<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1996
REGISTRATION NO. 333-13441
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CLAYTON WILLIAMS ENERGY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2396863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
--------------------------
SIX DESTA DRIVE, SUITE 6500
MIDLAND, TEXAS 79705
(915) 682-6324
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
L. PAUL LATHAM, EXECUTIVE VICE PRESIDENT
CLAYTON WILLIAMS ENERGY, INC.
SIX DESTA DRIVE, SUITE 6500
MIDLAND, TEXAS 79705
(915) 688-3212
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
RICHARD T. MCMILLAN ALAN P. BADEN
Cotton, Bledsoe, Tighe & Dawson, Vinson & Elkins L.L.P.
a Professional Corporation 1001 Fannin Street
500 West Illinois, Suite 300 Houston, Texas 77002-6760
Midland, Texas 79701 (713) 758-2222
(915) 684-5782
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If the registrant elects to deliver its latest annual report to security
holders or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1996
1,250,000 SHARES
[LOGO]
COMMON STOCK
All of the 1,250,000 shares of Common Stock offered hereby are being sold by
Clayton Williams Energy, Inc. (the "Company").
The Common Stock is quoted on the Nasdaq National Market under the symbol
"CWEI." The last reported sale price of the Common Stock on October 14, 1996, as
reported by the Nasdaq National Market, was $12 1/8 per share. See "Price Range
of Common Stock."
FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING
ON PAGE 7 HEREOF.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total (3).............................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting offering expenses estimated to be approximately $240,000
payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 187,500 additional shares of Common Stock solely to cover
over-allotments, if any, on the same terms and conditions as the shares
offered hereby. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
-------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of such
shares will be at the offices of Rodman & Renshaw, Inc., New York, New York on
or about , 1996.
-------------------
RODMAN & RENSHAW, INC. HANIFEN, IMHOFF INC.
The date of this Prospectus is , 1996.
<PAGE>
[PICTURE DEPICTING THE COMPANY'S METHOD
OF DRILLING WELLS IN THE TREND]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS
AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS
AND INCORPORATED HEREIN BY REFERENCE. THE TERM "COMPANY" REFERS TO CLAYTON
WILLIAMS ENERGY, INC., ITS SUBSIDIARIES AND ITS PREDECESSORS, UNLESS THE CONTEXT
REQUIRES OTHERWISE. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES A PUBLIC OFFERING PRICE OF $12 1/8 PER SHARE AND THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. SEE "GLOSSARY OF
TERMS" FOR DEFINITIONS OF CERTAIN TERMS RELATING TO THE OIL AND GAS INDUSTRY
USED IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH IN "RISK FACTORS" BEGINNING ON PAGE 7.
THE COMPANY
GENERAL
Clayton Williams Energy, Inc. is primarily engaged in the exploration,
development and production of oil and natural gas, and to a lesser extent, in
the gathering and marketing of natural gas. Since 1988, the Company and its
predecessors have concentrated their drilling activities primarily 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. The Company also has operations in the Jalmat Field located in
southeastern New Mexico and in the Texas Gulf Coast. As of June 30, 1996, the
Company had estimated proved reserves totaling 6,844 Mbbls of oil and 37.7 Bcf
of gas with a PV-10 Value of approximately $100.3 million as estimated by
Williamson Petroleum Consultants, Inc. (the "Independent Engineers"). At June
30, 1996, the Company held interests in 455 gross (337.1 net) oil and gas wells
and owned leasehold interests in approximately 191,289 gross (129,632 net)
undeveloped acres.
BUSINESS STRATEGY
The Company's business strategy is to increase reserves and production
through exploration and development of its oil and gas properties, concentrating
its efforts in the Trend. The Company has operated in the Trend for 20 years and
drilled or participated in the drilling of 634 gross vertical and horizontal
wells. Development of the Austin Chalk formation, which is characterized by
fractured carbonate reservoirs, has been enhanced by advances in horizontal
drilling and completion technologies since the early 1990's. These advances have
provided the Company with the opportunity to develop new reserves and to
generate more attractive economic returns in the Austin Chalk formation. The
Company believes that it is one of the leaders in horizontal drilling in the
Trend. Since the beginning of 1990 the Company has drilled or participated in
223 gross (175.2 net) horizontal wells in the Trend.
The Company's operational focus for the remainder of 1996 and 1997 will be
the continued development of a lease block (the "North Giddings Block") which
the Company has assembled in the updip area of the Giddings Field in east
central Texas. The Company has accumulated approximately 109,000 net acres in
the North Giddings Block and is continuing to lease acreage in this area. The
North Giddings Block is located in the northern area of the Giddings Field in
Burleson, Robertson and Milam Counties, Texas, where the Austin Chalk formation
is encountered at depths ranging from 5,500 feet to 7,000 feet.
During the six months ended June 30, 1996, the Company added 1,718 MBOE of
estimated proved reserves through extensions and discoveries primarily in the
North Giddings Block. Reserve additions for the first six months of 1996 were
110% of production for the same period, while production for such period was
approximately the same on an MBOE basis as in the first six months of 1995. As
of June 30, 1996, the Company had 61.2 producing net wells in the North Giddings
Block and 76 additional drilling locations, of which seven are locations to
which proved undeveloped reserves are attributed by the Independent Engineers.
3
<PAGE>
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 a portion of the North Giddings
Block that is anticipated to commence in early 1997. The second phase is the
evaluation of the seismic data to delineate any drilling opportunities in the
Cotton Valley formation. The Company estimates that the cost of conducting the
survey and evaluating the data will be approximately $5 million. The third phase
would be the exploratory drilling of any delineated prospects. The Company
estimates that it will take approximately 12 months to conduct the survey and
evaluate the seismic data before any drilling could be commenced. 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 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. See "Risk Factors--Liquidity and Capital Resources"
and "--Risk of Exploratory Activities."
The principal executive offices of the Company are located at Six Desta
Drive, Suite 6500, Midland, Texas 79705, and its telephone number at such
offices is (915) 682-6324.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......... 1,250,000 shares
Common Stock to be Outstanding After the
Offering (1).............................. 8,744,993 shares
Use of Proceeds............................. To provide funds for the Company's 1997
planned capital expenditure program and a 3-D
seismic survey as part of the Cotton Valley
Exploratory Project. See "Use of Proceeds."
Nasdaq National Market Symbol............... "CWEI"
</TABLE>
- ------------------------
(1) Does not include options to purchase 270,766 shares of Common Stock which
have been granted under the Company's stock option plans.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary consolidated financial data of the
Company for each of the three years ended December 31, 1995, which have been
derived from the Company's audited Consolidated Financial Statements. The
financial data for the year ended December 31, 1993 include the historical
results of the Company and its predecessors, which were consolidated in 1993
(the "Consolidation"). The financial data of the Company for the six months
ended June 30, 1995 and 1996 have been derived from the Company's unaudited
interim Consolidated Financial Statements, which in the opinion of management of
the Company, have been prepared on the same basis as the annual Consolidated
Financial Statements and include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the financial data
for such periods. The information in this table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere herein. The results for the six month period ended June 30,
1996 are not necessarily indicative of results for the full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................ $ 59,595 $ 49,485 $ 49,271 $ 26,939 $ 29,466
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Lease operations.................... 12,788 12,775 13,533 6,986 7,161
Exploration......................... 6,198 7,139 1,555 432 279
Natural gas services................ 2,518 3,510 3,714 2,450 1,571
Depreciation, depletion and
amortization...................... 26,751 25,248 25,110 13,810 11,852
Impairment of property and
equipment......................... -- -- 10,259 -- 1,186
General and administrative.......... 6,876 5,659 3,708 2,017 1,671
---------- ---------- ---------- ---------- ----------
Total costs and expenses.......... 55,131 54,331 57,879 25,695 23,720
---------- ---------- ---------- ---------- ----------
Operating income (loss)........... 4,464 (4,846) (8,608) 1,244 5,746
Interest expense...................... 4,003 4,461 5,493 2,991 1,943
Other income (expense)................ 149 759 6,022 249 40
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes..... 610 (8,548) (8,079) (1,498) 3,843
Income taxes (1)...................... 207 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)..................... $ 403 $ (8,548) $ (8,079) $ (1,498) $ 3,843
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share.... $ 0.09 $ (1.50) $ (1.31) $ (0.26) $ 0.51
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average common shares
outstanding......................... 4,700 5,700 6,165 5,704 7,553
OTHER DATA:
Net cash provided by operating
activities........................ $ 29,716 $ 23,672 $ 24,201 $ 15,254 $ 19,496
EBITDAX (2)......................... 37,413 27,541 28,316 15,486 19,063
EBITDAX per share................... 7.96 4.83 4.59 2.71 2.52
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------------------
ACTUAL AS ADJUSTED (3)
-------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................... $ (5,196) $ (5,196)
Total assets................................................... 94,672 94,672
Long-term debt................................................. 38,528 24,559
Stockholders' equity........................................... 39,087 53,056
</TABLE>
- ------------------------------
(1) Prior to the Consolidation, income taxes were computed at the applicable
federal statutory rate.
(2) EBITDAX refers to earnings before income taxes, interest expense,
depreciation, depletion and amortization, impairment of property and
equipment, exploration costs, and other income (expense). EBITDAX is a
financial measure commonly used in the Company's industry and should not be
considered in isolation or as a substitute for net income, cash flow
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity.
(3) As adjusted to reflect receipt by the Company of estimated net proceeds from
the issuance of 1,250,000 shares of Common Stock and the application of such
proceeds. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
SUMMARY OIL AND GAS RESERVE DATA
The following table sets forth summary information concerning the Company's
estimated proved oil and gas reserves as of June 30, 1996, based on a report
prepared by the Independent Engineers, a summary of which is included as Annex A
to this Prospectus. All calculations have been made in accordance with the rules
and regulations of the Securities and Exchange Commission (the "Commission").
See "Risk Factors--Uncertainty of Estimates of Reserves and Future Net
Revenues."
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
----------- ------------- ----------
<S> <C> <C> <C>
Estimated Proved Reserves:
Oil (Mbbls)............................................................... 6,022 822 6,844
Gas (Mmcf)................................................................ 31,440 6,257 37,697
MBOE...................................................................... 11,262 1,865 13,127
Present value of estimated future net revenues,
discounted at 10% (in thousands)........................................ $ 93,022 $ 7,319 $ 100,341
</TABLE>
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OIL AND GAS PRODUCTION DATA:
Oil (Mbbls).................................................... 1,881 1,709 1,831 954 1,080
Gas (Mmcf)..................................................... 10,364 8,369 6,845 3,640 2,816
Total (MBOE)................................................... 3,608 3,104 2,972 1,561 1,549
AVERAGE OIL AND GAS SALES PRICES(1):
Oil ($/Bbl).................................................... $ 17.41 $ 15.72 $ 17.35 $ 17.62 $ 19.08
Gas ($/Mcf).................................................... $ 2.15 $ 1.98 $ 1.77 $ 1.74 $ 2.41
OPERATING COSTS AND EXPENSES ($/BOE PRODUCED):
Lease operations............................................... $ 3.54 $ 4.12 $ 4.55 $ 4.48 $ 4.62
Oil and gas depletion.......................................... $ 7.03 $ 7.81 $ 8.16 $ 8.54 $ 7.40
General and administrative..................................... $ 1.90 $ 1.82 $ 1.24 $ 1.29 $ 1.07
NET WELLS DRILLED:
Horizontal wells............................................... 27.6 16.2 23.5 15.5 13.2
Vertical wells................................................. 0.1 3.6 -- -- 1.1
</TABLE>
- ------------------------
(1) Includes effects of hedging transactions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Hedging
Transactions."
6
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business and Properties," as well as those
discussed elsewhere in this Prospectus. Statements contained in this Prospectus
that are not historical facts are forward-looking statements that are subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995.
RISK FACTORS
In evaluating an investment in the Common Stock being offered hereby,
prospective investors should consider carefully, among other things, the
following risk factors.
VOLATILITY OF OIL AND GAS PRICES
The Company's revenues, profitability and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
gas. Prices for oil and gas are subject to wide fluctuation in response to
relatively minor changes in the supply of and demand for oil and gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. These factors include the level of consumer product demand, weather
conditions, domestic and foreign governmental regulations, the price and
availability of alternative fuels, political conditions in the Middle East,
foreign supply of oil and gas, the price of foreign imports and overall economic
conditions. In recent years, oil and gas prices have been depressed by excess
domestic and imported supplies. Prices have risen recently, but there can be no
assurance that such price levels will be sustained. It is impossible to predict
future oil and gas price movements with any certainty. Declines in oil and gas
prices may adversely affect the Company's financial condition, liquidity and
results of operations. Lower oil and gas prices may also reduce the amount of
the Company's oil and gas reserves that can be produced economically. Moreover,
any fall in the prices of oil and gas materially below their current levels may
have a material adverse affect on the Company's ability to repay outstanding
amounts under its bank credit facility (the "Credit Facility"). With the
objective of reducing price risk, the Company enters into hedging transactions
from time to time with respect to a portion of its expected future production.
There can be no assurance, however, that such hedging transactions will reduce
risk or mitigate the effect of any substantial or extended decline in oil or gas
prices. Any substantial or extended decline in the prices of oil or gas would
have a material adverse affect on the Company's financial condition and results
of operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
ABILITY TO REPLACE SHORT-LIVED RESERVES
As is customary in the oil and gas exploration and production industry, the
Company's future success depends upon its ability to find, develop and acquire
additional oil and gas reserves that are economically recoverable. The Company's
producing properties in the Trend are characterized by a high initial production
rate, followed by a steep decline in production. As a result, the Company must
locate and develop or acquire new oil and gas reserves to replace those being
depleted by production. Without successful drilling and exploration or
acquisition activities, the Company's reserves and revenues will decline
rapidly. No assurance can be given that the Company will be successful in
extending its reserve life, which is currently shorter than the average in the
industry. The Company's current strategy includes increasing its reserve base
through drilling activities on existing properties. There can be no assurance,
however, that the Company's exploration and development projects will result in
significant additional reserves or that the Company will have continuing success
drilling productive wells at economically viable costs. Furthermore, while the
Company's revenues may increase if prevailing oil and gas prices increase
significantly, the Company's finding costs for additional reserves could also
increase.
7
<PAGE>
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES
This Prospectus contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon reports
prepared by the Independent Engineers. Such reports rely upon various
assumptions, including assumptions required by the Commission as to oil and gas
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. For a description of assumptions utilized by the
Independent Engineers in preparing such estimate, see Annex A. The process of
estimating oil and gas reserves is complex, requiring significant decisions and
assumptions in the evaluation of available geological, geophysical, engineering
and economic data for each reservoir. As a result, such estimates are inherently
imprecise. Actual future production, oil and gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves may vary substantially. Any significant variance in these
assumptions could materially affect the estimated quantity and value of reserves
set forth in this Prospectus. In addition, the Company's reserves may be subject
to downward or upward revision based upon production history, results of future
development and exploration, prevailing oil and gas prices and other factors,
many of which are beyond the Company's control. Actual production, revenues,
taxes, development expenditures and operating expenses with respect to the
Company's reserves will likely vary from the estimates used, and such variances
may be material.
Approximately 14% of the Company's total proved reserves at June 30, 1996
were undeveloped, which are by their nature less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. The reserve data set forth in the Independent Engineers' report as
of June 30, 1996 assumes, based on the Company's estimates, that aggregate
capital expenditures by the Company of approximately $8.3 million through 1998
will be required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated. See "Business and Properties--Reserves."
The present value of future net revenues referred to in this Prospectus
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net revenues
from proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net revenues also will be affected by changes in
consumption and changes in governmental regulations or taxation. The timing of
actual future net revenues from proved reserves, and thus their actual present
value, will be affected by the timing of both the production and the incurrence
of expenses in connection with development and production of oil and gas
properties. In addition, the 10% discount factor, which is required by the
Commission to be used in calculating discounted future net revenues for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with
the Company or the oil and gas industry in general.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary financial resource is its proved developed oil and gas
reserves. In accordance with the terms of the Credit Facility, the banks
establish a borrowing base from time to time against which the Company may
borrow funds as needed to supplement cash flow from operations as a source of
financing its capital expenditure program. The Company's readily available
resources at any point in time are limited to the excess of the borrowing base
over the then-outstanding level of indebtedness. The borrowing base is currently
subject to a monthly commitment reduction of $1 million. At September 30, 1996,
the Company had $12.5 million of availability under the Credit Facility.
8
<PAGE>
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 1997. At this increased level of drilling activity, the Company
plans to incur capital expenditures of approximately $42 million during 1997. In
addition, the Company plans to spend approximately $5 million in 1997 to conduct
and evaluate a 3-D seismic survey in connection with the Cotton Valley
Exploratory Project. At these levels of expenditures, the Company believes that
proceeds from this Offering, cash flow from operations and funds available under
the Credit Facility will be sufficient in the aggregate to fund its planned
capital and exploratory expenditures. 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 this Offering.
In the event additional financing is required to fund the Company's growth, no
assurances can be given as to the availability or terms of such financing. See
"--Risk of Exploratory Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and the Consolidated Financial Statements.
RISK OF EXPLORATORY ACTIVITIES
The Company intends to devote significant resources in 1997 in initiating
the Cotton Valley Exploratory Project. See "Business and Properties--Cotton
Valley Exploratory Project." The lack of geographic proximity of the North
Giddings Block to production from depths to be covered by the 3-D seismic survey
increases the risk that no drillable prospects may be generated as a result of
such activities. Any wells to be drilled as a result of such efforts or any
other exploratory wells may be materially more expensive and involve a higher
degree of risk than the Company's traditional drilling activities. Exploratory
drilling is subject to numerous risks, including the risk that no commercially
productive oil and natural gas reservoirs will be encountered. The cost of
drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected formation and drilling conditions, pressure or
other irregularities in formations, equipment failures or accidents, as well as
compliance with governmental requirements and shortages or delays in the
delivery of equipment. In addition, exploratory drilling using 3-D seismic
surveys requires greater pre-drilling expenditures than alternative forms of
traditional drilling strategies. Because the Company uses the successful efforts
method of accounting, the costs incurred in connection with the seismic portion
of the Cotton Valley Exploratory Project will be expensed when incurred.
Accordingly, the Company's results of operations will be adversely affected by
the incurrence of such costs.
The Company will not conduct any exploratory drilling with respect to the
Cotton Valley Exploratory Project until the 3-D seismic data is evaluated. If
exploratory drilling appears advisable, the Company may drill one or more wells
without third party participation. If the Company determines that third party
participation is advisable to limit its financial risk, such participation will
reduce the Company's interest in any reserves discovered. In addition, the
Company's ability to bear the financial risks of such exploratory activities is
subject to a number of factors, some of which, such as prices for oil and gas,
are beyond the Company's control. Therefore, no assurance can be given as to the
extent, if any, that the Company will conduct exploratory drilling activities.
See "--Liquidity and Capital Resources".
ACTIVITIES OF AFFILIATES
As a result of the Consolidation of various entities controlled by Clayton
W. Williams, Jr. (the "Predecessors") into the Company contemporaneously with
its initial public offering, the Company succeeded to all the oil and gas
exploration and development operations of the Predecessors, except for certain
producing and non-producing oil and gas properties which were not contributed to
the Company
9
<PAGE>
(the "Excluded Properties"). The Excluded Properties were excluded because such
properties were either outside of the principal geographic areas in which it was
proposed that the Company would conduct its activities or did not offer
significant opportunity for future exploration and development activities. Mr.
Williams and certain entities affiliated with him (collectively, the "Williams
Entities") continue to own the Excluded Properties and may conduct activities on
such properties. Such activities will generally be limited to operations on
properties that are currently producing oil and gas and on certain undeveloped
acreage held by production. The selection of the Excluded Properties and the
nature of the arrangements in connection therewith were determined by Mr.
Williams and the Predecessors, each of which was an affiliate of Mr. Williams.
Accordingly, they are not the result of arm's-length negotiations between
independent parties. The Company has been granted a right of first refusal to
acquire undeveloped acreage not held by production and certain mineral interests
owned by the Williams Entities at such time as they propose to conduct drilling
activities thereon or receive an offer from a third party to acquire such
acreage or mineral interests which the Williams Entities intend to accept. Any
decision by the Company to exercise its right of first refusal with respect to
such acreage or mineral interest will be subject to approval by a majority of
the Company's independent directors.
Whether a director is independent with respect to a particular transaction
would be determined at the time of the transaction in light of all the facts and
circumstances. William P. Clements and Robert L. Parker are the only directors
of the Company who are independent with respect to a determination by the
Company to exercise its right of first refusal with respect to the Excluded
Properties consisting of acreage or mineral interests.
If the Company does not exercise its right of first refusal with respect to
any such acreage or mineral interests, the Williams Entities may elect to
conduct drilling operations thereon or accept a third party offer for such
acreage or mineral interests, as the case may be. The Williams Entities have
agreed that, so long as Mr. Williams serves as an officer or director of the
Company and for one year thereafter (except in the case of the involuntary
termination of Mr. Williams' employment), they will conduct all of their future
domestic and international oil and gas exploration, development and acquisition
activities and gas gathering and marketing activities through the Company,
except activities relating to the Excluded Properties.
CONTINUING TRANSACTIONS WITH CERTAIN AFFILIATES
The Company has entered into certain agreements in order to define its
ongoing relationships with Mr. Williams and the Williams Entities. The primary
agreement entered into by the Company and the Williams Entities is a service
agreement with respect to tax, legal, payroll and benefits, aircraft usage, and
lease operating and technical services with respect to the Excluded Properties.
The agreement is not the result of arms-length negotiations between independent
parties.
The Company also has a policy pursuant to which it may offer its employees,
including its officers, the opportunity to participate with the Company in
acquisition or drilling activities on prospects acquired or drilled by the
Company. Although this policy has only resulted in one such opportunity being
presented since the Company's formation, the policy may present opportunities
for conflicts of interest. See "Certain Transactions and Relationships--Certain
Contractual Arrangements--Acquisition of Oil and Gas Interests."
Additionally, the Company has in the past and may in the future enter into
other significant transactions and agreements incident to its business with the
Williams Entities. See "Certain Transactions and Relationships". Any future
material transactions between the Company and its directors, officers, principal
stockholders or other affiliates will be subject to approval by a majority of
the Company's independent and disinterested directors. The Company's Board of
Directors will be advised in advance of any such proposed transactions that are
material to the Company and will utilize such procedures in evaluating their
terms as are appropriate in light of the fiduciary duties of the Board of
Directors under
10
<PAGE>
Delaware law. Depending on the size and nature of the proposed transaction, in
any such review the Board may utilize outside experts or consultants, including
independent legal counsel, secure appraisals or other market comparisons, refer
to generally available statistics or prices or take such other actions as are
appropriate under the circumstances. Although the Company intends that the terms
of any such future transactions and agreements will be at least as favorable to
the Company as those that could be obtained from unaffiliated third parties, no
assurance can be given that this will be the case.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will be highly dependent upon its
continued ability to attract and retain skilled managers, including Mr.
Williams. The Company has not entered into employment agreements with any of its
executive officers. Although Mr. Williams devotes the majority of his time to
the Company, he devotes a portion of his time to business ventures in which the
Company does not have an interest. The Company does not maintain key man life
insurance policies on any of its employees.
CONTROL OF THE COMPANY
Upon completion of the Offering, Mr. Williams and certain individuals
related to, and entities associated with him (collectively, the "Affiliated
Holders") will own directly and indirectly, in the aggregate, 46.4% of the
outstanding Common Stock (or 45.4% if the Underwriters' over-allotment option is
exercised in full). Accordingly, the Affiliated Holders will be able to exercise
significant influence over the election of the directors of the Company and the
control of the Company's management, operations and affairs. The voting power
held by Affiliated Holders and their ability to exercise significant influence
over the election of directors may have the effect of delaying, deterring or
preventing certain types of transactions involving an actual or potential change
of control of the Company, including transactions in which the holders of Common
Stock might otherwise receive a premium for their shares over then current
market prices. See "Principal Stockholders" and "Description of Capital Stock."
OPERATING HAZARDS; UNINSURED RISKS
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures and discharges of toxic gases, the occurrence of any of
which could result in substantial losses to the Company due to injury and loss
of life, damage to and destruction of property and equipment, pollution and
other environmental damage and related suspension of operations. Gathering
systems and processing plants are subject to many of the same hazards and any
significant problems related to those facilities could adversely affect the
Company's ability to market its production. Drilling activities are subject to
numerous risks, including the risk that no commercially productive oil or gas
reservoirs will be encountered or that particular wells will not produce at
economic levels. The cost of drilling, completing and operating wells may vary
from initial estimates. Drilling activities may be curtailed, delayed or
canceled as a result of numerous factors outside the Company's control,
including but not limited to title problems, weather conditions, compliance with
governmental requirements, mechanical difficulties and shortages or delays in
the delivery of drilling rigs or other equipment. The Company maintains
insurance against some, but not all potential risks; however, there can be no
assurance that such insurance will be adequate to cover any losses or exposure
to liability. Furthermore, the Company cannot predict whether insurance will
continue to be available at premium levels that justify its purchase or whether
insurance will be available at all.
REGULATION
Virtually all of the Company's oil and gas activities are subject to a wide
variety of federal, state and local governmental regulations, which are changed
from time to time in response to economic or political conditions. Matters
subject to regulation include, but are not limited to, environmental matters,
discharge permits for drilling operations, drilling and operating bonds, reports
concerning operations, the spacing of wells, unitization and pooling of
properties, allowable rates of production, restoration of surface areas,
plugging and abandonment of wells, requirements for the operation of wells and
taxation. From time to
11
<PAGE>
time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and gas wells below actual
production capacity in order to conserve supplies of oil and gas. Many states
have raised state taxes on energy sources and additional increases may occur,
although there can be no certainty of the effect that such increases would have
on the Company. Legislation and new regulations concerning oil and gas
exploration and production operations are constantly being reviewed and
proposed. All of the jurisdictions in which the Company owns and operates
properties have statutes and regulations governing a number of the matters
enumerated above. Compliance with such laws and regulations generally increases
the Company's cost of doing business and consequently affects its profitability.
Due to the frequently changing requirements of laws and regulations, there can
no assurance that costs of future compliance will not impose new or substantial
burdens on the Company. See "Business and Properties--Regulation."
ENVIRONMENTAL MATTERS
The discharge of oil, gas or other pollutants into the air, soil or water
may give rise to liabilities to governmental agencies and third parties, and may
require the Company to incur costs to remedy such discharges. Oil, natural gas
and other pollutants (including salt water brine) may be discharged in many
ways, including from a well or drilling equipment at a drill site, leakage from
pipelines or other gathering and transportation facilities, leakage from storage
tanks and tailings ponds, and sudden discharges from damage or explosion at
natural gas facilities, oil and gas wells or other facilities. Discharged
hydrocarbons and other pollutants may migrate through soil to water supplies or
adjoining property, giving rise to additional liabilities. A variety of federal,
state and local laws and regulations govern the environmental aspects of oil and
natural gas exploration, production, transportation and processing and may, in
addition to other laws and regulations, impose liability in the event of
discharges (whether or not accidental), failure to notify the proper authorities
of a discharge, and other failures to comply with those laws and regulations.
Compliance with environmental quality requirements and reclamation laws imposed
by governmental authorities may necessitate significant capital outlays, may
materially affect the acquisition or operating costs of a given property, or may
cause material changes or delays in the Company's intended activities.
Management of the Company does not believe that its environmental, health, and
safety risks are materially different from those of comparable companies engaged
in similar businesses. Nevertheless, new or different environmental standards
imposed in the future may adversely affect the Company's activities and there
can be no assurance that significant costs for compliance will not be incurred
in the future. Moreover, no assurance can be given that environmental laws will
not, in the future, result in curtailment of production or material increases in
the cost of exploration, development or production or otherwise adversely affect
the Company's operations and financial condition. See "Business and Properties--
Environmental Matters."
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and gas companies for the acquisition of
desirable oil and gas properties, as well as for the equipment and labor
required to develop and operate such properties. Many competitors have
substantially larger financial resources, staffs and facilities. See "Business
and Properties--Competition and Markets."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law contain certain provisions that may have the effect of
discouraging unsolicited takeover proposals for the Company. The Certificate of
Incorporation and Bylaws provide that the Company's Directors will be divided
into three classes, with the directors of each class serving staggered terms of
three years each or until their respective successors are elected and qualified
and that the Directors may issue serial preferred stock with such rights and
preferences as the Board may determine, without stockholder approval. The
Delaware General Corporation Law imposes additional restrictions on business
combinations with certain interested parties. See "Description of Capital
Stock--Delaware Takeover Statute."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,250,000 shares of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated expenses of the Offering are estimated to be
approximately $14.0 million ($16.1 million if the Underwriters' over-allotment
option is exercised in full), based on an assumed offering price of $12 1/8 per
share. The net proceeds will be used initially to reduce indebtedness under the
Credit Facility. The Company intends to use such increased borrowing capacity,
together with internally generated funds, to finance (i) its 1997 planned
capital expenditure program and (ii) an estimated $5 million to conduct and
evaluate a 3-D seismic survey in connection with the Cotton Valley Exploratory
Project.
The Credit Facility, which was renewed in July 1996, established a revolving
loan facility with an initial borrowing base of $52 million, subject to a
monthly commitment reduction of $1 million. As of September 30, 1996, the
adjusted borrowing base was $49.0 million and the outstanding indebtedness under
the 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 outstanding
under the Credit Facility to a term obligation based on amortization formulas
set forth in the loan agreement. The Company has pledged its oil and gas
properties to secure advances under the Credit Facility and contains standard
restrictive covenants dealing with the Company's ability to incur additional
indebtedness, grant liens on its properties and other matters. All outstanding
balances on the Credit Facility may be designated, at the Company's option, as
either "Base Rate Loans" or "Eurodollar Loans" (as defined in the loan
agreement), provided that not more than two Eurodollar traunches may be
outstanding at any time. Base Rate Loans bear interest at a fluctuating base
rate plus a base rate margin ranging from 0% to 0.5% per annum, depending on
levels of outstanding advances and letters of credit. Eurodollar Loans 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. In addition, the
Company pays the banks a commitment fee equal to 0.5% 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.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"CWEI." The following table sets forth, for the periods indicated, the high and
low sale prices of the Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1996:
Fourth Quarter (through October 14, 1996)............................................ $12 1/8 $ 9 5/8
Third Quarter........................................................................ 12 7 3/8
Second Quarter....................................................................... 10 7/8 3 3/4
First Quarter........................................................................ 4 3/8 2 5/8
YEAR ENDED DECEMBER 31, 1995:
Fourth Quarter....................................................................... $ 3 3/8 $ 2
Third Quarter........................................................................ 3 5/8 2 3/8
Second Quarter....................................................................... 4 3/4 2 3/4
First Quarter........................................................................ 6 1/2 3 3/4
YEAR ENDED DECEMBER 31, 1994:
Fourth Quarter....................................................................... $ 9 1/4 $ 5
Third Quarter........................................................................ 9 1/2 6 1/2
Second Quarter....................................................................... 10 3/4 6 1/2
First Quarter........................................................................ 15 10
</TABLE>
The quotations in the table above reflect inter-dealer prices without retail
markups, markdowns or commissions. On October 14, 1996, the last reported sale
price for the Common Stock on the Nasdaq National Market was $12 1/8. As of
October 14, 1996, the Company had approximately 1,100 beneficial and record
stockholders.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and for the
foreseeable future intends to follow a policy of retaining all of its earnings,
if any, to finance the development and continued expansion of its business.
