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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/XX/
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
or
/ /
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to ________
COMMISSION FILE NO. 0-20838
CLAYTON WILLIAMS ENERGY, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2396863
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6 DESTA DRIVE, SUITE 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 OCTOBER 30, 1997....8,895,492
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CLAYTON WILLIAMS ENERGY, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
----
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1997 and 1996 . . . . . . . 4
Consolidated Statements of Cash Flows for the nine months
ended September 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 . . . . . . . . . . . . . . . . . 17
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2
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CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents........................ $ 1,712 $ 2,479
Accounts receivable:
Trade, net.................................... 2,132 1,876
Affiliates.................................... 123 92
Oil and gas sales............................. 9,287 10,440
Inventory........................................ 952 518
Other............................................ 901 557
--------- ---------
15,107 15,962
--------- ---------
PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts
method.......................................... 393,239 354,532
Natural gas gathering and processing systems..... 7,790 7,655
Other............................................ 10,099 9,547
--------- ---------
411,128 371,734
Less accumulated depreciation, depletion and
amortization.................................... (306,629) (284,173)
--------- ---------
Property and equipment, net................... 104,499 87,561
--------- ---------
OTHER ASSETS........................................ 83 75
--------- ---------
$ 119,689 $ 103,598
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable:
Trade......................................... $ 12,499 $ 10,233
Affiliates.................................... 246 615
Oil and gas sales............................. 7,458 7,454
Current maturities of long-term debt............. 21 112
Accrued liabilities and other.................... 987 970
--------- ---------
21,211 19,384
--------- ---------
LONG-TERM DEBT...................................... 27,500 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 -
8,963,292 shares in 1997 and 8,927,658
shares in 1996.................................. 896 893
Additional paid-in capital....................... 70,599 70,248
Retained earnings (deficit)...................... 598 (4,927)
--------- ---------
72,093 66,214
Less treasury stock, at cost (70,000 shares
in 1997)........................................ (1,115) -
--------- ---------
70,978 66,214
--------- ---------
$ 119,689 $ 103,598
--------- ---------
--------- ---------
The accompanying notes are an integral part
of these consolidated financial statements.
3
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CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------- --------
REVENUES
Oil and gas sales.............. $18,718 $14,619 $51,538 $42,136
Natural gas services........... 1,207 965 3,374 2,914
------- ------- ------- -------
Total revenues.............. 19,925 15,584 54,912 45,050
------- ------- ------- -------
COSTS AND EXPENSES
Lease operations............... 3,917 3,647 11,847 10,808
Exploration.................... 3,948 236 8,201 515
Natural gas services........... 1,070 792 2,849 2,363
Depreciation, depletion and
amortization.................. 8,611 5,891 22,561 17,743
Impairment of property and
equipment..................... - - - 1,186
General and administrative..... 806 728 2,767 2,399
------- ------- ------- -------
Total costs and expenses.... 18,352 11,294 48,225 35,014
------- ------- ------- -------
Operating income............ 1,573 4,290 6,687 10,036
------- ------- ------- -------
OTHER INCOME (EXPENSE)
Interest expense............... (480) (840) (1,271) (2,783)
Other.......................... 14 20 109 60
------- ------- ------- -------
Total other income
(expense).................. (466) (820) (1,162) (2,723)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES........ 1,107 3,470 5,525 7,313
INCOME TAX EXPENSE................ - - - -
------- ------- ------- -------
NET INCOME........................ $ 1,107 $ 3,470 $ 5,525 $ 7,313
------- ------- ------- -------
------- ------- ------- -------
Net income per common share....... $ .12 $ .45 $ .61 $ .96
------- ------- ------- -------
------- ------- ------- -------
Weighted average common
shares outstanding.............. 9,088 7,668 9,093 7,588
------- ------- ------- -------
------- ------- ------- -------
The accompanying notes are an integral part
of these consolidated financial statements.
