XNAS:CWEI Quarterly Report 10-Q Filing - 3/31/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

¨         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

 

Commission File Number 001-10924

 

CLAYTON WILLIAMS ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

75-2396863

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

Six Desta Drive - Suite 6500

 

 

Midland, Texas

 

79705-5510

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code:  (432) 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.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

 

There were 12,163,536 shares of Common Stock, $.10 par value, of the registrant outstanding as of May 2, 2012.

 

 

 



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

TABLE OF CONTENTS

 

PART I.  FINANCIAL INFORMATION

 

 

 

Page

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

3

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011

5

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2012

6

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

35

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

PART II. OTHER INFORMATION

 

Item 1A.

Risk Factors

38

 

 

 

Item 6.

Exhibits

39

 

 

 

 

Signatures

41

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1 -          Financial Statements

 

CLAYTON WILLIAMS ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

ASSETS

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

32,043

 

$

17,525

 

Accounts receivable:

 

 

 

 

 

Oil and gas sales

 

43,641

 

41,282

 

Joint interest and other, net

 

15,123

 

14,517

 

Affiliates

 

786

 

990

 

Inventory

 

55,288

 

44,868

 

Deferred income taxes

 

6,734

 

8,948

 

Prepaids and other

 

15,986

 

14,813

 

 

 

169,601

 

142,943

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

Oil and gas properties, successful efforts method

 

2,252,587

 

2,103,085

 

Natural gas gathering and processing systems

 

30,266

 

26,040

 

Contract drilling equipment

 

82,600

 

75,956

 

Other

 

20,375

 

19,134

 

 

 

2,385,828

 

2,224,215

 

Less accumulated depreciation, depletion and amortization

 

(1,190,055

)

(1,156,664

)

Property and equipment, net

 

1,195,773

 

1,067,551

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Debt issue costs, net

 

11,167

 

11,644

 

Fair value of derivatives

 

1,417

 

 

Investments and other

 

4,227

 

4,133

 

 

 

16,811

 

15,777

 

 

 

$

1,382,185

 

$

1,226,271

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable:

 

 

 

 

 

Trade

 

$

82,834

 

$

98,645

 

Oil and gas sales

 

34,854

 

37,409

 

Affiliates

 

1,897

 

1,501

 

Fair value of derivatives

 

10,036

 

5,633

 

Accrued liabilities and other

 

20,545

 

13,042

 

 

 

150,166

 

156,230

 

NON-CURRENT LIABILITIES

 

 

 

 

 

Long-term debt

 

624,547

 

529,535

 

Deferred income taxes

 

136,239

 

134,209

 

Fair value of derivatives

 

 

494

 

Asset retirement obligations

 

48,440

 

40,794

 

Deferred revenue from volumetric production payment

 

43,559

 

 

Accrued compensation under non-equity award plans

 

27,038

 

20,757

 

Other

 

916

 

751

 

 

 

880,739

 

726,540

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, par value $.10 per share, authorized — 3,000,000 shares; none issued

 

 

 

Common stock, par value $.10 per share, authorized — 30,000,000 shares: issued and outstanding — 12,163,536 shares in 2012 and 2011

 

1,216

 

1,216

 

Additional paid-in capital

 

152,515

 

152,515

 

Retained earnings

 

197,549

 

189,770

 

 

 

351,280

 

343,501

 

 

 

$

1,382,185

 

$

1,226,271

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except per share)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

REVENUES

 

 

 

 

 

Oil and gas sales

 

$

107,030

 

$

94,932

 

Natural gas services

 

350

 

409

 

Drilling rig services

 

1,552

 

260

 

Gain on sales of assets

 

137

 

13,572

 

Total revenues

 

109,069

 

109,173

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

Production

 

29,055

 

24,820

 

Exploration:

 

 

 

 

 

Abandonments and impairments

 

1,340

 

877

 

Seismic and other

 

2,012

 

1,278

 

Natural gas services

 

258

 

263

 

Drilling rig services

 

2,430

 

786

 

Depreciation, depletion and amortization

 

31,232

 

23,744

 

Accretion of asset retirement obligations

 

699

 

674

 

General and administrative

 

15,015

 

12,499

 

Loss on sales of assets and impairment of inventory

 

233

 

196

 

Total costs and expenses

 

82,274

 

65,137

 

 

 

 

 

 

 

Operating income

 

26,795

 

44,036

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

Interest expense

 

(8,763

)

(6,412

)

Loss on early extinguishment of long-term debt

 

 

(4,594

)

Loss on derivatives

 

(6,909

)

(46,345

)

Other

 

900

 

1,087

 

Total other income (expense)

 

(14,772

)

(56,264

)

 

 

 

 

 

 

Income (loss) before income taxes

 

12,023

 

(12,228

)

Income tax (expense) benefit

 

(4,244

)

4,353

 

NET INCOME (LOSS)

 

$

7,779

 

$

(7,875

)

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

Basic

 

$

0.64

 

$

(0.65

)

Diluted

 

$

0.64

 

$

(0.65

)

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

12,164

 

12,156

 

Diluted

 

12,164

 

12,156

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

 

 

Common Stock

 

Additional

 

 

 

Total

 

 

 

No. of

 

Par

 

Paid-In

 

Retained

 

Stockholders’

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Equity

 

BALANCE,

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

12,164

 

$

1,216

 

$

152,515

 

$

189,770

 

$

343,501

 

Net income

 

 

 

 

7,779

 

7,779

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE,

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

12,164

 

$

1,216

 

$

152,515

 

$

197,549

 

$

351,280

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income (loss)

