You really have to hand it to Carrizo Oil & Gas (NASDAQ:CRZO). In 2010, management was honest enough to admit that its domestic, dry-gas focused shale strategy wasn't working. Since then Carrizo has been on a quest to transform itself into a shale oil play. It most certainly has done so. Carrizo sold off most of its core shale gas assets in North Texas, and has actively acquired assets in liquids-rich shales such as the Niobrara, the Utica, and most of all the Eagle Ford. 

Crzo Production Composition

CRZO Investor Relations

Since 2012 Carrizo has really grown its oil production, with the Eagle Ford driving the trend. This is important because oil currently carries higher returns and margins than does dry gas.

Last year Carrizo wowed investors by increasing its oil production target from 30% to 45%, and finished the year with oil production 48% higher than in 2012. 

Three or four years ago, many believed that shale oil production would begin decelerating by now. But if Carrizo's guidance is any indication, that deceleration has not come yet. Management has set an ambitious goal of 50% oil production growth in 2014. Here is how management plans on achieving this.

Eagle Ford focus
Quite a few of today's fast-growing E&P names got their start in the Eagle Ford shale. Take EOG Resources (NYSE:EOG), for example, which continues to grow its production in the high 20% range this year. Like EOG, much of Carrizo's operations are in the Eagle Ford.

Crzo Capex Pie

Source: Carrizo investor presentation

As we can see here, a majority of Carrizo's capital spending in 2014 will be funneled to one of the premier, mostly explored shale plays in the US; the Eagle Ford.

This year Carrizo will dedicate three rigs to the Eagle Ford, but management has commented that it could commit up to six rigs and drill straight through until 2019. As of now, Carrizo has drilled only 96 wells but has a probable inventory of 576 more wells which it can drill. 

The Utica
Carrizo's liquids-rich positioning in the Utica has thus far made this play a success, with early well economics comparable to those in the Eagle Ford. For example, at $85 oil, Carrizo's Utica wells are yielding a very nice 62% return. In 2014, Carrizo will drill and complete nine wells in the Utica.

Efficiencies and downspacing
When shale drilling began last decade, operations and equipment were more geared toward basin drilling, and hence were very inefficient in the shale. Many questioned how long shale drilling could go on in such a manner.

For their part, Carrizo's shale operations are unmistakably improving. Two new generations of rigs have resulted in cost reduction and increased footage drilled. More lateral stages are being pumped per day, and doing so costs less than it did just a couple years ago.

Crzo Potential Downspacer

Source: Carrizo Investor Presentation

Well downspacing also looks to add another 300 wells to Carrizo's probable inventory. I believe that additional upside could be realized as the Utica is developed. 

Bottom line
Carrizo's production growth is driven by the Eagle Ford. However, the Utica is also providing some good economics and later potential for additional production growth. Finally, efficiencies are improving profitability and continuing to add potential inventory. Although Carrizo's stock price has run up from 2012 levels, I believe the market is undervaluing the company's probable reserves. Therefore, Carrizo is still a good buy right here. 


Casey Hoerth has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.