<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/XX/
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
or
/XX/
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
---- ----
COMMISSION FILE NO. 0-20838
CLAYTON WILLIAMS ENERGY, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2396863
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6 DESTA DRIVE, SUITE 6500, MIDLAND, TEXAS 79705-5510
----------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code: (915) 682-6324
Not applicable
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES /XX/ NO / /
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF JULY 31, 1997......8,957,614
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
----
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996................................................3
Consolidated Statements of Operations for the three months and six
months ended June 30, 1997 and 1996..................................4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996.........................................5
Notes to Consolidated Financial Statements................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................15
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
JUNE 30, DECEMBER 31,
1997 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 1,614 $ 2,479
Accounts receivable:
Trade, net................................................ 2,441 1,876
Affiliates................................................ 118 92
Oil and gas sales......................................... 7,565 10,440
Inventory................................................... 704 518
Other....................................................... 431 557
--------- ---------
12,873 15,962
--------- ---------
PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts method........... 379,737 354,532
Natural gas gathering and processing systems................ 7,770 7,655
Other....................................................... 9,879 9,547
--------- ---------
397,386 371,734
Less accumulated depreciation, depletion and amortization... (298,087) (284,173)
--------- ---------
Property and equipment, net............................... 99,299 87,561
--------- ---------
OTHER ASSETS.................................................. 29 75
--------- ---------
$ 112,201 $ 103,598
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable:
Trade..................................................... $ 12,119 $ 10,233
Affiliates................................................ 293 615
Oil and gas sales......................................... 6,208 7,454
Current maturities of long-term debt........................ 52 112
Accrued liabilities and other............................... 965 970
--------- ---------
19,637 19,384
--------- ---------
LONG-TERM DEBT................................................ 22,800 18,000
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per share; authorized -
3,000,000 shares; issued and outstanding - none........... - -
Common stock, par value $.10 per share; authorized -
15,000,000 shares; issued - 8,954,473 shares in 1997
and 8,927,658 shares in 1996.............................. 895 893
Additional paid-in capital.................................. 70,493 70,248
Retained deficit............................................ (509) (4,927)
--------- ---------
70,879 66,214
Less treasury stock, at cost (70,000 shares in 1997)........ (1,115) -
--------- ---------
69,764 66,214
--------- ---------
$ 112,201 $ 103,598
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales............................ $16,256 $15,149 $32,820 $27,517
Natural gas services......................... 837 985 2,167 1,949
------- ------- ------- -------
Total revenues............................. 17,093 16,134 34,987 29,466
------- ------- ------- -------
COSTS AND EXPENSES
Lease operations............................. 3,789 3,563 7,930 7,161
Exploration.................................. 2,449 25 4,253 279
Natural gas services......................... 634 814 1,779 1,571
Depreciation, depletion and amortization..... 7,606 6,175 13,950 11,852
Impairment of property and equipment......... - 1,186 - 1,186
General and administrative................... 1,058 964 1,961 1,671
------- ------- ------- -------
Total costs and expenses................... 15,536 12,727 29,873 23,720
------- ------- ------- -------
Operating income........................... 1,557 3,407 5,114 5,746
------- ------- ------- -------
OTHER INCOME (EXPENSE)
Interest expense............................. (439) (961) (791) (1,943)
Other........................................ 69 (7) 95 40
------- ------- ------- -------
Total other income (expense)............... (370) (968) (696) (1,903)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES..................... 1,187 2,439 4,418 3,843
INCOME TAX EXPENSE............................. - - - -
------- ------- ------- -------
NET INCOME..................................... $ 1,187 $ 2,439 $ 4,418 $ 3,843
------- ------- ------- -------
------- ------- ------- -------
Net income per common share.................... $ .13 $ .32 $ .49 $ .51
------- ------- ------- -------
------- ------- ------- -------
Weighted average common
shares outstanding........................... 9,079 7,627 9,096 7,553
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................... $ 4,418 $ 3,843
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation, depletion and amortization.................. 13,950 11,852
Impairment of property and equipment...................... - 1,186
Exploration costs......................................... 722 266
Other..................................................... 194 214
Changes in operating working capital:
Accounts receivable....................................... 2,284 (1,104)
Accounts payable.......................................... (2,337) 3,047
Other..................................................... 115 192
-------- --------
Net cash provided by operating activities............... 19,346 19,496
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment........................... (23,964) (16,737)
Proceeds from sale of property and equipment.................. 39 3,530
-------- --------
Net cash used in investing activities................... (23,925) (13,207)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt.................................. 4,800 -
Repayments of long-term debt.................................. - (6,404)
Repurchase of common stock for treasury....................... (1,115) -
Proceeds from sale of common stock............................ 29 22
-------- --------
Net cash provided by (used) in financing activities..... 3,714 (6,382)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS...................... (865) (93)
CASH AND CASH EQUIVALENTS
Beginning of period........................................... 2,479 1,303
-------- --------
End of period................................................. $ 1,614 $ 1,210
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amounts capitalized............ $ 776 $ 1,800
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(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 oil and gas exploration, development
and production activities in Texas and southeastern New Mexico. The Company
has also initiated exploration activities in Louisiana and Mississippi.