4
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CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 5,525 $ 7,313
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation, depletion and amortization.... 22,561 17,743
Impairment of property and equipment........ - 1,186
Exploration costs........................... 750 406
Other....................................... 287 314
Changes in operating working capital:
Accounts receivable......................... 866 (66)
Accounts payable............................ 79 3,006
Other....................................... (760) 145
-------- --------
Net cash provided by operating
activities.............................. 29,308 30,047
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment............ (38,646) (25,252)
Proceeds from sale of property and equipment... 157 3,525
-------- --------
Net cash used in investing activities.... (38,489) (21,727)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt................... 9,500 -
Repayments of long-term debt................... - (8,407)
Repurchase of common stock for treasury........ (1,115) -
Proceeds from sale of common stock............. 29 25
-------- --------
Net cash provided by (used in)
financing activities.................. 8,414 (8,382)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (767) (62)
CASH AND CASH EQUIVALENTS
Beginning of period............................ 2,479 1,303
-------- --------
End of period.................................. $ 1,712 $ 1,241
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amounts
capitalized................................... $ 1,235 $ 2,675
-------- --------
-------- --------
The accompanying notes are an integral part
of these consolidated financial statements.
5
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CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1997 and for the interim periods
ended September 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:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
(IN THOUSANDS)
Secured Bank Credit Facility
(matures July 31, 1999)........... $ 27,500 $ 18,000
Other............................... 21 112
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27,521 18,112
Less current maturities............. 21 112
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$ 27,500 $ 18,000
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6
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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 $12.5 million of funds available at September 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 September 30, 1997, the Company's indebtedness under the
Credit Facility consisted of $2.5 million of Base Rate Loans at a rate of
8.8% and $25 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 31, 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 nine months ended September 30, 1996 are net
losses totaling $1,154,000 (comprised of losses of $1,297,000, 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 September 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 nine months ended
September 30, 1997, the Company issued Mr. Williams 23,739 shares of common
stock in lieu of cash compensation aggregating $314,048 and issued 690 shares
to three outside directors in lieu of cash compensation aggregating $12,000.
Subsequent to September 30, 1997, the Company issued Mr. Williams an
additional 2,200 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
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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.
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
which changes the method of computing and disclosing earnings per share for
periods ending after December 15, 1997. The Company has determined that
basic and diluted earnings per share (as defined by SFAS 128) for the periods
presented would have been substantially the same as earnings per share
reported herein.
6. INCOME TAXES
Although the Company recorded net income of $5.5 million for financial
reporting purposes during the nine months ended September 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 September 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 September 30, 1997, the Company had purchased 70,000
shares at a cost of $1.1 million.
8
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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 September 30, 1997,
and results of operations and cash flows for the periods ended September 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, Buda and Georgetown formations. 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 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 three quarters of 1997
has been concentrated in the northern portion of the North Giddings Block
while the Company evaluated production from wells drilled in the southern
portion of the block. To date, the Company has drilled seven wells to the
Austin Chalk formation and one well to the Georgetown formation in the
southern portion of the block. Initial production results in this southern
area have not met the Company's expectations; however, the Company may
ultimately explore this acreage for Cotton Valley pinnacle reefs. In
addition, the Company has drilled three infill wells 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. Initial results
have been successful, and it is anticipated additional locations will be
added.
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. Initial results
from wells drilled on this acreage have been positive, and the Company plans
to continue drilling in these areas.
9
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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.
During the third quarter of 1997, the Company completed a 3-D seismic
survey covering approximately 50,000 net acres in Robertson County, Texas in
connection with its Cotton Valley Exploratory Project. The Company is
currently processing the data obtained through this survey and expects to
begin interpreting the results of the survey during the fourth quarter of
1997. Any drilling prospects delineated by the survey will commence no
sooner than the first quarter of 1998.
The Company is also 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 completed 3-D
seismic surveys on acreage in south Texas and in the oil producing salt domes
of Mississippi during the third quarter of 1997. The Driscoll Ranch survey
in Duvall County, Texas covered approximately 13,000 net acres at a net cost
of approximately $1.4 million, while the Hubbard Dome survey in Hinds County,
Mississippi covered approximately 12,000 net acres at a net cost of
approximately $800,000. Both surveys are currently being evaluated.
