Clayton Williams Energy, Inc.

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Clayton Williams Energy, Inc.

ASSET CONSOLIDATION: 1991

CLAYTON WILLIAMS ENERGY IN THE 21ST CENTURY

ORIGINS

Clayton Williams Energy owes its existence to its eponymous founder, Clayton Wheat Williams, Jr., a fourth-generation Texan steeped in the traditions of oil and gas exploration. The “West Texas wildcatter,” as industry publications often referred to Williams, delved into numerous ventures during a remarkably prolific career, displaying an ecumenical drive in the business world reminiscent of his father, Clayton Wheat Williams, Sr. Clayton, Sr., born in an officers’ building within the abandoned Fort Stockton in Fort Stockton, Texas, laid multidirectional footsteps for his son to follow, traveling down a variety of paths during his business career. He left Texas A&M University in 1915 with a degree in electrical engineering and proceeded to distinguish himself as an engineer, military officer, geologist, oilman, rancher, civic leader, historian, and philanthropist, pursuing business interests with tireless, boundless enthusiasm. After his son was born in 1935, Clayton, Sr., divided his time between drilling for oil and running his cattle ranch in Fort Stockton, where Clayton, Jr., grew up as the son of Fort Stockton’s most prominent citizen.

Clayton, Jr., like his father, threw himself into a variety of business ventures, becoming the west Texas wildcatter who presided over a formidable business

empire that included 26 different companies founded by the Fort Stockton native. Clayton, Jr., known as “Claytie” to his friends, attended his father’s alma mater, Texas A&M, leaving in 1954 with a degree in animal husbandry. After college, he spent two years in the U.S. Army before returning to Texas and following in the footsteps of his father, gaining employment in the oil fields of west Texas. Williams worked as lease broker with petroleum companies that held interests in the exploration and production of natural gas, as well as the transportation and extraction of natural gas and natural gas liquids. Once he began making a name for himself out of the shadow of his father, Williams delved into the discovery and development of oil and gas properties in numerous fields in Texas, New Mexico, and parts of the southeastern United States. He also displayed the same desire to jump into a variety of businesses that his father had. Williams diversified his business interests, investing his time and money into farming, ranching, real estate, and banking. At one point, he entered the telecommunications fray, forming long-distance company Clay-Desta, which drew its name from a combination of his given name and his wife’s given name, Modesta.

Williams devoted himself to a bevy of business pursuits while presiding at his 43-square-mile “Happy Cove Ranch” in Texas, but he primarily figured as an oil and gas executive. In the course of his career, with the numbers growing with each passing month, Williams drilled more than 1,000 wells and took part in the effort to drill an additional 2,400 wells. His interests in the oil and gas market comprised a slew of oil and gas and gas gathering properties owned and operated in a decentralized manner, which, in aggregate, vaulted Williams into Forbes magazine’s list of the 400 wealthiest Americans by the early 1980s. Clayton Williams Energy was created to give Williams’s oil and gas assets cohesion, a company formed to consolidate nearly 40 years of Williams’s activity in the sector into a single entity.

Before Williams gathered his assets into the company that would carry his name, he tried his hand at politics, launching a campaign that became notorious for one blunder in particular. The gubernatorial race in Texas in 1990 pitted Williams as the Republican contender against Democratic State Treasurer Ann Richards. Williams spent upward of $8 million of his own money in a race remembered for the personal attacks lodged by each candidate and for offensive remarks made by Williams. At a Dallas lunch event, Williams refused to shake Richards’ hand, a slight greeted with disdain in a state that prided itself on chivalry. In another incident, Williams told a reporter that before he was married he used to cross the border into Mexico to frequent brothels, describing his behavior as part of the fun of growing up in Texas. Williams made other gaffes that drew attention to his campaign for the wrong reasons, but nothing compared to his remarks in March 1990 when reporters gathered at his ranch for a cattle-roping exhibition. Rain delayed the event, and in effort to entertain reporters, Williams, with television cameras recording the moment, said, “Well, bad weather is like rape; if it’s inevitable, you might as well just relax and enjoy it,” as reported in the November 4, 1990, edition of the Sunday Times. The comment unleashed a storm of outrage whose intensity only increased when an Austin, Texas, woman testified one week before the election that her attacker had quoted Williams while raping her. Williams lost the race to Richards and returned to his business endeavors, making the formation of Clayton Williams Energy the first item on his agenda.