In the opinion of management, the Company's unaudited consolidated
financial statements as of June 30, 1997 and for the interim periods ended
June 30, 1997 and 1996 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, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's 1996 Form 10-K.
2. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
(IN THOUSANDS)
Secured Bank Credit Facility (matures July 31, 1999)..$ 22,800 $ 18,000
Other................................................. 52 112
--------- ---------
22,852 18,112
Less current maturities............................... 52 112
--------- ---------
$ 22,800 $ 18,000
--------- ---------
--------- ---------
6
<PAGE>
The Company's secured bank credit facility ("Credit Facility") provides
for a revolving loan facility in an amount not to exceed the lesser of the
borrowing base, as established by the banks, or that portion of the borrowing
base determined by the Company to be the elected borrowing limit. In July
1997, the banks established a borrowing base of $45 million. Based on its
expected needs for 1997, the Company elected a borrowing limit of $40
million, leaving $17.2 million of funds available at June 30, 1997. The
borrowing base is scheduled to be redetermined in November 1997 and at least
semi-annually thereafter; however, either 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
Credit Facility.
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 will bear interest
at the fluctuating Base Rate plus a Base Rate Margin ranging from 0% to 3/8%
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% to 1.75%
per annum. At June 30, 1997, the Company's indebtedness under the Credit
Facility consisted of $1.8 million of Base Rate Loans at a rate of 8.8% and
$21 million of Eurodollar Loans at a rate of 7.2%.
In addition, the Company pays the banks a commitment fee equal to 1/4%
per annum on the unused portion of the revolving loan commitment. Interest
on the revolving loan and commitment fees are payable quarterly, and all
outstanding principal and interest will be due July 1, 1999.
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
totaling $947,000 (comprised of losses of $1,090,000, partially offset by
gains of $143,000). The Company did not hedge any of its oil and gas
production during 1997, and none of the Company's future oil and gas
production was subject to hedging arrangements at June 30, 1997.
4. 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, permitting 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 reserved an aggregate of 650,000 shares
of common stock for issuance under these plans. During the six months ended
June 30, 1997, the Company issued Mr. Williams 14,920 shares of common stock
in lieu of cash compensation aggregating $206,795 and issued 690 shares to
three outside directors in lieu of cash compensation aggregating $12,000.
Subsequent to June 30, 1997, the Company issued Mr. Williams an additional
3,141 shares in lieu of cash compensation aggregating $35,751. The amounts
of such compensation are included in general and administrative expense in
the accompanying consolidated financial statements. The Company terminated
the outside directors stock compensation plan in January 1997.
7
<PAGE>
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.
6. INCOME TAXES
Although the Company recorded net income of $4.4 million for financial
reporting purposes during the six months ended June 30, 1997, no provision
for income tax expense is required since the Company has net operating loss
carryforwards of approximately $36 million available to offset any taxable
income generated by the Company during 1997. Due to the uncertainty of
realizing the related future benefits from these tax loss carryforwards,
valuation allowances were recorded at June 30, 1997 and December 31, 1996 to
the extent net deferred tax assets exceed net deferred tax liabilities.
7. STOCKHOLDERS' EQUITY
In January 1997, the Company's Board of Directors authorized the Company
to spend up to $2 million to repurchase shares of its common stock on the
open market. As of June 30, 1997, the Company had purchased 70,000 shares at
a cost of $1.1 million.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS: Certain statements in
this Form 10-Q constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 ( the "Reform Act").
Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of Clayton Williams Energy, Inc. and its
subsidiaries (the "Company") to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following: the volatility of oil and gas prices, the Company's drilling
results, the Company's ability to replace short-lived reserves, the
availability of capital resources, the reliance upon estimates of proved
reserves, operating hazards and uninsured risks, competition, government
regulation, the ability of the Company to implement its business strategy,
and other factors referenced in this Form 10-Q.