 

$

7,779

 

$

(7,875

)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

31,232

 

23,744

 

Exploration costs

 

1,340

 

877

 

(Gain) loss on sales of assets and impairment of inventory, net

 

96

 

(13,376

)

Deferred income tax expense (benefit)

 

4,244

 

(4,353

)

Non-cash employee compensation

 

6,257

 

7,401

 

Unrealized loss on derivatives

 

2,493

 

44,627

 

Amortization of debt issue costs and original issue discount

 

508

 

568

 

Accretion of asset retirement obligations

 

699

 

674

 

Loss on early extinguishment of long-term debt

 

 

4,594

 

Amortization of deferred revenue from volumetric production payment

 

(864

)

 

 

 

 

 

 

 

Changes in operating working capital:

 

 

 

 

 

Accounts receivable

 

(2,762

)

(5,721

)

Accounts payable

 

(6,772

)

(11,954

)

Other

 

8,083

 

(5,915

)

Net cash provided by operating activities

 

52,333

 

33,291

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Additions to property and equipment

 

(164,845

)

(82,993

)

Proceeds from volumetric production payment

 

44,423

 

 

Proceeds from sales of assets

 

1

 

11,002

 

Change in equipment inventory

 

(12,326

)

10,516

 

Other

 

(68

)

(120

)

Net cash used in investing activities

 

(132,815

)

(61,595

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from long-term debt

 

95,000

 

293,000

 

Repayments of long-term debt

 

 

(256,165

)

Premium on early extinguishment of long-term debt

 

 

(2,765

)

Proceeds from exercise of stock options

 

 

26

 

Net cash provided by financing activities

 

95,000

 

34,096

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

14,518

 

5,792

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

Beginning of period

 

17,525

 

8,720

 

End of period

 

$

32,043

 

$

14,512

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

1,432

 

$

1,061

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

 

1.                          Nature of Operations

 

Clayton Williams Energy, Inc. (a Delaware corporation),  is an independent oil and gas company engaged in the exploration for and development and production of oil and natural gas primarily in its core areas in Texas, Louisiana and New Mexico.  Unless the context otherwise requires, references to “CWEI” mean Clayton Williams Energy, Inc., the parent company, and references to the “Company”, “we”, “us” or “our” mean Clayton Williams Energy, Inc. and its consolidated subsidiaries.  Approximately 26% of the Company’s outstanding Common Stock is beneficially owned by Clayton W. Williams, Jr. (“Mr. Williams”), Chairman of the Board, President and Chief Executive Officer of the Company, and approximately 25% is owned by a partnership in which Mr. Williams’ adult children are limited partners.

 

Substantially all of our oil and gas production is sold under short-term contracts which are market-sensitive.  Accordingly, our results of operations and capital resources are highly dependent upon prevailing market prices of, and demand for, oil and natural gas.  These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond our control.  These factors include the level of global supply and demand for oil and natural gas, market uncertainties, weather conditions, domestic governmental regulations and taxes, political and economic conditions in oil producing countries, price and availability of alternative fuels, and overall domestic and foreign economic conditions.

 

2.                          Presentation

 

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires our management 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 periods.  Actual results could differ materially from those estimates.

 

The consolidated financial statements include the accounts of CWEI and its wholly-owned subsidiaries.  We account for our undivided interest in oil and gas limited partnerships using the proportionate consolidation method.  Under this method, we consolidate our proportionate share of assets, liabilities, revenues and expenses of such limited partnerships.  Less than 5% of our consolidated total assets and total revenues are derived from oil and gas limited partnerships.  All significant intercompany transactions and balances associated with the consolidated operations have been eliminated.  Certain reclassifications of prior year financial statement amounts have been made to conform to current year presentations.

 

In the opinion of management, our unaudited consolidated financial statements as of March 31, 2012 and for the interim periods ended March 31, 2012 and 2011 include all adjustments that are necessary for a fair presentation in accordance with GAAP.  These interim results are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP 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 our Form 10-K for the year ended December 31, 2011.

 

8



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.                          Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

 

 

 

 

 

 

7.75% Senior Notes due 2019, net of unamortized original issue discount of $453 in 2012 and $465 in 2011

 

$

349,547

 

$

349,535

 

Revolving credit facility, due November 2015

 

275,000

 

180,000

 

 

 

$

624,547

 

$

529,535

 

 

Senior Notes

 

In July 2005, we issued $225 million of aggregate principal amount of 7¾% Senior Notes due 2013 (“2013 Senior Notes”).  The 2013 Senior Notes were issued at face value and bore interest at 7¾% per year, payable semi-annually on February 1 and August 1 of each year, beginning February 1, 2006.  In March 2011, we redeemed $143.2 million in aggregate principal amount of 2013 Senior Notes in a tender offer and recorded a $4.6 million loss on early extinguishment of long-term debt, consisting of a $2.8 million premium and a $1.8 million write-off of debt issuance costs.  On August 1, 2011, we called at par and redeemed in full the remaining $81.8 million of 2013 Senior Notes and recorded an additional $907,000 loss on early extinguishment of long-term debt related to the write-off of debt issuance costs.

 

In March 2011, we issued $300 million of aggregate principal amount of 7.75% Senior Notes due 2019 (“2019 Senior Notes”).  The 2019 Senior Notes were issued at face value and bear interest at 7.75% per year, payable semi-annually on April 1 and October 1 of each year, beginning October 1, 2011.  In April 2011, we issued an additional $50 million aggregate principal amount of 2019 Senior Notes with an original issue discount of 1% or $500,000.  We may redeem some or all of the 2019 Senior Notes at redemption prices (expressed as percentages of principal amount) equal to 103.875% for the twelve-month period beginning on April 1, 2015, and 101.938% beginning on April 1, 2016, and 100% beginning on April 1, 2017 or for any period thereafter, in each case plus accrued and unpaid interest.

