<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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 [X] NO [ ]
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 8, 1998...8,895,153
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
TABLE OF CONTENTS
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
<S> <C> <C>
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997........................................... 3
Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997...................... 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997...................... 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.................................. 14
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $1,251 $2,150
Accounts receivable:
Trade, net. . . . . . . . . . . . . . . . . . . . . . . . . . 1,554 4,197
Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . 187 173
Oil and gas sales . . . . . . . . . . . . . . . . . . . . . . 8,353 9,126
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,775 2,530
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 1,243
-------- --------
14,409 19,419
-------- --------
PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts method . . . . . . . 421,983 412,352
Natural gas gathering and processing systems. . . . . . . . . . 7,888 7,869
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,467 10,411
-------- --------
440,338 430,632
Less accumulated depreciation, depletion and amortization . . . (324,370) (315,559)
-------- --------
Property and equipment, net . . . . . . . . . . . . . . . . . 115,968 115,073
-------- --------
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . 64 70
-------- --------
$130,441 $134,562
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable:
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,926 $ 16,480
Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . 118 603
Oil and gas sales . . . . . . . . . . . . . . . . . . . . . . 8,245 7,679
Current maturities of long-term debt. . . . . . . . . . . . . . 10 42
Accrued liabilities and other . . . . . . . . . . . . . . . . . 2,638 984
-------- --------
22,937 25,788
-------- --------
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . 33,400 35,700
-------- --------
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 -
8,986,263 shares in 1998 and 8,980,539
shares in 1997. . . . . . . . . . . . . . . . . . . . . . . . 899 898
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 70,923 70,856
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 3,802 2,840
-------- --------
75,624 74,594
Less treasury stock, at cost (95,000 shares). . . . . . . . . . (1,520) (1,520)
-------- --------
74,104 73,074
-------- --------
$130,441 $134,562
-------- --------
-------- --------
</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
MARCH 31,
---------------------------
1998 1997
------- -------
<S> <C> <C>
REVENUES
Oil and gas sales . . . . . . . . . . . . . . . . . . . . . . . $16,829 $16,564
Natural gas services. . . . . . . . . . . . . . . . . . . . . . 936 1,330
------- -------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . 17,765 17,894
------- -------
COSTS AND EXPENSES
Lease operations. . . . . . . . . . . . . . . . . . . . . . . . 3,988 4,141
Exploration:
Abandonments and impairments. . . . . . . . . . . . . . . . . 413 186
Seismic and other . . . . . . . . . . . . . . . . . . . . . . 1,233 1,618
Natural gas services. . . . . . . . . . . . . . . . . . . . . . 758 1,145
Depreciation, depletion and amortization. . . . . . . . . . . . 8,874 6,344
General and administrative. . . . . . . . . . . . . . . . . . . 1,077 903
------- -------
Total costs and expenses. . . . . . . . . . . . . . . . . . . 16,343 14,337
------- -------
Operating income. . . . . . . . . . . . . . . . . . . . . . . 1,422 3,557
------- -------
OTHER INCOME (EXPENSE)
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . (477) (352)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 26
------- -------
Total other income (expense). . . . . . . . . . . . . . . . . (460) (326)
------- -------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . . 962 3,231
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . . . . . . . . . - -
------- -------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 962 $ 3,231
------- -------
------- -------
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .11 $ .36
------- -------
------- -------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .11 $ .35
------- -------
------- -------
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,889 8,905
------- -------
------- -------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,084 9,112
------- -------
------- -------
</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>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 962 $ 3,231
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation, depletion and amortization. . . . . . . . . . . 8,874 6,344
Exploration costs . . . . . . . . . . . . . . . . . . . . . . 413 186
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 113
Changes in operating working capital:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 3,402 1,309
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 812 481
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,547 213
------- -------
Net cash provided by operating activities . . . . . . . . . 16,065 11,877
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment . . . . . . . . . . . . . . (14,677) (11,092)
Proceeds from sales of property and equipment . . . . . . . . . 13 16
------- -------
Net cash used in investing activities . . . . . . . . . . . (14,664) (11,076)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt. . . . . . . . . . . . . . . . . . (2,300) (1,000)
Repurchase of common stock for treasury . . . . . . . . . . . . - (1,115)
Proceeds from sale of common stock. . . . . . . . . . . . . . . - 11
------- -------
Net cash used in financing activities . . . . . . . . . . . (2,300) (2,104)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . (899) (1,303)
CASH AND CASH EQUIVALENTS
Beginning of period . . . . . . . . . . . . . . . . . . . . . . 2,150 2,479
------- -------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,251 $ 1,176
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amounts capitalized. . . . . . . $ 508 $ 379
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(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 south and east Texas, southeastern New Mexico
and the Texas Gulf Coast. 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 March 31, 1998 and for the interim periods ended
March 31, 1998 and 1997 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, 1998.
