Yard Sale at Clayton Williams Energy

Clayton Williams Energy reports a binding agreement to sell two new 2,000 horsepower drilling rigs and related components for total cash consideration of $22 million. Net proceeds from the sale will be used to repay bank indebtedness. Unfortunately, the proceeds will do little to improve the oil and gas operator's highly leveraged balance sheet.

CWI operates primarily in Texas, Louisiana and New Mexico, in mature areas abandoned by the majors in the 1990s. Management's aggressive appetite for exploration -- with less than stellar results in Louisiana -- has strained financial resources. Proved oil and gas reserves fell 7.9 percent to $1.18 billion in the first quarter. The implied life of these reserves is only about 8.1 years.

Led by its namesake, Clayton Williams, CWI has bored more more dry holes in the last two years [more than 15], than Clayton did in his previous forty as an independent wildcatter.

Expenses on drilling activities for the year ended 2007 exceeded cash flow by approximately $13.1 million. Expect similar overruns in fiscal 2008: Management plans to spend approximately $344.5 million on exploration activities in 2008, which is more than expected cash flow from operations.

Approximately 32 percent of funding is being allocated for borehole drilling. Most of these efforts will be focused in the Permian basin (which extends throughout southwest Texas and southeast New Mexico) and the Austin Chalk Trend (along the Texas and Louisiana border) areas of its asset base.

CWI owes $435.3 million in long-term debt, which is more than 3.1 times stockholder equity of $138.7 million -- considerably higher than debt loads at the top of the oil and gas food chain. For comparison, long-term debt-to-equity ratios at ExxonMobil and BP are 0.08 and 0.30, respectively.

Given management's appetite for ineptitude and risk, expect this wildcat driller to put more assets up for sale in coming quarters.