 

The Indenture contains covenants that restrict our ability to:  (1) borrow money; (2) issue redeemable or preferred stock; (3) pay distributions or dividends; (4) make investments; (5) create liens without securing the 2019 Senior Notes; (6) enter into agreements that restrict dividends from subsidiaries; (7) sell certain assets or merge with or into other companies; (8) enter into transactions with affiliates; (9) guarantee indebtedness; and (10) enter into new lines of business.  One such covenant provides that we may only incur indebtedness if the ratio of consolidated EBITDAX to consolidated interest expense (as these terms are defined in the Indenture) does not exceed certain ratios specified in the Indenture.  These covenants are subject to a number of important exceptions and qualifications as described in the Indenture.  We were in compliance with these covenants at March 31, 2012.

 

Revolving Credit Facility

 

We have a credit facility with a syndicate of banks that provides for a revolving line of credit of up to $500 million, limited to the amount of a borrowing base as determined by the banks.  The borrowing base, which is based on the discounted present value of future net cash flows from oil and gas production, is redetermined by the banks semi-annually in May and November.  We or the banks may also request an unscheduled borrowing base redetermination at other times during the year.  If, at any time, the borrowing base is less than the amount of outstanding credit exposure under the revolving credit facility, we will be required to (1) provide additional security, (2) prepay the principal amount of the loans in an amount sufficient to eliminate the deficiency (or by a combination of such additional security and such prepayment eliminate such deficiency), or (3) prepay the deficiency in not more than five equal monthly installments plus accrued interest.  In November 2011, the banks increased the borrowing base to $475 million from $350 million.  At our election, the aggregate commitment from the banks remained

 

9



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

unchanged at $350 million at March 31, 2012.  In April 2012, the banks increased the aggregate commitment, at our request, to equal the borrowing base of $475 million.  At March 31, 2012, after allowing for outstanding letters of credit totaling $4.1 million, we had $71 million available under the revolving credit facility based on then-existing commitments.  During the first three months of 2012, we increased indebtedness outstanding under the revolving credit facility by $95 million.

 

The revolving credit facility is collateralized primarily by 80% or more of the adjusted engineered value (as defined in the revolving credit facility) of our oil and gas interests evaluated in determining the borrowing base.  The obligations under the revolving credit facility are guaranteed by each of CWEI’s material domestic subsidiaries.

 

At our election, annual interest rates under the revolving credit facility are determined by reference to (1) LIBOR plus an applicable margin between 1.75% and 2.75% per year or (2) if an alternate base rate loan, the greatest of (A) the prime rate, (B) the federal funds rate plus 0.50%, or (C) one-month LIBOR plus 1% plus, if any of (A), (B) or (C), an applicable margin between 0.75% and 1.75% per year.  We also pay a commitment fee on the unused portion of the revolving credit facility at a rate between 0.375% and 0.50%.  The applicable margins are based on actual borrowings outstanding as a percentage of the borrowing base.  Interest and fees are payable no less often than quarterly.  The effective annual interest rate on borrowings under the revolving credit facility, excluding bank fees and amortization of debt issue costs, for the three months ended March 31, 2012 was 2.5%.

 

The revolving credit facility also contains various covenants and restrictive provisions that may, among other things, limit our ability to sell assets, incur additional indebtedness, make investments or loans and create liens.  One such covenant requires that we maintain a ratio of consolidated current assets to consolidated current liabilities of at least 1 to 1.  Another financial covenant prohibits the ratio of our consolidated funded indebtedness to consolidated EBITDAX (determined as of the end of each fiscal quarter for the then most-recently ended four fiscal quarters) from being greater than 4 to 1.  The computations of consolidated current assets, current liabilities, EBITDAX and indebtedness are defined in the revolving credit facility.  We were in compliance with all financial and non-financial covenants at March 31, 2012.

 

4.                          Acquisition of Southwest Royalties, Inc. Limited Partnerships

 

On March 14, 2012, Southwest Royalties, Inc. (“SWR”), a wholly owned subsidiary of CWEI, completed the mergers of each of the 24 limited partnerships of which SWR was the general partner, into SWR (“SWR Partnerships”) with SWR continuing as the surviving entity in the mergers. At the effective time of the mergers, all of the units representing limited partnership interests in the SWR Partnerships, other than those held by SWR, were converted into the right to receive cash. SWR did not receive any cash payment for its partnership interests in the SWR Partnerships. However, as a result of the mergers, SWR acquired 100% of the assets and liabilities of the SWR Partnerships. SWR paid aggregate merger consideration of $38.6 million in the mergers. Pro forma financial information is not presented as it would not be materially different from the information presented in the consolidated statements of operations and comprehensive income (loss) of CWEI.

 

To obtain the funds to finance the aggregate merger consideration, SWR entered into a volumetric production payment (“VPP”) with a third party for upfront cash proceeds of $44.4 million and deferred future advances aggregating $4.7 million.  Under the terms of the VPP, SWR conveyed to the third party a term overriding royalty interest covering approximately 725,000 barrel of oil equivalents (“BOE”) of estimated future oil and gas production from certain properties derived from the mergers.  The scheduled volumes under the VPP relate to production months from March 2012 through December 2019 and are to be delivered to, or sold on behalf of, the third party free of all costs associated with the production and development of the underlying properties.  Once the scheduled volumes have been delivered to the third party, the term overriding royalty interest will terminate.  SWR retained the obligation to prudently operate and produce the properties during the term of the VPP, and the third party assumed all risks related to the adequacy of the associated reserves to fully recoup the scheduled volumes and also assumed all risks associated with product prices.  As a result, the VPP has been accounted for as a sale of reserves, with the sales proceeds being deferred and amortized into oil and gas sales as the scheduled volumes are produced (see Note 6).

