Clayton Williams (ticker: CWEI) and Concho Resources (ticker: CXO) each made significant announcements regarding their respective Delaware Basin positions yesterday, including an acreage swap that is “highly beneficial to both companies,” said Mel Riggs, President of CWEI, in the company’s press release.
The two exploration and production companies also announced separate, unrelated transactions in their releases, but the direct exchange between the two companies included working interest swaps involving their assorted Permian positions. Pro forma, CWEI retained its standing of 65,000 net acres but increased its working interest to 100% from 75% “throughout most of its largely continuous acreage block.”
Different Sides of the Coin
The companies may be neighboring operators in America’s most prolific oil basin, but the two are headed in very different directions. Concho Resources is one of the stronger names in the oil and gas industry, backed by solid credit ratings (rated just below investment scale by Moody’s and S&P, despite the downturn) and low debt (40% debt to market cap percentage). Of the 37 analysts covering CXO, 28 recommend a “Buy” rating while the remaining nine recommend a “Hold.”
Clayton Williams, meanwhile, announced a review of strategic alternatives in October 2015, with “the sale of certain of the company’s core assets, a recapitalization transaction or a merger” all listed as possible outcomes. Two weeks later, CWEI reported long-term debt of $750 million, while revenues for the first nine months of 2015 were cumulatively below $200 million overall.
CWEI has made some deals to shore up its balance sheet, including a $21.8 million divesture earlier this week and a $22.1 million sale in June 2015.
Raymond James: Not the Deal We Were Looking For
The majority of analysts were somewhat bearish on the CXO/CWEI announcement – not because of the transaction itself, but because the market speculated Concho as a potential outright buyer of Clayton Williams. Raymond James Equity Research jumped right to the point in an update on January 20 in a note issued to clients entitled “Not the Deal We Were Looking For.” “Clearly management is attempting to walk a fine line between raising cash and retaining the asset base,” the note said. “As a result of this deal, it is reasonable to conclude that CXO is not interested in CWEI.”
Regardless, firms like Seaport Global Securities believe a “transformative transaction is still required” since Seaport projects CWEI’s pro forma full year 2016 net debt to exceed $800 million. Wunderlich believes CWEI is working on a non-core acreage sale in Upton County in the Midland Basin and could see other non-core sales.
CWEI: Short Term
Clayton Williams provided itself with a longer track for negotiations and some near-term liquidity by implementing hedges for H1’16 (its first contract of the year), which would generate roughly $7 million in that time frame (assuming current strip pricing). The counterparty holds an option to extend the hedges through the end of 2016. Until then, speculation is rampant that CWEI is ripe with inquiries, and its Delaware Basin acreage is certainly an admirable asset.
Wunderlich Securities says there is “appetite” for the Delaware Basin, citing two recent deals from Concho that valued acreage anywhere from $12,000 to $15,000 per acre. “These transactions show that there is still healthy interest in the Delaware Basin and that the price tags have not changed much despite a sub-$30/bbl environment,” the firm says. “We believe that some sort of deal will still get done.”
CWEI provided an additional news release today, confirming its strategic review is “ongoing” and the moves yesterday are no guarantees of any transactions in the future.