TEXT-Moody's may cut Clayton Williams

(The following statement was released by the rating agency)

Approximately $225 million of rated debt securities affected

Dec 23 - Moody's Investors Service placed Clayton Williams Energy, Inc.'s (CWEI) ratings (B2 Corporate Family Rating, B2 Probability of Default Rating, and B3 rated senior unsecured notes) under review for possible downgrade. The review for possible downgrade reflects Moody's heightened concerns regarding CWEI's high cost structure, likely continued weak leveraged full-cycle ratio, and a near-term capital budget that is expected to be primarily focused on higher risk exploration with an expected substantially reduced development drilling program. Given the current commodity price environment and the higher costs associated with the company's long-life oil reserves in the Permian Basin and Austin Chalk, CWEI has substantially curtailed its development drilling program. While service costs will likely moderate over the near-term, there remains uncertainty as to whether costs will diminish sufficiently to justify resumption of development drilling given the cost structure in the company's current portfolio of properties. As a result, the company has turned to an exploration program to identify lower cost properties. However, Moody's notes that this entails a considerable amount of risk, particularly given the company's small size and financial leverage profile. The review also reflects Moody's concerns about the CWEI's financial leverage profile in relation to its year-end 2008 reserve and future production levels. Moody's recognizes that during 2008 CWEI reduced leverage through asset sales in April of 2008 and the liquidation of its commodity derivative contracts in December of 2008. However, Moody's believes that CWEI faces the risk of negative reserve revisions given the high cost structure of certain of its properties, which could negatively impact its financial leverage profile. In addition, the company's debt to production (the generator of all its cash flows) could be negatively impacted if the company were to continue to curtail its development drilling program. Furthermore, with the unwinding of its commodity derivative contracts, CWEI currently does not have any of its production hedged in 2009, further limiting visibility around its cash flow generation. CWEI's liquidity profile currently appears to be adequate, with Moody's expectation that the company will maintain spending within internally generated cash flows in 2009, its borrowing base recently affirmed at $250 million in November of 2008, and sufficient headroom under its financial covenants. CWEI had $123 million outstanding under its credit facility and $34 million of cash as of September 2008. However, Moody's notes that significantly reduced credit capacity stemming from low commodity prices and/or significant negative reserve revisions could result in a borrowing base reduction and trigger tightness in the company's liquidity, which could result in Moody's revisiting the SGL-3 Speculative Grade Liquidity rating. Moody' expects to resolve the review following the evaluation of CWEI's 2008 year-end results, including its FAS 69 data, cost structure, and reserve based leverage metrics. We will also evaluate CWEI's 2009 capital expenditure budget, projected sequential production trends, future operating strategy, and its liquidity profile. The last rating action on CWEI was on November 30, 2007, at which time the rating outlook was changed to negative from stable. The principal methodology used in rating CWEI was Moody's Global Independent Exploration and Production Industry rating methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating CWEI can also be found in the Credit Policy & Methodologies directory. Clayton Williams Energy, Inc. is an independent oil and gas exploration and production company headquartered in Midland, Texas.