 

10



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash and cash equivalents

 

$

4,262

 

Other current assets

 

1,548

 

Oil and gas properties

 

39,616

 

Total assets acquired

 

45,426

 

 

 

 

 

Asset retirement obligations

 

(6,864

)

Total liabilities assumed

 

(6,864

)

 

 

 

 

Net assets acquired

 

$

38,562

 

 

5.                          Asset Retirement Obligations

 

Changes in asset retirement obligations (“ARO”) are as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Beginning of period

 

$

40,794

 

$

40,444

 

Additional ARO from new properties

 

7,009

 

1,526

 

Sales or abandonments of properties

 

(20

)

(4,425

)

Accretion expense

 

699

 

2,757

 

Revisions of previous estimates

 

(42

)

492

 

End of period

 

$

48,440

 

$

40,794

 

 

Our ARO is measured using primarily Level 3 inputs.  The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, inflation rate and well life.  The inputs are calculated based on historical data as well as current estimated costs.

 

6.                          Deferred Revenue from Volumetric Production Payment

 

The net proceeds from the VPP discussed in Note 4 were recorded as a non-current liability in the consolidated balance sheets.  Deferred revenue from VPP will be amortized over the life of the VPP and will be recognized in oil and gas sales in the consolidated statements of operations and comprehensive income (loss).

 

Changes in deferred revenue from the VPP are as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Beginning of period

 

$

 

$

 

Deferred revenue from VPP

 

44,423

 

 

Amortization of deferred revenue from VPP

 

(864

)

 

End of period

 

$

43,559

 

$

 

 

11



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.                          Compensation Plans

 

Stock-Based Compensation

 

We presently have options outstanding under a stock option plan for independent directors covering 6,000 shares of Common Stock.  As of March 31, 2012, the options had a weighted average exercise price of $28.86 per share (ranging from $12.14 per share to $41.74 per share), a weighted average remaining contractual term of 3.3 years, and an aggregate intrinsic value of $303,460 (based on a market price at March 31, 2012 of $79.44 per share).  No options were granted during the three months ended March 31, 2012 or 2011.

 

Non-Equity Award Plans

 

The Compensation Committee of the Board has adopted an after-payout (“APO”) incentive plan (the “APO Incentive Plan”) for officers, key employees and consultants who promote our drilling and acquisition programs.  The Compensation Committee’s objective in adopting this plan is to further align the interests of the participants with ours by granting the participants an APO interest in the production developed, directly or indirectly, by the participants.  The plan generally provides for the creation of a series of partnerships or participation arrangements, which are treated as partnerships for tax purposes (“APO Partnerships”), between us and the participants, to which we contribute a portion of our economic interest in wells drilled or acquired within certain areas.  Generally, we pay all costs to acquire, drill and produce applicable wells and receive all revenues until we have recovered all of our costs, plus interest (“payout”).  At payout, the participants receive 99% to 100% of all subsequent revenues and pay 99% to 100% of all subsequent expenses attributable to the economic interests that are subject to the APO Partnerships.  Between 5% and 7.5% of our economic interests in specified wells drilled or acquired by us subsequent to October 2002 are subject to the APO Incentive Plan.  We record our allocable share of the assets, liabilities, revenues, expenses and oil and gas reserves of these APO Partnerships in our consolidated financial statements.  Participants in the APO Incentive Plan are immediately vested in all future amounts payable under the plan.

 

The Compensation Committee has also adopted an APO reward plan (the “APO Reward Plan”) which offers eligible officers, key employees and consultants the opportunity to receive bonus payments that are based on certain profits derived from a portion of our working interest in specified areas where we are conducting drilling and production enhancement operations.  The wells subject to an APO Reward Plan are not included in the APO Incentive Plan.  Likewise, wells included in the APO Incentive Plan are not included in the APO Reward Plan.  Although conceptually similar to the APO Incentive Plan, the APO Reward Plan is a compensatory bonus plan through which we pay participants a bonus equal to a portion of the APO cash flows received by us from our working interest in wells in a specified area.  Unlike the APO Incentive Plan, however, participants in the APO Reward Plan are not immediately vested in all future amounts payable under the plan.  To date, we have granted awards under the APO Reward Plan in 13 specified areas, each of which established a quarterly bonus amount equal to 7% or 10% of the APO cash flow from wells drilled or recompleted in the respective areas after the effective date set forth in each plan, which dates range from January 1, 2007 to April 1, 2011.  Under these 13 awards, one award fully vested November 4, 2011, while the full vesting dates for future amounts payable under the plan for three awards are August 9, 2012, three awards are May 5, 2013, and six awards are June 1, 2013.

 

In January 2007, we granted awards under the Southwest Royalties Reward Plan (the “SWR Reward Plan”), a one-time incentive plan which established a quarterly bonus amount for participants equal to the after-payout cash flow from a 22.5% working interest in one well.  Under the plan, two-thirds of the quarterly bonus amount was payable to the participants until the full vesting date of October 25, 2011.  After the full vesting date, the deferred portion of the quarterly bonus amount, with interest of 4.83% per year, as well as 100% of all subsequent quarterly bonus amounts, are payable to participants.

