For those of you over 40 years of age, you might recall Clayton "Claytie" Williams run for Texas governor in 1990. He pretty much sealed his fate when he made a remark on the campagin trail (he ran against Ann Richards) to the effect that if rape was inevitible, you might as well sit back and enjoy it. Given this example of brilliance (there are many more foot-in-mouth moments) you might be surprised to learn that I think CWEI shares are a buy. If you are sanguine about oil prices (or really just that they stay about where they are) then CWEI might make for an interesting addition to your energy invesments. Two items to note: The stock trades sloppily...very thin. As of today, CWEI is about 2/3 oil and 1/3 natural gas / liquids.
CWEI has an oil focused strategy, with substantial (360k + acres net) assets in the Delaware Basin (Wolfbone) and Giddings area of Texas. This Giddings area acreage is legacy Austin Chalk from decades back, but of their 170k net + acres here, 100k are believed to be in the oil window of the Eagle Ford. In fact, nearly 40% of their '13 budget is to drill in the Eagle Ford. CWEI also owns and operate 14 drilling rigs. The company estimates daily production for '13 of 11,750 bbls and 3,500 boe of gas or 15,250 bbls total per day.
With a 2013 budget of approximately $229mm, estimated '13 operating cash flow of $201mm, and available liquidity of $132mm, I expect CWEI will successfully bring a JV partner in for the large drilling porfolio they have in the Wolfbone, and possibly the Eagle Ford. Further, they have announced their intention to sell some of their Wolfberry assets to pay down debt. Year end proved reserves came in at 75.4mmboe. Interestingly / amazingly the company has said it has a drilling inventory of 1,200 wells, translating to over 20 years of inventory, and $7billion in CAPEX. They KNOW that they need a partner(s). I have never made an investment based upon belief of a take over, but CWEI would make an interesting candidate to a number of larger players. Also, though healthy, Claytie is getting on in years at 81.
Valuation : One estimate we have seen of NAV values CWEI at $83 per share. We place a larger haircut on possible reserves, and our NAV comes to $74.50 per CWEI share, which also happens to be less than 3 x our estimate of 2013 cash flow per share. Pricing assumptions for this base case are $94/bbl and $3.25mmbtu.
Sensitivity : The most optimistic scenario we are comfortable sharing would be pricing of $105 and $4.50 respectively, and that gets us to an NAV of $96 per share. At $90 and $2, we get to a NAV of $48.50 per share.
We have also seen estimates of acreage value (exluding production obviously) of approximately $800mm...This is simply another data point which gets us comfortable that the downside here should be minimal unless pricing falls out of bed, or there is some sort of logistical snafu.
CWEI is a company with some (two) tremendous assets, located in reasonably close proximity, mostly of a contiguoius nature, operated by a team that has been doing business in Texas for well over half a century. There is ego at the top (there always is) and the stock has been much higher in the past. The last two years have seen the company outspend its CAPEX by approximately 2 : 1, and they "swear" they have discipline now to keep spending more in line, and to bring in a financial partner. As the Eagle Ford has been further delineated, there is much optimism about the prospects of their drilling inventory there. As mentioned / alluded to previously, while I have not invested in CWEI based upon a takeover, we fully expect that they will announce a JV partner this year, and that the discount to NAV will narrow significantly. Further, given that our low case NAV is slightly higher than the current quote, and the Delaware Basin and Eagle Ford acreage have great value, we fully believe you have reasonable downside protection short of some calamatous pricing or operational scenario.