ASSET CONSOLIDATION: 1991

Williams was 60 years old when he consolidated his assets into Clayton Williams Energy. He assumed the duties of president, chief executive officer, and chairman of the new company in September 1991, presiding over assets that had generated $47 million in revenue in 1990. The assets, which constituted Clayton Williams Energy’s predecessor companies, were the product of Williams’s acquisitions and investments over the span of decades, beginning with his first successful oil well in 1959. Williams began concentrating his exploration and drilling activity in the Cretaceous Trend in 1988, where the majority of Clayton Williams Energy’s activity was centered in the 1990s. The Trend extended from south Texas through east Texas, Louisiana, and other southern states, a region that contained the Austin Chalk, Buda, and Georgetown formations. Clayton Williams Energy, upon its formation, touted itself as one of the leaders in horizontal drilling in the Trend, concentrating the bulk of its activity in the Giddings Fields, part of the Austin Chalk formation.

KEY DATES

1991:: Clayton Williams Energy is incorporated.
1993:: The company completes its initial public offering of stock.
2004:: The acquisition of Southwest Royalties Inc. increases reserves by 150 percent.
2006:: Net income reaches $17.7 million.

The other focus of operations in the years immediately preceding the formation of Clayton Williams Energy was in the Jalamat Field, an oil and gas field located in Lea County, New Mexico, that was discovered in 1935. Williams acquired the Jalamat Field in 1988 and immediately launched a major recompletion and workover program, investing in the refurbishment of existing and temporarily abandoned wells. Between 1988 and 1991, Williams drilled 95 wells in the Trend and Jalamat Field and discovered producing properties in 91 of the wells. Williams’s success ratio led Forbes, in its November 11, 1991, issue, to refer to the oilman-rancher as “one of the most active and luckiest horizontal drillers in the country,” and it gave his new company momentum to begin its corporate life.

Williams’s success in finding producing properties, whether based on luck or skill, fueled Clayton Williams Energy’s financial growth during the 1990s. He took the company public in May 1993, when investors were given an opportunity to share in the success of the Midland-based firm, which had generated $60 million in sales and posted $1.9 million in net income the previous year. Investors were betting on Williams’s ability to avoid dry holes and find productive wells. Financial growth and profitability depended on continually assessing Clayton Williams Energy’s strategy and changing course whenever market conditions or other factors dictated finding new exploratory prospects. Accordingly, the company’s drilling profile was in flux, changing as Williams moved from field to field in search of oil- and gas-rich areas to sustain his company’s financial growth.

Williams demonstrated the nimbleness required of a successful wildcatter as the 1990s progressed. In 1997 Clayton Williams Energy started several exploratory projects aimed at reducing its dependence on drilling in the Trend, directing its resources to formations in east central Texas, southern Texas, Louisiana, and Mississippi. The major shift in emphasis become more profound in 1998, when low oil prices forced the company to suspend drilling activities in the Trend. In 1999 another dramatic change to the company’s drilling profile occurred when it sold its interests in the Jalamat Field.