 

To continue as a participant in the APO Reward Plan or the SWR Reward Plan, participants must remain in the employment or service of the Company through the full vesting date established for each plan.  The full vesting date may be accelerated in the event of a change of control or sale transaction, as defined in the plan documents.

 

12



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

We recognize compensation expense related to the APO Partnerships based on the estimated value of economic interests conveyed to the participants.  Estimated compensation expense applicable to the APO Reward Plan and SWR Reward Plan is recognized over the vesting periods, which range from two years to five years.  We recorded compensation expense of $6.3 million for the three months ended March 31, 2012 and $7.4 million for the three months ended March 31, 2011 in connection with all non-equity award plans.  Aggregate compensation under non-equity award plans is reflected on the balance sheet as detailed in the following schedule:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Current liabilities:

 

 

 

 

 

Accrued liabilities and other

 

$

1,986

 

$

1,994

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

Accrued compensation under non-equity award plans

 

27,038

 

20,757

 

 

 

 

 

 

 

Total accrued compensation under non-equity award plans

 

$

29,024

 

$

22,751

 

 

8.                          Derivatives

 

Commodity Derivatives

 

From time to time, we utilize commodity derivatives in the form of swap contracts to attempt to optimize the price received for our oil and gas production.  Under swap contracts, we receive a fixed price for the respective commodity and pay a floating market price as defined in each contract (generally NYMEX futures prices), resulting in a net amount due to or from the counterparty.  Commodity derivatives are settled monthly as the contract production periods mature.

 

The following summarizes information concerning our net positions in open commodity derivatives applicable to periods subsequent to March 31, 2012.  The settlement prices of commodity derivatives are based on NYMEX futures prices.

 

Swaps:

 

 

 

Oil

 

 

 

Bbls

 

Price

 

Production Period:

 

 

 

 

 

2nd Quarter 2012

 

410,000

 

$

95.70

 

3rd Quarter 2012

 

384,000

 

$

95.70

 

4th Quarter 2012

 

362,000

 

$

95.70

 

2013

 

1,200,000

 

$

104.60

 

2014

 

600,000

 

$

99.30

 

 

 

2,956,000

 

 

 

 

Accounting For Derivatives

 

We did not designate any of our currently open commodity derivatives as cash flow hedges; therefore, all changes in the fair value of these contracts prior to maturity, plus any realized gains or losses at maturity, are recorded as other income (expense) in our statements of operations and comprehensive income (loss).  For the three months ended March 31, 2012, we reported a $6.9 million net loss on derivatives, consisting of a $4.4 million realized loss for settled contracts and a $2.5 million unrealized loss related to changes in mark-to-market valuations.  For the three months ended March 31, 2011, we reported a $46.3 million net loss on derivatives, consisting of a $1.7 million realized loss for settled contracts and a $44.6 million unrealized loss related to changes in mark-to-market valuations.

 

13



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Effect of Derivative Instruments on the Consolidated Balance Sheets

 

 

 

Fair Value of Derivative Instruments as of March 31, 2012

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

 

 

Location

 

Fair Value

 

Location

 

Fair Value

 

 

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Fair value of derivatives:

 

 

 

Fair value of derivatives:

 

 

 

 

 

Current

 

$

 

Current

 

$

10,036

 

 

 

Non-current

 

1,417

 

Non-current

 

 

Total

 

 

 

$

1,417

 

 

 

$

10,036

 

 

 

 

Fair Value of Derivative Instruments as of December 31, 2011

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

 

 

Location

 

Fair Value

 

Location

 

Fair Value

 

 

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

Fair value of derivatives:

 

 

 

Fair value of derivatives:

 

 

 

 

 

Current

 

$

 

Current

 

$

5,633

 

 

 

Non-current

 

 

Non-current

 

494

 

Total

 

 

 

$

 

 

 

$

6,127

 

 

Gross to Net Presentation Reconciliation of Derivative Assets and Liabilities

 

 

 

March 31, 2012

 

 

 

Assets

 

Liabilities

 

 

 

(In thousands)

 

Fair value of derivatives — gross presentation

 

$

1,623

 

$

10,242

 

Effects of netting arrangements

 

(206

)

(206

)

Fair value of derivatives — net presentation

 

$

1,417

 

$

10,036

 

 

 

 

December 31, 2011

 

 

 

Assets

 

Liabilities

 

 

 

(In thousands)

 

Fair value of derivatives — gross presentation

 

$

26

 

$

6,153

 

Effects of netting arrangements

 

(26

)

(26

)

Fair value of derivatives — net presentation

 

$

 

$

6,127

 

 

All of our derivative contracts are with JPMorgan Chase Bank, N.A.  We have elected to net the outstanding positions with this counterparty between current and noncurrent assets or liabilities since we have the right to settle these positions on a net basis.

 

14



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Effect of Derivative Instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss)

 

 

 

Amount of Gain or (Loss) Recognized in Earnings

 

 

 

Three Months Ended March 31,

 

Location of Gain or (Loss)

 

2012

 

2011

 

Recognized in Earnings

 

Realized

 

Unrealized

 

Total

 

Realized

 

Unrealized

 

Total

 

 

 

 

 

(In thousands)

 

 

 

 

 

(In thousands)

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense) - Loss on derivatives

 

$

(4,416

)

$

(2,493

)

$

(6,909

)

$

(1,718

)

$

(44,627

)

$

(46,345

)

Total

 

$

(4,416

)

$

(2,493

)

$

(6,909

)

$

(1,718

)

$

(44,627

)

$

(46,345

)

 

9.                          Financial Instruments

 

Cash and cash equivalents, receivables, accounts payable and accrued liabilities were each estimated to have a fair value approximating the carrying amount due to the short maturity of those instruments.  Indebtedness under our revolving credit facility was estimated to have a fair value approximating the carrying amount since the interest rate is generally market sensitive.