In September 1997, the Company began drilling an exploratory well on the
Mamou prospect in Evangeline Parish, Louisiana to test the lower Wilcox
formation. The Company encountered structures and oil shows in two shallow
formations, but discontinued drilling to the deeper horizons since the well
was structurally low. The Company is currently attempting to complete the
well in the Sparta and upper Wilcox formations, and may attempt further
testing of the lower Wilcox formation in this area in the future.
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.
10
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RESULTS OF OPERATIONS
The following table sets forth certain operating information of the Company
for the periods presented:
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OIL AND GAS PRODUCTION DATA:
Oil (MBbls)........................... 820 521 2,102 1,601
Gas (MMcf)............................ 1,293 1,367 3,790 4,183
MBOE (1).............................. 1,036 749 2,734 2,298
AVERAGE OIL AND GAS SALES PRICES (2):
Oil ($/Bbl)........................... $ 19.11 $ 21.19 $ 20.00 $ 19.76
Gas ($/Mcf)........................... $ 2.44 $ 2.62 $ 2.52 $ 2.48
OIL AND GAS COSTS ($/BOE PRODUCED):
Lease operating expenses.............. $ 3.78 $ 4.87 $ 4.33 $ 4.70
Oil and gas depletion................. $ 8.10 $ 7.59 $ 8.02 $ 7.46
NET WELLS DRILLED:
Horizontal wells...................... 9.0 4.0 27.4 17.2
Vertical wells........................ - - 1.8 1.1
</TABLE>
- -------------
(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.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
REVENUES
Oil and gas sales increased 28% from $14.6 million in 1996 to $18.7
million in 1997 due primarily to a 57% increase in oil production. These
benefits were offset in part by a 10% decline in oil prices, a 7% decline in
gas prices, and a 5% decline in gas production. Production from wells
completed subsequent to September 30, 1996 accounted for approximately 63% 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 24% from $965,000 in 1996
to $1.2 million in 1997 due primarily to an increase in contract volumes on
existing systems.
COSTS AND EXPENSES
Lease operations expenses increased 8% from $3.6 million in 1996 to $3.9
million in 1997 while oil and gas production on a BOE basis increased 38%,
resulting in a decrease on a BOE basis from $4.87 per BOE in 1996 to $3.78
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 $236,000 in 1996 to $3.9 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 $5.3 million to
conduct and evaluate a 3-D seismic survey covering approximately 50,000 net
acres in the North Giddings Block in 1997, $5 million of which has been
incurred through September 30, 1997. The Company may drill one or more
11
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exploratory wells on any prospects which result from such survey. In
addition, the Company plans to spend approximately $14.5 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 46% from $5.9 million in 1996 to $8.6 million in
1997 due primarily to a 38% increase in oil and gas production on a BOE
basis, combined with a 7% 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 third
quarter of 1997 was $8.10 compared to $7.59 in the 1996 period.
G&A expenses increased 11% from $728,000 in 1996 to $806,000 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 September 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 39% from $792,000 in 1996 to
$1.1 million in 1997 due primarily to an increase in contract volumes on
existing systems.
INTEREST EXPENSE AND OTHER
Interest expense decreased 43% from $840,000 in 1996 to $480,000 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 third quarter
of 1997 was $26 million compared to $38 million in 1996. The effective
annual interest rate on bank debt, including bank fees, during the 1997
quarter was 8.7% compared to 9% in 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
REVENUES
Oil and gas sales increased 22% from $42.1 million in 1996 to $51.5
million in 1997 due primarily to a 31% increase in oil production. These
benefits were offset in part by a 9% 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 September 30, 1996
accounted for approximately 48% 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 17% from $2.9 million in
1996 to $3.4 million in 1997 due primarily to additional revenues generated
in 1997 related to three gathering systems acquired in the second quarter of
1996.