There can be no assurance that dividends will ever be paid by the Company.
Pursuant to the terms of the Credit Facility, the Company is currently limited
in its ability to pay dividends on its Common Stock (except dividends paid in
shares of Common Stock) to an amount which does not exceed 50% of the Company's
net income for the fiscal year in which the dividends are declared. Any future
determination as to payment of dividends will depend upon the Company's
financial condition, results of operations and other such factors as the Board
of Directors deems relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth the total consolidated capitalization of the
Company at June 30, 1996, and as adjusted to reflect the issuance of 1,250,000
shares of Common Stock offered by the Company at an assumed offering price of
$12 1/8 per share, and the application of the estimated net proceeds therefrom,
as described under "Use of Proceeds." The following table should be read in
conjunction with the Consolidated Financial Statements of the Company and the
related notes thereto and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
(IN THOUSANDS)
Long-term debt................................................................. $ 38,528 $ 24,559
---------- -----------
Stockholders' equity:
Preferred Stock, par value $.10 per share; 3,000,000 shares authorized; no
shares issued and outstanding (1).......................................... -- --
Common Stock, par value $.10 per share; 15,000,000 shares authorized;
7,477,473 shares issued and outstanding (8,727,473 shares as adjusted) (1)
(2)........................................................................ 748 873
Additional paid-in capital................................................... 53,153 66,997
Retained deficit............................................................. (14,814) (14,814)
---------- -----------
Total stockholders' equity................................................. 39,087 53,056
---------- -----------
Total capitalization....................................................... $ 77,615 $ 77,615
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) At June 30, 1996, the Company's authorized capital stock consisted solely of
10,000,000 shares of $.10 par value common stock. In October 1996, the
Company amended its Certificate of Incorporation to authorize the issuance
of 3,000,000 shares of preferred stock, $.10 par value, and to increase the
number of authorized shares of Common Stock from 10,000,000 to 15,000,000.
(2) Does not include 17,520 shares of Common Stock issued pursuant to stock
compensation plans subsequent to June 30, 1996 and 270,766 shares of Common
Stock issuable upon exercise of currently outstanding options.
15
<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary consolidated financial data of the
Company for each of the five years ended December 31, 1995, which have been
derived from the Company's audited Consolidated Financial Statements. The
financial data for each of the three years ended December 31, 1993 include the
historical results of the Company and its Predecessors prior to the
Consolidation. The financial data of the Company for the six months ended June
30, 1995 and 1996 have been derived from the Company's unaudited interim
Consolidated Financial Statements, which in the opinion of management of the
Company, have been prepared on the same basis as the annual Consolidated
Financial Statements and include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the financial data
for such periods. The information in this table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere herein. The results for the six month period ended June 30,
1996 are not necessarily indicative of results for the full year.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------
1991 1992 1993 1994 1995 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales..................................... $ 80,042 $ 60,134 $ 55,041 $ 43,617 $ 43,883 $ 23,222
Natural gas services.................................. 5,859 5,159 4,554 5,868 5,388 3,717
--------- --------- --------- --------- --------- ---------
Total revenues...................................... 85,901 65,293 59,595 49,485 49,271 26,939
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Lease operations...................................... 15,873 13,459 12,788 12,775 13,533 6,986
Exploration........................................... 8,432 4,365 6,198 7,139 1,555 432
Natural gas services.................................. 3,677 2,746 2,518 3,510 3,714 2,450
Depreciation, depletion and amortization.............. 39,348 28,769 26,751 25,248 25,110 13,810
Impairment of property and equipment.................. -- -- -- -- 10,259 --
General and administrative............................ 6,068 5,416 6,876 5,659 3,708 2,017
--------- --------- --------- --------- --------- ---------
Total costs and expenses............................ 73,398 54,755 55,131 54,331 57,879 25,695
--------- --------- --------- --------- --------- ---------
Operating income (loss)............................. 12,503 10,538 4,464 (4,846) (8,608) 1,244
Interest expense...................................... 6,339 6,807 4,003 4,461 5,493 2,991
Other income (expense)................................ 416 (740) 149 759 6,022 249
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes..................... 6,580 2,991 610 (8,548) (8,079) (1,498)
Income taxes (1)...................................... 2,237 1,017 207 -- -- --
--------- --------- --------- --------- --------- ---------
Net income (loss)..................................... $ 4,343 $ 1,974 $ 403 $ (8,548) $ (8,079) $ (1,498)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income (loss) per common share.................... $ 1.36 $ 0.62 $ 0.09 $ (1.50) $ (1.31) $ (0.26)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average common shares outstanding............ 3,200 3,200 4,700 5,700 6,165 5,704
OTHER DATA:
Net cash provided by operating activities............... $ 54,134 $ 27,795 $ 29,716 $ 23,672 $ 24,201 $ 15,254
EBITDAX (2)............................................. 60,283 43,672 37,413 27,541 28,316 15,486
EBITDAX per share....................................... 18.84 13.65 7.96 4.83 4.59 2.71
<CAPTION>
1996
---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales..................................... $ 27,517
Natural gas services.................................. 1,949
---------
Total revenues...................................... 29,466
---------
Costs and expenses:
Lease operations...................................... 7,161
Exploration........................................... 279
Natural gas services.................................. 1,571
Depreciation, depletion and amortization.............. 11,852
Impairment of property and equipment.................. 1,186
General and administrative............................ 1,671
---------
Total costs and expenses............................ 23,720
---------
Operating income (loss)............................. 5,746
Interest expense...................................... 1,943
Other income (expense)................................ 40
---------
Income (loss) before income taxes..................... 3,843
Income taxes (1)...................................... --
---------
Net income (loss)..................................... $ 3,843
---------
---------
Net income (loss) per common share.................... $ 0.51
---------
---------
Weighted average common shares outstanding............ 7,553
OTHER DATA:
Net cash provided by operating activities............... $ 19,496
EBITDAX (2)............................................. 19,063
EBITDAX per share....................................... 2.52
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1996
------------------------------- ----------------------------
1993 1994 1995 ACTUAL AS ADJUSTED (3)
--------- --------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ (3,891) $ (12,269) $ (13,717) $ (5,196) $ (5,196)
Total assets......................................... 116,116 111,746 93,161 94,672 94,672
Long-term debt....................................... 49,283 49,147 33,538 38,528 24,559
Stockholders' equity................................. 47,474 38,926 34,996 39,087 53,056
</TABLE>
- ------------------------------
(1) Prior to the Consolidation, income taxes were computed at the applicable
federal statutory rate.
(2) EBITDAX refers to earnings before income taxes, interest expense,
depreciation, depletion and amortization, impairment of property and
equipment, exploration costs, and other income (expense). EBITDAX is a
financial measure commonly used in the Company's industry and should not be
considered in isolation or as a substitute for net income, cash flow
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity.
(3) As adjusted to reflect receipt by the Company of estimated net proceeds from
the issuance of 1,250,000 shares of Common Stock and the application of such
proceeds. See "Use of Proceeds" and "Capitalization."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
Company's historical consolidated financial position at December 31, 1993, 1994
and 1995, and June 30, 1996, and results of operations and cash flows for each
of the three years in the period ended December 31, 1995 and the unaudited six
month periods ended June 30, 1995 and 1996. The Company's historical
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus contain detailed information that should be referred to in
conjunction with the following discussion.
OVERVIEW
The Company commenced operations in May 1993, following the Consolidation
and completion of the Company's initial public offering. The Company and its
predecessors have been engaged in the exploration for and development and
production of oil and gas in the Trend since 1976. During the 20-year period,
the Company has continually adapted its Trend drilling techniques to take
advantage of technological advancements available to the industry, particularly
in the area of horizontal drilling tools.
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 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 has attempted to supplement its Trend reserves
with longer-life reserves by diversifying its activities into (i) foreign
exploration and development ventures, (ii) 3-D exploration projects in areas of
Texas other than the Trend, and (iii) acquisitions of producing properties.
Although the Company has enjoyed some success through the acquisition of
properties in the Jalmat Field of New Mexico and the Texas Gulf Coast area, none
of the Company's exploration activities conducted outside the Trend during 1993
and 1994 were commercially productive. As a result, the Company determined in
1995 to direct its efforts in the North Giddings Block, where it has developed
substantial experience, and presently plans to continue to explore for and
develop oil and gas reserves from the North Giddings Block during the remainder
of 1996 and in 1997.
The Company follows the successful efforts method of accounting for its oil
and gas properties, whereby costs of productive wells, developmental dry holes
and productive leases are capitalized and amortized using the unit-of-production
method based on estimated proved reserves. Costs of unproved properties are
initially capitalized. Those properties with significant acquisition costs are
periodically assessed and any impairment in value is charged to expense. The
amount of impairment recognized on unproved properties which are not
individually significant is determined by amortizing the costs of such
properties within appropriate groups based on the Company's historical
experience, acquisition dates and average lease terms. Exploration costs,
including geological and geophysical expenses and delay rentals, are charged to
expense as incurred. Exploratory drilling costs, including the cost of
stratigraphic test wells, are initially capitalized but charged to expense if
and when the well is determined to be unsuccessful.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating information of the Company
for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OIL AND GAS PRODUCTION DATA:
Oil (Mbbls).................................................... 1,881 1,709 1,831 954 1,080
Gas (Mmcf)..................................................... 10,364 8,369 6,845 3,640 2,816
Total (MBOE)................................................... 3,608 3,104 2,972 1,561 1,549
AVERAGE OIL AND GAS SALES PRICES (1):
Oil ($/Bbl).................................................... $ 17.41 $ 15.72 $ 17.35 $ 17.62 $ 19.08
Gas ($/Mcf).................................................... $ 2.15 $ 1.98 $ 1.77 $ 1.74 $ 2.41
OPERATING COSTS AND EXPENSES ($/BOE PRODUCED):
Lease operations............................................... $ 3.54 $ 4.12 $ 4.55 $ 4.48 $ 4.62
Oil and gas depletion.......................................... $ 7.03 $ 7.81 $ 8.16 $ 8.54 $ 7.40
General and administrative..................................... $ 1.90 $ 1.82 $ 1.24 $ 1.29 $ 1.07
NET WELLS DRILLED:
Horizontal wells............................................... 27.6 16.2 23.5 15.5 13.2
Vertical wells................................................. 0.1 3.6 -- -- 1.1
</TABLE>
- ------------------------
(1) Includes effects of hedging transactions.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
REVENUES
Oil and gas sales increased 19% from $23.2 million during the six months
ended June 30, 1995 to $27.5 million during the six months ended June 30, 1996
due primarily to a 13% increase in oil production and an 8% rise in oil prices,
net of hedging losses. Production from wells completed subsequent to June 30,
1995 accounted for 40% of total oil production for the 1996 period. Production
from such wells more than offset the effects of steep production declines from
previously existing Trend wells. Although gas prices increased 39%, the benefit
from such increase was substantially offset by a 23% decline in gas production.
Revenues from natural gas services decreased 51% from $3.7 million during the
1995 period to $1.9 million during the 1996 period due primarily to the sale of
the Company's two principal gas gathering and processing systems in August 1995.
COSTS AND EXPENSES
Lease operations expenses increased 3% from $7.0 million during the 1995
period to $7.2 million during the 1996 period while production on a BOE basis
decreased 1%, resulting in an increase in lease operations expenses on a BOE
basis from $4.48 per BOE during the 1995 period to $4.62 per BOE during the 1996
period. Operating expenses of Trend wells are generally lower on a BOE basis in
the early stages of production since a large portion of the operating expenses
are fixed in nature and do not vary with production volume. As production
volumes decline, operating expenses per BOE typically increase.
Depreciation, depletion and amortization ("DD&A") expense decreased 14% from
$13.8 million during the 1995 period to $11.9 million during the 1996 period due
primarily to a 13% 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 recording of a non-cash provision for the impairment of
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certain producing properties in the fourth quarter of 1995 due to the adoption
of 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 $8.54 per BOE during the 1995 period to $7.40 per
BOE during the 1996 period.
The Company recorded an additional provision for impairment of property and
equipment of $1.2 million during the 1996 period due to a revision in estimated
proved oil and gas reserves attributable to one undeveloped location in the
Texas Gulf Coast area.
General and administrative ("G&A") expenses decreased 15% from $2.0 million
during the 1995 period to $1.7 million during the 1996 period. 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 not realized until the third
quarter of 1995.
Costs of natural gas services decreased 36% from $2.5 million during the
1995 period to $1.6 million during the 1996 period due primarily to the sale of
the Company's two principal gas gathering and processing systems in August 1995.
INTEREST EXPENSE AND OTHER
Interest expense decreased 37% from $3.0 million during the 1995 period to
$1.9 million during the 1996 period due primarily to lower average levels of
indebtedness on the Credit Facility and, to a lesser extent, lower average
interest rates. The average daily principal balance outstanding on the Credit
Facility during the 1996 period was $40.5 million compared to $57.8 million in
1995. The effective annual interest rate on bank debt during the 1996 period was
9.7% compared to 10.3% in 1995. Proceeds from the sale 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.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES
Oil and gas sales increased 1% from $43.6 million in 1994 to $43.9 million
in 1995 due primarily to higher oil prices, the benefit of which was largely
eliminated by the effects of lower gas prices and a 4% decline in oil and gas
production. Although production from wells completed after December 31, 1994
accounted for 33% of the Company's 1995 production, these additions were more
than offset by characteristically steep production declines from previously
existing Trend wells. Average prices received for oil production increased 10%
while average gas prices declined 11%.
Revenues from natural gas services decreased 8% from $5.9 million in 1994 to
$5.4 million in 1995, despite the sale in August 1995 of the Company's two
principal gas gathering and processing systems, since one of the systems sold
was acquired effective January 1995 and did not contribute to revenues in 1994.
COSTS AND EXPENSES
Lease operations expenses increased 5% from $12.8 million in 1994 to $13.5
million in 1995 despite a 4% decline in BOE production. On a BOE basis, lease
operations expenses increased from $4.12 per BOE to $4.55 per BOE. Operating
expenses of Trend wells are generally lower on a BOE basis in the early stages
of production since a large portion of the operating expenses are fixed in
nature and do not vary with production volume. As production volumes decline,
operating expenses per BOE typically increase. In addition, during 1995, the
Company conducted most of its drilling activity in the updip area of the Trend
where the reservoir pressures are lower. Generally, this requires wells to be
converted from flowing wells
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to electric-powered pumping units at an earlier stage of production, which
increases the lifting costs associated with the updip wells.
Effective October 1, 1995, the Company adopted SFAS 121, and recorded a
$10.3 million non-cash provision for impairment of certain producing assets.
Substantially all of the impaired assets are located in the Pearsall Field in
the Trend.
DD&A expense remained constant from 1994 to 1995, despite a 4% decline in
production, due to slightly higher amortization rates 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
effects on amortization rates of a 15% downward revision of estimated proved
reserves at December 31, 1994 were substantially offset by the adoption of SFAS
121, which reduced DD&A rates on the impaired properties.
G&A expenses decreased 35% from $5.7 million in 1994 to $3.7 million in
1995. Since March 1994, the Company has 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 benefit of these measures was fully realized in 1995.
Exploration costs decreased 77% from $7.1 million in 1994 to $1.6 million in
1995 due primarily to provisions for dry hole costs, impairments of unproved
properties and seismic expenses in 1994 related to the Company's acreage in the
Sabine Area of the Trend, its Argentina venture and its West and North Central
Texas 3-D seismic program which did not recur in 1995.
Costs of natural gas services increased 6% from $3.5 million in 1994 to $3.7
million in 1995 despite the sale in August 1995 of the Company's two principal
gas gathering and processing systems. The reduction in costs related to the
assets sold was more than offset by the fact that one of the systems sold was
acquired effective January 1995 and did not contribute to costs in 1994.
INTEREST EXPENSE AND OTHER
Interest expense increased 22% from $4.5 million in 1994 to $5.5 million in
1995 due primarily to higher average interest rates on the Credit Facility. The
effective annual interest rate on bank debt during 1995 was 10.6% compared to
8.7% in 1994. Proceeds from the sale of certain natural gas gathering and
processing systems in August 1995 and the sale of Common Stock pursuant to a
rights offering in September 1995 resulted in a slight reduction in average
levels of bank debt in 1995. The average daily principal balance outstanding on
bank debt during 1995 was $52.3 million compared to $52.6 million in 1994.
Other income increased from $800,000 in 1994 to $6.0 million in 1995. In
August 1995, the Company sold certain gas gathering assets 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.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUES
Oil and gas sales decreased 21% from $55.0 million in 1993 to $43.6 million
in 1994 due to a combination of lower oil and gas production and lower product
prices. Oil and gas production on a BOE basis decreased 14% from 1993. Trend
wells drilled in 1994 accounted for 12% of 1994 oil and gas production, while
1994 acquisitions contributed 2%, both of which were more than offset by the
steep production declines which are characteristic of Trend wells. In addition,
prices received for oil and gas production also declined during 1994 by 10% and
8%, respectively, accounting for approximately one-third of the 21% decrease in
oil and gas sales.
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<PAGE>
Revenues from natural gas services increased 28% from $4.6 million in 1993
to $5.9 million in 1994 due primarily to additional revenues generated in 1994
from the Company's Mentone gas treatment facility which was completed in August
1993 and additional revenues generated through third party gas marketing
arrangements originating in December 1993.
COSTS AND EXPENSES
Lease operations expenses remained relatively constant in 1994 as compared
to 1993 despite a 14% decline in BOE production. On a BOE basis, lease
operations expenses increased from $3.54 per BOE to $4.12 per BOE. Operating
expenses of Trend wells are generally lower on a BOE basis in the early stages
of production since a large portion of the operating expenses are fixed in
nature and do not vary with production volume. As production volumes decline,
operating expenses per BOE generally increase. In addition, during 1994, the
Company conducted most of its drilling activity in the updip area of the Trend
where the reservoir pressures are lower. Generally, this requires wells to be
converted from flowing wells to electric-powered pumping units at an earlier
stage of production, which increases the lifting costs associated with the updip
wells.
DD&A expense decreased 6% from $26.8 million in 1993 to $25.2 million in
1994 due to a 14% decline in BOE production which was offset in part by higher
amortization rates 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. Quantities of estimated proved reserves were
revised downward by 15% on a BOE basis during 1994, contributing to an increase
in the depletion rate for the fourth quarter of 1994 to $9.11 per BOE compared
to $7.81 per BOE for the entire 1994 year.
G&A expenses decreased 17% from $6.9 million in 1993 to $5.7 million in 1994
despite the incurrence of $601,000 of G&A expenses attributable to the Company's
Argentina venture in 1994. In March 1994, and again in January 1995, the Company
implemented certain cost reduction measures, including the elimination of three
senior level positions, in order to reduce overhead and conserve financial
resources. The Company reduced professional fees significantly during 1994. In
addition, the Company closed its San Antonio office and consolidated all
exploration and production functions, other than field operations, into its
corporate headquarters in Midland.
Exploration costs increased 15% from $6.2 million in 1993 to $7.1 million in
1994 due primarily to increases in provisions for dry holes and impairments of
unproved properties, offset in part by reductions in seismic expenses. During
1994, the Company recorded provisions for impairments of other unproved acreage
totaling $2.6 million, the most significant of which was attributable to the
Sabine area of the Trend. In addition, the Company recorded a provision for dry
holes and abandonments of $2.5 million related to an unsuccessful exploration
venture in the Colhue Huapi area of Argentina and expensed $1.4 million of
seismic costs, dry hole costs and leasehold impairments related to a 3-D seismic
program in West and North Central Texas initiated in 1993. By comparison, the
1993 exploration costs included $2.4 million of dry hole costs related to the
unsuccessful results of two exploratory wells, $1.9 million of leasehold
impairments (primarily related to the Sabine area of the Trend) and $1.5 million
of seismic costs related to the West and North Central Texas 3-D program.
Costs of natural gas services increased 40% from $2.5 million in 1993 to
$3.5 million in 1994 due primarily to the third party gas marketing arrangements
discussed under "Revenues" above. Since these arrangements are typically
characterized by low gross profit margins, the percentage increase in costs was
disproportionately higher than the associated percentage increase in revenues.
INTEREST EXPENSE AND OTHER
Interest expense increased 13% from $4.0 million in 1993 to $4.5 million in
1994 due to higher average interest rates during 1994, offset in part by lower
average levels of bank indebtedness. The effective annual
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<PAGE>
interest rate on bank debt during 1994 was 8.7% compared to 7.6% in 1993. The
average daily principal balance outstanding on bank debt during 1994 was $52.6
million compared to $54.1 million in 1993.
Included in other income during 1994 was a $600,000 gain related to a
favorable ruling in a legal proceeding for which a loss provision had been
recorded in 1992.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's primary financial resource is its oil and gas reserves. In
accordance with the terms of the 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 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 six months ended June 30, 1996,
the Company completed 13 net wells in the North Giddings Block and plans to
drill an additional 13 net wells during the remainder of 1996 in this area. 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 $17 million was incurred in the first six 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 1997. At this increased level of drilling activity, the Company
plans to incur capital expenditures of approximately $42 million during 1997. In
addition, the Company plans to spend approximately $5 million in 1997 to conduct
and evaluate a proprietary 3-D seismic survey in connection with the Cotton
Valley Exploratory Project. 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
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. See
"--Capital Resources" and "Business and Properties--Cotton Valley Exploratory
Project."
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
CREDIT FACILITY. The Company had $12.5 million of funds available to it
under the Credit Facility at September 30, 1996. The banks' loan commitment
currently reduces by $1 million each month. Net proceeds from the Offering will
initially be utilized to reduce indebtedness under the Credit Facility. The
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<PAGE>
Company intends to use such increased borrowing capacity, together with
internally generated funds, to finance (i) its 1997 planned capital expenditure
program and (ii) an estimated $5 million to conduct and evaluate a proprietary
3-D seismic survey as a part of the Cotton Valley Exploratory Project. See "Use
of Proceeds."
WORKING CAPITAL AND CASH FLOW. During the six months ended June 30, 1996,
the Company generated cash flow from operating activities of $19.5 million and
received proceeds from the sale of assets of $3.5 million. During the same
period, the Company spent $16.7 million on capital expenditures and repaid $4.7
million on a term loan facility. The residual cash flow of $1.6 million was
primarily used to reduce the amount of indebtedness outstanding on a revolving
loan facility.
The Company's working capital deficit decreased from $13.7 million at
December 31, 1995 to $5.2 million at June 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 Credit Facility, no portion of
the outstanding balance on the Credit Facility is deemed to be a current
liability at June 30, 1996.
The Company believes that the funds to be available under the 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, since the amount of
the borrowing base and cash flow from operations is subject to factors such as
drilling results and product prices, and since the borrowing base is further
subject to changes in discount rates and periodic redeterminations, there can be
no assurance that all of these combined sources of funds will be adequate to
meet the Company's capital and exploratory expenditure program, in which case
the Company may be required to cease or delay such activities.
INFLATION AND CHANGES IN PRICES
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.
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.
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.
As of the date of this Prospectus, 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.
23
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Clayton Williams Energy, Inc. is primarily engaged in the exploration,
development and production of oil and natural gas, and to a lesser extent, in
the gathering and marketing of natural gas. Since 1988, the Company and its
predecessors have concentrated their drilling activities primarily in the Trend,
which extends from South Texas through East Texas, Louisiana and other southern
states and includes the Austin Chalk formation. The Company also has operations
in the Jalmat Field located in southeastern New Mexico and in the Texas Gulf
Coast. As of June 30, 1996, the Company had estimated proved reserves totaling
6,844 Mbbls of oil and 37.7 Bcf of gas with a PV-10 Value of approximately
$100.3 million as estimated by the Independent Engineers. At June 30, 1996, the
Company held interests in 455 gross (337.1 net) oil and gas wells and owned
leasehold interests in approximately 191,289 gross (129,632 net) undeveloped
acres.
BUSINESS STRATEGY
The Company's business strategy is to increase reserves and production
through exploration and development of its oil and gas properties, concentrating
its efforts in the Trend. The Company has operated in the Trend for 20 years and
drilled or participated in the drilling of 634 gross vertical and horizontal
wells. Development of the Austin Chalk formation, which is characterized by
fractured carbonate reservoirs, has been enhanced by advances in horizontal
drilling and completion technologies since the early 1990's. These advances have
provided the Company with the opportunity to develop new reserves and to
generate more attractive economic returns in the Austin Chalk formation. The
Company believes that it is one of the leaders in horizontal drilling in the
Trend. Since the beginning of 1990 the Company has drilled or participated in
223 gross (175.2 net) horizontal wells in the Trend.
The Company's operational focus for the remainder of 1996 and 1997 will be
the continued development of the North Giddings Block, which the Company has
assembled in the updip area of the Giddings Field in east central Texas. The
Company has accumulated approximately 109,000 net acres in the North Giddings
Block and is continuing to lease acreage in this area. The North Giddings Block
is located in the northern area of the Giddings Field in Burleson, Robertson and
Milam Counties, Texas, where the Austin Chalk formation is encountered at depths
ranging from 5,500 feet to 7,000 feet.
During the six months ended June 30, 1996, the Company added 1,718 MBOE of
estimated proved reserves through extensions and discoveries primarily in the
North Giddings Block. Reserve additions for the first six months of 1996 were
110% of production for the same period, while production for such period was
approximately the same on an MBOE basis as in the first six months of 1995. As
of June 30, 1996, the Company had 61.2 producing net wells in the North Giddings
Block and 76 additional drilling locations, of which seven are locations to
which proved undeveloped reserves are attributed by the Independent Engineers.
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 the Cotton Valley Exploratory Project in three phases to explore for
potential reserves in this formation. The first phase is a proprietary 3-D
seismic survey covering a portion of the North Giddings Block that is
anticipated to commence in early 1997. The second phase is the evaluation of the
seismic data to delineate any drilling opportunities in the Cotton Valley
formation. The Company estimates that the cost of conducting the survey and
evaluating the data will be approximately $5 million. The third phase would be
the exploratory drilling of any delineated prospects. The Company estimates that
it will take approximately 12 months to conduct the survey and evaluate the
seismic data before any drilling could be commenced. 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 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
24
<PAGE>
Company's financial position, exploratory drilling success, technological
advances, drilling activities conducted by third parties and current and
anticipated product prices. See "Risk Factors--Liquidity and Capital Resources"
and "--Risk of Exploratory Activities."
PRINCIPAL AREAS OF OPERATIONS
THE TREND. The Company's current production of oil and gas in the Trend is
derived principally from the Austin Chalk formation in the Giddings Field. At
June 30, 1996, the Company had interests in 214 gross (157.3 net) producing
wells in the Giddings Field, including 145 horizontal and 69 vertical wells. For
the six months ended June 30, 1996, the Company's daily net production in the
Giddings Field averaged approximately 5,242 Bbls of oil and 8,702 Mcf of gas.
The Company has drilled 15 wells in the Giddings Field during the first half of
1996, all of which were completed as productive wells. The Company operates 81%
of its wells in the Giddings Field.
Since May 1994, the Company has concentrated its Trend drilling activities
in the North Giddings Block. Wells producing from the Austin Chalk formation in
this updip portion of the Giddings Field are more prone to produce oil than gas.
The Company's current drilling technique in this area involves the drilling of
"dual stacked" lateral horizontal wells in the "A" and "B" zones of the Austin
Chalk formation. Dual stacked lateral wells involve the extension of horizontal
well bores in the same direction from the vertical extension of the well with
one lateral designed to penetrate the "A" zone and the other lateral designed to
penetrate the "B" zone. Currently, the combined length of the Company's dual
stacked horizontal laterals in this area ranges from 10,000 feet to 11,000 feet
per well and a completed dual stacked lateral well costs approximately $950,000,
excluding acreage costs.
As the Company's drilling activities in the North Giddings Block have moved
to the southwest, the Company has begun drilling, and may continue to drill,
"dual opposed" horizontal laterals, a drilling technique in which horizontal
laterals are drilled in opposite directions from the vertical extension of the
well with both laterals designed to penetrate the "A" zone, which is the deeper
of the two Austin Chalk zones. This technique has been designed to extend
horizontal laterals into the "B" zone at a date subsequent to initial
completion.
The Company also has production from the Pearsall area of the Trend, located
in south central Texas. The Company discontinued drilling activities in the
Pearsall area in 1993 and has no plans to resume drilling activities in this
area. For the six months ended June 30, 1996, the Company's daily net production
from wells located in the Pearsall area averaged approximately 432 Bbls of oil
and 551 Mcf of gas. The Company operates 98% of its wells in the Pearsall area.
The Company's wells in the Trend are routinely subjected to cyclic water
stimulation. Cyclic water stimulation involves pumping large volumes of water at
high injection rates into a well, shutting-in the well for ten days to two
weeks, and then returning the well to production. Water is pumped into the
reservoir in several stages and is absorbed into the micro-pore spaces of the
rock, thereby displacing oil into the fractures where it may be more readily
produced and, in some cases, extending the fracture system. The Company has used
the cyclic water stimulation method since 1987. The Company generally uses this
treatment technique during the well completion process and repeats the process
12 to 18 months after a well has been placed in production.
JALMAT FIELD. The Jalmat Field, which is located in Lea County, New Mexico,
was discovered in 1935. The Company has working interests in 132 gross (106.7
net) producing wells, all of which are operated by the Company and are located
on approximately 8,023 net acres. Following the Company's acquisition of the
Jalmat Field properties in 1988, a major recompletion and workover program was
commenced. This program included recompletion of both existing and temporarily
abandoned wells, and the use of hydraulic fracture stimulation on wells in the
Jalmat Field. Through June 30, 1996, 57 gross (46.1 net) gas wells have been
successfully recompleted. For the six months ended June 30, 1996, the Company's
average daily production from this field was 117 Bbls of oil and 3,954 Mcf of
gas.