 

Fair Value Measurements

 

We follow a framework for measuring fair value, which outlines a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.  Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.  We categorize our assets and liabilities recorded at fair value in the accompanying consolidated balance sheets based upon the level of judgment associated with the inputs used to measure their fair value.

 

Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 

Level 1 -               Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2 -             Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

Level 3 -             Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

15



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The financial assets and liabilities measured on a recurring basis at March 31, 2012 and December 31, 2011 were commodity derivatives.  The fair value of all derivative contracts is reflected on the balance sheet as detailed in the following schedule:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

Significant Other

 

Significant Other

 

 

 

Observable Inputs

 

Observable Inputs

 

Description

 

(Level 2)

 

(Level 2)

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

Fair value of commodity derivatives

 

$

1,417

 

$

 

Total assets

 

$

1,417

 

$

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Fair value of commodity derivatives

 

$

10,036

 

$

6,127

 

Total liabilities

 

$

10,036

 

$

6,127

 

 

We estimate the fair value of our 2019 Senior Notes using quoted market prices (Level 1 inputs).  Fair value is compared to the carrying value in the table below:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

Description

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

7.75% Senior Notes due 2019

 

$

349,547

 

$

348,300

 

$

349,535

 

$

334,300

 

 

10.                   Income Taxes

 

Our effective federal and state income tax expense rate for the three months ended March 31, 2012 of 35.3% differed from the statutory federal rate of 35% due primarily to increases related to the effects of the Texas Margin Tax and certain non-deductible expenses, offset in part by tax benefits derived from excess statutory depletion deductions.

 

We file federal income tax returns with the United States Internal Revenue Service (“IRS”) and state income tax returns in various state tax jurisdictions.  Our tax returns for fiscal years after 2008 currently remain subject to examination by appropriate taxing authorities.  None of our income tax returns are under examination at this time.

 

11.                   Sales of Assets and Impairments of Inventory

 

Net gain (loss) on sales of assets and impairment of inventory for the three months ended March 31, 2012 and March 31, 2011 are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Gain on sales of assets

 

$

137

 

$

13,572

 

 

 

 

 

 

 

Loss on sales of assets and impairment of inventory

 

(233

)

(196

)

 

 

 

 

 

 

Net gain (loss)

 

$

(96

)

$

13,376

 

 

16



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The loss as of March 31, 2012 is related primarily to the write-down of inventory to its estimated market value at March 31, 2012.  In February 2011, we sold two 2,000 horsepower drilling rigs and related equipment for $22 million of total consideration.  In connection with the sale, we recorded a gain of $13.2 million during the first quarter of 2011.  Proceeds from the sale consisted of $11 million cash and an $11 million promissory note due June 2012.

 

We maintain an inventory of tubular goods and other well equipment for use in our exploration and development drilling activities.  Inventory is carried at the lower of average cost or estimated fair market value.  We categorize the measurement of fair value of inventory as Level 2 under applicable accounting standards.  To determine estimated fair value of inventory, we subscribe to market surveys and obtain quotes from equipment dealers for similar equipment.  We then correlate the data as needed to estimate the fair value of the specific items (or groups of similar items) in our inventory.  If the estimated fair values for those specific items (or groups of similar items) in our inventory are less than the related average cost, a provision for impairment is made.

 

12.                   Costs of Oil and Gas Properties

 

The following sets forth the net capitalized costs for oil and gas properties as of March 31, 2012 and December 31, 2011.

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Proved properties

 

$

2,177,075

 

$

2,021,181

 

Unproved properties

 

75,512

 

81,904

 

Total capitalized costs

 

2,252,587

 

2,103,085

 

Accumulated depletion

 

(1,124,909

)

(1,095,197

)

Net capitalized costs

 

$

1,127,678

 

$

1,007,888

 

 

13.                   Impairment of Property and Equipment

 

We impair our long-lived assets, including oil and gas properties and contract drilling equipment, when estimated undiscounted future net cash flows of an asset are less than its carrying value.  The amount of any such impairment is recognized based on the difference between the carrying value and the estimated fair value of the asset.  We categorize the measurement of fair value of these assets as Level 3 inputs.  We estimate the fair value of the impaired property by applying weighting factors to fair values determined under three different methods: discounted cash flow method, flowing daily production method and proved reserves per BOE method.  We then assign applicable weighting factors based on the relevant facts and circumstances.  We did not record a provision for impairment of proved properties during the three months ended March 31, 2012 or 2011.

 

Unproved properties are nonproducing and do not have estimable cash flow streams. Therefore, we estimate the fair value of individually significant prospects by obtaining, when available, information about recent market transactions in the vicinity of the prospects and adjust the market data as needed to give consideration to location of the prospects to known fields and reservoirs, the extent of geological and geophysical data on the prospects, the remaining terms of leases holding the acreage in the prospects, recent drilling results in the vicinity of the prospects, and other risk-related factors such as drilling and completion costs, estimated product prices and other economic factors. Individually insignificant prospects are grouped and impaired based on remaining lease terms and our historical experience with similar prospects. Based on the assessments previously discussed, we will impair our unproved oil and gas properties when we determine that a prospect’s carrying value exceed its estimated fair value. We categorize the measurement of fair value of these assets as Level 3 inputs. We recorded provisions for impairment of unproved properties aggregating $386,000 during the three months ended March 31, 2012 and $227,000 during the three months ended March 31, 2011, respectively, and charged these impairments to exploration costs in the accompanying consolidated statements of operations and comprehensive income (loss).

