In the short term, anything could happen in the oil markets. As Reuters columnist John Kemp points out, the crude slump at this point has become self-reinforcing as hedge funds continue to liquidate long positions, some producers rush to hedge production and momentum players pile on to bet on further declines.

Even after Friday’s rebound in futures trading, it would only take an 8% decline to have the West Texas Intermediate trade below $70. But could it stay at, say, $69.95 for long? Given what we know about offshore and shale exploration costs, that seems unlikely barring a global recession that’s not in the cards with the US economy generating more and more momentum.

And that means we probably won’t get many better opportunities to bargain-hunt some of the smaller drilling stocks beaten down severely since August. The time to buy safe stocks was earlier in the year, and on that score it’s gratifying to note that ConocoPhilips (NYSE: COP) has still returned 11% since we recommended it in February, and Energy Transfer Equity (NYSE: ETE) 40% since March.

They makes up for Emerald Oil (NYSE: EOX), which is down 57% from our entry price and 68% since the end of August, unjustly and temporarily, we believe.

We definitely want more Emeralds in our portfolio at this point — stocks that have suffered such a drubbing relative to their fundamentals that the risk-reward proposition is now skewed dramatically in the risk taker’s favor.

And we think we’ve found another such in Clayton Williams Energy (NYSE: CWEI).

Clayton Williams, headquartered in the unofficial Permian Basin capital of Midland, Texas, is named after its founder, the 83-year-old oilman and self-described “good ole boy” who nearly became Texas governor in 1990. He led in the polls but then likened rain to rape, refused to shake his opponent’s hand before a debate and was soon returned to the forgiving bosom of the oil patch, where money does most of the talking.

Since then, Clayton Williams’ money and wildcatter smarts talked and worked their way into 51% (including children’s trusts) of what is now “only” a $1 billion public company, which is admittedly down from $1.7 billion four months month ago. 

Clayton Williams presentation

Clayton Williams Energy has legacy wells in the Permian as well as the Austin Chalk formation within the Giddings area east of Austin, Texas; together these recently accounted for nearly half of the company’s daily output. The focus of current drilling is on the Eagle Ford shale beneath the company’s 170,000 net acres in Giddings, as well as 71,000 net acres in the Wolfbone play of the southern Delaware basin within the Permian. The 2014 drilling budget was split almost evenly between the two.

Both areas offer an estimated internal rate of return of 30% with crude at $80 per barrel, but with very different challenges. The Giddings position presents few drilling problems, but the Eagle Ford reserves within its large footprint must still be delineated and proved up. The Wolfbone is more geologically complex and tricky to drill but potentially also more rewarding given a 3,500-foot oil stack in multiple formations starting at 8,000 feet below surface.

Using six of the drilling rigs it owns, Clayton Williams has delivered output growth of 9% year-over-year so far in 2014, and a 15% gain in the more lucrative crude production, numbers that would have looked even better without the large and slowly depleting legacy base.

But this base is also the gravy from long-ago investments that is financing new drilling at this point. Cash flow from operations totaled $87 million during the most recent quarter, leaving CWEI on track for approximately $300 million this year. That’s only $100 million shy of the company’s capital spending balance, and the difference has been made up with non-core asset sales.

That also implies a cash flow multiple of 5 or so based on the company’s enterprise value (market cap plus net debt.) And that’s not bad for a company planning to grow its output 20% next year, while investing almost nothing in very slowly declining wells delivering half of its revenue. It’s better than not bad based on the company’s extensive acreage, one reason CWEI has been brought up in the past as a potential acquisition target.

Whether this ever goes beyond speculation depends entirely on the octogenarian founder and controlling shareholder for now, and Clayton Williams appears to still be having fun running his company and fielding conference call questions. But he’s not getting any younger, and a sale in exchange for stock before he dies would give his heirs a stepped up basis.

Clayton Williams presentation

One note of caution is that the company is not hedged beyond this quarter, when it has locked in roughly half its recent quarterly crude output at nearly $97/bbl. But we’re comfortable that crude will not spend long enough far enough below $80/bbl to meaningfully alter those 30% rates of return, which could improve if prices go higher and as the company continues to improve its drilling efficiency. Lifting costs were recently down 9% year-over-year.

Over the longer term, Clayton Williams is a great play on undeveloped acreage in high-quality plays strategically located near the Gulf Coast and with good access to midstream infrastructure. The balance sheet is solid and the legacy cash flow provides a nice cushion.

We’re adding the stock to our Aggressive Portfolio. Buy CWEI below $100.