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Although the Company's long-term strategy in the Jalmat Field is to resume a
recompletion and workover program, no such activities have been undertaken in
1996. The Company has 23 proved recompletion or workover opportunities and 3
proved undeveloped drilling locations available to drill in the future.
Depending upon gas prices, the Company may conduct activities on certain of
these locations in 1997.
TEXAS GULF COAST. The Company owns interests in 26 gross (8.3 net) wells in
Wharton and Matagorda Counties in the Gulf Coast region of Texas. These wells
were acquired through two acquisitions in 1994 and are operated by third
parties. The Company's daily net production from this area during the six months
ended June 30, 1996 averaged approximately 85 Bbls of oil and 1,305 Mcf of gas.
COTTON VALLEY EXPLORATORY PROJECT
As the first phase of the Cotton Valley Exploratory Project, the Company
plans to initiate a 3-D seismic survey during 1997 in its North Giddings Block
to determine if seismic features can be identified in the Cotton Valley
Haynesville formation at depths ranging from 15,000 to 16,000 feet indicating
the presence of pinnacle reef formations. The northern edge of the North
Giddings Block is approximately 24 miles southwest of the nearest current Cotton
Valley production. The presence of favorable 3-D seismic data provides no
assurance of success with respect to any subsequent drilling activities.
Approximately half of the wells drilled northeast of the North Giddings Block in
search of Cotton Valley pinnacle reefs have been productive. The Company
believes that all such wells have been drilled based on 3-D seismic surveys. The
Company estimates that a completed Cotton Valley pinnacle reef well would cost
at least $4,000,000. 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. See "Risk
Factors--Risk of Exploratory Activities."
PROVED RESERVES
The following table sets forth certain information as of June 30, 1996 with
respect to the Company's estimated proved oil and gas reserves and the present
value of estimated future net revenues therefrom (discounted at 10%).
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
----------- ------------- ----------
<S> <C> <C> <C>
Oil (Mbbls)................................................................. 6,022 822 6,844
Gas (Mmcf).................................................................. 31,440 6,257 37,697
MBOE........................................................................ 11,262 1,865 13,127
Present value of estimated future net revenues (in thousands)............... $ 93,022 $ 7,319 $ 100,341
</TABLE>
The following table sets forth certain information as of June 30, 1996
regarding the Company's proved oil and gas reserves in each of its principal
producing areas.
<TABLE>
<CAPTION>
PROVED RESERVES PERCENTAGE OF
------------------------------------- PRESENT VALUE PRESENT VALUE OF
TOTAL OIL PERCENT OF OF FUTURE NET FUTURE NET
EQUIVALENT TOTAL OIL REVENUES BEFORE REVENUES BEFORE
AREA OR FIELD OIL (MBBLS) GAS (MMCF) (MBOE) EQUIVALENT INCOME TAXES INCOME TAXES
- ----------------------------------- ----------- ----------- ----------- ------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Trend.............................. 6,281 14,807 8,749 66.6% $ 75,837 75.6%
Jalmat............................. 320 15,323 2,874 21.9 14,910 14.9
Texas Gulf Coast................... 121 2,729 576 4.4 5,159 5.1
Other.............................. 122 4,838 928 7.1 4,435 4.4
----- ----------- ----------- ----- --------------- -----
Total.......................... 6,844 37,697 13,127 100.0% $ 100,341 100.0%
----- ----------- ----------- ----- --------------- -----
----- ----------- ----------- ----- --------------- -----
</TABLE>
The estimates as of June 30, 1996 of proved reserves, future net revenues
from proved reserves and the present value of such future net revenues before
income taxes set forth in this Prospectus were based
26
<PAGE>
on a report prepared by the Independent Engineers, a summary of which is
included as Annex A. For purposes of preparing such estimates, the Independent
Engineers reviewed production data through June 30, 1996 for properties
representing 84% of the estimated present value of the Company's proved
developed producing reserves and through earlier dates for the balance of the
Company's properties. In order to calculate the proved reserve estimates as of
June 30, 1996, the Independent Engineers assumed that production for each of the
Company's properties since the date of the last production data reviewed was in
accordance with the production decline curve for such property.
In accordance with applicable guidelines of the Commission, the estimates of
the Company's proved reserves and future net revenues therefrom set forth herein
are made using oil and gas sales prices estimated to be in effect as of the date
of such reserve estimates and are held constant throughout the life of the
properties. The weighted average of the sales prices utilized for the purposes
of estimating the Company's proved reserves and the future net revenues
therefrom as of June 30, 1996 were $20.10 per Bbl and $2.24 per Mcf of gas.
Estimated quantities of proved reserves and future net revenues therefrom are
affected by changes in oil and gas prices. Oil and gas prices have fluctuated
widely in recent years.
Also in accordance with Commission guidelines, the estimates of the
Company's proved reserves and future net revenues therefrom are made using
current lease and well operating costs estimated by the Company. Lease operating
expenses for oil wells operated by the Company in the Austin Chalk, Buda and
Georgetown formations were estimated using a combination of fixed and
variable-by-volume costs consistent with the Company's experience in operating
such wells. For purposes of calculating future net revenues and the discounted
present value therefrom, operating costs exclude accounting and administrative
overhead expenses attributable to the Company's working interest in wells
operated by it under joint operating agreements, but include administrative
costs associated with production offices. The present values of proved reserves
set forth herein should not be construed as the current market value of the
estimated proved oil and gas reserves attributable to the Company's properties.
See "Risk Factors-- Uncertainty of Estimates of Reserves and Future Net
Revenues."
EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company drilled, or participated in the drilling of, the following
numbers of wells during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
---------------------------------------- ENDED
JUNE 30,
1993 1994 1995 1996
------------ ------------ ------------ ------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEVELOPMENT WELLS:
Oil....................................................... 22 17.9 14 11.7 24 21.0 15 12.7
Gas....................................................... 4 2.6 2 1.5 1 0.5 -- --
Dry....................................................... -- -- -- -- -- -- -- --
----- ---- ----- ---- ----- ---- ----- ----
Total................................................... 26 20.5 16 13.2 25 21.5 15 12.7
----- ---- ----- ---- ----- ---- ----- ----
----- ---- ----- ---- ----- ---- ----- ----
EXPLORATORY WELLS:
Oil....................................................... 6 5.3 4 2.9 2 2.0 1 1.0
Gas....................................................... 2 1.1 1 1.0 -- -- -- --
Dry....................................................... 1 0.8 5 2.7 -- -- 2 .6
----- ---- ----- ---- ----- ---- ----- ----
Total................................................... 9 7.2 10 6.6 2 2.0 3 1.6
----- ---- ----- ---- ----- ---- ----- ----
----- ---- ----- ---- ----- ---- ----- ----
TOTAL WELLS:
Oil....................................................... 28 23.2 18 14.6 26 23.0 16 13.7
Gas....................................................... 6 3.7 3 2.5 1 .5 -- --
Dry....................................................... 1 0.8 5 2.7 -- -- 2 .6
----- ---- ----- ---- ----- ---- ----- ----
Total................................................... 35 27.7 26 19.8 27 23.5 18 14.3
----- ---- ----- ---- ----- ---- ----- ----
----- ---- ----- ---- ----- ---- ----- ----
</TABLE>
27
<PAGE>
The information contained in the foregoing table should not be considered
indicative of future drilling performance, nor should it be assumed that there
is any necessary correlation between the number of productive wells drilled and
the amount of oil and gas that may ultimately be recovered by the Company.
The Company does not own any drilling rigs and all of its drilling
activities are conducted by independent contractors on a day rate basis under
standard drilling contracts. At June 30, 1996, the Company had two drilling rigs
under contract in the North Giddings Block, and plans to contract for a third
rig beginning in 1997.
PRODUCTIVE WELL SUMMARY
The following table sets forth certain information regarding the Company's
ownership as of June 30, 1996, of productive wells in the areas indicated.
<TABLE>
<CAPTION>
OIL GAS TOTAL
---------------------- ---------------------- -----------
GROSS NET GROSS NET GROSS
----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Trend........................................................... 246 185.3 21 15.5 267
Jalmat Area..................................................... 37 30.0 95 76.7 132
Texas Gulf Coast................................................ 1 .4 25 7.9 26
Other........................................................... 24 19.9 6 1.4 30
--- --------- --- --------- ---
Total....................................................... 308 235.6 147 101.5 455
--- --------- --- --------- ---
--- --------- --- --------- ---
<CAPTION>
NET
---------
<S> <C>
Trend........................................................... 200.8
Jalmat Area..................................................... 106.7
Texas Gulf Coast................................................ 8.3
Other........................................................... 21.3
---------
Total....................................................... 337.1
---------
---------
</TABLE>
The Company seeks to act as operator of the wells in which it owns a
significant interest. As operator of a well, the Company is able to manage
drilling and production operations as well as other matters affecting the
production and sale of oil and gas. In addition, the Company receives fees from
other working interest owners for the operation of the wells. At June 30, 1996,
the Company was the operator of 378 wells, or approximately 83% of the 455 total
wells in which it has a working interest. Production from those operated wells
represented approximately 91% of the Company's total net production for the six
months ended June 30, 1996.
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes of, average sales prices received from, and average production costs
associated with the Company's sales of oil and gas for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OIL AND GAS PRODUCTION DATA:
Oil (Mbbls).................................................... 1,881 1,709 1,831 954 1,080
Gas (Mmcf)..................................................... 10,364 8,369 6,845 3,640 2,816
Total (MBOE)................................................... 3,608 3,104 2,972 1,561 1,549
AVERAGE OIL AND GAS SALES PRICES (1):
Oil ($/Bbl).................................................... $ 17.41 $ 15.72 $ 17.35 $ 17.62 $ 19.08
Gas ($/Mcf) (2)................................................ $ 2.15 $ 1.98 $ 1.77 $ 1.74 $ 2.41
AVERAGE PRODUCTION COSTS:
Lease operations ($/BOE) (3)................................... $ 3.54 $ 4.12 $ 4.55 $ 4.48 $ 4.62
</TABLE>
- ------------------------
(1) Includes effects of hedging transactions.
(2) Includes natural gas liquids.
(3) Includes direct lifting costs (labor, repairs and maintenance, materials and
supplies), workover costs and the administrative costs of production
offices, insurance and property and severance taxes.
28
<PAGE>
DEVELOPMENT, EXPLORATION AND ACQUISITIONS EXPENDITURES
The following table sets forth certain information regarding the costs
incurred by the Company in its development, exploration and acquisition
activities during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------------- ENDED JUNE
1993 1994 1995 30, 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Property Acquisitions:
Proved............................................................ $ -- $ 10,199 $ -- $ 1,246
Unproved.......................................................... 5,978 2,325 2,254 2,852
Developmental Costs................................................. 25,519 13,136 16,823 11,461
Exploratory Costs................................................... 11,219 5,699 1,407 1,167
--------- --------- --------- -----------
$ 42,716 $ 31,359 $ 20,484 $ 16,726
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
ACREAGE
The following table sets forth certain information regarding the Company's
developed and undeveloped leasehold acreage as of June 30, 1996. Acreage in
which the Company's interest is limited to royalty, overriding royalty and
similar interests is excluded.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
-------------------- -------------------- --------------------
GROSS NET GROSS NET GROSS NET
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Trend........................................... 89,807 77,520 97,888 79,612 187,695 157,132
Jalmat Area..................................... 9,481 8,023 -- -- 9,481 8,023
Texas Gulf Coast................................ 8,617 3,922 562 163 9,179 4,085
Other........................................... 17,110 2,423 92,839 49,857 109,949 52,280
--------- --------- --------- --------- --------- ---------
Total......................................... 125,015 91,888 191,289 129,632 316,304 221,520
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
MARKETS
GENERAL. The revenues generated from the Company's oil and gas operations
are highly dependent upon the prices of and the demand for its oil and gas
production. The prices received by the Company for its oil and gas production
depend upon numerous factors beyond the Company's control. Future decreases in
the prices of oil and gas could have an adverse effect on the Company's proved
reserves, revenues, profitability and cash flow. See "Risk Factors--Volatility
of Oil and Gas Prices." As a result of these factors, the Company engages in
price hedging activities from time to time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Hedging
Transactions."
OIL SALES. Most oil purchasers periodically publish price bulletins to
inform producers of the base price for various grades and locations of crude
oil. These bulletins establish what is known in the oil and gas industry as the
"posted price." The posted price applicable to most of the Company's oil
production is generally $1 to $2 per barrel lower than the price quoted on the
NYMEX for spot West Texas Intermediate ("WTI") contracts since the oil purchaser
must bear the cost to physically gather, transport and store the purchased crude
oil.
The Company's oil production from the Trend is sold under three separate
contracts. The Giddings Field production from Burleson, Brazos and Robertson
Counties is primarily sold to Plains Marketing and Transportation, Inc.
("Plains"), under a contract which expires December 31, 1996, at a price based
on the average NYMEX price for WTI, less an agreed-upon deduction. The Giddings
Field production from Washington, Fayette and Lee Counties is sold to Plains,
under a contract which expires December 31, 1996 at a price based on the higher
of the average monthly posted price of Koch Oil Company or Pride Pipeline
Company, L.P. ("Pride"), plus an agreed-upon bonus. The Pearsall area production
is sold to Plains, under a contract which expires December 31, 1996, at a price
based on EOTT Energy Corp.'s monthly weighted average posted price for WTI, less
an agreed-upon deduction for sour oil, and plus an agreed-upon bonus for sweet
oil.
29
<PAGE>
Oil from the Jalmat Field is sold to Plains under a month-to-month contract.
This production is sold at a price equal to Pride's average monthly posted price
for WTI, less an agreed upon deduction.
GAS SALES. The Company is committed to sell substantially all of its gas
production from the Giddings Field to Aquila Southwest Pipeline Corporation
("Aquila") through September 1997. The predecessor to Aquila was formed in 1987
to acquire the assets of certain Predecessors engaged in the gas transmission
and processing businesses. In connection with the sale of such assets, certain
of the Predecessors dedicated certain gas production and processing rights with
respect to wells located in the Giddings Field and other area counties (the
"Dedicated Counties") to Aquila under terms which generally require Aquila to
match the best terms which the Company is able to obtain for its gas well gas
and to offer the best terms Aquila is offering for comparable quantities and
qualities of casinghead gas from the Dedicated Counties ("Dedication
Agreement"). The Dedication Agreement with respect to gas well gas produced from
the Dedicated Counties expires January 30, 1997.
As a result of the Dedication Agreement, the Company is a party to a gas
purchase contract dated October 1, 1991 with Aquila (the "Purchase Contract")
and has committed its gas to Aquila pursuant to a gas processing agreement (the
"Processing Agreement"). Both the Purchase Contract and the Processing Agreement
cover gas production from the Dedicated Counties. The term of the Purchase
Contract expires September 30, 1997. The prices received by the Company for gas
sold pursuant to the Purchase Contract and the Processing Agreement are based
upon formulae which are generally market responsive. The Company also has
reserved the right pursuant to the Purchase Contract to market its residue gas
to a third party.
Effective July 1, 1995, the Company began selling substantially all of its
gas production from the Jalmat Field to Sid Richardson Gasoline, Ltd.
("Richardson") under a contract which expires October 31, 2004. The price
received by the Company for residue gas sold pursuant to this contract is based
upon proceeds received by Richardson less a service fee and is generally market
responsive. The Company also shares in the proceeds received by Richardson for
liquids extracted from the Company's gas. Although the Company is currently
selling its residue gas to Richardson, it has the right to make sales to any
other third party.
A substantial portion of the Company's gas production from the Pearsall area
is sold to a subsidiary of the Company under two long-term contracts.
During 1995, Aquila purchased 52% and Richardson and its predecessor
combined to purchase 17% of the Company's gas production. If Aquila and
Richardson cease purchasing gas from the Company, the Company believes that it
would be able to replace such purchasers, although no assurance can be given as
to the prices it would be able to obtain from other parties; however, the loss
of Richardson as a purchaser in the Jalmat Field could result in curtailed
production due to the type of pipeline facilities otherwise available in the
area.
NATURAL GAS SERVICES
The Company owns an interest in and operates seven gas gathering systems and
three gas processing plants in the states of Texas and Mississippi. These
natural gas service facilities consist of interests in approximately 70 miles of
pipeline, two amine treating plants, one liquids extraction plant and three
compressor stations. The Company does not derive a significant portion of its
consolidated operating income from natural gas services and does not consider
this business to be a strategic part of its business plan.
COMPETITION AND MARKETS
Competition in all areas of the Company's operations is intense. Major and
independent oil and gas companies and oil and gas syndicates actively bid for
desirable oil and gas properties, as well as for the
30
<PAGE>
equipment and labor required to operate and develop such properties. A number of
the Company's competitors have financial resources and acquisition, exploration
and development budgets that are substantially greater than those of the
Company, which may adversely affect the Company's ability to compete with these
companies. Such companies may be able to pay more for productive oil and gas
properties and exploratory prospects and to define, evaluate, bid for and
purchase a greater number of properties and prospects than the Company's
financial or human resources permit.
The market for oil, gas and natural gas liquids produced by the Company
depends on factors beyond its control, including domestic and foreign political
conditions, the overall level of supply of and demand for oil, gas and natural
gas liquids, the price of imports of oil and gas, weather conditions, the price
and availability of alternative fuels, the proximity and capacity of gas
pipelines and other transportation facilities and overall economic conditions.
The oil and gas industry as a whole also competes with other industries in
supplying the energy and fuel requirements of industrial, commercial and
individual consumers.
REGULATION
The Company's oil and gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal, state and
local agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Because such rules and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and the
spacing, plugging and abandonment of such wells. The statutes and regulations of
certain states limit the rate at which oil and gas can be produced from the
Company's properties.
The Federal Energy Regulatory Commission ("FERC") regulates interstate
natural gas transportation rates and service conditions, which affect the
marketing of gas produced by the Company, as well as the revenues received by
the Company for sales of such production. Since the mid-1980s, the FERC has
issued a series of orders, culminating in Order Nos. 636, 636-A and 636-B
("Order 636"), that have significantly altered the marketing and transportation
of gas. Order 636 mandates a fundamental restructuring of interstate pipeline
sales and transportation service, including the unbundling by interstate
pipelines of the sales, transportation, storage and other components of the
city-gate sales services such pipelines previously performed. One of the FERC's
purposes in issuing the orders is to increase competition within all phases of
the gas industry. Generally, Order 636 has eliminated or substantially increased
competition and volatility in natural gas markets. While significant regulatory
uncertainty remains, Order 636 may ultimately enhance the Company's ability to
market and transport its gas, although it may also subject the Company to
greater competition and more restrictive pipeline imbalance tolerances and
greater associated penalties for violation of such tolerances. Numerous parties
have filed petitions for review of Order 636, as well as orders in individual
pipeline restructuring proceedings. In July 1996, Order 636 was generally upheld
on appeal. The portions remanded for further action do not appear to materially
affect the Company. It is difficult to predict when all appeals of Order 636
will be completed or their impact on the Company.
The FERC has recently announced several important transportation-related
policy statements and proposed rule changes. In 1995, the FERC issued a policy
statement on how interstate natural gas pipelines can recover the costs of new
pipeline facilities. In January 1996, the FERC issued a policy
31
<PAGE>
statement and a request for comments concerning alternatives to its traditional
cost-of-service ratemaking methodology, including criteria to be used in
evaluating proposals to charge market-based rates for the transportation of
natural gas. In addition, the FERC recently issued a notice of proposed
rulemaking pursuant to which it proposes to substantially revise its regulations
regarding releases of firm interstate natural gas pipeline capacity. While any
resulting FERC action regarding these matters would affect the Company only
indirectly, the FERC's current rules and policy statements may have the effect
of enhancing competition in natural gas markets by, among other things,
encouraging non-producer natural gas marketers to engage in certain purchase and
sale transactions. The Company cannot predict what action the FERC will take on
these matters, nor can it accurately predict whether the FERC's actions will
achieve the goal of increasing competition in markets in which the Company's
natural gas is sold. However, the Company does not believe that it will be
trated materially differently than other natural gas producers and marketers
with which it competes.
Sales of oil and natural gas liquids by the Company are not regulated and
are made at market prices. The price the Company receives from the sale of those
products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, the FERC implemented regulations establishing
an indexing system for transportation rates for oil pipelines, which, generally,
would index such rate to inflation, subject to certain conditions and
limitations. These regulations could increase the cost of transporting oil and
natural gas liquids by pipeline, although the most recent adjustment generally
decreased rates. The Company is not able to predict with any certainty what
effect, if any, these regulations will have on it, but, other factors being
equal, the regulations may, over time, tend to increase transportation costs or
reduce wellhead prices for oil and natural gas liquids.
ENVIRONMENTAL MATTERS
Operations of the Company pertaining to oil and gas exploration, production
and related activities are subject to numerous and constantly changing federal,
state and local laws governing the discharge of materials into the environment
or otherwise relating to environmental protection. Numerous governmental
agencies issue regulations to implement and enforce such laws which are often
difficult and costly to comply with and which carry substantial civil and
criminal penalties for failure to comply. These laws and regulations may require
the acquisition of certain permits prior to or in connection with drilling
activities, restrict or prohibit the types, quantities and concentration of
substances that can be released into the environment in connection with drilling
and production, restrict or prohibit drilling activities that could impact
wetlands, endangered or threatened species or other protected areas or natural
resources, require some degree of remedial action to mitigate pollution from
former operations, such as pit cleanups and plugging abandoned wells, and impose
substantial liabilities for pollution resulting from the Company's operations.
Such laws and regulations may substantially increase the cost of exploring for,
developing, producing or processing oil and gas and may prevent or delay the
commencement or continuation of a given project and thus generally could have a
material adverse effect upon the capital expenditures, earnings, or competitive
position of the Company. Management of the Company believes it is in substantial
compliance with current applicable environmental laws and regulations, and the
cost of compliance with such laws and regulations has not been material and is
not expected to be material during the next fiscal year. Nevertheless, changes
in existing environmental laws and regulations or in the interpretations thereof
could have a significant impact on the operating costs of the Company, as well
as the oil and gas industry in general. For instance, legislation has been
proposed in Congress from time to time that would reclassify certain oil and gas
production wastes as "hazardous wastes," which reclassification would make
exploration and production wastes subject to much more stringent handling,
disposal and clean-up requirements. State initiatives to further regulate the
disposal of oil and gas wastes and naturally occurring radioactive materials
could have a similar impact on the Company.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original
32
<PAGE>
conduct, on certain classes of persons that are considered to have contributed
to the release of a "hazardous substance" into the environment. These persons
include the owner or operator of the disposal site or the site where the release
occurred and companies that disposed or arranged for the disposal of the
hazardous substances at the site where the release occurred. Under CERClA, such
persons may be subject to joint and several liability for the costs of cleaning
up the hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for neighboring landowners
and other third paries to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. The
Company is able to control directly the operation of only those wells with
respect to which it acts as operator. Notwithstanding the Company's lack of
direct control over wells operated by others, the failure of an operator other
than the Company to comply with applicable environmental regulations may, in
certain circumstances, be attributed to the Company. Management of the Company
believes that it has no material commitments for capital expenditures to comply
with existing environmental requirements.
The Oil Pollution Act ("OPA") imposes a variety of requirements on
"responsible parties" (E.G., owners, operators, lessees and permittees) for oil
and gas onshore and offshore facilities, pipelines, and vessels related to the
prevention of oil spills and imposes liability for damages resulting from such
spills in waters of the United States. OPA requirements include the assignment
of liability to each responsible party for oil spill removal costs and a variety
of public and private damages from oil spills, and the preparation of oil spill
contingency plans. Failure to comply with ongoing requirements or inadequate
cooperation in a spill event may subject a responsible party to civil or
criminal enforcement actions.
State water discharge regulations and federal waste discharge permitting
requirements adopted pursuant to the Federal Water Pollution Control Act
prohibit or are expected to prohibit within the next several months the
discharge of produced water and sand, and some other substances related to the
oil and gas industry, to coastal waters. Although the costs to comply with zero
discharge mandates under state or federal law may be significant, the entire
industry will experience similar costs and the Company believes that these costs
will not have a material adverse impact on the Company's financial conditions
and operations.
EMPLOYEES
At September 30, 1996, the Company had approximately 100 full-time
employees. None of the Company's employees is subject to a collective bargaining
agreement. The Company considers its relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is a defendant in a suit styled THE STATE OF TEXAS, ET AL V.
UNION PACIFIC RESOURCES COMPANY ET AL, presently pending in Lee County, Texas.
The suit attempts to establish a class action consisting of unidentified royalty
and working interest owners throughout the State of Texas. Among other things,
the plaintiffs are seeking actual and exemplary damages for alleged violation of
various statutes relating to common carriers and common purchasers of crude oil
including discrimination in the purchase of oil by giving preferential treatment
to defendants' own oil and conspiring to keep the posted price or sales price of
oil below market value. A general denial has been filed. Because the Company is
neither a common purchaser nor common carrier of oil, management of the Company
believes there is no merit to the allegations as they relate to the Company or
its operations.
In addition, the Company is a defendant or codefendant in minor lawsuits
that have arisen in the ordinary course of business. While the outcome of these
lawsuits cannot be predicted with certainty, management does not expect any of
these to have a material adverse effect on the Company's consolidated financial
condition or results of operations.
33
<PAGE>
MANAGEMENT
The following are the members of the Company's Board of Directors and the
Company's executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ----- ---------------------------------------------------------------------
<S> <C> <C>
Clayton W. Williams, Jr............. 65 Chairman of the Board, President, Chief Executive Officer and a
Director
L. Paul Latham...................... 44 Executive Vice President, Chief Operating Officer and a Director
Mel G. Riggs........................ 41 Senior Vice President--Finance, Secretary, Treasurer, Chief Financial
Officer and a Director
Robert C. Lyon...................... 58 Vice President--Gas Gathering and Marketing
Patrick C. Reesby................... 43 Vice President--Acquisition/New Ventures
Jerry F. Groner..................... 34 Vice President--Land and Lease Administration
T. Mark Tisdale..................... 39 Vice President and General Counsel
Stanley S. Beard (1)(2)............. 55 Director
William P. Clements (1)(2).......... 79 Director
Robert L. Parker (1)(2)............. 72 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Following are brief descriptions of the business experience of the Company's
directors and executive officers:
CLAYTON W. WILLIAMS, JR. has served as Chairman of the Board, President and
Chief Executive Officer and as a Director of the Company since September 1991.
Mr. Williams has been the Chief Executive Officer of the Williams Entities for
in excess of 15 years.
L. PAUL LATHAM is Executive Vice President, Chief Operating Officer and a
Director of the Company, having served in such capacities since September 1991.
Mr. Latham continues to serve as President of ClayDesta Corporation, a Williams
Entity engaged in real estate development and management.
MEL G. RIGGS has served as Senior Vice President--Finance, Secretary,
Treasurer, and Chief Financial Officer since 1991, and as a Director since 1994.
Mr. Riggs has served as manager of finance for various Williams Entities since
1989.
ROBERT C. LYON is Vice President--Gas Gathering and Marketing of the
Company. Mr. Lyon has been employed by the Company and its Predecessors since
1991.
PATRICK C. REESBY is Vice President--Acquisition/New Ventures of the
Company. He has been employed by the Company or its Predecessors since 1981.
JERRY F. GRONER is Vice President--Land and Lease Administration of the
Company. He has served as Manager of Land and Lease Administration since 1994.
Prior to 1994, he served as Associate General Counsel of the Company and its
Predecessors since 1990.
T. MARK TISDALE is Vice President and General Counsel of the Company. He has
been employed by the Company and its Predecessors since 1988.
STANLEY S. BEARD, is a Director of the Company and a member of the
Compensation and Audit Committees of the Board of Directors. Mr. Beard has been
an independent oil and gas operator for over
34
<PAGE>
twenty years, and has been a consultant to Mr. Williams periodically since 1968.
See "Certain Transactions and Relationships--Certain Contractual
Arrangements--Consulting Arrangements."
WILLIAM P. CLEMENTS is a Director of the Company and a member of the
Compensation and Audit Committees of the Board of Directors. Mr. Clements is a
former Governor of the State of Texas, having served two terms in such office
from 1979 to 1983 and from 1987 to 1991 and has been engaged in private
investments for more than the past five years.
ROBERT L. PARKER is a Director of the Company and a member of the
Compensation and Audit Committees of the Board of Directors. Mr. Parker has been
Chairman of the Board of Parker Drilling Company, a publicly-owned corporation
providing contract drilling services, for more than the past five years. He also
serves as a director of MAPCO, Inc., a diversified energy company, Weatherford-
Enterra Corporation, an international provider of specialized services and
products to the oil and gas industry, Bank of Oklahoma Financial Corp. and
Norwest Bank of Texas, Kerrville, N.A.
The following table sets forth the names, ages, titles and dates of
employment of certain other significant employees of the Company.
<TABLE>
<CAPTION>
EMPLOYED
NAME AGE POSITION SINCE
- ----------------------- --- -------------------------------- -----------
<S> <C> <C> <C>
D. Gregory Benton 34 Exploitation Manager 1990
Jeffery R. Cummins 42 Drilling Manager 1981
David G. Grafe 34 Production Manager 1989
Mark B. Heinen 41 Acquisitions Manager 1993
Samuel L. Lyssy 34 Exploration Manager 1990
Ed Norwood 67 Team Leader Cotton Valley 1996
Michael L. Pollard 46 Controller 1993
</TABLE>
Prior to joining the Company in October 1996, Ed Norwood was an Advanced
Senior Geologist with Marathon Oil Company, and was involved in Marathon's
Cotton Valley pinnacle reef exploratory program.
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as to the number and percentage
of shares of Common Stock owned beneficially as of October 11, 1996 by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
Common Stock, (ii) certain of the Company's directors and executive officers,
and (iii) all directors and officers of the Company as a group. Unless otherwise
indicated in the footnotes following the table, the named beneficial owner had
sole voting and investment power over the shares of Common Stock shown as
beneficially owned by such beneficial owner.