The following discussion is intended to assist in understanding the
Company's historical consolidated financial position at June 30, 1997, and
results of operations and cash flows for the periods ended June 30, 1997 and
1996. This discussion should be read in conjunction with the Company's Form
10-K for the year ended December 31, 1996 and the consolidated financial
statements and notes thereto included elsewhere in this Form 10-Q.
OVERVIEW
Since 1988, the Company and its predecessors have concentrated their
drilling activities in the Cretaceous Trend (the "Trend") which extends from
south Texas through east Texas, Louisiana and other southern states and
includes the Austin Chalk formation. Oil and gas production in the Trend is
generally characterized by a high initial production rate, followed by a
steep rate of decline. In order to maintain its oil and gas reserve base,
production levels and cash flow from operations, the Company must maintain or
increase its level of drilling activity and achieve comparable or improved
results from such activities.
The Company is continuing to drill wells in the Austin Chalk formation in
its North Giddings Block, which is located in the updip area of the Giddings
Field in east central Texas. Most of the drilling activity during the first
half of 1997 has been concentrated in the northern portion of the North
Giddings Block while the Company evaluated production from the first seven
wells drilled in the southern portion of the block. As an integral part of
this evaluation, the Company plans to test deeper formations, primarily the
Buda and Georgetown formations, in the southern portion of the block and may
ultimately explore this acreage for Cotton Valley pinnacle reefs. Pending
the outcome of this evaluation and subject to an improvement in oil prices,
the Company has elected to release one of the three rigs contracted to drill
Company-operated wells in the Trend. The Company is currently drilling an
infill well in the northern portion of the North Giddings Block to test the
feasibility of developing additional reserves by increasing the density of
wells in this area.
During the second quarter of 1997, the Company completed two wells
drilled on acreage acquired through two separate farm-in agreements covering
up to 50,000 acres north of the North Giddings Block. Under the terms of each
of these agreements, the Company earns its share of the acreage by drilling a
commercial well and must spud each successive well on the applicable acreage
within 90 days or 180 days, respectively, from completion of the previous
well in order to maintain its right to continue drilling. Although the
Company is still evaluating the results of the completed wells, continued
drilling in these areas is anticipated.
9
<PAGE>
The level and nature of drilling activity in the Trend during 1998 is
uncertain and will depend on the results of drilling on farm-in acreage, the
effectiveness of infill drilling and the ultimate evaluation of acreage in
the southern portion of the North Giddings Block.
The Company is actively conducting a 3-D seismic survey covering
approximately 50,000 net acres in Robertson County, Texas in connection with
its Cotton Valley Exploratory Project. The seismic survey is currently on
schedule for completion during the third quarter of 1997.
In addition, the Company is conducting exploration activities in
connection with certain newly acquired projects in Mississippi, Louisiana and
south Texas, all of which are in areas outside the Trend. The Company is
currently conducting two 3-D seismic surveys in these areas, one in south
Texas and one in an oil-producing salt dome in Mississippi.
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.
RESULTS OF OPERATIONS
The following table sets forth certain operating information of the
Company for the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ ------
OIL AND GAS PRODUCTION DATA:
Oil (MBbls)................... 705 598 1,282 1,080
Gas (MMcf).................... 1,282 1,354 2,497 2,816
MBOE (1)...................... 919 824 1,698 1,549
AVERAGE OIL AND GAS SALES
PRICES (2):
Oil ($/Bbl)................... $19.14 $19.38 $20.56 $19.08
Gas ($/Mcf)................... $ 2.20 $ 2.53 $ 2.55 $ 2.41
OIL AND GAS COSTS ($/BOE PRODUCED):
Lease operating expenses...... $ 4.12 $ 4.32 $ 4.67 $ 4.62
Oil and gas depletion......... $ 8.05 $ 7.25 $ 7.97 $ 7.40
NET WELLS DRILLED:
Horizontal wells.............. 8.0 6.0 18.4 13.2
Vertical wells................ 0.7 0.1 1.8 1.1
- ---------
(1) Gas is converted to barrel of oil equivalents (BOE) at the ratio of six Mcf
of gas to one Bbl of oil.
(2) Includes effects of hedging transactions.