 

17



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

14.                   Segment Information

 

We have two reportable operating segments, which are oil and gas exploration and production and contract drilling services.

 

The following tables present selected financial information regarding our operating segments for the three-month periods ended March 31, 2012 and 2011.

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

Contract

 

Intercompany

 

Consolidated

 

(In thousands)

 

Oil and Gas

 

Drilling

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

107,517

 

$

14,712

 

$

(13,160

)

$

109,069

 

Depreciation, depletion and amortization

 

29,949

 

3,450

 

(2,167

)

31,232

 

Other operating expenses (a)

 

48,546

 

13,500

 

(11,004

)

51,042

 

Interest expense

 

8,763

 

 

 

8,763

 

Other (income) expense

 

6,009

 

 

 

6,009

 

Income (loss) before income taxes

 

14,250

 

(2,238

)

11

 

12,023

 

 

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

(5,027

)

783

 

 

(4,244

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,223

 

$

(1,455

)

$

11

 

$

7,779

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,353,606

 

$

46,235

 

$

(17,656

)

$

1,382,185

 

Additions to property and equipment

 

$

156,429

 

$

6,644

 

$

12

 

$

163,085

 

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

March 31, 2011

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

Contract

 

Intercompany

 

Consolidated

 

(In thousands)

 

Oil and Gas

 

Drilling

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

108,913

 

$

12,159

 

$

(11,899

)

$

109,173

 

Depreciation, depletion and amortization

 

23,484

 

2,855

 

(2,595

)

23,744

 

Other operating expenses (a)

 

40,533

 

9,409

 

(8,549

)

41,393

 

Interest expense

 

6,412

 

 

 

6,412

 

Other (income) expense

 

63,074

 

(13,222

)

 

49,852

 

Income (loss) before income taxes

 

(24,590

)

13,117

 

(755

)

(12,228

)

 

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

8,680

 

(4,327

)

 

4,353

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(15,910

)

$

8,790

 

$

(755

)

$

(7,875

)

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

909,159

 

$

49,419

 

$

(755

)

$

957,823

 

Additions to property and equipment

 

$

86,687

 

$

1,553

 

$

 

$

88,240

 

 


(a)           Includes the following expenses:  production, exploration, natural gas services, drilling rig services, accretion of asset retirement obligations, general and administrative and loss on sales of assets and impairment of inventory.

 

18



Table of Contents

 

CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15.                   Guarantor Financial Information

 

In March and April 2011, we issued $350 million of aggregate principal amount of 2019 Senior Notes (see Note 3).  Presented below is condensed consolidated financial information of CWEI (“Issuer”) and the Issuer’s material wholly owned subsidiaries, all of which have jointly and severally, irrevocably and unconditionally guaranteed the performance and payment when due of all obligations under the 2019 Senior Notes and are referred to as “Guarantor Subsidiaries” in the following condensed consolidating financial statements.  We have reclassified amounts in the previously reported condensed consolidating financial statements in this Note 15 between the Issuer and the Guarantor Subsidiaries to conform to the current year presentation, which includes applying equity-method accounting for the investment in subsidiaries at the Issuer, and allocating appropriate income taxes to the Guarantor Subsidiaries.

 

The financial information which follows sets forth our condensed consolidating financial statements as of and for the periods indicated.

 

Condensed Consolidating Balance Sheet

March 31, 2012

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

Guarantor

 

Adjustments/

 

 

 

 

 

Issuer

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

158,219

 

$

236,772

 

$

(225,390

)

$

169,601

 

Property and equipment, net

 

822,479

 

373,294

 

 

1,195,773

 

Investments in subsidiaries

 

282,618

 

 

(282,618

)

 

Fair value of derivatives

 

1,417

 

 

 

1,417

 

Other assets

 

13,140

 

2,254

 

 

15,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,277,873

 

$

612,320

 

$

(508,008

)

$

1,382,185

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

239,568

 

$

135,988

 

$

(225,390

)

$

150,166

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt

 

624,547

 

 

 

624,547

 

Deferred income taxes

 

133,531

 

115,308

 

(112,601

)

136,239

 

Other

 

41,547

 

78,406

 

 

119,953

 

 

 

799,625

 

193,714

 

(112,601

)

880,739

 

 

 

 

 

 

 

 

 

 

 

Equity

 

238,680

 

282,618

 

(170,017

)

351,280

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

1,277,873

 

$

612,320

 

$

(508,008

)

$

1,382,185

 

 

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CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Condensed Consolidating Balance Sheet

December 31, 2011

(Dollars in thousands)

 

 

 

 

 

Guarantor

 

Adjustments/

 

 

 

 

 

Issuer

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

142,102

 

$

164,515

 

$

(163,674

)

$

142,943

 

Property and equipment, net

 

737,562

 

329,989

 

 

1,067,551

 

Investments in subsidiaries

 

271,342

 

 

(271,342

)

 

Other assets

 

13,538

 

2,239

 

 

15,777

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,164,544

 

$

496,743

 

$

(435,016

)

$

1,226,271

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

233,729

 

$

86,175

 

$

(163,674

)

$

156,230

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt

 

529,535

 

 

 

529,535

 

Fair value of derivatives

 

494

 

 

 

494

 

Deferred income taxes

 

141,923

 