<TABLE>
<CAPTION>
PERCENT OWNED
--------------------------
NAME AND ADDRESS OF NUMBER OF BEFORE AFTER
BENEFICIAL OWNER SHARES OFFERING OFFERING
- --------------------------------------------------------------------------------- ---------- ------------ ------------
<S> <C> <C> <C>
Clayton Williams Partnership, Ltd. (1)........................................... 3,772,009 50.3% 43.1%
CWPLCO, Inc. (1)................................................................. 3,772,009 50.3% 43.1%
Clayton W. Williams, Jr. (1) (2)................................................. 4,066,428 54.1% 46.4%
Heartland Advisors, Inc. (3)..................................................... 1,139,388 15.2% 13.0%
790 North Milwaukee Street
Milwaukee, WI 53202
Metropolitan Life Insurance Company.............................................. 556,168 7.4% 6.4%
One Madison Avenue
New York, NY 10010
State Street Research & Management Company (4)................................... 528,412 7.1% 6.0%
One Financial Center, 30th Floor
Boston, MA 02111-2690
L. Paul Latham (5)............................................................... 12,661 * *
Mel G. Riggs (6)................................................................. 11,437 * *
Stanley S. Beard (7)............................................................. 12,171 * *
William P. Clements (7).......................................................... 10,269 * *
Robert L. Parker (7)............................................................. 12,710 * *
T. Mark Tisdale (8).............................................................. 6,180 * *
All officers and directors as a group (10 persons) (9)........................... 4,152,844 54.9% 47.1%
</TABLE>
- ------------------------
* Less than 1% of shares outstanding.
(1) The mailing address of Clayton Williams Partnership, Ltd., CWPLCO, Inc. and
Mr. Williams is Six Desta Drive, Suite 3000, Midland, Texas 79705. CWPLCO,
Inc. is the sole general partner of Clayton Williams Partnership, Ltd. Mr.
Williams shares voting and investment power with respect to the shares owned
by Clayton Williams Partnership, Ltd. and CWPLCO, Inc. The Company granted
Clayton Williams Partnership, Ltd. ("CWPL") and CWPLCO, Inc. certain
"piggy-back" registration rights with respect to the shares of Common Stock
each entity received in connection with the Consolidation. Whenever the
Company proposes to register any of its securities under the Securities Act
(other than registrations in connection with stock option plans and certain
other registrations) each of CWPL and CWPLCO may require the Company,
subject to certain limitations, to include all or any portion of such shares
of Common Stock in any such registrations. CWPL and CWPLCO have each waived
their registration rights in connection with this Offering.
(2) Includes (a) an aggregate of 3,772,009 shares owned of record by Clayton
Williams Partnership, Ltd. and CWPLCO, Inc. and beneficially owned by Mr.
Williams due to Mr. Williams' control of Clayton Williams Partnership, Ltd.
and CWPLCO, Inc., (b) 1,878 shares owned by Mr. Williams' spouse, (c) 588
shares owned by an estate administered by Mr. William's spouse, (d) 205,620
shares owned
36
<PAGE>
directly by Mr. Williams (including 4,679 shares held in the Company's
401(k) Plan & Trust over which Mr. Williams exercises investment control),
(e) 12,594 shares owned by three of Mr. Williams' children residing with
him, (f) 49,434 shares in Trusts of which Mr. Williams is the Trustee and
(g) the right to acquire beneficial ownership through presently exercisable
options to purchase 24,305 shares of Common Stock granted under the 1993
Stock Compensation Plan at an option price of $2.375 per share.
(3) Represents shares owned by clients of Heartland Advisors, Inc.
(4) Represents shares owned by clients of State Street Research & Management
Company.
(5) Includes (a) 2,895 shares owned directly by Mr. Latham (including 212 shares
held in the Company's 401(k) Plan & Trust which Mr. Latham exercises
investment control) and (b) the right to acquire beneficial ownership
through presently exercisable options to purchase 9,766 shares of Common
Stock granted under the 1993 Stock Compensation Plan at an option price of
$2.375 per share.
(6) Includes (a) 2,852 shares owned directly by Mr. Riggs (including 162 shares
held in the Company's 401(k) Plan & Trust over which Mr. Riggs exercises
investment control), (b) 1,382 shares over which Mr. Riggs exercises control
under a Power of Attorney and (c) the right to acquire beneficial ownership
through presently exercisable options to purchase 7,203 shares of Common
Stock granted under the 1993 Stock Compensation Plan at an option price of
$2.375 per share.
(7) Includes, in the case of Messrs. Beard, Clements and Parker, the right to
acquire beneficial ownership through presently exercisable options to
purchase (i) 1,000 shares each of Common Stock granted under the outside
Directors Stock Option Plan at an option price of $15.75 per share, (ii)
1,000 shares each of Common Stock granted under the Outside Directors Stock
Option Plan at an option price of $7.25 per share, (iii) 1,000 shares each
of Common Stock granted under the Outside Directors Stock Option Plan at an
option price of $5.50 per share and (iv) 1,000 shares each of Common Stock
granted under the Outside Directors Stock Option Plan at an option price of
$3.25 per share.
(8) Includes (a) 3,030 shares owned directly by Mr. Tisdale (including 2,271
shares held in the Company's 401(k) Plan & Trust over which Mr. Tisdale
exercises investment control) and (b) the right to acquire beneficial
ownership through presently exercisable options to purchase 3,150 shares of
Common Stock granted under the 1993 Stock Compensation Plan at an option
price of $2.375 per share.
(9) Includes all rights of directors and executive officers to acquire
beneficial ownership through presently exercisable options to purchase
shares of Common Stock granted under the Outside Directors Stock Option Plan
and the 1993 Stock Compensation Plan.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
THE CONSOLIDATION
The Company was formed to consolidate and continue certain operations
previously conducted by the Predecessors, which are controlled by Mr. Williams.
Concurrent with the completion of the Company's initial public offering, certain
of the operations of the Predecessors were consolidated, and the Company
succeeded to the oil and gas properties, exploration and development operations
and the natural gas gathering and marketing operations of the Predecessors,
except for the Excluded Properties.
In connection with the Consolidation, 3,200,000 shares of Common Stock were
issued to the predecessors of certain of the Affiliated Holders in exchange for
oil and gas properties, gas gathering facilities and other assets transferred to
the Company by the Predecessors. The predecessors of such Affiliated Holders
disposed of 325,000 of such shares in the initial public offering.
37
<PAGE>
CERTAIN CONTRACTUAL ARRANGEMENTS
SERVICE AGREEMENT. The Company and the Williams Entities are parties to an
agreement (the "Service Agreement") pursuant to which the Company furnishes
services to, and receives services from, such entities. Under the Agreement, the
Company provides general accounting services, legal services, payroll and
benefits services and aircraft usage to the Williams Entities, as well as lease
operating and technical services with respect to the Excluded Properties. The
Williams Entities provide tax preparation and planning services to the Company.
The Company believes that these services can be performed on a more economical
basis through the use of shared personnel than by the establishment of separate
facilities. The recipient of a service is obligated to reimburse the provider
for the salary and benefit expenses incurred in providing such service and the
allocable portion of its associated general and administrative expenses. In
general, charges for personnel under the Service Agreement are made on a per
hour basis except that the Williams Entities are not required to pay in excess
of $50,000 per year for general accounting services and the Company is not
required to pay in excess of $40,000 per year for tax services. The obligation
to provide such services may be canceled by the Company or any of the Williams
Entities upon notice periods ranging from 30 days to 180 days. The Service
Agreement also allows for the Company and the Williams Entities to maintain
certain joint insurance coverage, including term life, medical and disability
insurance. The cost of such insurance is allocated among the parties on a cost
per employee basis which the Company believes to be reasonable. In addition, the
Service Agreement provides for the sharing of computer usage, which arrangement
can be canceled by the Company or the Williams Entities upon 180 days' notice.
Each party is entitled under the Service Agreement to audit the books and
records of any other party to ensure that charges made thereunder are proper and
to submit any dispute to arbitration by an independent third party. In general,
the Company does not provide to or obtain from unaffiliated third parties most
categories of services covered by the Service Agreement and it is not known upon
what terms such services would be available from, or made available to, such
parties. However, to the extent that the Company has provided services to the
Williams Entities at cost under the Service Agreement, the Company believes that
the terms upon which it has provided such services may be less favorable than
the terms the Company could have negotiated with unaffiliated third parties.
Conversely, to the extent that the Company has received services from the
Williams Entities at cost under the Service Agreement, the Company believes that
the terms upon which such services were available to the Company may be more
favorable than the terms the Company could have negotiated with unaffiliated
third parties. During 1995, the Williams Entities paid the Company approximately
$772,000, while the Company paid the Williams Entities approximately $16,000,
both pursuant to the Service Agreement.
OFFICE LEASE. The Company leases approximately 40,000 square feet of office
space in ClayDesta Center in Midland, Texas, pursuant to lease agreements
expiring at dates not later than November 1998. The building was owned by
ClayDesta Corporation until August 15, 1995. The Company continues to sublease
7,164 square feet from ClayDesta pursuant to an agreement which expires November
15, 1998. The Company believes each lease agreement is on terms not less
favorable than those generally available to unaffiliated parties for comparable
office space in the building.
GAS GATHERING MATTERS. Robert C. Lyon, Vice President Gathering and
Marketing, has a five percent net profits interest with respect to the presently
owned and future acquired gas gathering systems of the Company. Generally, the
Company's net profits from their gas gathering systems are computed in
accordance with generally accepted accounting principles, except that the
Company may charge against such profits an amount equal to its cost of funds on
its net fixed assets after depreciation. If Mr. Lyon leaves the employment of
the Company for any reason other than being discharged for cause, his net
profits interest is reduced to 1.5 percent and terminates seven years after the
cessation of his employment. In addition, Mr. Lyon also has the right to acquire
10 percent of the gas plants and systems of the Company by paying 10 percent of
the acquisition and construction costs concurrently with the Company payment of
such costs. During 1995, the Company sold its interest in two gas gathering and
processing systems. Mr. Lyon owned a direct ownership interest in one of the
systems pursuant to his right to acquire
38
<PAGE>
10 percent of the Company's interest in such system. As a result, Mr. Lyon
received $296,862 of sales proceeds in connection with this transaction. In
addition, Mr. Lyon received $364,597 pursuant to his net profits interest in
1995, of which $311,915 related to the net profit realized by the Company and
its Subsidiaries from the sale of these systems.
CONSULTING AGREEMENTS. Stanley S. Beard, a Director of the Company and a
member of the Compensation and Audit Committees, served as a consultant to the
Company in connection with the disposition of certain properties previously
acquired by the Company in connection with its 3-D seismic exploration efforts
which were undertaken primarily in 1994. Mr. Beard received a monthly consulting
fee of $3,000, plus reimbursements of out-of-pocket expenses, for such services.
In total, Mr. Beard received $38,668 in consulting fees and expense
reimbursements during 1995. The consulting arrangements with Mr. Beard were
terminated in January 1996.
LOVING COUNTY PARTNERSHIP AGREEMENT. The Company entered into a partnership
effective in October 1995, (the "Partnership") with the Williams Entities for
the purpose of owning and operating certain wells and a gas treating plant
located in Loving County, Texas. Previous to the creation of the Partnership the
Company, along with Ellersly, Inc. ("Ellersly"), a company owned by Mr. Lyon
(the "Plant Owners"), owned the Mentone gas plant which is a gas treating
facility and associated pipeline of approximately seven miles in length (the
"Plant"). The Williams Entities owned interests in the Gataga 5-A well and the
Gataga 2-A well (collectively, the "Gataga Wells"). The Gataga Wells were
designated as Excluded Properties at the time of the Company's initial public
offering. The gas produced from the Gataga Wells must be treated in order to
render the gas marketable. The Plant treats gas from the Gataga Wells and one
other well, but is primarily dependent on the Gataga 5-A well in order to remain
economically viable. In 1995, a tubing leak was discovered in the Gataga 5-A
which jeopardized the continued long-term production from the well and,
correspondingly, the economic viability of the Plant. Due to the projected high
cost of repairing the tubing leak and the cause thereof, the Williams Entities
were not prepared to undertake such costs. Because the economic viability of the
Plant and the Gataga 5-A are dependent on one another, the Company and the
Williams Entities determined that it was in their best interest to enter into
the Partnership in order to protect the respective values of these assets. The
Plant Owners contributed all their interests in the Plant and the Williams
Entities contributed their interest in the Gataga Wells to the Partnership.
Currently, the Partnership provides for an allocation of revenues and expenses
of 50 percent to the well owners, 45 percent to the Company and 5 percent to
Ellersly. In reliance upon the opinion of an independent third party gas
industry expert that the terms of the Partnership are fair and reasonable to
both the Company and the Williams Entities, the creation of the Partnership and
the terms of the Agreement were approved by the Company's outside directors.
ACQUISITION OF OIL AND GAS INTERESTS. From time to time, the Company may
offer its employees, including its officers, the opportunity to participate with
the Company in acquisition and drilling activities on selected prospects. The
Company may authorize certain employees to purchase an interest in prospects to
be drilled or acquired by the Company, by paying the Company their pro rata
percentage of acquisition and drilling and completion costs (including costs
incurred by the Company prior to the date an interest is purchased by an
employee) on the same terms and conditions as the Company. In no instances will
such employee participation in the aggregate exceed 10% of the Company's
interest in a particular prospect. Any grant to any employee of the Company of
the opportunity to purchase an interest in a prospect must be approved by the
Compensation Committee. In the period since inception of the Company, this
policy has only been implemented twice. In January 1996, 18 employees of the
Company (including 6 of the Company's officers) purchased an aggregate 8.75%
working interest in a drilling prospect in which the Company participated in
Karnes County, Texas. The total consideration paid by the Company's employees
was $12,724 ($4,362 of which was paid by the Company's officers). The sole well
drilled on the prospect resulted in a dry hole. In August 1996, one employee of
the Company purchased an undivided 2.50% interest in certain non-operated
properties acquired by the Company from Conoco, Inc. The employee paid $30,625
for his interest.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 3,000,000 shares of
Preferred Stock, par value $.10 per share ("Preferred Stock"), and 15,000,000
shares of Common Stock, par value $.10 per share. Upon the completion of this
Offering, the issued and outstanding capital stock of the Company will consist
of 8,744,993 shares of Common Stock.
The following description of certain matters relating to the capital stock
of the Company is summary in nature and is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and Bylaws, copies of
which have been filed with the Commission.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the payment of preferential dividends with
respect to any Preferred Stock that from time to time may be outstanding. In the
event of the dissolution, liquidation or wind-up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of all liabilities of the Company and subject to the prior distribution rights
of the holders of any Preferred Stock that may be outstanding at that time. The
holders of Common Stock do not have cumulative voting rights or preemptive or
other rights to acquire or subscribe for additional, unissued or treasury
shares. All outstanding shares of Common Stock are, and when issued, the shares
of Common Stock to be sold by the Company in this Offering will be, fully paid
and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue 3,000,000 shares of
Preferred Stock, in one or more series, and to fix the rights, preferences,
qualifications, privileges, limitations or restrictions of each such series
without any further vote or action by the stockholders, including the dividend
rights, dividend rate, conversation rights, voting rights, terms of redemption
(including sinking funds provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or the designations
of such prices. No shares of Preferred Stock have ever been issued, and the
Company has no present plans to issue any Preferred Stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon the completion of this Offering, the Company's authorized but unissued
capital stock will consist of 3,000,000 shares of Preferred Stock and 6,255,007
shares of Common Stock. One of the effects of the existence of authorized but
unissued capital stock may be to enable the Board of Directors to render more
difficult or to discourage an attempt to obtain control of the Company by means
of a merger, tender offer, proxy contest or otherwise, and thereby to protect
the continuity of the Company's management. If, in the due exercise of its
fiduciary obligations, for example, the Board of Directors were to determine
that a takeover proposal was not in the Company's best interests, such shares
could be issued by the Board of Directors without stockholder approval in one or
more private offerings or other transactions that might prevent or render more
difficult or costly the completion of the takeover transaction by: (i) diluting
the voting or other rights of the proposed acquiror or insurgent stockholder or
stockholder group; (ii) creating a substantial voting block in institutional or
other hands that might undertake to support the position of the incumbent Board
of Directors; and (iii) effecting an acquisition that might complicate or
preclude the takeover, or otherwise. In this regard, the Company's Certificate
of Incorporation grants the Board of Directors broad power to establish the
rights and preferences of the authorized and unissued Preferred Stock, one or
more series of which could be issued entitling holders to vote separately as a
class on any proposed merger or consolidation, to convert Preferred Stock into a
larger number of shares of Common
40
<PAGE>
Stock or other securities, to demand redemption at a specified price under
prescribed circumstances related to a change in control, or to exercise other
rights designed to impede a takeover. The issuance of shares of Preferred Stock
pursuant to the Board's authority described above could decrease the amount of
earning and assets available for distribution to holders of Common Stock, and
adversely affect the rights and powers, including voting rights, of such holders
and may have the effect of delaying, deferring or preventing a change in control
of the Company. The Board of Directors does not currently intend to seek
stockholder approval prior to any issuance of authorized but unissued stock,
unless otherwise required by law.
CERTIFICATE OF INCORPORATION AND BYLAWS
Under Delaware law, the exclusive power to adopt, amend and repeal bylaws is
conferred solely upon the stockholder unless the corporation's certificate of
incorporation also confers such power upon its Board of Directors. Under the
Company's Certificate of Incorporation, the Board of Directors has been granted
this power. The Certificate of Incorporation and the Company's Bylaws also
provide that (i) the number of directors shall be fixed from time to time by
resolution of the Board of Directors and (ii) the directors shall be divided
into three classes, with all directors in each class serving staggered terms of
three years each or until their respective successors are elected and qualified.
These provisions, in addition to the existence of authorized but unissued
capital stock, may have the effect, either alone or in combination with each
other, of making more difficult or discouraging an acquisition of the Company
deemed undesirable by the Board of Directors.
The Company's Board of Directors is currently comprised of six directors,
each of whom has one vote on each matter for which directors are entitled to
vote. The Bylaws provide that the Board has the power to decrease the number of
directors to one and increase the number of directors up to 15 persons, except
that no reduction in the number of directors shall have the effect of shortening
the term of any incumbent director. See "Management--Directors and Executive
Officers."
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law. In general, Section 203 prevents an "interested stockholder" from engaging
in a "business combination" with a Delaware corporation for three years
following the date such person became an interested stockholder, unless (i)
prior to the date such person became an interested stockholder, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the interested stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held (x) by
directors who are also officers of the corporation and (y) by employee stock
plans that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) on or subsequent to the date of the transaction in which such
person became an interested stockholder, the business combination is approved by
the board of directors of the corporation and authorized at a meeting of the
stockholders by affirmative vote of the holders of two-thirds of the outstanding
voting stock of the corporation not owned by the interested stockholder. Under
Section 203, the restrictions described above do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of a number of extraordinary transactions involving the
corporation and a person who had not been an interested stockholder during the
previous three years or who became an interested stockholder with the approval
of a majority of the directors, if such extraordinary transaction is approved or
not approved by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or who
were recommended for election or elected to succeed such directors by a majority
of such directors.
41
<PAGE>
Section 203 defines a "business combination" to include (i) any merger or
consolidation involving the corporation and an interested stockholder, (ii) any
sale, lease, exchange, mortgage, pledge, transfer or other disposition involving
an interested stockholder of 10% or more of assets of the corporation, (iii)
subject to certain exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to an interested
stockholder, (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporations beneficially owned by the interested stockholder or (v) the receipt
by an interested stockholder of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the corporation. In addition,
Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding stock of the corporation and
any entity or person affiliated with or controlling or controlled by such an
entity or person.
STOCKHOLDER REPORTS
The Company furnishes to its stockholders annual reports containing audited
financial statements reported on by the independent public accountants for each
fiscal year.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016.
42
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Rodman & Renshaw, Inc. and Hanifen,
Imhoff Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to terms and conditions contained in the Underwriting
Agreement, to purchase from the Company the respective number of shares of
Common Stock set forth opposite their names.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Rodman & Renshaw, Inc......................................................
Hanifen, Imhoff Inc........................................................
-----------------
Total.................................................................... 1,250,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other considerations. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose to offer the Common Stock initially at the public offering price
set forth on the cover page of this Prospectus; that the Underwriters may allow
to selected dealers a concession of $ per share; and that such dealers may
reallow a concession of $ per share to certain other dealers. After the
public offering, the offering price and other selling terms may be changed by
the Underwriters. The Common Stock is included for quotation on the Nasdaq
National Market.
The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to an aggregate of 187,500 additional shares of Common Stock,
exercisable at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it as shown in the above table bears to the 1,250,000
shares of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby.
The Company, the officers and directors of the Company and certain
stockholders of the Company have agreed that they will not sell or dispose of
any shares of the Common Stock of the Company for a period of 180 days after the
later of the date on which the Registration Statement is declared effective by
the Commission or the first date on which the shares are bona fide offered to
the public, without the written consent of the Representatives, other than
issuances or dispositions by the Company pursuant to certain existing employee
benefit plans.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
43
<PAGE>
In connection with the Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934 (the "Exchange Act"),
during a specified period before commencement of offers or sales of the Common
Stock. The passive market making transactions must comply with applicable volume
and price limits and be identified as such. In general, a passive market maker
may display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Cotton, Bledsoe, Tighe &
Dawson, a Professional Corporation, Midland, Texas. Certain legal matters in
connection with the sale of such securities will be passed upon for the
Underwriters by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The audited Consolidated Financial Statements of Clayton Williams Energy,
Inc. and its subsidiaries included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report. Reference is made to said report, which includes an explanatory
paragraph with respect to the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of" as discussed in Note 8 to the audited
Consolidated Financial Statements included elsewhere herein.
The estimates of proved reserves, estimated future net revenues and present
value thereof included in this Prospectus have been derived from the reports of
Williamson Petroleum Consultants, Inc., and all such information has been so
included in reliance on the authority of such firm as experts regarding the
matters contained in their reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company since May 1996 are available at the web site that the
Commission maintains at http:\www.sec.gov. and can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and the Commission's Regional Offices at
Seven World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can be obtained by mail from the Public Reference Branch
of the Commission at 450 West Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Company has filed with the Commission a Registration Statement on Form
S-2 (herein, together with all amendments and exhibits, referred to as the
"Regulation Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which were omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in
44
<PAGE>
each instance reference is made to the copy of such document so filed. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Prospectus are (i) the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, (ii) the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996
and June 30, 1996 (iii) the Company's Proxy Statement dated May 15, 1996 and
(iv) Information Statements dated June 20, 1996 and September 9, 1996 filed
previously with the Commission pursuant to Section 13 of the Exchange Act. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner of Common Stock, to whom a copy of this Prospectus has been
delivered, on the written or oral request of such person, a copy of any or all
of the foregoing documents incorporated by reference in this Prospectus, other
than exhibits to such documents unless such exhibits are specifically
incorporated by referenced into the information that this Prospectus
incorporates. Written or oral requests for such copies should be directed to Mel
G. Riggs, Secretary, Clayton Williams Energy, Inc., Six Desta Drive, Suite 6500,
Midland, Texas 79705 (telephone: (915) 682-6324).
45
<PAGE>
GLOSSARY OF TERMS
The terms defined in this section are used throughout this Prospectus.
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BCF. One billion cubic feet.
BOE. Equivalent barrels of oil. In reference to natural gas, natural gas
equivalents are determined using the ratio of six Mcf of natural gas to one Bbl
of crude oil, condensate or natural gas liquids.
BTU. One British thermal unit. The quantity of heat required to raise the
temperature of one pound of water one degree Fahrenheit.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
DRY WELL. A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion of an oil or gas well.
EXPLORATORY WELL. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which a working interest is owned.
MBBL. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
MMBTU. One million Btu's.
MCF. One thousand cubic feet.
MMCF. One million cubic feet.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES OR PV-10 VALUE. The present
value of estimated future net revenues is an estimate of future net revenues
from a property at its acquisition date, at a specified date, after deducting
production and ad valorem taxes, future capital costs and operating expenses,
but before deducting federal income taxes. The future net revenues have been
discounted at an annual rate of 10% to determine their "present value." The
present value is shown to indicate the effect of time on the value of the
revenue stream and should not be construed as being the fair market value of the
properties. Estimates have been made using constant oil and natural gas prices
and operating costs at the specified date.
PRODUCTIVE WELL. A well that is producing oil or gas that is capable of
production.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
46
<PAGE>
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
ROYALTY INTEREST. An interest in an oil and gas property entitling the
owner to a share of oil and gas production free of costs of production.
3-D SEISMIC. Advanced technology method of detecting underground structures
with the potential for accumulations of hydrocarbons identified by the
collection and measurement of the intensity and timing of sound waves
transmitted into the earth as they reflect back to the surface.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
WORKING INTEREST. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
47
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995............................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995.............. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995.... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995.............. F-6
Notes to Consolidated Financial Statements.............................................................. F-7
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996................................... F-19
Consolidated Statements of Operations for the Six Months and the Three Months Ended June 30, 1995 and
1996.................................................................................................. F-20
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1995 and 1996................... F-21
Notes to Consolidated Financial Statements.............................................................. F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Clayton Williams Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Clayton
Williams Energy, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clayton Williams Energy,
Inc. as of December 31, 1995 and 1994, and the results of its operations and
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 8, effective October 1, 1995, the Company adopted
Statement of Financial Accounting Standards No. 121 "Accounting for Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
ARTHUR ANDERSEN LLP
Dallas, Texas
March 8, 1996
F-2
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................................. $ 1,431 $ 1,303
Accounts receivable:
Trade, net.......................................................................... 2,696 1,184
Affiliates.......................................................................... 387 738
Oil and gas sales................................................................... 5,575 6,615
Inventory............................................................................. 836 505
Other................................................................................. 479 565
----------- -----------
11,404 10,910
----------- -----------
PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts method..................................... 306,448 325,268
Natural gas gathering and processing systems.......................................... 9,583 6,951
Other................................................................................. 9,399 9,460
----------- -----------
325,430 341,679
Less accumulated depreciation, depletion and amortization............................. (225,239) (259,533)
----------- -----------
Property and equipment, net......................................................... 100,191 82,146
----------- -----------
OTHER ASSETS............................................................................ 151 105
----------- -----------
$ 111,746 $ 93,161
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable:
Trade............................................................................... $ 6,419 $ 6,911
Affiliates.......................................................................... 133 346
Oil and gas sales................................................................... 4,446 4,813
Current maturities of long-term debt.................................................. 11,556 11,509
Accrued liabilities and other......................................................... 1,119 1,048
----------- -----------
23,673 24,627
----------- -----------
LONG-TERM DEBT.......................................................................... 49,147 33,538
----------- -----------
COMMITMENTS AND CONTINGENCIES........................................................... -- --
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 per share; authorized--10,000,000 shares; issued and
outstanding--5,700,000 shares in 1994 and 7,409,664 shares in 1995.................. 570 741
Additional paid-in capital............................................................ 48,934 52,912
Retained deficit...................................................................... (10,578) (18,657)
----------- -----------
38,926 34,996
----------- -----------
$ 111,746 $ 93,161
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Oil and gas sales.............................................................. $ 55,041 $ 43,617 $ 43,883
Natural gas services........................................................... 4,554 5,868 5,388
--------- --------- ---------
Total revenues............................................................... 59,595 49,485 49,271
--------- --------- ---------
COSTS AND EXPENSES
Lease operations............................................................... 12,788 12,775 13,533
Exploration.................................................................... 6,198 7,139 1,555
Natural gas services........................................................... 2,518 3,510 3,714
Depreciation, depletion and amortization....................................... 26,751 25,248 25,110
Impairment of property and equipment........................................... -- -- 10,259
General and administrative..................................................... 6,876 5,659 3,708
--------- --------- ---------
Total costs and expenses..................................................... 55,131 54,331 57,879
--------- --------- ---------
Operating income (loss)...................................................... 4,464 (4,846) (8,608)
Interest expense............................................................... 4,003 4,461 5,493
Other income (expense)......................................................... 149 759 6,022
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES................................................ 610 (8,548) (8,079)
--------- --------- ---------
INCOME TAX EXPENSE
Current........................................................................ -- -- --
Deferred....................................................................... -- -- --
Pro forma...................................................................... 207 -- --
--------- --------- ---------
Total income tax expense..................................................... 207 -- --
--------- --------- ---------
NET INCOME (LOSS)................................................................ $ 403 $ (8,548) $ (8,079)
--------- --------- ---------
--------- --------- ---------
Net income (loss) per common share............................................... $ .09 $ (1.50) $ (1.31)
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding....................................... 4,700 5,700 6,165
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
NO. OF PAR PAID-IN RETAINED OWNERS'
SHARES VALUE CAPITAL DEFICIT TOTAL EQUITY
----------- --------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........................ -- $ -- $ -- $ -- $ -- $ 8,852
Pre-Consolidation net income, before pro forma
income taxes..................................... -- -- -- -- -- 2,640
Issuance of stock in connection with the
Consolidation.................................... 3,200 320 11,172 -- 11,492 (11,492)
Sale of stock in connection with the Initial
Public Offering, net of offering costs........... 2,500 250 37,762 -- 38,012 --
Post-Consolidation net loss....................... -- -- -- (2,030) (2,030) --
----- --------- ----------- ---------- --------- ----------
BALANCE, December 31, 1993........................ 5,700 570 48,934 (2,030) 47,474 --
Net loss........................................ -- -- -- (8,548) (8,548) --
----- --------- ----------- ---------- --------- ----------
BALANCE, December 31, 1994........................ 5,700 570 48,934 (10,578) 38,926 --
Sale of stock through rights offering, net of
offering costs................................ 1,599 160 3,648 -- 3,808 --
Issuance of stock through compensation plans.... 111 11 330 -- 341 --
Net loss........................................ -- -- -- (8,079) (8,079) --
----- --------- ----------- ---------- --------- ----------
BALANCE, December 31, 1995........................ 7,410 $ 741 $ 52,912 $ (18,657) $ 34,996 $ --
----- --------- ----------- ---------- --------- ----------
----- --------- ----------- ---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) before pro forma income taxes................................. $ 610 $ (8,548) $ (8,079)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation, depletion and amortization...................................... 26,751 25,248 25,110
Impairment of property and equipment.......................................... -- -- 10,259
Exploration costs............................................................. 4,244 6,227 1,472
(Gain) loss on sales of property and equipment................................ (165) (11) (5,978)
Other......................................................................... -- -- 339
Changes in operating working capital:
Accounts receivable........................................................... 7,415 2,964 121
Accounts payable.............................................................. (8,031) (2,197) 737
Other......................................................................... (1,108) (11) 220
--------- --------- ---------
Net cash provided by operating activities................................... 29,716 23,672 24,201
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment........................................... (37,417) (35,330) (20,433)
Proceeds from sales of property and equipment................................. 1,502 880 7,950
--------- --------- ---------
Net cash used in investing activities....................................... (35,915) (34,450) (12,483)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt.................................................. 499 17,200 --
Repayments of long-term debt.................................................. (27,885) (5,942) (15,656)
Repayments of vendor financing................................................ (10,872) -- --
Proceeds from sale of common stock............................................ 38,012 -- 3,808
--------- --------- ---------
Net cash provided by (used in) financing activities......................... (246) 11,258 (11,846)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (6,445) 480 (128)
CASH AND CASH EQUIVALENTS
Beginning of period............................................................. 7,396 951 1,431
--------- --------- ---------
End of period................................................................... $ 951 $ 1,431 $ 1,303
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amounts capitalized.............................. $ 3,879 $ 4,860 $ 5,613
--------- --------- ---------
--------- --------- ---------
Noncash investing and financing activities--
Additions to property and equipment financed by vendors....................... $ 4,137 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (the "Initial Public Offering") on May
26, 1993, these operations were consolidated (the "Consolidation"), and the
Company succeeded to the oil and gas properties, exploration and development
operations and the natural gas gathering and marketing operations of Mr.