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 1997 Form 10-K.
2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Secured Bank Credit Facility (matures July 31, 1999)..... $ 33,400 $ 35,700
Other.................................................... 10 42
----------- -----------
33,410 35,742
Less current maturities.................................. 10 42
----------- -----------
$ 33,400 $ 35,700
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
The Company's secured bank credit facility (the "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.
At March 31, 1998, the elected borrowing limit was $50 million, and the
available credit on the revolving facility was $16.6 million. The borrowing
base is scheduled to be redetermined in May 1998 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 secured bank
credit 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 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 March 31, 1998, all
of the Company's indebtedness under the Credit Facility consisted of $33
million of Eurodollar Loans at a rate of 7.1% and $400,000 of Base Rate Loans
at a rate of 8.8%.
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.
The loan agreement requires the Company to maintain financial ratios
covering working capital, cash flow and net tangible assets. The Company was
in compliance with all covenants at March 31, 1998.
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 three months ended March 31, 1998 are gains
totaling $2,624,000. The Company did not hedge any of its oil and gas
production during the first quarter of 1997.
As of March 31, 1998, the Company had realized gains aggregating
$1,674,000 on early terminations of swap arrangements covering 381,000
barrels of oil production for April and May 1998. These gains will be
recognized during the second quarter of 1998. In addition, the Company has
entered into swap arrangements for 828,000 barrels of oil production for the
period from June 1998 through December 1998 at an average price of $19.51 and
has hedged 1,140,000 MMBtu of gas production for the period from April 1998
through September 1998 at an average price of $2.08.
7
<PAGE>
4. STOCK COMPENSATION PLANS
In May 1995, the Company's Board of Directors adopted the Executive
Incentive Stock Compensation Plan, permitting the Company to pay all or part
of selected executives' salaries in shares of common stock in lieu of cash.
The Company reserved 500,000 shares of common stock for issuance under this
plan. During the three months ended March 31, 1998, the Company issued Mr.
Williams 5,724 shares of common stock in lieu of cash compensation
aggregating $67,369. Subsequent to March 31, 1998, the Company issued Mr.
Williams an additional 3,890 shares in lieu of cash compensation aggregating
$47,050. The amounts of such compensation are included in general and
administrative expense in the accompanying consolidated financial statements.
5. EARNINGS PER SHARE
In December 1997, the Company adopted 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. In accordance with SFAS 128, basic earnings per common
share was computed by dividing net income (loss) by the weighted average
number of shares of common stock outstanding during the period. Diluted
earnings per common share was computed by including the dilutive effect, if
any, of outstanding employee stock options utilizing the treasury stock
method. All prior periods have been restated to give effect to the adoption
of SFAS 128, the impact of which was immaterial. For all periods presented,
the differences between basic shares and diluted shares were attributable to
the dilutive effect of employee stock options.
6. INCOME TAXES
Although the Company recorded net income for financial reporting
purposes during each of the three month periods ended March 31, 1998 and
1997, no provisions for income tax expense were required since the Company
has net operating loss carryforwards available to offset any taxable income
generated during the periods. Due to the uncertainty of realizing the
related future benefits from these tax loss carryforwards, valuation
allowances were recorded at March 31, 1998 and 1997 to the extent net
deferred tax assets exceed net deferred tax liabilities.
7. RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and displaying of
comprehensive income and its components (revenue, expenses, gains and losses)
in a full set of general-purpose financial statements. During the three
months ended March 31, 1998 and 1997, the Company reported no differences
between comprehensive income and net income.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements, other than statements of historical facts, included
in this Form 10-Q that address activities, events or developments that
Clayton Williams Energy, Inc. and its subsidiaries (the "Company") expects,
projects, believes or anticipates will or may occur in the future, including
such matters as oil and gas reserves, future drilling and operations, future
production of oil and gas, future net cash flows, future capital expenditures
and other such matters, are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements of 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 March 31, 1998 and
results of operations and cash flows for the periods ended March 31, 1998 and
1997. This discussion should be read in conjunction with the Company's Form
10-K for the year ended December 31, 1997 and the consolidated financial
statements and notes thereto included 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 has been required to maintain or increase its level
of drilling activity and achieve comparable or improved results from such
activities.
