terms and
with such preferences as the Board may determine, without additional
stockholder approval.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit
NUMBER DESCRIPTION
--------- -------------------------------------------------------
3.1 Second Restated Certificate of Incorporation, filed as
an exhibit to the Form S-2 Registration Statement,
Registration No. 333-13441
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
16
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CLAYTON WILLIAMS ENERGY, INC.
Date: November 12, 1996 By: /s/ L. PAUL LATHAM
----------------------------
L. Paul Latham
Executive Vice President and
Chief Operating Officer
Date: November 12, 1996 By: /s/ MEL G. RIGGS
----------------------------
Mel G. Riggs
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the condensed financial statements for the nine months ended September
30, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,241
<SECURITIES> 0
<RECEIVABLES> 8,603
<ALLOWANCES> 0
<INVENTORY> 418
<CURRENT-ASSETS> 10,897
<PP&E> 363,067
<DEPRECIATION> 278,377
<TOTAL-ASSETS> 95,647
<CURRENT-LIABILITIES> 16,456
<BONDS> 36,522
0
0
<COMMON> 749
<OTHER-SE> 41,920
<TOTAL-LIABILITY-AND-EQUITY> 95,647
<SALES> 42,136
<TOTAL-REVENUES> 45,050
<CGS> 10,808
<TOTAL-COSTS> 35,014
<OTHER-EXPENSES> (60)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,783
<INCOME-PRETAX> 7,313
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,313
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,313
<EPS-PRIMARY> .96
<EPS-DILUTED> 0
</TABLE>
