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07 Mar 2011
Approximately $300 million of debt securities affected
New York, March 07, 2011 -- Moody's Investors Service changed Clayton Williams Energy,
Inc.'s (CWEI) outlook to positive from negative. At
the same time, Moody's assigned a Caa1 rating to CWEI's
proposed $300 million senior unsecured notes and affirmed CWEI's
B3 Corporate Family Rating and SGL-3 Speculative Grade Liquidity
Proceeds from the notes offering will be used to fund a tender offer for
CWEI's existing $225 million senior unsecured notes due 2013
and repay revolver drawings.
The positive outlook reflects the favorable oil price outlook, CWEI's
shift to a lower risk development strategy and assumes that the company
is able to continue to grow production and reserves relative to expected
increased debt levels. The ratings could be upgraded if CWEI is
successful in continuing to grow production and reserves at competitive
costs while maintaining sufficiently conservative financial leverage (production
in the 18 Mboe/d range and debt/production in the $30,000/boe
range and trending lower).
CWEI's B3 Corporate Family Rating reflects the company's oil weighted
production and reserves, high level of operating control of its
property base, and a capital budget that is primarily focused on
developmental drilling in order to increase its oil production.
The rating also reflects the company's seasoned management team,
which has operated through numerous sector cycles.
The B3 Corporate Family Rating is restrained by the company's small
scale as measured by production and reserves, projected rising costs
and the high costs associated with its property base, and the expectation
that debt will increase in 2011 as the company outspends cash flows.
Over the last couple of years, the company has transitioned from
spending a large part of its capital budget on high-impact exploration
natural gas wells to spending on relatively lower risk oil development
drilling, primarily in the Permian Basin and to a lesser extent
the Giddings Area. We view this transition as credit positive,
as CWEI's prior focus involved substantially more risk and a higher
level of capital intensity per well, particularly relative to its
small size and leveraged balance sheet. Moreover, limited
success and weakness in commodity prices resulted in a number of years
of weak capital productivity and declining reserves.
In 2010, CWEI was successful in reversing declining reserve trends
and was able to achieve pro forma growth in both production and reserves
at competitive costs. However, with the upcoming expiration
of its fixed price service contracts (expiring in mid-2011) and
generally rising service costs, we expect CWEI's cost structure
will rise in 2011. Additionally, spending to develop proved
undeveloped (PUD) reserves will also pressure costs. However,
even with rising costs, given expected high oil price realizations,
we expect CWEI will generate sound returns in 2011.
CWEI's pro forma leverage (as adjusted for operating leases) based
on debt/PD reserves and debt/production was approximately $11.70/boe
and $26,900/boe, respectively, at year-end
2010, which are indicative of the Caa and B rating categories.
While we expect that CWEI will grow production and reserves in 2011,
we also expect that debt levels will increase due to a 31% increase
in capital spending levels in 2011. Even with the benefit of rising
production and strong oil prices, Moody's expects cash flow
from operations to fall $80 to $100 million short of its
capital expenditures. The company anticipates drawing under its
revolver to fund the shortfall.
If CWEI is unable to generate significant production gains and reserves
additions from its capital spending, if leverage on production increases
above $40,000/boe, or as a result of diminished liquidity,
its ratings and/or outlook could come under pressure.
The Caa1 rating on the proposed notes reflects both the overall probability
of default of CWEI, to which Moody's assigns a Probability of Default
of B3, and a loss given default of LGD 5 (76%). The
new senior unsecured notes are rated Caa1, one notch below the B3
Corporate Family Rating, reflecting the contractual subordination
of the notes relative to the company's secured bank credit facility.
The bank credit facility is secured with substantially all of CWEI's oil
and gas properties. Both the credit facility and senior unsecured
notes are guaranteed by all of CWEI's wholly owned subsidiaries.
The principal methodologies used in this rating were Independent Exploration
and Production (E&P) Industry published in December 2008, and
Loss Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Clayton Williams Energy, Inc. is an independent oil and gas
exploration and production company headquartered in Midland, Texas.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
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Please see ratings tab on the issuer/entity page on Moodys.com
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of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's changes Clayton Williams' outlook to positive
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