Beginning in 1997, the Company initiated several exploratory projects
designed to reduce its dependence on Trend drilling for future production and
reserve growth. These new areas include other formations in the vicinity of
its core properties in east central Texas, as well as south Texas, Louisiana
and Mississippi. During 1998, the Company is devoting a substantial portion
of its capital expenditures to these new areas and is actively seeking and
evaluating opportunities to acquire proven properties. See "LIQUIDITY AND
CAPITAL RESOURCES - CAPITAL EXPENDITURES."
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.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating information of the Company
for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
OIL AND GAS PRODUCTION DATA:
Oil (Mbbls). . . . . . . . . . . . . . . . . . . . . . . . 793 577
Gas (Mmcf) . . . . . . . . . . . . . . . . . . . . . . . . 1,253 1,215
MBOE (1) . . . . . . . . . . . . . . . . . . . . . . . . . 1,002 780
AVERAGE OIL AND GAS SALES PRICES (2):
Oil ($/Bbl). . . . . . . . . . . . . . . . . . . . . . . . $16.99 $22.27
Gas ($/Mcf). . . . . . . . . . . . . . . . . . . . . . . . $2.61 $2.93
OIL AND GAS COSTS ($/BOE PRODUCED):
Lease operating expenses . . . . . . . . . . . . . . . . . $3.98 $5.31
Oil and gas depletion. . . . . . . . . . . . . . . . . . . $8.60 $7.87
NET WELLS DRILLED:
Horizontal Wells . . . . . . . . . . . . . . . . . . . . . 4.5 10.4
Vertical Wells . . . . . . . . . . . . . . . . . . . . . . 1.9 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 MARCH 31, 1998 COMPARED TO MARCH 31, 1997
REVENUES
Oil and gas sales increased 1% from $16.6 million in 1997 to $16.8
million in 1998. Substantially all of the benefits derived from a 37%
increase in oil production were offset by drastically lower product prices.
Oil prices during the current quarter, after giving effect to a $2.76 per
barrel gain on hedging activities, declined 24% while gas prices declined 11%
after posting a $.34 per Mcf hedging gain. Production from wells completed
subsequent to March 31, 1997 accounted for approximately 47% of the total oil
production for the 1998 period. Except for its participation in wells
proposed by other operators and wells which must be drilled in order to
preserve its drilling rights, the Company has indefinitely suspended Trend
drilling activities until oil prices improve and stabilize. The suspension
of Trend drilling activities for an extended period of time may adversely
affect the Company's production and revenues during the remainder of 1998.
Revenues from natural gas services decreased 28% from $1.3 million in
1997 to $936,000 in 1998 due to a combination of lower contract volumes and
lower gas prices.
COSTS AND EXPENSES
Lease operations expenses decreased 2% from $4.1 million in 1997 to $4
million in 1998 due primarily to lower production taxes resulting from a
significant decline in oil and gas prices. Oil and gas production on a BOE
basis increased 28% during the current quarter, causing a 25% decrease in
lease operations expenses on a BOE basis from $5.31 per BOE in 1997 to $3.98
per BOE in 1998.
Exploration costs decreased 11% from $1.8 million in 1997 to $1.6
million in 1998 due primarily to a reduction in seismic costs during the 1998
period as compared to the 1997 period, which were offset in part by higher
impairments of undeveloped acreage. During the remainder of 1998, the
Company expects to conduct exploratory drilling on several of the prospects
generated by seismic surveys which were initiated in 1997. See "LIQUIDITY
AND CAPITAL RESOURCES -CAPITAL EXPENDITURES." Because the Company follows
the
10
<PAGE>
successful efforts method of accounting, the Company's results of operations
may be adversely affected during any accounting period in which seismic
costs, exploratory dry hole costs, and unproved property impairments are
expensed.
DD&A expense increased 41% from $6.3 million in 1997 to $8.9 million in
1998 due primarily to a 28% increase in oil and gas production on a BOE
basis, combined with a 9% 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 increase in the Company's average depletion
rate was primarily attributable to the effects of lower oil and gas prices on
estimated quantities of proved reserves.
G&A expenses increased 22% from $903,000 in 1997 to $1.1 million in 1998
due primarily to increased personnel costs. In order to effectively manage
the increased level of activity associated with its emerging exploration
program, the Company has hired additional personnel and increased salaries of
existing personnel since March 31, 1997.
