Private Equity Firm Lends $350 Million to Struggling US Oil Producer

In the first publicly reported transaction of its kind, independent energy producer Clayton Williams Energy Inc. (NYSE: CWEI) announced Tuesday that it has closed a $350 million term loan transaction with private equity firm Ares Management L.P. (NYSE: ARES). The oil producer also announced recent hedging transactions for a portion of its expected production in 2016 and 2017.

Under the terms of the agreement with Ares, the company issued warrants to purchase 2.25 million shares of common stock (18.5% of currently outstanding shares) at $22 a share. Clayton Williams has about 12.17 million shares outstanding. Ares also gets to appoint two directors to the company’s board.

That’s a steep price, but the oil company does not have many (any?) other options. Banks that have come under more regulatory pressure to maintain larger cash reserves to cover potential losses on energy lending are not about to make new loans. And when the banks review credit lines, cuts of 15% to 20% in borrowing capability are possible, according to a report from Reuters.

Once Clayton Williams pays off its existing revolver debt of around $160 million, the lender commitment will drop from a prior line of credit of $450 million to $100 million. Reuters reported that Clayton Williams will pay 12.5% interest on the Ares loan, a nosebleed level compared with an interest rate of around 3.1% on the $100 million revolving credit line.
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The company also said it would file its 2015 Form 10-K annual report late as a result of the new financing deal. It plans to file the report by March 30.

Finally, like other energy companies taking advantage of the recent uptick in oil prices, Clayton Williams has now hedged about 1.6 million barrels of production over the next 18 months and offered a counter-party an option to extend a swap agreement for 739,000 barrels into the third and fourth quarters of this year. Last week the company forecast oil production of 8,200 to 8,600 barrels per day in 2016, around 3 million barrels for the year.

Shares of Clayton Williams jumped as high as $11.40 Wednesday morning, up about 6.6%, and traded at around $10.87 in the noon hour.