December 30, 2011 - 6:31pm EST by
2011 2012
Price: 76.00 EPS $0.00 $0.00
Shares Out. (in M): 12 P/E 0.0x 0.0x
Market Cap (in $M): 923 P/FCF 0.0x 0.0x
Net Debt (in $M): 478 EBIT 0 0
TEV ($): 1,401 TEV/EBIT 0.0x 0.0x

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Clayton Williams is a small-cap energy company which has a number of ways to win from an investors perspective.
Located primarily in Texas's Permian and Gulf Coast Basins the company has largely avoided the rush into shales and stuck with conventional oil drilling in some of the oldest and most reliable basins in the country...  However, as application of horizontal drilling and artificial stimulation technology has evolved, even in these mature conventional basins, operators are finding ways to economically increase production through the creation of artifical permeability...
Clayton Williams has amassed a large (722,000 acre) land base within the Permian Basin and Giddings Area (located NE of the core of the Eagleford in SE Texas).
CWEI is 50.5% owned by Clayton Williams Jr, age 80.  In short, we think are a number of reasons why this business may be sold in the near term, after the unfortunate passing of the CFO last winter and due to the age of the majority shareholder.  Furthermore it would strike us as a perfect time to monetize the business as Clayton has found himself in areas which are of high interest to E&Ps trying to get more "oily" or to a company who thinks they could get better value for the large land portfolio (Floyd Wilson, ex-CEO of Petrohawk, now with RAM Energy, comes to mind)
To think about what a potential acquirer might get as well as the value proposition of an investment at the current stock price, its a relatively simple exercise.
The Proved Reserves, we think are worth ~$1bn alone at $100 oil.  This is the value that one would realize if you simply drilled up the remaining Proved Locations and ran-off the business.  This value is arrived at by examining the Standardized Measure from the 2010 10k of $685... calculated at ~$85 oil and ~$3 gas... we add the sum of (Cash Flow From Ops minus Capex) for the 1st 9 months of 2011 = $107mn (this decreases the PV-10 for production realized and assumes capex invested accretes to the PV-10 at a 0% return, to be conservative/given the unknowns).  Finally adjusting the $685 from $85-->$100 oil, adds ~$225mn of value (25mn bbls of PDPs x $15 change = gross change in cash flows x .6 discounting factor (per the Standardized Measure) = 225).  We ignore adjusting the PUDs to $100 oil for conservatism/again given the unknows.
So Current PDP Value = 685+225+107 = ~$1bn.
What you're left with through the EV is you're paying $400mn for exposure to a total of 722,000 acres, of which 186,000 are "developed", and the remaining undeveloped.  Also note 154,000 acres expire this year so I would take those out in case they can't be released. 
The most valuable of this undeveloped acreage would be the 156,000 in the Permian Basin, scattered across a number of plays which are gaining attention currently including the Southern Wolfcamp extension, the Delaware Basin "Wolfbone"/Bone Springs, as well as the legacy Wolfberry and Yeso plays.  Petrohawk, pre-BHP acquisition, had assembled a similar sized (and scattered) acreage position for around 3200/acre, which alone would explain the entire $400mn we're paying for this position.
The other major area of opportunity is the Giddings area (168,000 net acres) prospective for the Eagleford Shale/"Eaglebine"/"Woodbine".  This area has more geological risk but CHK, APA, and a number of smaller companies have been acquiring acreage and drilling horiziontal wells trying to piece together an oil play.  Its an oily region, which needs a completion technique to economically extract the oil.  In a private deal, a company named Woodbine Acquisition Corp, reportedly paid >15,000/acre for a chunk of land in the neighborhood... Again, its a little early to speculate on well results/land value but it would appear this is certainly not goat pasture and would have value to someone.
In summary, Clayton Williams is an attractively-priced, somewhat under-the-radar E&P company with assets that are attractive on a number of levels, and a number of reasons why a sale of the company might make sense in the near-term.  To the extent one were bullish on oil, this would seem like an interesting way to gain exposure.  Otherwise, the oil risk could likely be hedged with a basket of other Permian players (CXO, AREX, PXD, etc).


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