Below the Surface at Carrizo Oil & Gas

With the recent run-up in Carrizo Oil & Gas (NASDAQ: CRZO  ) (NASDAQ: CRZO  ) (NASDAQ: CRZO  ) , you are probably wondering if the stock has any room for future gains. Balancing long-term potential and the risk of losing 100% in gains can be a difficult task.

The company is a small exploration firm focused on the production of oil in the Eagle Ford Shale, Niobrara Shale, and natural gas in the Marcellus Shale. In addition, it recently completed the first well in the Utica Shale.

The more you research the stock, the more potential you'll find hiding the below the surface of its financials. Carrizo could just be getting started; I'm sure you remember Kodiak Oil & Gas (NYSE: KOG  ) (NYSE: KOG  ) (NYSE: KOG  ) and Oasis Petroleum (NYSE: OAS  ) (NYSE: OAS  ) (NYSE: OAS  ) , both of which just saw multi-year gains.

Wheeling and dealing
Until recently, Carrizo struggled due to management constantly buying and selling properties. Investors had a difficult time understanding the valuation proposition, with assets moving on and off the balance sheet. In addition, it becomes difficult to track organic growth.

Even recently, the company sold the remaining assets in the Barnett Shale and unloaded some non-core assets in East Texas. At the same time, the company added acreage during the second quarter in the Eagle Ford, and is looking for bargains in the Utica Shale.

The assets sold in September involved Barnett Shale proved reserves of 303.5 Bcf and net production of 44 MMcf/d. The East Texas assets had proved reserves of 1 million barrels, and current net production of about 160 Bbl/d of oil. The transaction was effective July 1, 2013 and had a total consideration of $268 million that will be used to repay debt and fund capital expenditures.

Hidden potential
On top of exceptionally strong oil production guidance for the rest of 2013, the company has a couple of substantially hidden catalysts. The most glaring is the Eagle Ford wells waiting on completion. At the end of the second quarter, Carrizo had 17.5 net wells awaiting completion. The total is nearly double the 9.8 net wells, completed during the second quarter. The most incredible part is that these wells equate to 6,600 Bbls/d of net oil production for a company that only generated 11,747 Bbls/d during the quarter.

While not as meaningful considering the price of natural gas, Carrizo has shut in production in the Marcellus Shale that would nearly double current production. During the second quarter, natural gas production from the Marcellus Shale was 33.9 MMcf/d. The company estimates that net production capacity would reach 60 MMcf/d based on wells currently drilled, and completed in the Marcellus region.

Sustainable gains
After the large gain, some question whether the gains are sustainable. Several companies, including Kodiak Oil & Gas and Oasis Petroleum, were able to generate years of strong production growth. Once an oil producer gets momentum, it can spend the next several years increasing that production. Each additional well adds to existing production even with declining production rates at existing wells.

Kodiak is an interesting example, as total production is similar to that of Carrizo. The company expects production to double this year to average 30,000 Boe/d, up from 14,400 Boe/d in 2012. That 2012 number was up 270% from 2011 totals of 3,900 Boe/d. Investors have been attracted to that growth rate, sending Kodiak to an enterprise value of roughly double that of Carrizo.

Oasis Petroleum is an example of an exploration company that has consistently increased production by 100% a year since 2010. The company expects to average roughly 35,000 Boe/d in 2013 after only producing 5,200 Boe/d in 2010. Oasis has ridden this production growth to an enterprise value of over $6 billion. Could Carrizo follow suit?

Bottom line
The recent performance of both Kodiak and Oasis Petroleum is a decent indicator that Carrizo's production growth should be sustainable for years, especially considering Carrizo already has inventory lined up for sharp production gains in 2014. Carrizo Oil & Gas should be one to watch.

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  • Report this Comment On November 04, 2013, at 4:42 PM, jmtocci wrote:

    Ouch - Low cash and high debt - you should have and equity raise coming to fund the "growth".

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