Clayton Williams Energy Inc. (NYSE: CWEI) announced Nov. 12 it entered into a farm-out and exploration agreement with Caza Oil and Gas Inc. (TSE: CAZ) in the Permian Basin.

The agreement covers a portion of the Midland, Texas-based Clayton Williams' 71,000 net acre resource play in Reeves County, Texas. All of the roughly 15,000 net undeveloped acres covered by this agreement are located along the western flank of Clayton Williams' acreage block. The company has drilled no horizontal Wolfcamp wells within the farm-out area.

Under the terms of the agreement, Caza, of The Woodlands, Texas, will pay 75% of the costs of the initial horizontal Wolfcamp well to earn 50% of the acreage associated with that well (either 640 or 1,280 gross acres, depending on lateral length). After the initial well, Caza will pay 100% of the costs of all other carried wells to earn 75% of the associated acreage. CWEI will pay its 25% of the cost to drill and complete all density wells drilled on previously earned acreage.

In addition to the initial well, Caza is obligated to drill and complete two additional horizontal Wolfcamp wells in the farm-out area by Dec. 31, 2015. Caza is subject to a penalty of $1.6 million per well for any obligation well not drilled. Caza must also drill a minimum of two carried wells per year in order to continue participation in the agreement beyond Dec. 31, 2015.

"We are very pleased with the terms of this strategic farm-out arrangement," stated Clayton W. Williams, Jr., president and CEO, in a statement. "We have been impressed with Caza's operating results in the Delaware Basin and look forward to a mutually beneficial exchange of knowledge through this venture. Through this drill-to-earn structure with Caza, we have effectively sold up to 75% of our interest in fringe acreage at an attractive price per acre. And more importantly, we have sharpened our focus on developing the remaining 56,000 net acres in the heart of our Reeves County position where we have effectively delineated the Wolfcamp A and are moving toward delineating the Wolfcamp C."