Williams and his affiliates, except for minor interests in certain producing
wells, certain undeveloped acreage and mineral interests located outside of the
Company's primary areas of operations and the stock of a company owned by
affiliates of Mr. Williams. The consolidated financial statements include the
historical amounts and results of operations associated with the assets and
liabilities consolidated, as well as the assets and liabilities of subsidiaries
which became wholly owned by the Company following the Consolidation.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES AND ASSUMPTIONS
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Clayton
Williams Energy, Inc. and its subsidiaries (collectively, the "Company"). The
Company accounts for its interests in joint ventures and partnerships (all of
which are undivided) using the proportionate consolidation method, whereby its
share of assets, liabilities, revenues and expenses are consolidated with other
operations. All significant intercompany transactions and balances associated
with the consolidated operations have been eliminated.
OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for its oil
and gas properties, whereby costs of productive wells, developmental dry holes
and productive leases are capitalized and amortized using the unit-of-production
method based on estimated proved reserves. Sales proceeds from sales of
individual properties are credited to property costs. No gain or loss is
recognized until the entire amortization base is sold or abandoned.
Costs of acquisition of leaseholds are capitalized. Unproved oil and gas
properties with significant acquisition costs are periodically assessed and any
impairment in value is charged to exploration costs. The amount of impairment
recognized on unproved properties which are not individually significant is
determined by amortizing the costs of such properties within appropriate groups
based on the Company's historical experience, acquisition dates and average
lease terms. The costs of unproved properties which are determined to hold
proved reserves are transferred to proved oil and gas properties.
F-7
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Exploration costs, including geological and geophysical expenses and delay
rentals, are charged to expense as incurred. Exploratory drilling costs,
including the cost of stratigraphic test wells, are initially capitalized but
charged to exploration expense if and when the well is determined to be
unsuccessful.
NATURAL GAS AND OTHER PROPERTY AND EQUIPMENT
Natural gas gathering and processing systems consist primarily of gas
gathering pipelines, compressors and gas processing plants. Other property and
equipment primarily consists of field buildings, office equipment, leasehold
improvements, vehicles and live oil systems. Major renewals and betterments are
capitalized while the costs of repairs and maintenance are charged to expense as
incurred. The costs of assets retired or otherwise disposed of and the
applicable accumulated depreciation are removed from the accounts, and any gain
or loss is included in the results of operations.
Depreciation of natural gas gathering and processing systems and other
property and equipment is computed on the straight-line method over the
estimated useful lives of the assets, which range from 3 to 32 years.
VALUATION OF PROPERTY AND EQUIPMENT
Effective October 1, 1995, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121 "Accounting for Impairment of
Long-Lived Assets" which requires that long-lived assets be assessed for
potential impairment in their carrying values when circumstances indicate such
impairment may have occurred. See Note 8 for the impact of adoption of SFAS 121
on the Company.
INVENTORY
Inventory consists primarily of tubular goods and other well equipment which
the Company plans to utilize in its ongoing exploration and development
activities and is carried at the lower of cost or market value.
CAPITALIZATION OF INTEREST
Interest costs associated with maintaining the Company's inventory of
unproved oil and gas properties are capitalized. Interest capitalized totaled
approximately $355,000, $192,000 and $85,000 for the years ended December 31,
1993, 1994 and 1995, respectively.
STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
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 (loss) per share in 1993, 1994 or 1995 since the effect was
anti-dilutive.
F-8
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION AND GAS BALANCING
The Company utilizes the sales method of accounting for natural gas revenues
whereby revenues are recognized based on the amount of gas sold to purchasers.
The amount of gas sold may differ from the amount to which the Company is
entitled based on its revenue interests in the properties. The Company had no
significant imbalance positions at December 31, 1993, 1994 or 1995.
RECLASSIFICATIONS
Certain reclassifications of prior year financial statement amounts have
been made to conform to current year presentations.
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Secured Bank Credit Facility (matures July 31, 1998):
Revolving loan........................................................ $ 21,100 $ 17,000
Term loan............................................................. 39,225 27,825
Subordinated Debt Facility.............................................. -- --
Other................................................................... 378 222
--------- ---------
60,703 45,047
Less current maturities................................................. 11,556 11,509
--------- ---------
$ 49,147 $ 33,538
--------- ---------
--------- ---------
</TABLE>
Aggregate maturities of long-term debt at December 31, 1995 are as follows:
1996--$11,509,000; 1997--$11,513,000; and 1998--$22,025,000.
SECURED BANK CREDIT FACILITY
The Company's secured bank credit facility provides for a revolving loan
facility and a term loan facility, the limits of which are determined by a
borrowing base established by the banks. At December 31, 1995, the borrowing
base was $49.5 million, of which $21.7 million was attributable to the revolving
loan facility and $27.8 million was attributable to the term loan facility. The
amount of funds available on the revolving loan facility at December 31, 1995
was $4.7 million. The borrowing base is scheduled to be redetermined in May 1996
and at least semi-annually thereafter; however, the Company or the banks may
request a borrowing base redetermination 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. Substantially all of the
Company's oil and gas properties are pledged to secure advances under the
secured bank credit facility.
F-9
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
The term loan facility presently requires monthly principal prepayments of
$950,000. The amount of monthly prepayments is subject to change at the time of
each borrowing base redetermination. No additional advances are permitted
against the term loan facility.
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 2% to 2.75% per
annum. At December 31, 1995, the Company's indebtedness under these facilities
consisted of $30.8 million of Base Rate Loans at 9% and $14 million of
Eurodollar Loans at 8.6%.
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 on the
revolving loan and fees are payable quarterly, and all outstanding principal and
interest will be due July 31, 1998.
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 approval of the lenders
in the secured bank credit facility. The Company does not plan to utilize this
subordinated debt facility unless the funds available on the secured bank credit
facility are inadequate to finance the Company's planned capital expenditure
program in 1996.
4. SALE OF COMMON STOCK
In September 1995, the Company received $3,808,000, net of offering costs of
$93,000, from the sale of 1,598,971 shares of common stock at a price of $2.44
per share pursuant to a registered rights offering made to stockholders of
record on August 18, 1995. Proceeds from the offering were used to repay
indebtedness on the secured bank credit facility.
5. STOCK COMPENSATION PLANS
1993 PLAN
The Company has reserved 298,200 shares of common stock for issuance under
the 1993 Stock Compensation Plan ("1993 Plan"). The 1993 Plan provides for the
issuance of nonqualified stock options with an exercise price which is not less
than the market value of the Company's common stock on the date of grant. All
options granted to date vest 25% annually and expire seven years from date of
grant.
F-10
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK COMPENSATION PLANS (CONTINUED)
The following table reflects activity in the 1993 Plan for 1993, 1994 and
1995.
<TABLE>
<CAPTION>
1993 1994 1995
---------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year............................. -- -- 276,937 $ 15.75 149,101 $ 7.25
Granted..................................... 276,937 $ 15.75 149,101 $ 7.25 149,101 $ 2.38
Forfeited................................... -- -- (33,785) $ 15.75 (18,540) $ 7.25
Cancelled (a)............................... -- -- (243,152) $ 15.75 (128,061) $ 7.25
--------- ---------- ----------
End of year................................... 276,937 $ 15.75 149,101 $ 7.25 151,601 $ 2.45
--------- ---------- ----------
--------- ---------- ----------
Exercisable................................... -- -- 37,275 $ 7.25 75,800 $ 2.45
--------- ---------- ----------
--------- ---------- ----------
Issuable...................................... 21,263 149,099 146,599
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
- ------------------------
(a) During 1994, the Company offered participants the opportunity to exchange
options issued in 1993 at $15.75 per share for a lesser number of options
with an exercise price of $7.25 per share. In 1995, the Company offered to
exchange substantially all of the options issued in 1994 with an exercise
price of $7.25 per share for new options with an exercise price of $2.38 per
share.
DIRECTORS PLAN
The Company has reserved 86,300 shares of common stock for issuance under
the Outside Directors Stock Option Plan ("Directors Plan"). Since inception of
the Directors Plan, the Company has issued options covering 9,000 shares of
common stock (3,000 in 1993 at $15.75 per share, 3,000 in 1994 at $7.25 per
share, and 3,000 in 1995 at $5.50 per share). All options expire in 2000 and are
fully exercisable at date of grant. At December 31, 1995, options to purchase
9,000 shares were outstanding, and 77,300 shares remain available for future
grants.
BONUS INCENTIVE PLAN
The Company has reserved 115,500 shares of common stock for issuance under
the Bonus Incentive Plan. The plan provides that the Board of Directors each
year may award bonuses in cash, common stock of the Company, or a combination
thereof. To date, no bonuses in cash or stock have been awarded under this plan.
STOCK COMPENSATION PLANS
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 shares of common stock in lieu of
cash. The Company has reserved an aggregate of 650,000 shares of common stock
for issuance under these plans. During 1995, the Company has issued Mr. Williams
101,663 shares of common stock in lieu of cash compensation aggregating
$312,000, and has issued 9,030 shares to three outside directors in lieu of cash
compensation aggregating $29,000. The amounts of such compensation are included
in general and administrative expense in the accompanying consolidated financial
statements.
F-11
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TRANSACTIONS WITH AFFILIATES
During the periods presented, the Company and various entities controlled by
Mr. Williams provided certain general and administrative services to one
another. In connection with the Consolidation, the Company and the Williams
entities entered into a service agreement to standardize the procedures for
charging for such services. In addition, the Company leases office space from an
affiliate. General and administrative expenses in the accompanying financial
statements are net of charges by the Company to affiliates for services
aggregating $559,000, $855,000 and $772,000 for the years ended December 31,
1993, 1994 and 1995, respectively, and include charges to the Company by
affiliates for rents and services aggregating $636,000, $512,000 and $289,000
for the years ended December 31, 1993, 1994 and 1995, respectively.
Accounts receivable from affiliates and accounts payable to affiliates
include, among other things, amounts for charges whereby the Company is the
operator of certain wells in which affiliates own an interest. These charges are
on terms which are consistent with the terms offered to unaffiliated third
parties which own interests in wells operated by the Company.
At December 31, 1995, the Company owned a 90% interest in the Mentone gas
plant constructed in 1993 to process gas from two wells in Loving County, Texas
pursuant to a long-term contract. The two wells are substantially owned by
entities controlled by Mr. Williams. Because the plant and the wells are largely
dependent upon each other for their economic viability, the Company and the
entities controlled by Mr. Williams contributed their respective interests in
the plant and wells to a partnership effective January 1996. After recoupment of
certain workover costs by the well owners, the Company will own an undivided 45%
interest in the partnership, and will proportionately consolidate its share of
partnership income, expense, assets and liabilities.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space from affiliates and nonaffiliates under
noncancelable operating leases. Rental expense pursuant to the office leases
amounted to $489,000, $489,000 and $453,000 for the years ended December 31,
1993, 1994 and 1995, respectively. Included in property and equipment are assets
under capital leases aggregating $648,000, $528,000 and $233,000 net of
accumulated depreciation, at December 31, 1993, 1994 and 1995, respectively.
Future minimum payments under noncancelable leases at December 31, 1995, are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
1996............................................................................... $ 129 $ 534
1997............................................................................... 118 440
1998............................................................................... -- 88
----- -----------
Total minimum lease payments................................................... 247 $ 1,062
-----------
-----------
Less amount representing interest.................................................. (25)
-----
Present value of net minimum lease payments.................................... $ 222
-----
-----
</TABLE>
F-12
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. The concentration of credit risk in a
single industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other conditions.
The Company has not experienced significant credit losses on such receivables.
FORWARD SALES 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 are gains totaling $631,000 in 1993 and net losses totaling $78,000 in
1994 (comprised of losses of $238,000 partially offset by gains of $160,000) and
$342,000 in 1995 (comprised of losses of $426,000 partially offset by gains of
$84,000). In December 1995, the Company entered into a financial swap
arrangement covering the sale of 99,000 barrels of oil production from February
1996 through April 1996 at a price of $18.00 per Bbl. In January 1996, the
Company entered into a financial swap arrangement covering an additional 135,000
barrels of oil production from January 1996 through April 1996 at a weighted
average price of $19.37 per Bbl, ranging from a high of $20.09 to a low of
$18.67. In February 1996, the Company entered into a financial swap arrangement
covering the sale of 223,000 barrels of oil production from March 1996 through
August 1996 at a weighted average price of $18.48 per Bbl, ranging from a high
of $19.55 to a low of $17.75. In March 1996, the Company entered into a
financial swap arrangement covering the sale of 60,000 barrels of oil production
from April 1996 through June 1996 at a weighted average price of $18.46 per Bbl,
ranging from a high of $19.02 to a low of $17.99. In the aggregate, these hedge
transactions account for approximately 40% of the Company's expected oil
production from January 1996 through August 1996.
LEGAL PROCEEDINGS
In April 1994, the Fifth Circuit Court of Appeals reversed a judgment
against the Company for approximately $600,000 in damages. The case was settled
with no damages being assessed against the Company. Accordingly, the Company
reversed the previously recorded loss provision, resulting in the recognition of
$600,000 of other income during 1994.
The Company is involved in various legal proceedings arising in the normal
course of its business, including actions for which insurance coverage is
available. While the ultimate results of these proceedings cannot be predicted
with certainty, the Company does not believe that the outcome of any of these
matters will have, individually or in the aggregate, a material adverse effect
on its financial condition; however, they could have a material impact on
results of operations in an annual or interim period.
8. ADOPTION OF ACCOUNTING PRONOUNCEMENT
On March 31, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for Impairment of
Long-Lived Assets" ("SFAS 121"). SFAS 121 requires entities to record an
impairment loss equal to the difference between the fair market value and the
carrying value of any asset (or group of assets) which is deemed to be impaired
in accordance with certain prescribed measurement criteria. Adoption of SFAS 121
is required for fiscal years beginning after December 15, 1995, although earlier
adoption is encouraged.
F-13
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ADOPTION OF ACCOUNTING PRONOUNCEMENT (CONTINUED)
The Company elected to adopt SFAS 121 effective October 1, 1995, and as a
result, recorded a provision for impairment of property and equipment totaling
$10.3 million, of which $9.1 million related to proved oil and gas properties
and $1.2 million related to gas gathering and processing systems. Substantially
all of the impaired assets are located in the Pearsall Field of South Texas.
9. SALES OF ASSETS
In August 1995, XCEL Gas Company, a general partnership in which the Company
owns 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. The Company used the
proceeds from these sales to repay indebtedness on the secured bank credit
facility.
The following table sets forth, on a pro forma basis, the results of
operations of the Company for the year ended December 31, 1995, as adjusted to
give effect to the sale of assets described above and the sale of common stock
discussed in Note 4.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-------------------------
HISTORICAL PRO FORMA
------------ -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)
<S> <C> <C>
Revenues.................................................................... $ 49,271 $ 46,456
Operating loss.............................................................. $ (8,608) $ (9,061)
Net loss.................................................................... $ (8,079)(a) $ (13,449)
Net loss per common share................................................... $ (1.31)(a) $ (1.83)
</TABLE>
- ------------------------
(a) Includes gain on sale of gas gathering and processing assets of $5,960,000
($.81 per share).
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 approximately
$600,000 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. 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.
10. INCOME TAXES
Concurrent with the Consolidation on May 26, 1993 (see Note 1), the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109
("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in enacted tax rates is recognized in income in the
period that includes the enactment date.
F-14
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Prior to the Consolidation, the results of operations of the Company were
included in the tax returns of the owners of the affiliates of Mr. Williams. As
a result, tax strategies were implemented which were not reflective of the
strategies the Company would have implemented. As of the date of Consolidation,
financial statement carrying amounts of existing assets and liabilities were
approximately the same as their respective tax bases. Accordingly, no net
deferred tax assets or liabilities were recorded in connection with the
Consolidation. For periods prior to the Consolidation, a pro forma tax charge
was computed at the applicable federal statutory rate.
Since the Consolidation, the Company has incurred net losses for financial
reporting purposes aggregating $18.7 million and has recognized cumulative tax
losses of approximately $32 million which can be carried forward and used to
offset future taxable income. Tax loss carryforwards begin to expire in 2008.
Due to the uncertainty of realizing the related future tax benefits, valuation
allowances have been recorded to the extent net deferred tax assets exceed net
deferred tax liabilities at December 31, 1995 and 1994.
The tax effected temporary differences and tax loss carryforwards which
comprise net deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities):
Depreciable and depletable property............................................. $ (6,153) $ (4,030)
Tax loss carryforwards.......................................................... 10,533 11,305
Other........................................................................... 1,057 912
Valuation allowance............................................................. (5,437) (8,187)
--------- ---------
Net deferred tax asset (liability)............................................ $ -- $ --
--------- ---------
--------- ---------
</TABLE>
11. TERMINATION OF ARGENTINA VENTURE
During 1994, the Company conducted certain exploration activities in the
Colhue Huapi area of Argentina pursuant to an exploration agreement with CAPEX
S.A. This agreement obligated the Company to drill a minimum of six wells by
March 1, 1995, as extended, or pay a contract termination fee of $437,500 per
well for each well not drilled. The Company drilled two of the six obligation
wells, and based upon its evaluation of the drilling results, elected not to
drill any additional wells in the area. In February 1995, the Company sold its
entire interest in the Argentina venture to Occidental Petrolera de Argentina,
Ltd. for $100,000 and secured a release from all drilling commitments and
obligations under the original agreement, including any obligation to pay
termination fees. The 1994 results of operations include exploration costs of
$2,481,000 and general and administrative expenses of $601,000 attributable to
the Argentina venture. Results of operations in 1995 from this venture were
insignificant.
F-15
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COSTS OF OIL AND GAS PROPERTIES
The following table sets forth certain information with respect to costs
incurred in connection with the Company's oil and gas producing activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquisitions:
Proved............................................................... $ -- $ 10,199 $ --
Unproved............................................................. 5,978 2,325 2,254
Developmental costs.................................................... 25,519 13,136 16,823
Exploratory costs...................................................... 11,219 5,699 1,407
--------- --------- ---------
$ 42,716 $ 31,359 $ 20,484
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the capitalized costs for oil and gas
properties:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Proved properties.............................................................. $ 298,113 $ 318,179
Unproved properties............................................................ 8,335 7,089
---------- -----------
Total capitalized costs........................................................ 306,448 325,268
Accumulated depreciation, depletion and amortization........................... (212,680) (246,034)
---------- -----------
Net capitalized costs...................................................... $ 93,768 $ 79,234
---------- -----------
---------- -----------
</TABLE>
13. OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of proved oil and gas reserves utilized in the preparation of
the consolidated financial statements were prepared by independent petroleum
engineers. Such estimates are in accordance with guidelines established by the
Securities and Exchange Commission and the Financial Accounting Standards Board,
which require that reserve reports be prepared under economic and operating
conditions existing at the registrant's year end with no provision for price and
cost escalations except by contractual arrangements. The Company's reserves are
substantially located onshore in the United States.
The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current information
becomes available. In addition, a portion of the Company's proved reserves is
undeveloped, which increases the imprecision inherent in estimating reserves
which may ultimately be produced.
F-16
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
The following table sets forth proved oil and gas reserves together with the
changes therein (oil in MBbls, gas in MMcf, gas converted to BOE at one Bbl per
six Mcf):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1993 1994 1995
------------------------------- ------------------------------- ---------
OIL GAS BOE OIL GAS BOE OIL
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Proved reserves
Beginning of period............................. 7,867 58,350 17,592 5,671 59,418 15,574 5,304
Revisions....................................... (1,913) 886 (1,765) (403) (11,565) (2,329) 98
Extensions and discoveries...................... 1,598 10,546 3,355 1,321 676 1,433 2,392
Purchases of minerals-in-place.................. -- -- -- 424 6,531 1,512 --
Production...................................... (1,881) (10,364) (3,608) (1,709) (8,369) (3,104) (1,831)
--------- --------- --------- --------- --------- --------- ---------
End of period................................... 5,671 59,418 15,574 5,304 46,691 13,086 5,963
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Proved developed reserves
Beginning of period............................. 5,601 42,893 12,750 4,702 43,366 11,930 4,635
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
End of period................................... 4,702 43,366 11,930 4,635 38,505 11,052 5,381
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
GAS BOE
--------- ---------
<S> <C> <C>
Proved reserves
Beginning of period............................. 46,691 13,086
Revisions....................................... (914) (54)
Extensions and discoveries...................... 564 2,486
Purchases of minerals-in-place.................. -- --
Production...................................... (6,845) (2,972)
--------- ---------
End of period................................... 39,496 12,546
--------- ---------
--------- ---------
Proved developed reserves
Beginning of period............................. 38,505 11,052
--------- ---------
--------- ---------
End of period................................... 31,668 10,659
--------- ---------
--------- ---------
</TABLE>
The standardized measure of discounted future net cash flows relating to
proved reserves was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Future cash inflows...................................... $ 203,445 $ 165,043 $ 191,191
Future costs:
Production............................................. (55,774) (52,020) (55,626)
Development............................................ (14,741) (8,280) (9,295)
Income taxes........................................... (14,088) -- (9,875)
---------- ---------- ----------
Future net cash flows.................................... 118,842 104,743 116,395
10% discount factor...................................... (28,945) (30,533) (27,565)
---------- ---------- ----------
Standardized measure of discounted future net cash
flows.................................................. $ 89,897 $ 74,210 $ 88,830
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-17
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
Changes in the standardized measure of discounted future net cash flows
relating to proved reserves were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Standardized measure, beginning of period................. $ 94,949 $ 89,897 $ 74,210
Net changes in sales prices, net of production costs...... (19,722) (9,926) 12,515
Revisions of quantity estimates........................... (11,367) (12,917) (383)
Accretion of discount..................................... 12,505 9,072 7,421
Changes in future development costs, including development
costs incurred that reduced future development costs.... 4,075 10,415 3,777
Changes in timing and other............................... 5,407 (2,196) (3,460)
Net change in income taxes................................ 29,852 819 --
Extensions and discoveries................................ 16,451 9,479 25,100
Sales, net of production costs............................ (42,253) (30,842) (30,350)
Purchases of minerals-in-place............................ -- 10,409 --
---------- ---------- ----------
Standardized measure, end of period....................... $ 89,897 $ 74,210 $ 88,830
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-18
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
<S> <C> <C>
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents........................................................... $ 1,303 $ 1,210
Accounts receivable:
Trade, net........................................................................ 1,184 1,569
Affiliates........................................................................ 738 153
Oil and gas sales................................................................. 6,615 7,919
Inventory........................................................................... 505 445
Other............................................................................... 565 565
------------ -----------
10,910 11,861
------------ -----------
PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts method................................... 325,268 338,230
Natural gas gathering and processing systems........................................ 6,951 7,496
Other............................................................................... 9,460 9,525
------------ -----------
341,679 355,251
Less accumulated depreciation, depletion and amortization........................... (259,533) (272,512)
------------ -----------
Property and equipment, net....................................................... 82,146 82,739
------------ -----------
OTHER ASSETS.......................................................................... 105 72
------------ -----------
$ 93,161 $ 94,672
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable:
Trade............................................................................. $ 6,911 $ 9,142
Affiliates........................................................................ 346 724
Oil and gas sales................................................................. 4,813 5,685
Current maturities of long-term debt................................................ 11,509 115
Accrued liabilities and other....................................................... 1,048 1,391
------------ -----------
24,627 17,057
------------ -----------
LONG-TERM DEBT........................................................................ 33,538 38,528
------------ -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 per share; authorized--10,000,000 shares; issued and
outstanding--7,409,664 shares in 1995 and 7,477,473 shares
in 1996........................................................................... 741 748
Additional paid-in capital.......................................................... 52,912 53,153
Retained deficit.................................................................... (18,657) (14,814)
------------ -----------
34,996 39,087
------------ -----------
$ 93,161 $ 94,672
------------ -----------
------------ -----------
</TABLE>
F-19
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales................................................... $ 11,791 $ 15,149 $ 23,222 $ 27,517
Natural gas services................................................ 1,858 985 3,717 1,949
--------- --------- --------- ---------
Total revenues.................................................... 13,649 16,134 26,939 29,466
--------- --------- --------- ---------
COSTS AND EXPENSES
Lease operations.................................................... 3,490 3,563 6,986 7,161
Exploration......................................................... 239 25 432 279
Natural gas services................................................ 1,294 814 2,450 1,571
Depreciation, depletion and amortization............................ 6,887 6,175 13,810 11,852
Impairment of property and equipment................................ -- 1,186 -- 1,186
General and administrative.......................................... 1,095 964 2,017 1,671
--------- --------- --------- ---------
Total costs and expenses.......................................... 13,005 12,727 25,695 23,720
--------- --------- --------- ---------
Operating income.................................................. 644 3,407 1,244 5,746
Interest expense.................................................... 1,533 961 2,991 1,943
Other income (expense).............................................. 85 (7) 249 40
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES..................................... (804) 2,439 (1,498) 3,843
INCOME TAX EXPENSE.................................................... -- -- -- --
--------- --------- --------- ---------
NET INCOME (LOSS)..................................................... $ (804) $ 2,439 $ (1,498) $ 3,843
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share.................................... $ (.14) $ .32 $ (.26) $ .51
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding............................ 5,708 7,627 5,704 7,553
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-20
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................................................... $ (1,498) $ 3,843
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation, depletion and amortization................................................. 13,810 11,852
Impairment of property and equipment..................................................... -- 1,186
Exploration costs........................................................................ 396 266
Other.................................................................................... 117 214
Changes in operating working capital:
Accounts receivable...................................................................... 657 (1,104)
Accounts payable......................................................................... 1,848 3,047
Other.................................................................................... (76) 192
--------- ---------
Net cash provided by operating activities.............................................. 15,254 19,496
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment........................................................ (11,553) (16,737)
Proceeds from sale of property and equipment............................................... 201 3,530
--------- ---------
Net cash used in investing activities.................................................. (11,352) (13,207)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt............................................................... 1,600 --
Repayments of long-term debt............................................................... (5,806) (6,404)
Proceeds from sale of common stock......................................................... -- 22
--------- ---------
Net cash used in financing activities.................................................. (4,206) (6,382)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................... (304) (93)
CASH AND CASH EQUIVALENTS
Beginning of period........................................................................ 1,431 1,303
--------- ---------
End of period.............................................................................. $ 1,127 $ 1,210
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amounts capitalized......................................... $ 3,090 $ 1,800
--------- ---------
--------- ---------
</TABLE>
F-21
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 1996 and for the interim periods ended June 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.
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ---------
<S> <C> <C>
(IN THOUSANDS)
Secured Bank Credit Facility (matures July 31, 1999):
Revolving loan..................................................... $ 17,000 $ 15,400
Term loan.......................................................... 27,825 23,075
Subordinated Debt Facility........................................... -- --
Other................................................................ 222 168
------------ ---------
45,047 38,643
Less current maturities.............................................. 11,509 115
------------ ---------
$ 33,538 $ 38,528
------------ ---------
------------ ---------
</TABLE>
SECURED BANK CREDIT FACILITY
As of June 30, 1996, the Company's secured bank credit facility provided for
a revolving loan facility and a term loan facility, the limits of which are
determined by a borrowing base established by the banks. Effective July 18,
1996, the Company and the banks amended and restated the prior loan agreement to
combine the prior facilities into one reducing revolver loan facility. The
initial borrowing base established by the new loan agreement was $52 million and
is subject to a monthly commitment reduction of $1 million beginning July 31,
1996. The amount of funds available under the amended borrowing base as of June
30, 1996 was $13.5 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
F-22
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
2. LONG-TERM DEBT (CONTINUED)
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 June 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 June 30, 1996, the Company's indebtedness under these facilities
consisted of $16.5 million of Base Rate Loans at a rate of 8.75% and $22 million
of Eurodollar Loans at a rate of 8.2%.
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 approval of the lenders
in the secured bank credit facility. The Company does not plan to utilize this
subordinated debt facility.
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 six months ended June 30, 1996 are net losses from these
activities totaling $947,000 (comprised of losses of $1,090,000, partially
offset by gains of $143,000). In
F-23
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
3. FORWARD SALE TRANSACTIONS (CONTINUED)
addition, the Company has hedged approximately 15% of its expected oil
production from July 1996 through August 1996 utilizing certain financial swap
arrangements as summarized below:
<TABLE>
<CAPTION>
FIXED PRICE PER BBL
DATE PRODUCTION VOLUMES -------------------------------
ENTERED MONTHS (BBLS) HIGH LOW AVERAGE
- ----------- ---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
2/96 7/96-8/96 60,000 $ 17.90 $ 17.75 $ 17.86
</TABLE>
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 six months ended June 30, 1996, the Company issued Mr. Williams 49,965
shares of Common Stock in lieu of cash compensation aggregating $195,755, and
issued 8,484 shares to three outside directors in lieu of cash compensation
aggregating $30,000. Subsequent to June 30, 1996, the Company issued Mr.
Williams an additional 13,373 shares and issued an aggregate of 3,097 shares to
three outside directors in lieu of cash compensation aggregating $156,000.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation." FAS 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 FAS 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 FAS 123 for 1995 and 1996 in its 1996 annual financial
statements. Such pro forma effects on results of operations for 1995 and the six
month period ended June 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
loss per share in the 1995 periods since the effect was anti-dilutive.
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
F-24
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
6. SALE OF ASSETS (CONTINUED)
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 $3.8 million for financial
reporting purposes during the six months ended June 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.
F-25
<PAGE>
ANNEX A
September 30, 1996
Clayton Williams Energy, Inc.