10
<PAGE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO JUNE 30, 1996
REVENUES
Oil and gas sales increased 8% from $15.1 million in 1996 to $16.3
million in 1997 due primarily to an 18% increase in oil production. These
benefits were offset in part by a 5% decline in gas production, and a 13%
decline in gas prices. Production from wells completed subsequent to June
30, 1996 accounted for approximately 50% of the total oil production for the
1997 period, which more than offset the effects of steep production declines
from previously existing Trend wells.
Revenues from natural gas services decreased 15% from $985,000 in 1996 to
$837,000 in 1997 due primarily to a reduction in contract volumes during the
second quarter of 1997, offset in part by additional revenues from three
gathering systems acquired during the second quarter of 1996.
COSTS AND EXPENSES
Lease operations expenses increased 6% from $3.6 million in 1996 to $3.8
million in 1997 while oil and gas production on a BOE basis increased 12%,
resulting in a decrease on a BOE basis from $4.32 per BOE in 1996 to $4.12
per BOE in 1997. High initial rates of production on several of the wells
completed during 1997 contributed materially to the decline in lease
operations expenses per BOE.
Exploration costs increased from $25,000 in 1996 to $2.4 million in 1997
due primarily to costs incurred during the 1997 period in connection with
exploration projects initiated since the fourth quarter of 1996. To date,
the Company has committed to spend approximately $4.3 million to conduct and
evaluate a 3-D seismic survey covering approximately 50,000 acres in the
North Giddings Block in 1997, $3.5 million of which has been incurred through
June 30, 1997. The Company may continue to expand the area covered by the
survey and may drill one or more exploratory wells on any prospects which
result from such survey. In addition, the Company plans to spend
approximately $12.5 million on other exploration activities, a significant
portion of which will be classified as exploration costs. Because the
Company follows the successful efforts method of accounting, the Company's
results of operations may be adversely affected during any accounting period
in which such costs are incurred and expensed.
DD&A expense increased 23% from $6.2 million in 1996 to $7.6 million in
1997 due primarily to a 12% increase in oil and gas production on a BOE
basis, combined with an 11% increase 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 depletion rate per BOE during the second
quarter of 1997 was $8.05 compared to $7.25 in the 1996 period. The 1997
depletion rate was adversely affected by the drilling results in the southern
portion of the North Giddings Block.
G&A expenses increased 10% from $1 million in 1996 to $1.1 million in
1997 due primarily to increased personnel costs. In response to an increase
in demand for skilled technical and managerial personnel in the oil and gas
industry and an increase in the Company's level of exploration and
development activities, the Company has hired additional personnel and
increased salaries of existing personnel since June 30, 1996. This increase
follows a three-year period during which the Company implemented certain cost
reduction measures, resulting in a 47% reduction in annual G&A costs.
Costs of natural gas services decreased 22% from $814,000 in 1996 to
$634,000 in 1997 due primarily to a reduction in contract volumes during the
second quarter of 1997, offset in part by additional costs attributable to
three gathering systems acquired during the second quarter of 1996.
11
<PAGE>
INTEREST EXPENSE AND OTHER
Interest expense decreased 54% from $961,000 in 1996 to $439,000 in 1997
due primarily to lower average levels of indebtedness on the Credit Facility
and, to a much lesser extent, lower average interest rates. The average
daily principal balance outstanding on such facility during the second
quarter of 1997 was $21.6 million compared to $40.2 million in 1996. The
effective annual interest rate on bank debt, including bank fees, during the
1997 quarter was 8.9% compared to 9.5% in 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO JUNE 30, 1996
REVENUES
Oil and gas sales increased 19% from $27.5 million in 1996 to $32.8
million in 1997 due primarily to a 19% increase in oil production, an 8%
increase in oil prices, and a 6% increase in gas prices. These benefits were
offset in part by a 11% decline in gas production since most of the wells
drilled by the Company since 1995 have been predominately oil wells.
Production from wells completed subsequent to June 30, 1996 accounted for
approximately 50% of the total oil production for the 1997 period, which more
than offset the effects of steep production declines from previously existing
Trend wells.
Revenues from natural gas services increased 16% from $1.9 million in
1996 to $2.2 million in 1997 due primarily to additional revenues generated
in 1997 related to three gathering systems acquired in the second quarter of
1996, offset in part by a reduction in contract volumes during the second
quarter of 1997.
