What happened

Shares of Carrizo Oil & Gas (NASDAQ:CRZO) plunged in December, falling 34% for the month, according to data provided by S&P Global Market Intelligence. Driving the oil company's sell-off was another big drop in the price of crude oil and an analyst downgrade.

So what

Oil prices continued their steep descent last month, falling another 9%. That put crude down 19% for the year and 40% off its peak in October. The main weight was worries that oil supplies would rise faster than demand, which would cause crude to pile up in storage.

Pump jack backlit by the setting sun after the rain.

Image source: Getty Images.

The sell-off in the oil market hit Carrizo Oil & Gas hard because its balance sheet isn't as strong as that of most rivals. While the company has pushed its leverage ratio down from a worrisome level of more than 4.0 times in early 2017 to a more comfortable sub-2.0 times by the third quarter of 2018 thanks to asset sales and higher oil prices, that's still well above the 1.0- to 1.5-times comfort zone of most rivals. 

The company had hoped to use the cash flows produced at higher oil prices to continue reducing its debt level as well as funding new wells. However, with crude crashing, the company's leverage will likely rise, which will hinder its ability to finance growth. The impact lower oil prices will have on its operations is the reason analysts from J.P. Morgan downgraded Carrizo's stock last month from neutral to underweight.

Now what

Carrizo Oil & Gas thought that it could ride the cash flows from higher oil prices to expand its production at a 10% to 20% compound annual growth rate while also reducing leverage and repurchasing stock. However, with crude crashing, the company's finances will tighten significantly, impacting its ability to create value for investors. That's why they should avoid oil stocks like Carrizo and instead consider those better positioned to handle lower oil prices.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.