CLAYTON WILLIAMS ENERGY IN THE 21ST CENTURY

Clayton Williams Energy entered the 21st century poised for growth. Historically low oil prices during the late 1990s held the company’s financial growth in check, limiting revenues in 1998 to $51 million and forcing a decline in 1999 to $43 million. Escalating oil prices during the first years of the 21st century created a far more fertile economic climate for the company, producing the most substantial financial leaps in its history. Revenues eclipsed $100 million in 2000, more than doubling in a year that saw Clayton Williams Energy establish a new core area of operation in southern Louisiana. The company focused its exploration efforts on the swamps in Plaquemines Parish situated between dry land and the Gulf of Mexico. In 2002 the company deepened its involvement in the area by purchasing all of the working interest in the Romere Pass Unit in Plaquemines Parish for $21.7 million.

As Clayton Williams Energy completed its first decade as a publicly traded company and prepared for its second, the company exhibited a more aggressive stance toward expansion. The biggest acquisition of the period occurred in mid-2004, when Williams orchestrated the acquisition of Southwest Royalties Inc. for $187.8 million, and a related limited partnership, Southwest Partners L.P., for $7 million. The two transactions added 187 billion cubic feet equivalent of proved reserves, nearly all of which were located in the Permian Basin. The deal doubled Clayton Williams Energy’s reserve life and provided substantial exploitation opportunities, contributing to an increase in revenues to $193 million in 2004. “We are very excited about this acquisition,” Williams noted in a May 24, 2004, company press release. “It increases our reserves by 150 percent, doubles our reserve life, and provides significant exploitation drilling opportunities.”

In the years ahead, Clayton Williams Energy’s drilling profile was guaranteed to change, but the company hoped its financial growth remained constant. The greatest uncertainty in regard to its future was the question of who would succeed Williams as the company’s leader. Williams turned 77 years old in 2007, wielding considerable influence over the company as its chairman, chief executive officer, and president. The end of his tenure promised to mark a major transition for the company, one that represented a potential stumbling block as the company looked to the future.

Jeffrey L. Covell

PRINCIPAL SUBSIDIARIES

Warrior Gas Co.; Clayton Williams Trading Company; Clayton Williams Venezuela, Inc.; CWEI Acquisitions, Inc.; Clayton Williams Pipeline, Inc.; CWEI Romere Pass Acquisition Corp.; Warrior Mississippi Corporation; Southwest Royalties, Inc.; CWEI Longfellow Ranch I, L.P.; CWEI South Louisiana II, L.P.; Rocky Arroyo, L.P.; CWEI West Pyle/McGonagill, L.P.; CWEI South Louisiana III, L.P.; CWEI North Louisiana, L.P.; Floyd Prospect, L.P.; Southwest Royalties, Inc. Income Fund V; Southwest Royalties, Inc. Income Fund VI; Southwest Oil and Gas Income Fund VII-A, L.P.; Southwest Royalties, Inc. Income/Drilling Program 1987-I, L.P.; Southwest Oil and Gas Income Fund VIII-A, L.P.; Southwest Royalties Institutional Income Fund VIII-B, L.P.; Southwest Combination Income/Drilling Program 1988, L.P.; Southwest Oil and Gas Income Fund IX-A, L.P.; Southwest Royalties Institutional Income Fund IX-B, L.P.; Southwest Oil & Gas Income Fund X-A, L.P.; Southwest Royalties Institutional Income Fund X-A, L.P.; Southwest Oil & Gas Income Fund X-B, L.P.; Southwest Royalties Institutional Income Fund X-B, L.P.; Southwest Oil & Gas Income Fund X-C, L.P.; Southwest Royalties Institutional Income Fund X-C, L.P.; Southwest Oil & Gas Income Fund XI-A, L.P.; Southwest Institutional Income Fund XI-A, L.P.; Southwest Developmental Drilling Fund 1990, L.P.; Southwest Developmental Drilling Fund 91-A, L.P.; Southwest Developmental Drilling Fund 92-A, L.P.; Southwest Developmental Drilling Fund 1993, L.P.; Southwest Royalties Institutional Income Fund XI-B, L.P.; Southwest Developmental Drilling Fund 1994, L.P.; Floyd Prospect II, L.P.; West Coast Energy Properties GP, LLC; West Coast Energy Properties, L.P.