COSTS AND EXPENSES
Lease operations expenses increased 10% from $7.2 million in 1996 to $7.9
million in 1997 while oil and gas production on a BOE basis also increased
10%, resulting in a minimal increase on a BOE basis from $4.62 per BOE in
1996 to $4.67 per BOE in 1997. On a BOE basis, the benefit of increased
production, which was attributed to higher initial rates from wells completed
in 1997, was offset in part primarily by (a) higher salt water disposal costs
resulting from both price and volume increases, and (b) higher production
taxes resulting from increases in oil and gas sales during the period.
Higher lease operations expenses reported during the first quarter of 1997,
which were attributable to remedial work and other well repairs, were
mitigated during the second quarter of 1997 due in part to the effects of an
improved chemical treatment program initiated late in 1996.
Exploration costs increased from $279,000 in 1996 to $4.3 million in 1997
due primarily to costs incurred during the 1997 period in connection with
exploration projects initiated since the fourth quarter of 1996. To date,
the Company has committed to spend approximately $4.3 million to conduct and
evaluate a 3-D seismic survey covering approximately 50,000 acres in the
North Giddings Block in 1997, $3.5 million of which has been incurred through
June 30, 1997. The Company may continue to expand the area covered by the
survey and may drill one or more exploratory wells on any prospects which
result from such survey. In addition, the Company plans to spend
approximately $12.5 million on other exploration activities, a significant
portion of which will be classified as exploration costs. Because the
Company follows the successful efforts method of accounting, the Company's
results of operations may be adversely affected during any accounting period
in which such costs are incurred and expensed.
DD&A expense increased 18% from $11.9 million in 1996 to $14 million in
1997 due primarily to a 10% increase in oil and gas production on a BOE
basis, combined with an 8% increase 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 average depletion rate per BOE was $7.97 in
the 1997 period compared to $7.40 in the 1996 period. The 1997
12
<PAGE>
depletion rate has been adversely affected by the drilling results in the
southern portion of the North Giddings Block.
G&A expenses increased 18% from $1.7 million in 1996 to $2 million in
1997 due primarily to increased personnel costs. In response to an increase
in demand for skilled technical and managerial personnel in the oil and gas
industry and an increase in the Company's level of exploration and
development activities, the Company has hired additional personnel and
increased salaries of existing personnel since June 30, 1996. This increase
follows a three-year period during which the Company implemented certain cost
reduction measures, resulting in a 47% reduction in annual G&A costs.
Costs of natural gas services increased 13% from $1.6 million in 1996 to
$1.8 million in 1997 due primarily to additional costs incurred in 1997
related to three gas gathering systems acquired in the second quarter of
1996, offset in part by a reduction in contract volumes during the second
quarter of 1997.
INTEREST EXPENSE AND OTHER
Interest expense decreased 58% from $1.9 million in 1996 to $791,000 in
1997 due primarily to lower average levels of indebtedness on the Credit
Facility and, to a much lesser extent, lower average interest rates. The
average daily principal balance outstanding on such facility during 1997
period was $19.2 million compared to $40.5 million in 1996. The effective
annual interest rate on bank debt, including bank fees, during the 1997
period was 8.9% compared to 9.7% in 1996.
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 1997, and the expected capital resources needed to
finance such plans.
CAPITAL EXPENDITURES
At the beginning of 1997, the Company expected to drill up to 36 net
wells in the Trend. In response to lower oil prices and the Company's
continued evaluation of the southern portion of the North Giddings Block, the
Company has elected to release one of the three rigs contracted to drill
Company-operated wells in the Trend. Accordingly, the Company now plans to
drill approximately 31 net wells in the Trend and has reduced its 1997
planned capital expenditures in the Trend from $42 million to approximately
$35 million.
The Company has also committed to spend approximately $4.3 million in
1997 to conduct and evaluate a proprietary 3-D seismic survey covering a
portion of its acreage in connection with the Cotton Valley Exploratory
Project and to begin drilling one or more exploratory wells on any prospects
delineated by such survey.
13
<PAGE>
During the first six months of 1997, the Company initiated certain other
exploratory projects in Mississippi, South Texas and Louisiana, all of which
are in areas outside the Trend. The Company has increased the nature and
scope of these projects, and has raised its aggregate project cost estimates
for 1997 from $8 million to $12.5 million. These activities will include
substantial geological and geophysical expenditures which are expensed as
incurred.
A significant portion of the planned 1997 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 expenditures
accordingly. The Company's current policy is to limit its annual Cotton
Valley Exploratory Project expenditures to not more than 25% of its planned
annual capital expenditures. However, the Company may modify this policy
depending upon certain factors, including the Company's financial position,
exploratory drilling success, technological advances, drilling activities
conducted by third parties and current and anticipated product prices.