COSTS AND EXPENSES
Lease operations expenses increased 9% from $10.8 million in 1996 to
$11.8 million in 1997 while oil and gas production on a BOE basis increased
19%, resulting in a decrease on a BOE basis from $4.70 per BOE in 1996 to
$4.33 per BOE in 1997. Higher initial rates of production on several of the
wells completed during 1997 contributed materially to the decline in lease
operations expenses per BOE.
12
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Exploration costs increased from $515,000 in 1996 to $8.2 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 $5.3 million to
conduct and evaluate a 3-D seismic survey covering approximately 50,000 net
acres in the North Giddings Block in 1997, $5 million of which has been
incurred through September 30, 1997. The Company may drill one or more
exploratory wells on any prospects which result from such survey. In
addition, the Company plans to spend approximately $14.5 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 28% from $17.7 million in 1996 to $22.6 million
in 1997 due primarily to a 19% 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 $8.02 in
the 1997 period compared to $7.46 in the 1996 period.
G&A expenses increased 17% from $2.4 million in 1996 to $2.8 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 September 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 17% from $2.4 million in 1996 to
$2.8 million in 1997 due primarily to additional costs incurred in 1997
related to three gas gathering systems acquired in the second quarter of 1996.
INTEREST EXPENSE AND OTHER
Interest expense decreased 54% from $2.8 million in 1996 to $1.3 million
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 $21.5 million compared to $40 million in 1996. The effective
annual interest rate on bank debt, including bank fees, during the 1997
period was 8.9% compared to 9.5% 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.
13
<PAGE>
CAPITAL EXPENDITURES
During the third quarter of 1997, the Company altered its plans to
release one of the three rigs contracted to drill Company-operated wells in
the Trend. Instead, the Company utilized all three rigs for drilling
primarily in the northern portion of the North Giddings Block where initial
production rates and reserves exceeded the Company's expectations. As
revised, the Company plans to drill approximately 35 net wells in the Trend
at a cost of approximately $42 million.
The Company has also committed to spend approximately $5.3 million to
conduct and evaluate a proprietary 3-D seismic survey covering a portion of
its acreage in connection with the Cotton Valley Exploratory Project and may
drill one or more exploratory wells on any prospects delineated by such
survey. The estimated cost of the survey increased from $4.3 million due
primarily to an increase in the Company's interest in acres covered by the
survey.
During 1997, the Company initiated certain other exploratory projects in
Mississippi, south Texas and Louisiana, all of which are in areas outside the
Trend. During the third quarter of 1997, the Company continued to expand the
nature and scope of these projects, and has raised its aggregate project cost
estimates for 1997 from $12.5 million to $14.5 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 $12.5 million of
funds available at September 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.
14
<PAGE>
WORKING CAPITAL AND CASH FLOW
During the nine months ended September 30, 1997, the Company generated
cash flow from operating activities of $29.3 million (net of $7.4 million of
geological and geophysical costs which were expensed as incurred), spent
$38.6 million on capital expenditures and borrowed $9.5 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 $6.1 million at September 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
September 30, 1997. However, working capital will increase as funds are
advanced on the Credit Facility to finance the Company's capital expenditure
program.
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.
15
<PAGE>
During the first nine 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.
16
<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 September 30,
1997.
17
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CLAYTON WILLIAMS ENERGY, INC.
Date: November 4, 1997 By: /s/ L. Paul Latham
-------------------------------
L. Paul Latham
Executive Vice President and
Chief Operating Officer
Date: November 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, CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE QUARTER
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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<SECURITIES> 0
<RECEIVABLES> 11,542
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<INVENTORY> 952
<CURRENT-ASSETS> 15,107
<PP&E> 411,128
<DEPRECIATION> 306,629
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<CURRENT-LIABILITIES> 21,211
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<COMMON> 896
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<TOTAL-LIABILITY-AND-EQUITY> 119,689
<SALES> 51,538
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