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Clayton Williams Energy Inc. (NYSE: CWEI) said Feb. 26 it will suspend drilling in the Eagle Ford Shale and Delaware Basin until well costs slacken or oil prices move back up.
Company executives said production could fall by up to 10%.
Clayton Williams’ decision is similar to other companies, such as Magnum Hunter Resources Corp. (NYSE: MHR), that have stopped or slowed drilling until service costs fall or prices rise.
Mel Riggs, COO, noted that drilling in the core of fields is self-defeating.
“The logic doesn’t hold up for us that you drill your best areas at the lowest prices,” Riggs said.
The company, which has already cut general and administrative expenses by 30% with layoffs and cutting expenses, is slashing its 2015 capex 73% compared with 2014.
Riggs paraphrased Warren Buffett in saying that the company had made a preventable mistake.
“We have an unforced error in that we did not have hedges coming into 2015,” he said. “That has pushed us into somewhat of a defensive posture.”
The lack of oil hedge puts stress on the balance sheet.
“At these product prices it’s hard to see how you could make money,” Riggs said, adding that in time he expects dramatic cost reductions, such as Eagle Ford well expenses falling to $4 million from $6 million.
Clayton Williams, president and CEO, likened the company’s situation to that of the battle of Dunkirk, in which the Nazis cornered British and French troops who were evacuated by military and civilian watercraft.
“Every boat that was able to be manned got the troops … from France to fight another day,” Williams said. “We've found that we want to be here and fight another day and we want to be prepared for what we’re doing.”
The company’s fourth-quarter 2014 financials missed analyst estimates and consensus, driven by lower than expected oil production and higher than expected production expenses.
Clayton Williams received relief from lenders under its revolving credit through the second quarter of 2016, said Andrew Smith, analyst Global Hunter Securities.
Clayton Williams’ announced 2015 production guidance is 14.1-14.7 thousand barrels of oil equivalent per day down 8-10% from 2014.
Its 2015 capex budget was scaled down to $107 million, down about 75% from 2015, including drilling and completion costs of $77 million. The company’s preliminary guidance was $270-400 million based on a four-rig program or six-rig program.
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