The Company does not have any specified amounts of capital expenditures
designated for acquisitions of proven properties in 1997. However, the
Company plans to actively seek and evaluate acquisition opportunities which
meet its purchase criteria.
CAPITAL RESOURCES
CREDIT FACILITY
The Company's Credit Facility provides for a revolving loan facility in
an amount not to exceed the lesser of the borrowing base, as established by
the banks, or that portion of the borrowing base determined by the Company to
be the elected borrowing limit. In July, 1997, the banks established a
borrowing base of $45 million. Based on its expected needs for 1997, the
Company elected a borrowing limit of $40 million, leaving $17.2 million of
funds available at June 30, 1997. The borrowing base is scheduled for
redetermination in November 1997, at which time the Company may elect a
higher borrowing limit, if such an increase in borrowing capacity is both
needed and available. The Company intends to use such borrowing capacity,
together with internally generated funds, to (i) finance its 1997 planned
capital expenditure program in the Trend, (ii) conduct and evaluate the
proprietary 3-D seismic survey as a part of the Cotton Valley Exploratory
Project, and (iii) conduct certain other exploration projects. Substantially
all of the Company's oil and gas properties are pledged to secure advances
under the Credit Facility.
WORKING CAPITAL AND CASH FLOW
During the six months ended June 30, 1997, the Company generated cash
flow from operating activities of $19.3 million (net of $3.5 million of
geological and geophysical costs which were expensed as incurred), spent
$23.9 million on capital expenditures and borrowed $4.8 million on the Credit
Facility. During the same period, the Company spent $1.1 million to
repurchase 70,000 shares of its common stock.
The Company's working capital deficit increased from $3.4 million at
December 31, 1996 to $6.8 million at June 30, 1997. The Company applies most
of its available cash toward the repayment of the Credit Facility. Since all
outstanding indebtedness on the Credit Facility is classified as a noncurrent
liability, the timing of receipts and disbursements can cause reported
working capital to fluctuate as it did from December 31, 1996 to June 30,
1997. However, working capital will increase as funds are advanced on the
Credit Facility to finance the Company's capital expenditure program.
14
<PAGE>
The Company believes that the funds available under the Credit Facility
and cash provided by operations will be adequate to fund the Company's
operations and projected capital and exploratory expenditures during 1997.
However, because future cash flows and the availability of borrowings are
subject to a number of variables, such as the level of production from
existing wells, the Company's success in locating and producing new reserves,
prevailing prices of oil and gas, and the uncertainty with respect to the
amount of funds which may ultimately be required to finance its exploration
activities, there can be no assurance that the Company's capital resources
will be sufficient to sustain the Company's exploration and development
activities. If such capital resources are insufficient, 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 the 1997 periods.
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 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 physical delivery of the hedged products.
During the first six months of 1997, the Company did not utilize any
financial instruments for hedging transactions. Furthermore, the Company
does not have any open positions in swap, collar or other financial hedging
arrangements at this time. However, the Company may enter into various
hedging arrangements in the future in order to realize commodity prices which
it considers favorable under the circumstances.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------
27 Financial Data Schedule
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1997.
16
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CLAYTON WILLIAMS ENERGY, INC.
Date: August 4, 1997 By: /s/ L. Paul Latham
------------------------------------
L. Paul Latham
Executive Vice President and Chief
Operating Officer
Date: August 4, 1997 By: /s/ Mel G. Riggs
------------------------------------
Mel G. Riggs
Senior Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,614
<SECURITIES> 0
<RECEIVABLES> 10,124
<ALLOWANCES> 0
<INVENTORY> 704
<CURRENT-ASSETS> 12,873
<PP&E> 397,386
<DEPRECIATION> 298,087
<TOTAL-ASSETS> 112,201
<CURRENT-LIABILITIES> 19,637
<BONDS> 22,800
0
0
<COMMON> 895
<OTHER-SE> 68,869
<TOTAL-LIABILITY-AND-EQUITY> 112,201
<SALES> 32,820
<TOTAL-REVENUES> 34,987
<CGS> 7,930
<TOTAL-COSTS> 29,873
<OTHER-EXPENSES> (95)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 791
<INCOME-PRETAX> 4,418
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,418
<EPS-PRIMARY> .49
<EPS-DILUTED> 0
</TABLE>