Six Desta Drive, Suite 3000
Midland, Texas 79705
Attention Mr. Greg Benton
Gentlemen:
Subject: Summary Letter (for Inclusion in a Prospectus included in a
Registration Statement for Clayton Williams Energy, Inc. on Form S-2)
of the Evaluation of Oil and Gas Reserves
1) to the Interests of Clayton Williams Energy, Inc. in Domestic Oil and
Gas Properties and
2) to the Interests of Warrior Gas Company [a Subsidiary of Clayton
Williams Energy, Inc.] in the Gataga Gas Unit No. 5A, Vermejo
(Ellenburger) Field, Loving County, Texas, Effective July 1, 1996, for
Disclosure to the Securities and Exchange Commission, Utilizing Aries
Software, Williamson Project 6.8430
In accordance with your request, Williamson Petroleum Consultants, Inc.
(Williamson) has prepared this summary letter for inclusion in a Prospectus for
Clayton Williams Energy, Inc. (Williams Energy) of the Williamson report
entitled "Evaluation of Oil and Gas Reserves 1) to the Interests of Clayton
Williams Energy, Inc. in Domestic Oil and Gas Properties and 2) to the Interests
of Warrior Gas Company in the Gataga Gas Unit No. 5A, Vermejo (Ellenburger)
Field, Loving County, Texas, Effective July 1, 1996, for Disclosure to the
Securities and Exchange Commission, Utilizing Aries Software, Williamson Project
6.8430" (the Williamson report). All values and discussion of proved reserves
and net revenues, data utilized, assumptions, and qualifications are taken from
and include by reference data from the Williamson report.
I. ESTIMATED RESERVES AND ESTIMATED FUTURE NET REVENUES
Projections of the reserves that are attributable to the evaluated interests
of Williams Energy and Warrior Gas Company (Warrior) were based on economic
parameters and operating conditions considered applicable as of July 1, 1996 and
may be used in disclosure to the Securities and Exchange Commission (SEC).
The present values of the estimated future net revenues from proved reserves
were calculated using a discount rate of 10.00 percent per year and were
computed in accordance with the financial reporting requirements of the SEC.
Following is a summary of the results of the evaluation of proved reserves
effective July 1, 1996:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED DEVELOPED PROVED
PRODUCING NON- PRODUCING UNDEVELOPED
(PDP) (PDNP) (PU) TOTAL PROVED
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Reserves to the Evaluated Interests:
Oil/Condensate, MBBL.................................. 5,381,862 640.814 821.795 6,844.471
Gas, MMCF............................................. 31,030.181 409.675 6,257.249 37,697.105
Future Net Revenue, M$:
Undiscounted.......................................... 117,472.928 9,745.637 13,918.525 141,137.090
Discounted Per Annum at 10.00 Percent................. 86,124.005 6,897.704 7,319.181 100,340.891
</TABLE>
- ------------------------
Note: Due to the method of rounding within Aries Software, Total Proved may
not equal PDP + PDNP + PU.
A-1
<PAGE>
Clayton Williams Energy, Inc.
Mr. Greg Benton
September 30, 1996
Page 2
At the request of Williams Energy, Williamson used the Landmark Munro
Garrett graphics and reserves and economics evaluation software, Aries, to
prepare this evaluation. In evaluations of these properties prior to December
31, 1995, Williamson utilized its proprietary software programs. No comparative
tests have been performed to determine the difference in evaluation results of
either reserves or revenue quantities that may occur solely as a result of the
differences in the programs nor has Williamson performed tests to determine the
accuracy of Aries. However, in accordance with the request made by Williams
Energy and the general acceptance of Aries by the oil and gas industry,
Williamson has used Aries to prepare the Williamson report.
II. DEFINITIONS OF SEC RESERVES(1)
The estimated reserves presented in this summary letter are net proved
reserves, including proved developed producing, proved developed nonproducing,
and proved undeveloped reserves, and were computed in accordance with the
financial reporting requirements of the SEC. In preparing these evaluations, no
attempt has been made to quantify the element of uncertainty associated with any
category. Reserves were assigned to each category as warranted. The definitions
of oil and gas reserves pursuant to the requirements of the Securities Exchange
Act are:
PROVED RESERVES(2)
Proved reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under the economic criteria employed and existing operating conditions, i.e.,
prices and costs as of the date the estimate is made. Prices and costs include
consideration of changes provided only by contractual arrangements but not on
escalations based upon an estimate of future conditions.
A. Reservoirs are considered proved if economic producibility is supported
by either actual production or conclusive formation test. The area of a
reservoir considered proved includes:
1. that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and
2. the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of
information on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the reservoir.
B. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in
the "proved" classification when successful testing by a pilot project,
or the operation of an installed program in the reservoir, provides
support for the engineering analysis on which the project or program was
based.
C. Estimates of proved reserves do not include the following:
- ------------------------
(1) For evaluations prepared for disclosure to the Securities and Exchange
Commission, see SEC ACCOUNTING RULES. Commerce Clearing House, Inc. October
1981, Paragraph 290, Regulation 210.4-10, p.329.
(2) Any variations to these definitions will be clearly stated in the report.
A-2
<PAGE>
Clayton Williams Energy, Inc.
Mr. Greg Benton
September 30, 1996
Page 3
1. oil that may become available from known reservoirs but is classified
separately as "indicated additional reserves";
2. crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to
geology, reservoir characteristics, or economic factors;
3. crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; and
4. crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal(3), gilsonite, and other such
sources.
PROVED DEVELOPED RESERVES(4)
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as "proved developed reserves"
only after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased recovery will
be achieved.
PROVED UNDEVELOPED RESERVES
Proved undeveloped reserves are reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
III. DISCUSSION OF SEC RESERVES
The properties in the Williamson report are located in the states of
Louisiana, Mississippi, New Mexico, Texas, and Wyoming and the state and federal
offshore waters of Louisiana with the majority of the value represented in two
areas, the Giddings field area in Brazos, Burleson, Fayette, Lee, Robertson, and
Washington Counties, Texas and the Jalmat gas field area of Lea County, New
Mexico. These two areas comprise approximately 84.9 percent of the proved
reserves with the Giddings field area contributing 70.1 percent and the Jalmat
gas field area 14.8 percent. Production is from the Austin Chalk, Austin
Chalk-3, Austin Chalk gas, Austin Chalk 11900, Buda, Edwards, Georgetown,
Navarro A, Taylor, Wilcox,
- ------------------------
(3) According to Staff Accounting Bulletin 85, excluding certain coalbed
methane gas.
(4) Williamson Petroleum Consultants, Inc. separates proved developed reserves
into proved developed producing and proved developed nonproducing reserves.
This is to identify proved developed producing reserves as those to be
recovered from actively producing wells; proved developed nonproducing
reserves as those to be recovered from wells or intervals within wells,
which are completed but shut in waiting on equipment or pipeline
connections, or wells where a relatively minor expenditure is required for
recompletion to another zone.
A-3
<PAGE>
Clayton Williams Energy, Inc.
Mr. Greg Benton
September 30, 1996
Page 4
and Wilcox 4400 formations in the Giddings field area and the Tansil, Yates,
Seven Rivers, and Queen formations in the Jalmat gas field area.
Future development in the Giddings field is focused on water fracture
treatments of existing wells and the drilling of horizontal wells in the Austin
Chalk formation updip of current producing wells in the Giddings (Austin
Chalk-3) field in Burleson and Robertson Counties.
Proved developed nonproducing reserves from hydraulic fracture treatments
were assigned to certain vertically and horizontally drilled wells. The
hydraulic fracture treatment utilized by Williams Energy in this field is
generally referred to as a "water frac". Reserves were based on analogy to
similar wells in the area which have previously been fracture treated.
The locations to be drilled are immediate offsets to existing producing
wells and are on-trend with identified fracture systems. Proved undeveloped
reserves assigned to undrilled locations were based on analogy to two or more
offset producing wells whenever possible. Rate-time forecasts were based on
analogy to the average initial producing rates, decline profiles, and projected
ultimate recoveries of the offset wells.
Future development in the Jalmat gas field area includes 26 proved
undeveloped recompletions to behind-pipe zones, stimulation treatments, and the
drilling of additional locations.
The detailed property review included in the Williamson report provides
significant detail concerning the reserves for the properties and the
engineering assumptions utilized in the evaluation.
The individual projections of lease reserves and economics include data that
describe the production forecasts and associated evaluation parameters such as
interests, taxes, product prices, operating costs, investments, salvage values,
abandonment costs, and net profit interests.
Net income to the evaluated interests is the future net revenue after
consideration of royalty revenue payable to others, taxes, operating expenses,
investments, salvage values, abandonment costs, and net profit interests, as
applicable. The future net revenue is before federal income tax and excludes
consideration of any encumbrances against the properties if such exist.
No opinion is expressed by Williamson in the Williamson report as to a fair
market value of the evaluated properties.
The future net revenue values were based on projections of oil and gas
production. It was assumed there would be no significant delay between the date
of oil and gas production and the receipt of the associated revenue for this
production.
Unless specifically identified and documented by Williams Energy as having
curtailment problems, gas production trends have been assumed to be a function
of well productivity and not of market conditions. The effect of "take or pay"
clauses in gas contracts was not considered.
Oil reserves are expressed in thousands of United States (U.S.) barrels
(MBBL) of 42 U.S. gallons. Gas volumes are expressed in millions of cubic feet
(MMCF) at 60 degrees Fahrenheit and at the legal pressure base that prevails in
the state in which the reserves are located. No adjustment of the individual gas
volumes to a common pressure base has been made.
The Williamson report includes only those costs and revenues which are
considered by Williams Energy to be directly attributable to individual leases
and areas. There could exist other revenues, overhead costs, or other costs
associated with Williams Energy or Warrior which are not included. Such
A-4
<PAGE>
Clayton Williams Energy, Inc.
Mr. Greg Benton
September 30, 1996
Page 5
additional costs and revenues are outside the scope of the Williamson report. In
accordance with the instructions of Williams Energy, operating overhead costs
were excluded for the calculation of economics for all properties operated by
Williams Energy. However, operating overhead costs were considered in the
determination of the economic lifetime and reserves of each property. The
Williamson report is not a financial statement for Williams Energy or Warrior
and should not be used as the sole basis for any transaction concerning Williams
Energy, Warrior, or the evaluated properties.
The reserves projections in this evaluation are based on the use of the
available data and accepted industry engineering methods. Future changes in any
operational or economic parameters or production characteristics of the
evaluated properties could increase or decrease their reserves. Unforeseen
changes in market demand or allowables set by various regulatory agencies could
also cause actual production rates to vary from those projected. The dates of
first production for nonproducing properties were based on estimates by Williams
Energy or Williamson and the actual dates may vary from those estimated.
Williamson reserves the right to alter any of the reserves projections and the
associated economics included in this evaluation in any future evaluations based
on additional data that may be acquired.
All data utilized in the preparation of the Williamson report with respect
to interests, reversionary status, oil and gas prices, gas categories, gas
contract terms, operating expenses, investments, salvage values, abandonment
costs, net profit interests, well information, and current operating conditions,
as applicable, were provided by Williams Energy and the operators. Data obtained
after the effective date but prior to the completion of the Williamson report
were used and were applied consistently. The reserves category assignments
reflect the status of the wells as of the effective date. July production data
were utilized on all operated properties. Daily production data through
September 10, 1996 were utilized on all new wells and wells drilled after the
effective date but prior to September 1996. These data were used in the
determination of initial producing and decline rates. Production data provided
by Williams Energy were used where available. If production data were not
provided by Williams Energy, production data from public records were utilized.
All data have been reviewed for reasonableness and, unless obvious errors were
detected, have been accepted as correct. It should be emphasized that revisions
to the projections of reserves and economics included in the Williamson report
may be required if the provided data are revised for any reason. No inspection
of the properties was made as this was not considered within the scope of this
evaluation. No investigation was made of any environmental liabilities that
might apply to the evaluated properties, and no costs are included for any
possible related expenses.
The estimates of reserves were determined by accepted industry methods and
in accordance with the Definitions of SEC Reserves included in this summary
letter. Methods utilized include extrapolation of historical production trends,
material balance determinations, analogy to similar properties, and volumetric
calculations.
Where sufficient production history and other data were available, reserves
for producing properties were determined by extrapolation of historical
production trends or through the use of material balance determinations. Analogy
to similar properties or volumetric calculations were used for nonproducing
properties and those producing properties which lacked sufficient production
history and other data to yield a definitive estimate of reserves. Reserves
projections based on analogy are subject to change due to subsequent changes in
the analogous properties or subsequent production from the evaluated properties.
Volumetric calculations are often based upon limited log and/or core analysis
data and incomplete reservoir fluid and formation rock data. Since these limited
data must frequently be extrapolated over an assumed drainage area, subsequent
production performance trends or material balance calculations may cause the
need for significant revisions to the estimates of reserves.
A-5
<PAGE>
Clayton Williams Energy, Inc.
Mr. Greg Benton
September 30, 1996
Page 6
Area oil prices were provided by Williams Energy to be used at the effective
date with the written assurance that the use of these area prices is reasonable
on an aggregate basis and would not materially affect the income from any
major-value property. After the effective date, prices were held constant for
the life of the properties. No attempt has been made to account for oil price
fluctuations which have occurred in the market subsequent to the effective date
of the Williamson report.
Area gas prices were provided by Williams Energy to be used at the effective
date with the written assurance that the use of these area prices for wellhead
volumes is reasonable on an aggregate basis and would not materially affect the
income from any major-value property. After the effective date, prices were held
constant for the life of the properties unless Williams Energy indicated that
changes were provided for by contract. A contract price of $2.65 per thousand
cubic feet (MCF) of gas was used for properties in the Southwest Rugeley field,
Matagorda County, Texas through December 1997. This price was then reduced to
the area price of $2.28 per MCF of gas and was held constant for the life of
those properties. All gas prices were applied to projected wellhead volumes.
It should be emphasized that with the current economic uncertainties,
fluctuation in market conditions could significantly change the economics of the
properties included in the Williamson report.
Operating expenses were provided by Williams Energy and represented, when
possible, the average of all recurring expenses which are billable to the
working interest owners. Lease operating expenses for all Williams
Energy-operated Base and Acquisition properties were a combination of fixed
costs and variable-by-volume costs to reflect reductions in expenses with
declining volumes as exhibited by historical operating performance. The fixed
costs on a cost per month per well basis and the variable costs on a per barrel
of oil basis varied by area. Fixed operating costs were used on the Williams
Energy-operated New Mexico wells and on all nonoperated wells. These expenses
included, but were not limited to, all direct operating expenses and any ad
valorem taxes not deducted separately. In accordance with the instructions of
Williams Energy, operating overhead costs were excluded for the calculation of
economics for all properties operated by Williams Energy. However, operating
overhead costs were considered in the determination of the economic lifetime and
reserves of each property. These costs include any overhead costs (general and
administrative) which are billable to the working interest owners. For all
nonoperated wells, the economic lifetime and calculation of economics included
overhead costs. Expenses for workovers, well stimulations, and other maintenance
were not included in the operating expenses unless such work was expected on a
recurring basis. Judgments for the exclusion of the nonrecurring expenses were
made by Williams Energy. For new and developing properties where data were
unavailable, operating expenses were estimated by Williams Energy. Operating
costs, except for the variable expenses mentioned above, were held constant for
the life of the properties.
State production taxes have been deducted at the rates provided by Williams
Energy. County ad valorem taxes provided by Williams Energy were deducted for
those Williams Energy-operated properties located in Texas. Any ad valorem taxes
for properties in other states and nonoperated properties in Texas were
represented by Williams Energy to be included in the operating expenses.
All capital costs for drilling and completion of wells, recompletions to
behind-pipe zones, restimulation, other nonrecurring workover or operating
costs, and property abandonment costs have been deducted as applicable. These
costs were provided by Williams Energy. No adjustments were made to account for
the potential effect of inflation on these costs.
Salvage values were not provided by Williams Energy to be included in this
evaluation.
A-6
<PAGE>
Clayton Williams Energy, Inc.
Mr. Greg Benton
September 30, 1996
Page 7
IV. DECLARATION OF INDEPENDENT STATUS
Williamson is an independent consulting firm and does not own any interests
in the oil and gas properties covered by the Williamson report. No employee,
officer, or director of Williamson is an employee, officer, or director of
Williams Energy. Neither the employment of nor the compensation received by
Williamson is contingent upon the values assigned to the properties covered by
the Williamson report.
Yours very truly,
WILLIAMSON PETROLEUM CONSULTANTS, INC.
JDS/jek
A-7
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE ANY
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER TO SELL OR SOLICITATION IS NOT QUALIFIED TO
DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Cautionary Statement Regarding Forward-Looking
Statements................................... 7
Risk Factors................................... 7
Use of Proceeds................................ 13
Price Range of Common Stock.................... 14
Dividend Policy................................ 14
Capitalization................................. 15
Selected Financial Information................. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Business and Properties........................ 24
Management..................................... 34
Principal Stockholders......................... 36
Certain Transactions and Relationships......... 37
Description of Capital Stock................... 40
Underwriting................................... 43
Legal Matters.................................. 44
Experts........................................ 44
Available Information.......................... 44
Incorporation of Certain Documents by
Reference.................................... 45
Glossary of Terms.............................. 46
Index to Consolidated Financial Statements..... F-1
Summary Reserve Report......................... A-1
</TABLE>
[LOGO]
1,250,000 SHARES
COMMON STOCK
--------------
PROSPECTUS
--------------
RODMAN & RENSHAW, INC.
HANIFEN, IMHOFF INC.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 4,411
NASD filing fee................................................... 1,955
Blue Sky fees and expenses........................................ 12,000
Accounting fees and expenses...................................... 25,000
Engineering fees and expenses..................................... 45,000
Transfer Agent fees and expenses.................................. 1,000
Legal fees and expenses........................................... 80,000
Printing and mailing expenses..................................... 60,000
Miscellaneous..................................................... 10,634
---------
TOTAL........................................................... $ 240,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation to indemnify certain persons, including officers and directors and
former officers and directors, and to purchase insurance with respect to
liability arising out of their capacity or status as officers and directors.
Such law provides further that the indemnification permitted thereunder shall
not be deemed exclusive of any other rights to which officers and directors may
be entitled under the corporation's bylaws, any agreement or otherwise. Article
IX of the Company's Second Restated Certificate of Incorporation, included in
Exhibit 3.1 hereto, and Article VI of the Company's Bylaws, included in Exhibit
3.2 hereto, provide, in general, that the Company shall indemnify its directors
and officers under the circumstances defined in Section 145 of the General
Corporation Law of the State of Delaware and gives authority to the Company to
purchase insurance with respect to such indemnification. The Company may in the
future seek to obtain insurance providing for indemnification of officers and
directors of the Company and certain other persons against liabilities and
expenses incurred by any of them in certain stated proceedings and under certain
stated conditions.
In addition, Section 102(b)(7) of the General Corporation Law of the State
of Delaware permits a corporation to limit the liability of its directors
subject to certain exceptions. In accordance with Section 102(b)(7), Article VI
of the Company's Second Restated Certificate of Incorporation, included in
Exhibit 3.1 hereto, provides, in general, that a director of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
from breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware or (iv) for any transaction from which
the director derived an improper personal benefit.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant, its directors and officers, and by the Registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Securities Act of 1933 (the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
* 3.1 Second Restated Certificate of Incorporation
+3.2 Bylaws, filed as an exhibit to the Form S-1 Registration Statement, Registration No.
33-43350
5.1 Opinion of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation
+ 10.1 Fourth Restated Loan Agreement dated June 2, 1995, among Clayton Williams Energy, Inc.,
Warrior Gas Co., CWEI Acquisitions, Inc., as Borrowers, and Bank One, Texas, N.A.,
Banque Paribas and NBD Bank, as Lenders, filed as an exhibit to the June 30, 1995 Form
10-K.
+ 10.2 First Amendment to Fourth Restated Loan Agreement dated as of December 31, 1995, by and
among Clayton Williams Energy, Inc., Warrior Gas Co., CWEI Acquisitions, Bank One, Texas
N.A., Banque Paribas and NBD Bank, filed as an exhibit to the December 31, 1995 Form
10-K.
+ 10.3 Second Amendment to Fourth Restated Loan Agreement dated as of March 11, 1996, by and
among Clayton Williams Energy, Inc., Warrior Gas Co., CWEI Acquisitions, Bank One, Texas
N.A., Banque Paribas and NBD Bank, filed as an exhibit to the December 31, 1995 Form
10-K.
+ 10.4 Subordinated Loan Agreement dated as of June 2, 1995, among Clayton Williams Energy,
Inc., CWEI Acquisitions, Inc. and Bank One, Texas, N.A., filed as an exhibit to the June
30, 1995 Form 10-Q
+ 10.5 First Amendment to Subordinated Loan Agreement dated as of December 31, 1995, among
Clayton Williams Energy, Inc., CWEI Acquisitions, Inc. and Bank One, Texas, N.A., filed
as an exhibit to the December 31, 1995 Form 10-K
+ 10.6 Second Amendment to Subordinated Loan Agreement dated as of March 11, 1996, among
Clayton Williams Energy, Inc., CWEI Acquisitions, Inc. and Bank One, Texas, N.A., filed
as an exhibit to the December 31, 1995 Form 10-K
+ 10.7 Agreement between Clayton Williams Argentina, Inc. and CAPSA Exploradora, S.A. dated
January 7, 1994, filed as an exhibit to the December 31, 1993 Form 10-K
+ 10.8 Amendment dated July 20, 1994, to Agreement between Clayton Williams Argentina, Inc. and
CAPSA Exploradora, S.A., filed as an exhibit to the September 30, 1995 Form 10-Q
+ 10.9 Agreement among Clayton Williams Argentina, Inc., CAPEX SA and Occidental Petrolera
Argentina, Ltd. dated February 24, 1995, filed as an exhibit to the December 31, 1994
Form 10-K
+ 10.10 1993 Stock Compensation Plan, filed as an exhibit to the Form S-8 Registration
Statement, Registration No. 33-68318
+ 10.11 First Amendment to the 1993 Stock Compensation Plan, filed as an exhibit to the December
31, 1995 Form 10-K
+ 10.12 Second Amendment to the 1993 Stock Compensation Plan, filed as an exhibit to the Form
S-8 Registration Statement No. 33-68318
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------------
<S> <C>
+ 10.13 Outside Directors Stock Option Plan, filed as an exhibit to the Form S-8 Registration
Statement, Registration No. 33-68316
+ 10.14 First Amendment to Outside Directors Stock Option Plan, filed as an exhibit to the
December 31, 1995 Form 10-K
+ 10.15 Bonus Incentive Plan, filed as an exhibit to the Form S-8 Registration Statement,
Registration No. 33-68320
+ 10.16 Amended and Restated 401(k) Plan & Trust, filed as an exhibit to the December 31, 1995
Form 10-K
+ 10.17 Second Amendment to the Amended and Restated 401(k) Plan & Trust, filed as an exhibit to
the December 31, 1995 Form 10-K
+ 10.18 Third Amendment to Amended and Restated 401(k) Plan & Trust, filed as an exhibit to the
December 31, 1995 Form 10-K
+ 10.19 Outside Directors Stock Compensation Plan, filed as an exhibit to the Form S-8
Registration Statement, Registration No. 33-92832
+ 10.20 First Amendment to Outside Directors Stock Compensation Plan, filed as an exhibit to the
December 31, 1995 Form 10-K
+ 10.21 Executive Incentive Stock Compensation Plan, filed as an exhibit to the Form S-8
Registration Statement, Registration 33-92834
+ 10.22 Consolidation Agreement dated May 13, 1993 among Clayton Williams Energy, Inc., Warrior
Gas Co. and the Williams Entities, filed as an exhibit to the Form S-1 Registration
Statement, Registration No. 33-43350
+ 10.23 Agreement dated April 23, 1993 between the Company and Robert C. Lyon, filed as an
exhibit to the Form S-1 Registration Statement, Registration No. 33-43350
+ 10.24 Service Agreement effective October 1, 1995 among Clayton Williams Energy, Inc. and
certain Williams Entities, filed as an exhibit to the December 31, 1995 Form 10-K
+ 21 Subsidiaries of the Registrant, filed as an exhibit to the December 31, 1995 Form 10-K
23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Williamson Petroleum Consultants, Inc.
23.3 Consent of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation (such consent is
included in the opinion filed as Exhibit 5.1 to this Registration Statement)
*24.1 Power of Attorney
*24.2 Certified copy of resolution of Board of Directors of Clayton Williams Energy, Inc.
authorizing signature pursuant to Power of Attorney
</TABLE>
- ------------------------
* Previously filed
+ Incorporated by reference to the filing indicated
(b) Financial Statement Schedules.
None.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such directors, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, (i) the information omitted
from the Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A under the Securities Act and contained in a form of Prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registrant Statement as of the
time it was declared effective and (ii) each post-effective amendment that
contains a form of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Midland, State of Texas,
on October 15, 1996.
CLAYTON WILLIAMS ENERGY, INC.
(Registrant)
By: /s/ CLAYTON W. WILLIAMS, JR.*
-----------------------------------
Clayton W. Williams, Jr.
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
Chairman of the Board,
/s/ CLAYTON W. WILLIAMS, JR.* President and Chief
- ----------------------------------- Executive Officer and October 15, 1996
Clayton W. Williams, Jr. Director
Executive Vice
/s/ L. PAUL LATHAM President-- Chief
- ----------------------------------- Operating Officer and October 15, 1996
L. Paul Latham Director
Senior Vice
/s/ MEL G. RIGGS* President--Finance,
- ----------------------------------- Secretary, Treasurer and October 15, 1996
Mel G. Riggs Chief Financial Officer
/s/ STANLEY S. BEARD*
- ----------------------------------- Director October 15, 1996
Stanley S. Beard
- ----------------------------------- Director October 15, 1996
William P. Clements, Jr.
/s/ ROBERT L. PARKER*
- ----------------------------------- Director October 15, 1996
Robert L. Parker
*By: /s/ L. PAUL LATHAM
- -----------------------------------
L. Paul Latham
ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ----------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
* 3.1 Second Restated Certificate of Incorporation
+3.2 Bylaws, filed as an exhibit to the Form S-1 Registration Statement, Registration No.
33-43350
5.1 Opinion of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation
+ 10.1 Fourth Restated Loan Agreement dated June 2, 1995, among Clayton Williams Energy, Inc.,
Warrior Gas Co., CWEI Acquisitions, Inc., as Borrowers, and Bank One, Texas, N.A.,
Banque Paribas and NBD Bank, as Lenders, filed as an exhibit to the June 30, 1995 Form
10-K.
+ 10.2 First Amendment to Fourth Restated Loan Agreement dated as of December 31, 1995, by and
among Clayton Williams Energy, Inc., Warrior Gas Co., CWEI Acquisitions, Bank One, Texas
N.A., Banque Paribas and NBD Bank, filed as an exhibit to the December 31, 1995 Form
10-K.
+ 10.3 Second Amendment to Fourth Restated Loan Agreement dated as of March 11, 1996, by and
among Clayton Williams Energy, Inc., Warrior Gas Co., CWEI Acquisitions, Bank One, Texas
N.A., Banque Paribas and NBD Bank, filed as an exhibit to the December 31, 1995 Form
10-K.
+ 10.4 Subordinated Loan Agreement dated as of June 2, 1995, among Clayton Williams Energy,
Inc., CWEI Acquisitions, Inc. and Bank One, Texas, N.A., filed as an exhibit to the June
30, 1995 Form 10-Q
+ 10.5 First Amendment to Subordinated Loan Agreement dated as of December 31, 1995, among
Clayton Williams Energy, Inc., CWEI Acquisitions, Inc. and Bank One, Texas, N.A., filed
as an exhibit to the December 31, 1995 Form 10-K
+ 10.6 Second Amendment to Subordinated Loan Agreement dated as of March 11, 1996, among
Clayton Williams Energy, Inc., CWEI Acquisitions, Inc. and Bank One, Texas, N.A., filed
as an exhibit to the December 31, 1995 Form 10-K
+ 10.7 Agreement between Clayton Williams Argentina, Inc. and CAPSA Exploradora, S.A. dated
January 7, 1994, filed as an exhibit to the December 31, 1993 Form 10-K
+ 10.8 Amendment dated July 20, 1994, to Agreement between Clayton Williams Argentina, Inc. and
CAPSA Exploradora, S.A., filed as an exhibit to the September 30, 1995 Form 10-Q
+ 10.9 Agreement among Clayton Williams Argentina, Inc., CAPEX SA and Occidental Petrolera
Argentina, Ltd. dated February 24, 1995, filed as an exhibit to the December 31, 1994
Form 10-K
+ 10.10 1993 Stock Compensation Plan, filed as an exhibit to the Form S-8 Registration
Statement, Registration No. 33-68318
+ 10.11 First Amendment to the 1993 Stock Compensation Plan, filed as an exhibit to the December
31, 1995 Form 10-K
+ 10.12 Second Amendment to the 1993 Stock Compensation Plan, filed as an exhibit to the Form
S-8 Registration Statement No. 33-68318
+ 10.13 Outside Directors Stock Option Plan, filed as an exhibit to the Form S-8 Registration
Statement, Registration No. 33-68316
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ----------------------------------------------------------------------------------------
<C> <S>
+ 10.14 First Amendment to Outside Directors Stock Option Plan, filed as an exhibit to the
December 31, 1995 Form 10-K
+ 10.15 Bonus Incentive Plan, filed as an exhibit to the Form S-8 Registration Statement,
Registration No. 33-68320
+ 10.16 Amended and Restated 401(k) Plan & Trust, filed as an exhibit to the December 31, 1995
Form 10-K
+ 10.17 Second Amendment to the Amended and Restated 401(k) Plan & Trust, filed as an exhibit to
the December 31, 1995 Form 10-K
+ 10.18 Third Amendment to Amended and Restated 401(k) Plan & Trust, filed as an exhibit to the
December 31, 1995 Form 10-K
+ 10.19 Outside Directors Stock Compensation Plan, filed as an exhibit to the Form S-8
Registration Statement, Registration No. 33-92832
+ 10.20 First Amendment to Outside Directors Stock Compensation Plan, filed as an exhibit to the
December 31, 1995 Form 10-K
+ 10.21 Executive Incentive Stock Compensation Plan, filed as an exhibit to the Form S-8
Registration Statement, Registration 33-92834
+ 10.22 Consolidation Agreement dated May 13, 1993 among Clayton Williams Energy, Inc., Warrior
Gas Co. and the Williams Entities, filed as an exhibit to the Form S-1 Registration
Statement, Registration No. 33-43350
+ 10.23 Agreement dated April 23, 1993 between the Company and Robert C. Lyon, filed as an
exhibit to the Form S-1 Registration Statement, Registration No. 33-43350
+ 10.24 Service Agreement effective October 1, 1995 among Clayton Williams Energy, Inc. and
certain Williams Entities, filed as an exhibit to the December 31, 1995 Form 10-K
+ 21 Subsidiaries of the Registrant, filed as an exhibit to the December 31, 1995 Form 10-K
23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Williamson Petroleum Consultants, Inc.