111,662

 

(119,376

)

134,209

 

Other

 

34,738

 

27,564

 

 

62,302

 

 

 

706,690

 

139,226

 

(119,376

)

726,540

 

 

 

 

 

 

 

 

 

 

 

Equity

 

224,125

 

271,342

 

(151,966

)

343,501

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

1,164,544

 

$

496,743

 

$

(435,016

)

$

1,226,271

 

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Three Months Ended March 31, 2012

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

Guarantor

 

Adjustments/

 

 

 

 

 

Issuer

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

77,748

 

$

31,572

 

$

(251

)

$

109,069

 

Costs and expenses

 

59,463

 

23,062

 

(251

)

82,274

 

Operating income (loss)

 

18,285

 

8,510

 

 

26,795

 

Other income (expense)

 

(16,686

)

1,914

 

 

(14,772

)

Equity in earnings of subsidiaries

 

6,776

 

 

(6,776

)

 

Income tax (expense) benefit

 

(596

)

(3,648

)

 

(4,244

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

7,779

 

$

6,776

 

$

(6,776

)

$

7,779

 

 

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CLAYTON WILLIAMS ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Three Months Ended March 31, 2011

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

Guarantor

 

Adjustments/

 

 

 

 

 

Issuer

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

61,971

 

$

47,428

 

$

(226

)

$

109,173

 

Costs and expenses

 

44,256

 

21,107

 

(226

)

65,137

 

Operating income (loss)

 

17,715

 

26,321

 

 

44,036

 

Other income (expense)

 

(57,922

)

1,658

 

 

(56,264

)

Equity in earnings of subsidiaries

 

18,186

 

 

(18,186

)

 

Income tax (expense) benefit

 

14,146

 

(9,793

)

 

4,353

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(7,875

)

$

18,186

 

$

(18,186

)

$

(7,875

)

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2012

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

Guarantor

 

Adjustments/

 

 

 

 

 

Issuer

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Operating activities

 

$

22,306

 

$

27,860

 

$

2,167

 

$

52,333

 

Investing activities

 

(128,737

)

(1,911

)

(2,167

)

(132,815

)

Financing activities

 

121,620

 

(26,620

)

 

95,000

 

Net increase (decrease) in cash and cash equivalents

 

15,189

 

(671

)

 

14,518

 

 

 

 

 

 

 

 

 

 

 

Cash at the beginning of the period

 

12,130

 

5,395

 

 

17,525

 

 

 

 

 

 

 

 

 

 

 

Cash at end of the period

 

$

27,319

 

$

4,724

 

$

 

$

32,043

 

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2011

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

Guarantor

 

Adjustments/

 

 

 

 

 

Issuer

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Operating activities

 

$

21,452

 

$

9,244

 

$

2,595

 

$

33,291

 

Investing activities

 

(75,872

)

16,872

 

(2,595

)

(61,595

)

Financing activities

 

58,066

 

(23,970

)

 

34,096

 

Net increase (decrease) in cash and cash equivalents

 

3,646

 

2,146

 

 

5,792

 

 

 

 

 

 

 

 

 

 

 

Cash at the beginning of the period

 

5,040

 

3,680

 

 

8,720

 

 

 

 

 

 

 

 

 

 

 

Cash at end of the period

 

$

8,686

 

$

5,826

 

$

 

$

14,512

 

 

16.                   Subsequent Events

 

We have evaluated events and transactions that occurred after the balance sheet date of March 31, 2012 and have determined that no events or transactions have occurred, other than these shown below,  that would require recognition in the consolidated financial statements or disclosures in these notes to the consolidated financial statements.

 

·                  On April 23, 2012, the aggregate commitment of the banks under our revolving credit facility was increased from $350 million to the full borrowing base of $475 million.

 

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Item 2 -          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and in our Form 10-K for the year ended December 31, 2011.  Unless the context otherwise requires, references to “CWEI” mean Clayton Williams Energy, Inc., the parent company, and references to the “Company”, “we”, “us” or “our” mean Clayton Williams Energy, Inc. and its consolidated subsidiaries.

 

Forward-Looking Statements

 

The information in this Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  All statements, other than statements of historical or current facts, that address activities, events, outcomes and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should, could or may occur in the future are forward-looking statements.  These forward-looking statements are based on management’s current expectations and belief, based on currently available information, as to the outcome and timing of future events and their effect on us.  While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate.  All statements concerning our expectations for future operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions.  Our forward-looking statements involve significant risks and uncertainties, many of which are beyond our control, and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in our Form 10-K for the year ended December 31, 2011 and in this Form 10-Q.

 

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

 

·    estimates of our oil and gas reserves;

 

·    estimates of our future oil and gas production, including estimates of any increases or decreases in production;

 

·    planned capital expenditures and the availability of capital resources to fund those expenditures;

 

·    our outlook on oil and gas prices;

 

·    our outlook on domestic and worldwide economic conditions;

 

·    our access to capital and our anticipated liquidity;

 

·    our future business strategy and other plans and objectives for future operations;

 

·    the impact of political and regulatory developments;

 

·    our assessment of counterparty risks and the ability of our counterparties to perform their future obligations;

 

·    estimates of the impact of new accounting pronouncements on earnings in future periods; and

 

·    our future financial condition or results of operations and our future revenues and expenses.

 

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, incident to the exploration for and development, production and marketing of oil and gas.  These risks include, but are not limited to:

 

·    the possibility of unsuccessful exploration and development drilling activities;

 

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·            our ability to replace and sustain production;

 

·            commodity price volatility;

 

·   &#