Editor's note: The EV/Proved Reserves figures were incorrectly calculated in the original version of this story. They have since been updated to reflect correct reserves. We regret the error.

Carrizo Oil & Gas' (NASDAQ:CRZO) valuation relative to its peers stands out like a red dress at a funeral:

Company

CAPS Rating (out of 5)

EV / Proved Reserves

Carrizo Oil & Gas

*

$6.46 / mcfe

Chesapeake Energy (NYSE:CHK)

*****

$2.92 / mcfe

Pogo Producing (NYSE:PPP)

**

$2.44 / mcfe

Stone Energy (NYSE:SGY)

**

$2.75 / mcfe

XTO Energy (NYSE:XTO)

*****

$2.91 / mcfe

The company has delivered some monster returns to investors over the past couple of years, though, so maybe there's something more to this story.

Taking money, making money
I first encountered Carrizo when I saw Fool colleague and CAPS rock star Seth Jayson slaying the stock for its meager cash pile and steadily mounting debt. I didn't dig any deeper, and rode his coattails to the detriment of my CAPS score.

It's true that Carrizo keeps raising debt and equity to finance its exploration and development activities. In its defense, however, the company has had a lot of success through the drill bit. In recent years, exploratory drilling has been largely responsible for eye-popping reserve replacement ratios north of 500%. This makes it pretty easy to raise more capital.

Last year, for example, Carrizo booked a 39% gain in proved reserves, which ought to drive cash flows sustainably higher for years. In my view, this above-average growth profile largely explains the elevated valuation. The stock has been a nine-bagger since early 2003, and investors clearly expect the hits to keep on coming.

A Mega gamble?
A wild card for Carrizo is its 28% working interest in MegaMata, a Petrobras (NYSE:PBR)-led Lower Tertiary play on the Louisiana coast. Halliburton (NYSE:HAL) has been hired to aid in the flow test of this first well, the results of which should be released within a few weeks.

Carrizo has estimated the resource potential of MegaMata at 1 trillion cubic feet equivalent (1 tcfe). If that turns out to be roughly accurate, the company may double its proved reserves in pretty short order. At first, I believed the stock's valuation implied that a positive result is something of a fait accompli. After all, the stock is priced at roughly double the value of its competitors on a reserve basis.

I contacted one analyst with an "outperform" rating on Carrizo regarding his view on the MegaMata upside, expecting to hear a lofty projection. Message-board chatter has cited analyst estimates of up to four times management's 1 tcfe figure. In fact, this firm is attributing no value to the play in its estimate of next year's earnings. MegaMata does not make or break the company.

This caution on the part of Carrizo's boosters is reassuring, and I'm forced to conclude that this hype hunt has not turned up a clear culprit. Carrizo is a little pricier than Chesapeake after figuring in growth estimates, but not to an irrational degree.

Related Foolishness:

Chesapeake Energy is a Motley Fool Inside Value selection. To find out what other natural gas E&P the newsletter is recommending to readers right now, check out a 30-day free trial.

Fool contributor Toby Shute points out that while snipe hunting is a fool's errand, hype hunting is a Fool's errand. He doesn't own shares in any company mentioned. The Motley Fool's disclosure policy looks good in red.