Costs of natural gas services decreased 31% from $1.1 million in 1997 to
$758,000 in 1998 due to a combination of lower contract volumes and lower gas
prices.
INTEREST EXPENSE AND OTHER
Interest expense increased 36% from $352,000 in 1997 to $477,000 in 1998
due primarily to higher average levels of indebtedness on the Credit
Facility, offset in part by an increase in capitalized interest and lower
average interest rates. The average daily principal balance outstanding on
such facility during the first quarter of 1998 was $34.9 million compared to
$16.9 million in 1997. The effective annual interest rate on bank debt,
including bank fees, during the 1998 quarter was 8.2% compared to 8.9% in
1997. Capitalized interest was $229,000 higher during the 1998 quarter due
to a significant increase in unproved acreage since the first quarter of 1997.
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 1998, and the expected capital resources needed to
finance such plans.
CAPITAL EXPENDITURES
The Company has generally suspended its Trend drilling activities,
except for its participation in wells proposed by other operators and wells
which must be drilled in order to preserve the Company's drilling rights,
until oil prices improve and stabilize. During the first quarter of 1998,
the Company spent $3.9 million on Trend drilling and leasing activities
compared to $11.2 million during the first quarter of 1997.
In 1998, the Company is devoting a substantial portion of its capital
expenditures to its emerging exploration program. In May 1998, the Company
began drilling a 16,000 foot exploratory gas well to test
11
<PAGE>
one of the reef anomalies identified through a 3-D seismic survey completed
in 1997 in connection with its Cotton Valley Pinnacle Reef play. In
addition, the Company plans to complete the interpretation of the 3-D seismic
survey and extend and renew existing leases during 1998. During the first
quarter of 1998, the Company spent $600,000 on the Cotton Valley Pinnacle
Reef play, and plans to spend a total of approximately $9 million on this
project during 1998.
In addition, the Company spent $5.9 million during the first quarter of
1998 on other exploration projects in south Texas, Louisiana and Mississippi,
and plans to spend approximately $15 million on such projects during 1998.
Substantially all of the planned 1998 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 does not have any specified amounts of capital expenditures
designated for acquisitions of proven properties in 1998. 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 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. At March 31, 1998, the elected borrowing limit was
$50 million, and the available credit on the revolving facility was $16.6
million. The borrowing base is scheduled for redetermination in May 1998, 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 finance its 1998 planned capital expenditure program.
WORKING CAPITAL AND CASH FLOW
During the first quarter of 1998, the Company generated cash flow from
operating activities of $16.1 million, spent $14.7 million on capital
expenditures and repaid $2.3 million on the Credit Facility.
The Company's working capital deficit increased from $6.4 million at
December 31, 1997 to $8.5 million at March 31, 1998. 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, 1997 to
March 31, 1998. 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 1998.
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 Company's
exploration program, there can be no assurance that the Company's capital
resources will be sufficient to sustain the Company's exploratory and
development activities. If such capital resources are insufficient, the
Company may be required to cease or delay such activities.
12
<PAGE>
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.
As of March 31, 1998, the Company had realized gains aggregating
$1,674,000 on early terminations of swap arrangements covering 381,000
barrels of oil production for April and May 1998. These gains will be
recognized during the second quarter of 1998. In addition, the Company has
entered into swap arrangements for 828,000 barrels of oil production for the
period from June 1998 through December 1998 at an average price of $19.51,
and has hedged 1,140,000 MMBtu of gas production for the period from April
1998 through September 1998 at an average price of $2.08.
13
<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 March
31, 1998.
14
<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: May 13, 1998 By: /s/ L. PAUL LATHAM
----------------------------------------
L. Paul Latham
Executive Vice President and Chief
Operating Officer
Date: May 13, 1998 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 DATED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,251
<SECURITIES> 0
<RECEIVABLES> 10,094
<ALLOWANCES> 0
<INVENTORY> 2,775
<CURRENT-ASSETS> 14,409
<PP&E> 440,338
<DEPRECIATION> 324,370
<TOTAL-ASSETS> 130,441
<CURRENT-LIABILITIES> 22,937
<BONDS> 33,400
0
0
<COMMON> 899
<OTHER-SE> 73,205
<TOTAL-LIABILITY-AND-EQUITY> 130,441
<SALES> 16,829
<TOTAL-REVENUES> 17,765
<CGS> 3,988
<TOTAL-COSTS> 16,343
<OTHER-EXPENSES> (17)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 477
<INCOME-PRETAX> 962
<INCOME-TAX> 0
<INCOME-CONTINUING> 962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 962
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