23.3 Consent of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation (such consent is
included in the opinion filed as Exhibit 5.1 to this Registration Statement)
*24.1 Power of Attorney
*24.2 Certified copy of resolution of Board of Directors of Clayton Williams Energy, Inc.
authorizing signature pursuant to Power of Attorney
</TABLE>
- ------------------------
* Previously filed
+ Incorporated by reference to the filing indicated
<PAGE>
1,437,500 SHARES
CLAYTON WILLIAMS ENERGY, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_____________, 1996
Rodman & Renshaw, Inc.
Hanifen, Imhoff Inc.
c/o Rodman & Renshaw, Inc.
Two World Financial Center
225 Liberty St., 30th Floor
New York, New York 10281
On behalf of the Several
Underwriters named in
SCHEDULE I attached hereto.
Ladies and Gentlemen:
Clayton Williams Energy, Inc., a Delaware corporation (the "COMPANY")
proposes to sell to you and the other underwriters named in SCHEDULE I attached
hereto (the "UNDERWRITERS"), for whom you are acting as the representatives (the
"REPRESENTATIVES"), 1,250,000 shares (the "FIRM SHARES") of the Company's Common
Stock, par value $0.10 per share (the "COMMON STOCK"), to be issued and sold by
the Company. In addition, the Company proposes to grant to the Underwriters an
option to purchase up to an additional 187,500 shares (the "OPTION SHARES"), of
Common Stock for the purpose of covering over-allotments in connection with the
sale of the Firm Shares. The Firm Shares and the Option Shares are together
called the "SHARES."
1. SALE AND PURCHASE OF THE SHARES. On the basis of the representations,
warranties and agreements contained in, and subject to the terms and conditions
of, this Agreement:
(a) The Company agrees to issue and sell the Firm Shares to the
several Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase at the purchase price per share of Common Stock of
$______ (the "INITIAL PRICE"), the aggregate number of Firm Shares set
forth opposite such Underwriter's name in SCHEDULE I attached hereto.
<PAGE>
(b) The Company grants to the several Underwriters an option to
purchase up to an additional 187,500 shares at the Initial Price. Pursuant
to such option, the Company agrees to issue and sell the Option Shares to
the several Underwriters, and each of the Underwriters agrees, severally
and not jointly, to purchase at the Initial Price the same percentage
(adjusted by the Representatives to eliminate fractions) of the total
number of Option Shares to be purchased by the Underwriters as such
Underwriter is purchasing of the Firm Shares. Such option may be exercised
only to cover over-allotments in the sales of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on or
before 12:00 noon, New York City time, on the business day before the Firm
Shares Closing Date (as defined below) and from time-to-time thereafter
within 30 days after the date of this Agreement, upon verbal or telephonic
notice by the Representatives to the Company setting forth the number of
Option Shares to be purchased and the time and date (if other than the Firm
Shares Closing Date) of such purchase.
2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares to
the Representatives for the respective accounts of the Underwriters, and payment
of the purchase price by certified or official bank check or checks payable in
New York Clearing House (next day) funds to the Company, shall take place at the
offices of Rodman & Renshaw, Inc., at Two World Financial Center, 225 Liberty
St., 30th Floor, New York, New York, 10281, at 10:00 a.m., New York City time,
on the third business day following the date on which the public offering of the
Shares commences (unless such date is postponed in accordance with the
provisions of Section 10(b)), or at such time and place on such other date, not
later than 10 business days after the date of this Agreement, as shall be agreed
upon by the Company and the Representatives (such time and date of delivery and
payment are called the "FIRM SHARES CLOSING DATE"). The public offering of the
Shares shall be deemed to have commenced at the time, which is the earlier of
(a) the time, after the Registration Statement (as defined in Section 4 below)
becomes effective, of the release by you for publication of the first newspaper
advertisement which is subsequently published relating to the Shares or (b) the
time, after the Registration Statement becomes effective, when the Shares are
first released by you for offering by the Underwriters or dealers by letter,
facsimile transmission or telegram.
In the event the option with respect to the Option Shares is exercised,
delivery by the Company of the Option Shares to the Representatives for the
respective accounts of the Underwriters, and payment of the purchase price by
certified or official bank check or checks payable in New York, Clearing House
(next day) funds to the Company shall take place at the offices of Rodman &
Renshaw, Inc. specified above at the time and on the date (which may be the same
date as, but in no event shall be earlier than, the Firm Shares Closing Date)
specified in the notice referred to in Section 1(b) (such time and date of
delivery and payment is called the "OPTION SHARES CLOSING DATE"). The Firm
Shares Closing Date and the Option Shares Closing Date are called, individually,
a "CLOSING DATE" and, together, the "CLOSING DATES."
2
<PAGE>
Certificates evidencing the Shares shall be registered in such names and
shall be in such denominations as the Representatives shall request at least two
full business days before the Firm Shares Closing Date or the Option Shares
Closing Date, as the case may be, and shall be made available to the
Representatives for checking and packaging, at such place as is designated by
the Representatives, on the full business day before the Firm Shares Closing
Date or the Option Shares Closing Date, as the case may be.
The documents to be delivered at each Closing Date by or on behalf of the
parties hereto, including the cross receipt for the Shares and any additional
documents requested by the Underwriters, will be delivered at the offices of
Vinson & Elkins L.L.P., 2300 First City Tower, 1001 Fannin, Houston, Texas 77002
(the "CLOSING LOCATION"). A meeting will be held at the Closing Location at
2:00 p.m., Houston time, on the New York Business Day next preceding such Time
of Delivery, at which meeting the final drafts of the documents to be delivered
pursuant to the preceding sentence will be available for review by the parties
hereto. "NEW YORK BUSINESS DAY" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in New York
are generally authorized or obligated by law or executive order to close.
3. PUBLIC OFFERING. The Company understands that the Underwriters
propose to make a public offering of the Shares, as set forth in and pursuant to
the Prospectus (as defined in Section 4 below), as soon after the effective date
of the Registration Statement and the date of this Agreement as the
Representatives deems advisable. The Company hereby confirms that the
Underwriters and dealers have been authorized to distribute or cause to be
distributed each preliminary prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented if the Company
furnishes amendments or supplements thereto to the Underwriters).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with, the several
Underwriters that:
(i) The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement, and may have
filed one or more amendments thereto, on Form S-2 (Registration No.
333-13441), including in such registration statement and each such
amendment a related preliminary prospectus (a "PRELIMINARY
PROSPECTUS"), for the registration of the Shares and the Option
Shares, in conformity with the requirements of the Securities Act of
1933, as amended (the "ACT"). In addition, the Company has filed or
will promptly file a further amendment to such registration statement,
in the form heretofore delivered to you. Other than a registration
statement, if any, increasing the size of the offering
3
<PAGE>
(a "RULE 462(b) REGISTRATION STATEMENT"), filed pursuant to Rule
462(b) under the Act, which became effective upon filing, no other
document with respect to the registration statement referred to
above has heretofore been filed with the Commission. As used in
this Agreement, the term "REGISTRATION STATEMENT" means such
registration statement and the Rule 462(b) Registration Statement,
if any, as amended, on file with the Commission at the time such
registration statement becomes effective (including the prospectus,
financial statements, exhibits and all other documents filed as a
part thereof or incorporated by reference directly or indirectly
therein), provided that such Registration Statement, at the time it
becomes effective, may omit such information as is permitted to be
omitted from the Registration Statement when it becomes effective
pursuant to Rule 430A of the General Rules and Regulations
promulgated under the Act (the "REGULATIONS"), which information
("RULE 430 INFORMATION") shall be deemed to be included in such
Registration Statement when a final prospectus is filed with the
Commission in accordance with Rules 430A and 424(b)(1) or (4) of
the Regulations; the term "PRELIMINARY PROSPECTUS" means each
prospectus included in the Registration Statement, or any
amendments thereto, before it becomes effective under the Act, the
form of prospectus omitting Rule 430A Information included in the
Registration Statement when it becomes effective, if applicable
(the "RULE 430A PROSPECTUS"), and any prospectus filed by the
Company with your consent pursuant to Rule 424(a) of the
Regulations; and the term "PROSPECTUS" means the final prospectus
included as part of the Registration Statement, except that if the
prospectus relating to the securities covered by the Registration
Statement in the form first filed on behalf of the Company with the
Commission pursuant to Rule 424(b) of the Regulations shall differ
from such final prospectus, the term "PROSPECTUS" shall mean the
prospectus as filed pursuant to Rule 424(b) from and after the date
on which it shall have first been used.
(ii) When the Registration Statement becomes effective, and at
all times subsequent thereto to and including the Closing Dates and
during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer,
and during such longer period until any post-effective amendment
thereto shall become effective, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment or supplement to the Registration Statement or the
Prospectus) will contain all statements which are required to be
stated therein in accordance with the Act and the Regulations, will
comply with the Act and the Regulations, and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no
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event will have occurred which should have been set forth in an
amendment or supplement to the Registration Statement or the
Prospectus which has not then been set forth in such an amendment
or supplement; if a Rule 430A Prospectus is included in the
Registration Statement at the time it becomes effective, the
Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4) will
contain all Rule 430A Information: and each Preliminary Prospectus,
as of the date filed with the Commission, did not include any
untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading; except that no representation or
warranty is made in this Section 4(a)(ii) with respect to
statements or omissions made in reliance upon and in conformity
with written information furnished to the Company as stated in
Section 7(b) with respect to any Underwriter by or on behalf of
such Underwriter through the Representatives expressly for
inclusion in any Preliminary Prospectus, the Registration Statement
or the Prospectus, or any amendment or supplement thereto.
(iii) Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction have issued an order (a "STOP ORDER")
suspending the effectiveness of the Registration Statement, preventing
or suspending the use of any Preliminary Prospectus, the Prospectus,
the Registration Statement, or any amendment or supplement thereto,
refusing to permit the effectiveness of the Registration Statement or
suspending the registration or qualification of the Firm Shares or the
Option Shares, nor has any of such authorities instituted or, to the
knowledge of the Company, threatened to institute any proceedings with
respect to a Stop Order.
(iv) Any contract, agreement, instrument, lease or license
required to be described in the Registration Statement or the
Prospectus has been properly described therein. Any contract
agreement, instrument, lease or license required to be filed as an
exhibit to the Registration Statement has been filed with the
Commission as an exhibit to or has been incorporated as an exhibit by
reference into the Registration Statement.
(v) The Company has no subsidiary or subsidiaries and does not
control, directly or indirectly, any corporation, partnership, joint
venture, association or other business organization, except for those
set forth on SCHEDULE II hereto (each such corporation singly a
"SUBSIDIARY" and collectively the "SUBSIDIARIES"). Each Subsidiary is
a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation, with full
corporate power and authority and all necessary consents,
authorizations, approvals, orders, licenses, certificates and permits
of and from, and declarations and filings with, all federal, state,
foreign, local and other governmental authorities and all courts and
other
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tribunals, to own, lease, license and use its properties and assets
and to carry on its business as now being conducted and in the
manner described in the Prospectus, except where such failure would
not have a material adverse effect upon the operations, business,
properties, assets, stockholder's equity, results of operations or
financial condition of the Company or any of the Subsidiaries
("MATERIAL ADVERSE EFFECT"). Each Subsidiary has been duly
qualified to do business and is in good standing in each
jurisdiction in which its respective ownership, leasing, licensing
or character, location or use of property and assets or the conduct
of its respective business makes such qualification necessary,
except where the failure to so qualify would not have a Material
Adverse Effect.
(vi) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, and are
fully paid and nonassessable, without any personal liability attaching
to the ownership thereof, have not been issued and are not owned or
held in violation of any preemptive rights of shareholders,
optionholders, warrantholders or other persons. The Company owns all
of the shares of capital stock of the Subsidiaries, free and clear of
all liens, claims, security interests, restrictions, stockholders'
agreements, voting trusts and any other encumbrances whatsoever,
except as described in the Prospectus. There is no commitment, plan,
preemptive right or arrangement to issue, and no outstanding option,
warrant or other right calling for the issuance of, shares of capital
stock of the Company or any of the Subsidiaries or any security or
other instrument which by its terms is convertible into, exercisable
for or exchangeable for capital stock of the Company or any of the
Subsidiaries, except as described in the Prospectus. There is
outstanding no security or other instrument which by its terms is
convertible into or exchangeable for capital stock of the Company or
any of the Subsidiaries, except as described in the Prospectus.
(vii) The consolidated financial statements of the Company
included in the Registration Statement and the Prospectus fairly
present in all material respects, with respect to the Company, the
consolidated financial position, the consolidated results of
operations and the other information purported to be shown therein at
the respective dates and for the respective periods to which they
apply. Such financial statements have been prepared in accordance
with generally accepted accounting principles consistently applied
throughout the periods involved, are correct and complete and are in
accordance with the books and records of the Company. The accountants
whose reports on the audited financial statements are filed with the
Commission as a part of the Registration Statement are, and during the
periods covered by their reports included in the Registration
Statement and the Prospectus
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were, independent certified public accountants with respect to the
Company within the meaning of the Act and the Regulations. No
other financial statements are required by Form S-2 or otherwise to
be included in the Registration Statement or the Prospectus. There
has at no time been a material adverse change in the financial
condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Company or any of the
Subsidiaries from the latest information set forth in the
Registration Statement or the Prospectus.
(viii) There is no litigation, arbitration, claim,
governmental or other proceeding (formal or informal) or investigation
before any court or before any public body or board pending, or, to
the knowledge of the Company, threatened or in prospect (or any basis
therefor) with respect to the Company or any of the Subsidiaries, or
any of their respective operations, business, properties or assets,
except as may be properly described in the Prospectus or such as
individually or in the aggregate do not now have and could not
reasonably be expected in the future to have a material adverse effect
upon the operations, business, properties, assets or financial
condition of the Company or any of the Subsidiaries. Neither the
Company nor any of the Subsidiaries is involved in any labor dispute
nor, to the knowledge of the Company, is such dispute threatened,
which dispute could reasonably be expected to have a Material Adverse
Effect. Neither the Company nor any of the Subsidiaries is in
violation of, or in default with respect to, the provisions of its
articles of incorporation or by-laws or any law, rule, regulation,
order, judgment or decree which could reasonably be expected to have a
material adverse effect on the Company or any of the Subsidiaries; nor
is the Company or any of the Subsidiaries required to take any action
in order to avoid any such violation or default with respect thereto.
(ix) Except as described in the Prospectus, the Company and each
of the Subsidiaries have (1) good and indefeasible title to all its
interests in its oil and gas properties, title investigations having
been carried out by or on behalf of such person in accordance with
good practice in the oil and gas industry in the areas in which the
Company and each of the Subsidiaries operate, (2) good and
indefeasible title to all other real property and good and marketable
title to all other material properties and assets described in the
Prospectus as owned by the Company or any of the Subsidiaries and (3)
valid, subsisting and enforceable leases for all of the properties and
assets, real or personal, described in the Prospectus as leased by
them, in each case free and clear of any security interests,
mortgages, pledges, liens, encumbrances or charges of any kind, other
than those described in the Prospectus and those that could not,
individually or in the aggregate, have a Material Adverse Effect.
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<PAGE>
(x) Except as described in the Prospectus, as of the date
hereof, (1) all royalties, rentals, deposits and other amounts due on
the oil and gas properties of the Company and each of the Subsidiaries
have been properly and timely paid, and no proceeds from the sale or
production attributable to the oil and gas properties of the Company
or any of the Subsidiaries are currently being held in suspense by any
purchaser thereof, except where such amounts due could not, singly or
in the aggregate, have a Material Adverse Effect and (2) there are no
claims under take-or-pay contracts pursuant to which natural gas
purchasers have any make-up rights affecting the interest of the
Company or any of the Subsidiaries in its oil and gas properties,
except where such claims could not, singly or in the aggregate, have a
Material Adverse Effect.
(xi) As of the date hereof, the aggregate undiscounted monetary
liability of the Company and each of the Subsidiaries for natural gas
or oil taken or received under any operating or gas balancing and
storage agreement relating to its oil and gas properties that permits
any person to receive any portion of the interest of the Company or
any of the Subsidiaries in any natural gas or oil or to receive cash
or other payments to balance any disproportionate allocation of
natural gas or oil could not, singly or in the aggregate, have a
Material Adverse Effect.
(xii) The Company and each of the Subsidiaries, and to the
knowledge of the Company, any other party, is not now and is not
expected by the Company to be in violation or breach of, or in default
with respect to, complying with any term, obligation or provision of
any contract, agreement, instrument, lease, license, indenture,
mortgage, deed of trust, note, arrangement or understanding which is
material to the Company or any of the Subsidiaries and no event has
occurred which with notice or lapse of time or both would constitute
such a default, and each such contract, agreement, instrument, lease,
license, indenture, mortgage, deed of trust, note, arrangement or
understanding is in full force and is the legal, valid and binding
obligation of the parties thereto and is enforceable as to the
Company, each of the Subsidiaries and, to the knowledge of the
Company, each other party thereto, in accordance with its terms,
subject to applicable bankruptcy, insolvency and other laws affecting
the enforceability of creditor's rights generally and the effects of
general principles of equity. The Company and each of the
Subsidiaries enjoys peaceful and undisturbed possession under all
property leases and licenses under which it is operating, the loss of
any of which would not have a Material Adverse Effect. Neither the
Company nor any of the Subsidiaries is in violation or breach of, or
in default with respect to, any term of its certificate of
incorporation (or other charter document) or by-laws or of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation, which breach or default of such franchise, license,
8
<PAGE>
permit, judgment, decree, order, statute, rule or regulation could
reasonably be expected to have a Material Adverse Effect.
(xiii) The Company and the Subsidiaries have filed all
federal, state, local and foreign tax returns which are required to be
filed through the date hereof, or have received extensions thereof,
and have paid all taxes shown on such returns and all assessments
received by them to the extent that the same are material and have
become due.
(xiv) None of the Company, any Subsidiary, director, officer,
agent, employee or other person associated with or acting on behalf of
the Company and the Subsidiaries has, directly or indirectly: used any
corporate funds for unlawful contributions, gifts, entertainment or
other unlawful expenses relating to political activity; made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns
from corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment. No transaction
has occurred between or among the Company or the Subsidiaries and any
officers or directors or any affiliates or affiliates of any such
officer or director, except as described in the Prospectus.
(xv) The Company and each of the Subsidiaries (A) are in
compliance with any and all applicable federal, state and local laws
and regulations relating to the protection of human health and safety,
the environment or hazardous or toxic substances or waste, pollutants
or contaminants ("ENVIRONMENTAL LAWS"), (B) have received all permits,
licenses or other approvals required of it under applicable
Environmental Laws to conduct its business and (C) are in compliance
with all terms and conditions of any such permit, license or approval,
except for such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals that would not, singly or in the aggregate, have a Material
Adverse Effect. There has been no storage, disposal, generation,
transportation, handling or treatment of hazardous substances or solid
wastes by the Company or any of the Subsidiaries (or to the knowledge
of the Company, any of their predecessors in interest) at, upon or
from any of the property now or previously owned or leased by the
Company or any of the Subsidiaries in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or
which would require remedial action by the Company or any of the
Subsidiaries under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or
remedial action which would not result in, or
9
<PAGE>
which would not be reasonably likely to result in, singularly or in
the aggregate with all such violations and remedial actions, a
Material Adverse Effect; there has been no spill, discharge, leak,
emission, injection, escape, dumping or release of any kind onto
such property or into the environment surrounding such property of
any solid wastes or hazardous substances due to or caused by the
Company or any of the Subsidiaries, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release
which would not result in or would not be reasonably likely to
result in, singularly or in the aggregate with all such spills,
discharges, leaks, emissions, injections, escapes, dumpings and
releases, a Material Adverse Effect; and the terms "HAZARDOUS
SUBSTANCES" and "SOLID WASTES" shall have the meanings specified in
any applicable local, state and federal laws or regulations with
respect to environmental protection;
(xvi) The Company have all requisite corporate power and
authority to execute, deliver and perform this Agreement. All
necessary corporate proceedings of the Company have been duly taken to
authorize the execution, delivery and performance of this Agreement.
This Agreement has been duly authorized, executed and delivered by the
Company, is the legal, valid and binding obligation of the Company and
is enforceable as to the Company in accordance with its terms, subject
to applicable bankruptcy, insolvency and other laws affecting the
enforceability of creditor's rights generally and the effects of
general principles of equity. No consent, authorization, approval,
order, license, certificate or permit of or from, or declaration or
filing with, any federal, state, local, foreign or other governmental
authority or any court or other tribunal is required by the Company or
the Subsidiaries for the execution, delivery or performance by the
Company of this Agreement (except filings under the Act which have
been or will be made before the applicable Closing Date and such
consents consisting only of consents under "blue sky" or securities
laws which have been obtained at or prior to the date of this
Agreement). No consent of any party to any contract, agreement,
instrument, lease, license, indenture, mortgage, deed of trust, note,
arrangement or understanding to which the Company or the Subsidiaries
is a party, or to which any of their respective properties or assets
are subject, is required for the execution, delivery or performance of
this Agreement, and the execution, delivery and performance of this
Agreement will not violate, result in a breach of, conflict with,
accelerate the due date of any payments under, or (with or without the
giving of notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract, agreement,
instrument, lease, license, indenture, mortgage, deed of trust, note,
arrangement or understanding, or violate or result in a breach of any
term of the certificate of incorporation (or other charter document)
or by-laws of the Company or any of the Subsidiaries, or violate,
result in a breach of or conflict with any law, rule, regulation,
order, judgment or
10
<PAGE>
decree binding on the Company or any of the Subsidiaries or to
which any of their respective operations, business, properties or
assets are subject.
(xvii) The Shares have been duly and validly authorized. The
Firm Shares, when issued and delivered in accordance with this
Agreement, and the Option Shares, when issued and delivered in
accordance with this Agreement, will be duly and validly issued, fully
paid and nonassessable, without any personal liability attaching to
the ownership thereof, and will not be issued in violation of any
preemptive rights of shareholders, optionholders, warrantholders and
any other persons.
(xviii) All types and series of capital stock of the Company,
the Firm Shares and the Option Shares conform to all statements
relating thereto contained in the Registration Statement or the
Prospectus.
(xix) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
and except as may otherwise be properly described therein, there has
not been any material adverse change in the assets or properties,
business or results of operations or financial condition of the
Company or the Subsidiaries, whether or not arising from transactions
in the ordinary course of business; neither the Company nor the
Subsidiaries have sustained any material loss or interference with its
respective business or properties from fire, explosion, earthquake,
flood or other calamity, whether or not covered by insurance; since
the date of the latest balance sheet included in the Registration
Statement and the Prospectus, except as reflected in the Registration
Statement, neither the Company nor the Subsidiaries, have undertaken
any liability or obligation, direct or contingent, except for
liabilities or obligations undertaken in the ordinary course of
business; and neither the Company nor the Subsidiaries have (A) issued
any securities or incurred any liability or obligation, primary or
contingent, for borrowed money, (B) entered into any transaction not
in the ordinary course of business or (C) declared or paid any
dividend or made any distribution on any of its capital stock or
redeemed, purchased or otherwise acquired or agreed to redeem,
purchase or otherwise acquire any shares of its capital stock.
(xx) The Company and each Subsidiary maintain insurance covering
their properties, operations, personnel and businesses that, in the
Company's reasonable judgment, insures against such losses and risks
as are adequate in accordance with customary industry practice to
protect the Company and the Subsidiaries and their businesses.
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<PAGE>
(xxi) The Company and each Subsidiary maintain a system of
internal accounting controls sufficient to provide reasonable
assurance that (a) transactions are executed in accordance with
management's general or specific authorizations, (b) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability, (c) access to assets is permitted only
in accordance with management's general or specific authorization and
(d) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(xxii) Neither the Company nor its Subsidiaries or any of
their respective officers, directors or affiliates (as defined in the
Regulations), have taken or will take, directly or indirectly, prior
to the termination of the underwriting syndicate contemplated by this
Agreement, any action designed to stabilize or manipulate the price of
any security of the Company, or which has caused or resulted in, or
which might in the future reasonably be expected to cause or result
in, stabilization or manipulation of the price of any security of the
Company, to facilitate the sale or resale of any of the Firm Shares or
the Option Shares.
(xxiii) The Company has obtained from each of its executive
officers and directors, their enforceable written agreement, in form
and substance satisfactory to counsel for the Underwriters, that for a
period of 180 days from the date on which the public offering of the
Shares commences they will not, without your prior written consent,
offer, pledge, sell, contract to sell, grant any option for the sale
of or otherwise dispose of, directly or indirectly, any shares of
Common Stock or other securities of the Company (or any security or
other instrument which by its terms is convertible into, exercisable
for or exchangeable for shares of Common Stock or other securities of
the Company, including, without limitation, any shares of Common Stock
issuable under any employee stock options), beneficially owned by
them, except with respect to Shares being sold in connection herewith
or their being a beneficial owner of any such Shares.
(xxiv) The Company and Subsidiary are not, and after giving
effect to the offering and sale of the shares, will not be an
"investment company" or an entity "controlled" by an "investment
company," as such terms are defined in the Investment Company Act of
1940, as amended (the "INVESTMENT COMPANY ACT").
(xxv) Arthur Andersen LLP, who have certified certain
financial statements of the Company, are independent public
accountants as required by the Act and the rules and regulations of
the Commission thereunder.
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(xxvi) Williams Petroleum Consultants, Inc. (the "ENGINEERING
CONSULTANTS") are independent petroleum engineers with respect to the
Company.
(xxvii) No person or entity has the right to require
registration of shares of Common Stock or other securities of the
Company because of the filing or effectiveness of the Registration
Statement, other than such rights as described in the Prospectus and
which have been duly and effectively waived.
(xxviii) Except as may be set forth in the Prospectus, the Company
has not incurred any liability for a fee, commission or other
compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement.
(xxix) No transaction has occurred between or among the
Company, the Subsidiaries or any of their officers or directors or any
affiliates of any such officers or directors that is required to be
described in and is not described in the Registration Statement and
the Prospectus.
(xxx) The Common Stock, including the Shares, are authorized for
quotation on the Nasdaq National Market.
(xxxi) Neither the Company nor any of the Subsidiaries or any
of their respective affiliates is presently doing business with the
government of Cuba or with any person or affiliate located in Cuba.
If, at any time after the date that the Registration Statement is
declared effective with the Commission or with the Florida Department
of Banking and Finance (the "FLORIDA DEPARTMENT"), whichever date is
later, and prior to the end of the period referred to in the first
clause of Section 4(ii) hereof, the Company commences engaging in
business with the government of Cuba or with any person or affiliate
located in Cuba, the Company will so inform the Florida Department
within ninety days after such commencement of business and during the
period referred to in Section 4(ii) hereof will inform the Florida
Department within ninety days after any change occurs with respect to
previously reported information.
5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 6(a)(i) of this Agreement.
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(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect and no
order suspending the effectiveness of the Registration Statement shall be
in effect and no proceedings for such purpose shall be pending before or
threatened by the Commission, and any requests for additional information
on the part of the Commission (to be included in the Registration Statement
or the Prospectus or otherwise) shall have been complied with to the
satisfaction of the Representatives.
(c) The representations and warranties of the Company contained in
this Agreement and in the certificates delivered pursuant to Section 5(d)
shall be true and correct when made and on and as of each Closing Date as
if made on such date and the Company shall have performed all covenants and
agreements and satisfied all the conditions contained in this Agreement
required to be performed or satisfied by it at or before such Closing Date.
(d) The Representatives shall have received on each Closing Date a
certificate, addressed to the Representatives and dated such Closing Date,
of the chief executive officer and the chief financial officer of the
Company to the effect that the persons executing such certificate have
carefully examined the Registration Statement, the Prospectus and this
Agreement and that the representations and warranties of the Company in
this Agreement are true and correct on and as of such Closing Date with the
same effect as if made on such Closing Date and the Company has performed
all covenants and agreements and satisfied all conditions contained in this
Agreement required to be performed or satisfied by it at or prior to such
Closing Date.
(e) The Representatives shall have received at the time this
Agreement is executed and on each Closing Date, signed letters from Arthur
Andersen LLP, addressed to the Representatives and dated, respectively, the
date of this Agreement and each such Closing Date, in the form and scope
reasonably satisfactory to the Representatives, with reproduced copies or
signed counterparts thereof for each of the Underwriters confirming that
they are independent accountants within the meaning of the Act and the
Regulations, that the response to Item 10 of the Registration Statement is
correct in so far as it relates to them and stating in effect that:
(i) in their opinion the audited financial statements included
in the Registration Statement and the Prospectus (including the
related schedules and notes) and reported on by them comply as to form
in all material respects with the applicable accounting requirements
of the Act, the Exchange Act and the related published rules and
regulations thereunder;
(ii) On the basis of specified procedures as of a specified date
not more than five days prior to the date of their letter (which
procedures do not constitute an
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examination made in accordance with generally accepted accounting
principles) and which include a reading of the latest available
unaudited interim consolidated financial statements of the Company
and the Subsidiaries, a reading of the minutes of the meetings of
the shareholders and directors of the Company and inquiries of
certain officials of the Company and the Subsidiaries who have
responsibility for financial and accounting matters of the Company
and the Subsidiaries as to transactions and events subsequent to the
date of the latest audited financial statements, except as disclosed
in the Registration Statement and the Prospectus, nothing came to
their attention which caused them to believe that:
(A) the amounts in "Summary Financial Data," and included
in the Registration Statement and the Prospectus do not agree
with the corresponding amounts in the audited financial
statements from which such amounts were derived; or
(B) there were any decreases in net sales, income before
income taxes and net income or any increases in long-term debt of
the Company or any decreases in the capital stock, working
capital or the shareholders' equity in the Company, as compared
with the amounts shown on the Company's audited Balance Sheet for
the fiscal year ended December 31, 1995 included in the
Registration Statement or the audited Statement of Operations,
for such year; and
(iii) information of an accounting, financial or statistical
nature (which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company) set forth in the Registration Statement and the Prospectus
and reasonably specified by the Representatives agrees with the
accounting records of the Company.
