Clayton Williams Energy Downgraded To Sell

• Shares of Clayton Williams Energy, Inc. CWEI have been volatile in 2005 and are down 8 percent year-to-date.
• Roth Capital Partners’ John M White downgraded the rating on the company from Neutral to Sell, while raising the price target from $36 to $40.
• The company’s leverage is expected to decline in view of its recent equity offering, White mentioned.

Clayton Williams Energy has solid assets across the Permian Basin, the Eagle Ford play and the Austin Chalk trend. The company posted its 3Q15 production results marginally ahead of expectations.

Analyst John White noted that Clayton Williams Energy’s shares have appreciated 61 percent since August 17, when the company announced that it was exploring all options including a potential sale. The company also announced that it had engaged a financial advisor.

White believes that Clayton Williams Energy’s intention is not to sell the entire company. “If our thesis is wrong and a sale of the entire company is pursued and concluded, based on recent merger and acquisition valuation metrics and our general outlook for oil and gas prices in the near term, our estimated takeout value for CWEI is $44 per share,” White added.

The analyst expects Clayton William Energy’s production levels to decline in the near future. The company has guided to 4Q15 production levels that are 7 percent lower than the actual 3Q15 levels.

“Due to minimal free cash flow and in turn minimal capex, there were no significant drilling operations during 3Q 2015,” the Roth Capital Partners report stated.

Clayton William Energy’s shares appear overvalued in comparison to its peers especially since the company has reported three straight quarters of declining production and leverage, White pointed out.