References to the Registration Statement and the Prospectus in this
paragraph (e) are to such documents as amended and supplemented at the date of
such letter.
(f) The Engineering Consultants shall have delivered to you on the
date of this Agreement a letter (the "RESERVE LETTER") and also on the
Closing Date a letter dated the Closing Date, in each case in form and
substance reasonably satisfactory to you and substantially in the form
heretofore approved by you, stating, as of the date of such letter (or,
with respect to matters involving changes or developments since the
respective dates as of which specified information with respect to the oil
and gas reserves is given or incorporated in the Prospectus as of the date
not more than five days prior to the date of such letter), the conclusions
and findings of such firm with respect to the Company's oil and gas
reserves.
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(g) The Representatives shall have received on each Closing Date from
Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation, counsel for
the Company, an opinion, addressed to the Representatives and dated such
Closing Date, and in form and scope satisfactory to counsel for the
Underwriters, with reproduced copies or signed counterparts thereof for
each of the Underwriters, to the effect that:
(i) The Company and each of the Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws
of the state of its incorporation, with full corporate power and
authority to own, lease, license and use its properties and assets and
to conduct its business in the manner described in the Prospectus.
The Company and each of the Subsidiaries has all necessary consents,
authorizations, approvals, orders, certificates and permits of and
from, and declarations and filings with, all federal, state, foreign,
local and other governmental authorities and all courts and other
tribunals, to own, lease, license and use its properties and assets
and to conduct its business in the manner described in the Prospectus.
The Company has no subsidiary or subsidiaries and does not control,
directly or indirectly, any corporation, partnership, joint venture,
association or other business organization, except for those set forth
on SCHEDULE II hereto.
(ii) The Company and each of the Subsidiaries have been duly
qualified as a foreign corporation for the transaction of business and
is in good standing under the laws of each other jurisdiction in which
it owns or leases properties or conducts any business so as to require
such qualification or is subject to no material liability or
disability by reason of failure to be so qualified in any such
jurisdiction (such counsel being entitled to rely in respect of the
opinion in this clause upon opinions of local counsel and in respect
of matters of fact upon certificates of officers of the Company or the
Subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates);
(iii) The Company has authorized, issued and outstanding
capital stock as set forth in the "actual" column of the
capitalization table under the caption "Capitalization" in the
Prospectus. The certificates evidencing the shares are in due and
proper legal form. Each outstanding share of Common Stock has been
duly and validly authorized and issued and is fully paid and
nonassessable, without any personal liability attaching to the
ownership thereof, and has not been issued and is not owned or held in
violation of any preemptive right of shareholders. The Company owns
all of the shares of capital stock of the Subsidiaries, except as
disclosed in the Prospectus, and to the knowledge of such counsel,
such shares have been duly and validly authorized and issued, are
fully paid and non-assessable, and (except as set forth in the
Prospectus) are owned directly or indirectly by the
16
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Company, and are owned by the Company free and clear of all liens,
claims, security interests, restrictions, shareholders' agreements,
voting trusts and any other encumbrances whatsoever. There is no
commitment, plan or arrangement to issue, and no outstanding option,
warrant or other right calling for the issuance of, any share of
capital stock of the Company or any security or other instrument
which by its terms is convertible into, exercisable for or
exchangeable for capital stock of the Company, except as described
in the Prospectus. There is outstanding no security or other
instrument which by its terms is convertible into, exercisable for or
exchangeable for capital stock of the Company or any of the
Subsidiaries, except as described in the Prospectus.
(iv) There is no litigation, arbitration, claim, governmental or
other proceeding (formal or informal) or investigation before any
court or before any public body or board pending, or to the best of
such counsel's knowledge threatened or in prospect (or any basis
therefor) with respect to the Company, any of the Subsidiaries or any
of their respective operations, businesses, properties, assets or
financial condition except as may be properly described in the
Prospectus or such as individually or in the aggregate do not now have
and could not reasonably be expected in the future to have a Material
Adverse Effect.
(v) Neither the Company nor any of the Subsidiaries or any other
party is now or is expected by the Company to be in violation or
breach of, or in default with respect to, complying with any term,
obligation or provision of any contract, agreement, instrument, lease,
license, indenture, mortgage, deed of trust, note, arrangement or
understanding which is material to the Company and known to such
counsel, and to the knowledge of such counsel, no event has occurred
which with notice or lapse of time or both would constitute such a
default.
(vi) Neither the Company nor any of the Subsidiaries is in
violation or breach of, or in default with respect to, any term of its
certificate of incorporation (or other charter document) or bylaws.
(vii) The Company has all requisite power and authority to
execute, deliver and perform this Agreement and to issue and sell the
Shares. All necessary corporate proceedings of the Company have been
taken to authorize the execution, delivery and performance by the
Company of this Agreement. This Agreement has been duly authorized,
executed and delivered by the Company is the legal, valid and binding
obligation of the Company and (subject to applicable bankruptcy,
insolvency and other laws affecting the enforceability of creditor's
rights generally and the effects of general principles of equity) is
enforceable as to the Company in accordance with
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its terms. No consent, authorization, approval, order, license,
certificate or permit of or from, or declaration or filing with, any
federal, state, foreign, local or other governmental authority or any
court or other tribunal is required by the Company for the execution,
delivery or performance by the Company of this Agreement (except
filings under the Act which have been made prior to the Closing Date
and consents consisting only of consents under "blue sky" or
securities laws). No consent of any party to any contract, agreement,
instrument, lease, license, indenture, mortgage, deed of trust, note,
arrangement or understanding to which the Company or any of the
Subsidiaries is a party, or to which any of their respective
properties or assets are subject, is required for the execution,
delivery or performance of this Agreement; and the execution, delivery
and performance of this Agreement will not violate, result in a breach
of, conflict with or (with or without the giving of notice or the
passage of time or both) entitle any party to terminate or call a
default under any such contract, agreement, instrument, lease,
license, indenture, mortgage, deed of trust, note, arrangement or
understanding, or violate or result in a breach of any term of the
certificate of incorporation (or other charter document) or by-laws
of the Company or any of the Subsidiaries, or violate, result in a
breach of, or conflict with any law, rule, regulation, order,
judgment, or decree binding on the Company or any of the Subsidiaries
or to which any of their respective operations, businesses,
properties or assets are subject.
(viii) The Shares are duly and validly authorized. Such
opinion delivered at each of the Closing Dates shall state that each
Share, as the case may be, to be delivered on that date is duly and
validly issued, fully paid and non-assessable, with no personal
liability attaching to the ownership thereof, and is not issued in
violation of any preemptive rights of shareholders. The Shares and
all series of capital stock conform to all statements relating thereto
contained in the Registration Statement or the Prospectus.
(ix) Any contract, agreement, instrument, lease or license
required to be described in the Registration Statement or the
Prospectus has been properly described therein. Any contract,
agreement, instrument, lease or license required to be filed as an
exhibit to the Registration Statement has been filed with the
Commission as an exhibit to or has been incorporated as an exhibit by
reference into the Registration Statement.
(x) Insofar as statements in the Prospectus purport to summarize
the status of litigation or the provisions of laws, rules,
regulations, orders, judgments, decrees, contracts agreements,
instruments, leases or licenses, such statements have been prepared or
reviewed by such counsel and to the knowledge of such counsel,
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accurately reflect the status of such litigation and provisions
purported to be summarized and are correct in all material respects.
(xi) Neither the Company nor any of the Subsidiaries is an
"investment company" as defined in Section 3(a) of the Investment
Company Act and, if the Company and the Subsidiaries conduct their
businesses as set forth in the Prospectus, will not become an
"investment company" and will not be required to be registered under
the Investment Company Act.
(xii) No person or entity has the right to require
registration of shares of Common Stock or other securities of the
Company because of the filing or effectiveness of the Registration
Statement, other than such rights as described in the Prospectus and
which have been duly and effectively waived.
(xiii) The Registration Statement has become effective under
the Act. No Stop Order has been issued and no proceedings for that
purpose have been instituted or are threatened, pending or
contemplated.
(xiv) The Registration Statement, any Rule 430A Prospectus
and the Prospectus, and any amendment or supplement thereto (other
than financial statements and other financial data and schedules which
are or should be contained in any thereof, as to which such counsel
need express no opinion), comply as to form in all material respects
with the requirements of the Act and the Regulations. The conditions
for the use of Form S-2 have been satisfied with respect to the
Registration Statement.
(xv) Since the effective date of the Registration Statement, no
event has occurred which should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus which has
not been set forth in such an amendment or supplement.
In addition, such counsel shall state that such counsel has
participated in the preparation of the Registration Statement and the Prospectus
and in conferences with officers and other Representatives of the Company,
representatives of the Representatives and representatives of the independent
accountants of the Company, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although such counsel has not independently verified and is not passing
upon and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and the
Prospectus (except as specified in the foregoing opinion), on the basis of the
foregoing and relying as to materiality upon the representations of executive
officers of the
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Company after conferring with such executive officers, no facts have come to
the attention of such counsel which lead such counsel to believe that the
Registration Statement at the time it became effective contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
or that the Prospectus, except for the financial statements and other financial
and statistical data included therein as to which counsel need express no
opinion, as amended or supplemented on the date thereof contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
In rendering their opinion as aforesaid, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company, provided that executed copies of such
certificates are provided to the Representatives.
(h) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be satisfactory
in form and substance to the Representatives and its counsel, and the
Underwriters shall have received from Vinson & Elkins L.L.P., a favorable
opinion, addressed to the Representatives and dated such Closing Date, with
respect to such matters as the Representatives may reasonably request, and
the Company shall have furnished to Vinson & Elkins L.L.P., such documents
as they may reasonably request for the purpose of enabling them to pass
upon such matters.
(i) The Company shall not have sustained since the date of the latest
audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been
any change in the capital stock, short-term debt or long-term debt of the
Company or any change, or any development involving a prospective change,
in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company, otherwise
than as set forth or contemplated in the Prospectus, the effect of which,
in any such case described in Clause (i) or (ii), in the judgment of the
Representatives, makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time
of Delivery on the terms and in the manner contemplated in the Prospectus.
(j) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each of its officers and directors,
substantially to the effect set forth in Subsection 6(a)(viii) hereof in
form and substance satisfactory to you.
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6. COVENANTS OF THE COMPANY.
(a) The Company covenants and agrees as follows:
(i) The Company shall use its best efforts to cause the
Registration Statement to become effective as promptly as possible.
If the Registration Statement has become or becomes effective with a
form of prospectus omitting Rule 430A information, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
file the Prospectus, properly completed, pursuant to Rule 424(b)
within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company shall notify
you immediately, and confirm such notice in writing, (A) when the
Registration Statement and any post-effective amendment thereto become
effective, (B) of the receipt of any comments from the Commission or
the "blue sky" or securities authority of any jurisdiction regarding
the Registration Statement, any posteffective amendment thereto, the
Prospectus or any amendment or supplement thereto and (C) of the
receipt of any notification with respect to a Stop Order. The Company
shall not file any amendment of the Registration Statement or
supplement to the Prospectus unless the Company has furnished the
Representatives a copy for their review prior to filing and shall not
file any such proposed amendment or supplement to which the
Representatives reasonably object. The Company shall use its best
efforts to prevent the issuance of any Stop Order and, if issued, to
obtain as soon as possible the withdrawal thereof.
(ii) During the time when a prospectus relating to the Shares is
required to be delivered hereunder or under the Act or the
Regulations, comply so far as it is able with all requirements imposed
upon it by the Act, as now existing and as hereafter amended, and by
the Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Shares in
accordance with the provisions hereof and the Prospectus. If, at any
time when a prospectus relating to the Shares is required to be
delivered under the Act and the Regulations, any event as a result of
which the Prospectus as then amended or supplemented would include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it
shall be necessary to amend or supplement the Prospectus to comply
with the Act or the Regulations, the Company promptly shall prepare
and file with the Commission, subject to the third sentence of
paragraph (i) of this Section 6(a), an amendment or supplement which
shall correct such statement or omission or an amendment which shall
effect such compliance.
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(iii) Prior to 10:00 a.m., New York City Time, on the New
York Business Day next succeeding the date of this Agreement and from
time to time, to furnish the Underwriters with copies of the
Prospectus in New York City in such quantities as you may reasonably
request. The Company shall make generally available to its security
holders and to the Representatives as soon as practicable, but not
later than 45 days after the end of the 12-month period beginning at
the end of the fiscal quarter of the Company during which the
Effective Date (or 90 days if such 12-month period coincides with the
Company's fiscal year), an earnings statement (which need not be
audited) of the Company, covering such 12-month period, which shall
satisfy the provisions of Section 11(a) of the Act or Rule 158 of the
Regulations.
(iv) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on
the date of this Agreement, and the Company shall at the time of
filing either pay to the Commission the filing fee for the Rule 462(b)
Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act.
(v) The Company shall furnish to the Representatives and counsel
for the Underwriters, without charge, signed copies of the
Registration Statement (including all exhibits and amendments thereto)
and to each other Underwriter a copy of the Registration Statement
(without exhibits thereto) and all amendments thereof and, so long as
delivery of a prospectus by an Underwriter or dealer may be required
by the Act or the Regulations, as many copies of any preliminary
prospectus and the Prospectus and any amendments thereof and
supplements thereto as the Representatives may reasonably request.
(vi) The Company shall cooperate with the Representatives and
their counsel in endeavoring to qualify the Shares for offer and sale
under the laws of such jurisdictions as the Representatives may
designate and shall maintain such qualifications in effect so long as
required for the distribution of the Shares; provided, however, that
the Company shall not be required in connection therewith, as a
condition thereof, to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction or subject
itself to taxation as doing business in any jurisdiction.
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<PAGE>
(vii) Without the prior written consent of the
Representatives, for a period of 180 days from the date on which a
public offering of the Shares commences, the Company shall not issue,
sell or register with the Commission or otherwise dispose of, directly
or indirectly, any securities of the Company (or any securities
convertible into or exercisable or exchangeable for securities of the
Company), except for the issuance of the Shares pursuant to the
Registration Statement, shares issuable upon exercise of currently
outstanding options and warrants issued by the Company as of the date
of this Agreement or the issuance, sale or other disposition of
shares and options by the Company pursuant to the Company's existing
employee benefit plans; and that it will deliver to the
Representatives agreements of the Company's officers and directors
to the same effect.
(viii) On or before completion of this offering, the Company
shall make all filings required under applicable securities laws
and by the Nasdaq National Market.
(ix) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders,
and to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in
reports furnished to its stockholders generally or to the Commission).
(x) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds."
(xi) Prior to each Closing Date and for a period of 25 days
thereafter, you shall be given reasonable written prior notice of any
press release or other direct or indirect communication and of any
press conference with respect to the Company, the financial
conditions, results of operations, business, properties, assets,
liabilities of the Company, or this offering.
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<PAGE>
(b) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses
relating to the registration and public offering of the Shares including
those relating to: (i) the preparation, printing, filing and distribution
of the Registration Statement including all exhibits thereto, each
preliminary prospectus, the Prospectus, all amendments and supplements to
the Registration Statement and the Prospectus, and any documents required
to be delivered with any Preliminary Prospectus or the Prospectus, and the
printing, filing and distribution of the Agreement Among Underwriters, this
Agreement and related documents; (ii) the preparation and delivery of
certificates for the Shares to the Underwriters; (iii) the registration or
qualification of the Shares for offer and sale under the securities or Blue
Sky laws of the various jurisdictions referred to in Section 6(a)(v),
including the fees and disbursements of counsel for the Underwriters in
connection with such registration and qualification and the preparation,
printing, distribution and shipment of preliminary and supplementary Blue
Sky memoranda; (iv) the furnishing (including costs of shipping and
mailing) to the Representatives and to the Underwriters of copies of each
preliminary prospectus, the Prospectus and all amendments or supplements to
the Prospectus, and of the several documents required by this Section to be
so furnished, as may be reasonably requested for use in connection with the
offering and sale of the Shares by the Underwriters or by dealers to whom
Shares may be sold; (v) the filing fees of the National Association of
Securities Dealers, Inc. in connection with its review of the terms of the
public offering; (vi) the furnishing (including costs of shipping and
mailing) to the Representatives and to the Underwriters of copies of all
reports and information required by Section 6(a)(vi); (vii) inclusion of
the Shares for quotation on the Nasdaq National Market; (viii) the cost and
charges of any transfer agent or registration;
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and (ix) all transfer taxes, if any, with respect to the sale and
delivery of the Shares by the Company to the Underwriters. Except as
otherwise contemplated by Section 9 hereof, the Underwriters will pay
their own counsel fees and expenses to the extent not otherwise
covered by clause (iii) above, and their own travel and travel-related
expenses in connection with the distribution of the Shares.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act
against any and all losses, claims, damages and liabilities, joint or
several (including any reasonable investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Act, the Exchange Act or other federal,
state or foreign law or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto, or arise out of
or are based upon any omission or alleged omission to state therein such
fact required to be stated therein or necessary to make such statements
therein not misleading. This indemnity agreement will be in addition to
any liability which the Company may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, each director of the Company, and each officer of the Company
who signs the Registration Statement, to the same extent as the foregoing
indemnity from the Company to each Underwriter, but only insofar as such
losses, claims, damages or liabilities arise out of or are based upon any
untrue statement or mission or alleged untrue statement or omission which
was made in any Preliminary Prospectus, any Rule 430A Prospectus, the
Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto, which were made in reliance upon and in conformity with
information furnished in writing to the Company by the Representatives on
behalf of any Underwriter for specific use therein; PROVIDED, HOWEVER, that
the obligation of each Underwriter to indemnify the Company (including any
controlling person, director or officer thereof) shall be limited to the
excess of the net proceeds received by such Underwriter from the offering
of Shares and all expenses, penalties and other damages incurred by such
Underwriter by reason of such untrue statement or omission or alleged
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<PAGE>
untrue statement or omission. For all purposes of this Agreement the
amounts of the selling concession and reallowance set forth in the
Prospectus constitute the only information furnished in writing by or on
behalf of any Underwriter expressly for inclusion in any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement or the
Prospectus or any amendment or supplement thereto.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a
claim is to be made against an indemnifying party or parties under this
Section, notify each such indemnifying party of the commencement of such
action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in Section 7(a) or 7(b) shall be available to
any party who shall fail to give notice as provided in this Section 7(c) if
the party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was prejudiced by the failure to
give such notice but the omission so to notify such indemnifying party of
any such action, suit or proceeding shall not relieve it from any liability
that it may have to any indemnified party for contribution or otherwise
than under this Section. In case any such action, suit or proceeding shall
be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate in, and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and the approval by
the indemnified party of such counsel, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses, except as
provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the
defense thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such
action (in which case the indemnifying parties shall not have the right to
direct the defense of such action on behalf of the indemnified party) or
(iii) the indemnifying parties shall not have employed counsel to assume
the defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the reasonable fees and
expenses of counsel shall be at the expense of the indemnifying parties.
An indemnifying party shall not be liable for any settlement of any action,
suit, proceeding or claim effected without its written consent.
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8. CONTRIBUTION. In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in Sections 7(a) and
(b) is due in accordance with its terms but for any reason is held to be
unavailable from the Company or the Underwriters, the Company and the
Underwriters shall contribute to the aggregate losses, claims, damages and
liabilities (including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting any contribution
received by the Company from persons other than the Underwriters, such as
persons who control the Company within the meaning of the Act, officers of the
Company who signed the Registration Statement and directors of the Company, who
may also be liable for contribution) to which the Company and one or more of the
Underwriters may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company on the one
hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Underwriters shall be deemed to be in
the same proportion as (x) the total proceeds from the Offering (net of
underwriting discounts but before deducting expenses) received by the Company
from the sale of the Shares, as set forth in the table on the cover page of the
Prospectus (but not taking into account the use of the proceeds of such sale of
Shares by the Company), bear to (y) the underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus.
The relative fault of the Company and the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact related to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 8 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
Section 8, no person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 8, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of the Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to clauses
(i) and (ii) in the immediately preceding sentence of this Section 8. Any party
entitled to contribution will, promptly after receipt
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<PAGE>
of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against
another party or parties under this Section, notify such party or parties
from whom contribution may be sought, but the omission so to notify such
party or parties from whom contribution may be sought shall not relieve the
party or parties from whom contribution may be sought from any other
obligation it or they may have hereunder or otherwise than under this
Section. No party shall be liable for contribution with respect to any
action, suit, proceeding or claim settled without its written consent. The
Underwriters' obligations to contribute pursuant to this Section 8 are
several in proportion to their respective underwriting commitments and not
joint.
9. TERMINATION. This Agreement may be terminated with respect to the
Shares to be purchased on any Closing Date by the Representatives by notifying
the Company at any time prior to the purchase of the Shares:
(a) in the absolute discretion of the Representatives at or before
any Closing Date: (i) if on or prior to such date, any domestic or
international event or act or occurrence has materially disrupted, or in
the opinion of the Representatives will in the future materially disrupt,
the securities markets; (ii) if there has occurred any outbreak or material
escalation of hostilities or other calamity or crisis the effect of which
on the financial markets of the United States is such as to make it, in the
judgment of the Representatives, inadvisable to proceed with the Offering;
(iii) if there shall be such a material adverse change in, general
financial, political or economic conditions or the effect of international
conditions on the financial markets in the United States such as to make
it, in the judgment of the Representatives, inadvisable or impracticable to
market the Shares; (iv) if trading in the Shares has been suspended by the
Commission or trading generally on the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. or the Nasdaq National Market has been
suspended or limited, or minimum or maximum ranges for prices for
securities shall have been fixed, or maximum ranges for prices for
securities have been required, by said exchanges or by order of the
Commission, the National Association of Securities Dealers, Inc., or any
other governmental or regulatory authority; or (v) if a banking moratorium
has been declared by any state or federal authority, or
(b) at or before any Closing Date, if any of the conditions specified
in Section 5 shall not have been fulfilled when and as required by this
Agreement.
If this Agreement is terminated pursuant to any of its provisions, the
Company shall not be under any liability to any Underwriter, and no Underwriter
shall be under any liability to the Company, except that (y) if this Agreement
is terminated by the Representatives or the Underwriters because of any failure,
refusal or inability on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company will reimburse the
Underwriters for
28
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all out-of-pocket expenses (including the fees and disbursements of their
counsel) incurred by them in connection with the proposed purchase and sale
of the Shares or in contemplation of performing their obligations hereunder
and (z) no Underwriter who shall have failed or refused to purchase the
Shares agreed to be purchased by it under this Agreement, without some reason
sufficient hereunder to justify cancellation or termination of its
obligations under this Agreement, shall be relieved of liability to the
Company or to the other Underwriters for damages occasioned by its failure or
refusal.
10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under Section 9) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representatives may find one or more substitute underwriters
to purchase such Shares or make such other arrangements as the Representatives
may deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date:
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date, then
each of the nondefaulting Underwriters shall be obligated to purchase such
Shares on the terms herein set forth in proportion to their respective
obligations hereunder; PROVIDED, that in no event shall the maximum number
of Shares that any Underwriter has agreed to purchase pursuant to Section 1
be increased pursuant to this Section 10 by more than one-ninth of such
number of Shares without the written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that all
the Underwriters are obligated to purchase on such Closing Date, then the
Company shall be entitled to an additional business day within which it
may, but is not obligated to, find one or more substitute underwriters
reasonably satisfactory to the Representatives to purchase such Shares upon
the terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall have the
right to postpone the applicable Closing Date for a period of not more than five
business days in order that necessary changes and arrangements (including any
necessary amendments or supplements to the Registration Statement or Prospectus)
may be effected by the Representatives and the Company. If the number of Shares
to be purchased on such Closing Date by such defaulting Underwriter or
Underwriters shall exceed 10% of the Shares that all the Underwriters are
obligated to purchase on such Closing
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Date, and none of the nondefaulting Underwriters or the Company shall make
arrangements pursuant to this Section within the period stated for the
purchase of the Shares that the defaulting Underwriters agreed to purchase,
this Agreement shall terminate with respect to the Shares to be purchased on
such Closing Date without liability on the part of any nondefaulting
Underwriter to the Company and without liability on the part of the Company,
except in both cases as provided in Sections 6(b), 7, 8 and 9. The provisions
of this Section shall not in any way affect the liability of any defaulting
Underwriter to the Company or the nondefaulting Underwriters arising out of
such default. A substitute underwriter hereunder shall become an Underwriter
for all purposes of this Agreement.
11. MISCELLANEOUS. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers and
of the Underwriters set forth in or made pursuant to this Agreement shall remain
in full force and effect, regardless of any investigation made by or on behalf
of any Underwriter or the Company or any of the officers, directors or
controlling persons referred to in Sections 7 and 8 hereof, and shall survive
delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8
and 9 shall survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the Underwriters and
the Company and their respective successors and assigns and, to the extent
expressed herein, for the benefit of persons controlling any of the
Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and mailed or
delivered, or by telefax or telegraph if subsequently confirmed by letter, (a)
if to the Representatives, to Rodman & Renshaw, Inc., Two World Financial
Center, 225 Liberty Street, 30th Floor, New York, New York 10281, Attention:
Peter Blum, Managing Director, telecopy: (212) 416-7439 and (b) if to the
Company, to the Company's agent for service as such agent's address appears on
the cover page of the Registration Statement.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflict of laws.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
All pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine, or neuter, singular or plural, as the identity of the
person or persons or entity or entities require.
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All section headings herein are for convenience of reference only and are
not part of this Agreement, and no construction or inference shall be derived
therefrom.
Please confirm that the foregoing correctly sets forth the agreement among
us.
Very truly yours,
CLAYTON WILLIAMS ENERGY, INC.
By:
----------------------------------
L. Paul Latham
Executive Vice President and
Chief Operating Officer
Confirmed on behalf of itself and as the
Representatives of the several Underwriters
named in SCHEDULE I annexed hereto:
RODMAN & RENSHAW, INC.
By:
---------------------------------
Peter H. Blum
Managing Director
31
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SCHEDULE I
Number of Firm
Shares to be
NAME OF UNDERWRITER Purchased
------------------- --------------
Rodman & Renshaw, Inc. . . . . . . . . . . . . . . . .
Hanifen, Imhoff Inc. . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
----------
32
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SCHEDULE II
SUBSIDIARIES
33
<PAGE>
EXHIBIT 5.1
COTTON, BLEDSOE, TIGHE & DAWSON
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
SUITE 300
500 WEST ILLINOIS
MIDLAND, TEXAS 79701-4337
P.O. BOX 2776 ZIP 79702-2776
TELEPHONE (915) 684-5782
FAX (915) 682-3672
October 15, 1996
Clayton Williams Energy, Inc.
6 Desta Drive, Suite 6500
Midland, Texas 79705
Re: Registration Statement on Form S-2
(Registration No. 333-13441)
Gentlemen:
We have acted as counsel for Clayton Williams Energy, Inc., a Delaware
corporation (the "Company") in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of 1,250,000 shares (the
"Firm Shares") of the common stock, par value $0.10 per share (the "Common
Stock"), of the Company be sold to the several Underwriters to be named in
Schedule I (collectively, the "Underwriters") attached to the Underwriting
Agreement (the "Underwriting Agreement") to be entered into by and between
the Underwriters, for whom Rodman & Renshaw, Inc. and Hanifen, Imhoff Inc.
are acting as representatives, and the Company. The Company has also granted
to the Underwriters an option to purchase up to an additional 187,500 shares
of Common Stock (the "Option Shares") on the terms and for the purposes set
forth in the Underwriting Agreement. The Firm Shares and the Option Shares
are referred to collectively herein as the "Shares." A Registration
Statement on Form S-2 (Registration No. 333-13441) covering the sale of the
Shares was filed under the Act with the Securities and Exchange Commission
(the "Commission") on October 4, 1996, as amended by Amendment No. 1 to be
filed with the Commission on October 15, 1996, and as further amended (the
"Registration Statement").
<PAGE>
Clayton Williams Energy, Inc.
October 15, 1996
Page 2
In reaching the conclusions expressed in this opinion, we have examined
signed copies of the Registration Statement and all exhibits thereto. We
have also examined and relied upon originals, or copies certified to our
satisfaction, of (i) the Certificate of Incorporation and Bylaws of the
Company, (ii) minutes and records of the corporate proceedings of the Company
with respect to the issuance of the Shares and related matters, (iii) the
form of Underwriting Agreement, and (iv) such other agreements and
instruments relating to the Company as we have deemed necessary or
appropriate for the purposes of the opinions hereinafter expressed. In
rendering such opinions, we have relied, to the extent we deemed reasonable,
on certificates and certain other information provided to us by officers of
the Company and public officials as to matters of fact of which the maker of
such certificates or the person providing such information had knowledge,
without investigation into or verification of such information. Furthermore,
in rendering such opinions we have assumed that the signatures on all
documents examined by us are genuine, that all documents and corporate record
books submitted to us as originals are authentic, accurate and complete, and
that all documents submitted to use as copies are true, correct and complete
copies of the originals thereof. We have also assumed that the Underwriting
Agreement will be executed in substantially the same form as presented to us.
Based solely upon the foregoing, subject to the assumptions, limitations
and qualifications set forth herein, and specifically limited in all respects
to the laws of the State of Texas, of the United States of America and the
General Corporation Law of the State of Delaware, we are of the opinion that
the Shares of the Company registered pursuant to the Registration Statement
have been duly and validly authorized by the Company and, when paid for,
issued or sold and delivered in accordance with the terms of the Underwriting
Agreement and the Registration Statement, such Shares will be legally issued,
fully paid and nonassessable. Please note in this regard that we are not
licensed to practice law in the State of Delaware, but have reviewed Delaware
law in connection with the opinions expressed herein.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to this Firm under the caption
"Legal Matters" in the Prospectus forming a part of the Registration
Statement. In giving this consent we do not thereby admit that we come
within the category of persons whose consent is required under the Act or the
rules and regulations of the Commission promulgated thereunder.
This opinion is rendered only to the Company and solely for the benefit
of the Company and the Commission in connection with the registration and the
issuance of the Shares pursuant to the Registration Statement. This opinion
may not be otherwise used, circulated, quoted,
<PAGE>
Clayton Williams Energy, Inc.
October 15, 1996
Page 3
relied upon, or referred to by you or the Commission for any other purpose or
by any other person, firm or corporation for any purpose, without our prior
written consent.
Yours very truly,
COTTON, BLEDSOE, TIGHE & DAWSON
/s/ RICHARD T. MCMILLAN
By:
Richard T. McMillan
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
October 15, 1996
