Carrizo Oil & Gas Significantly Undervalued

Feb.27.13 | About: Carrizo Oil (CRZO)

Just recently, Carrizo Oil & Gas (NASDAQ:CRZO), which gets roughly 80% of revenues from oil output, put to shame quarterly estimates as it delivered a $.19 EPS beat on a $.35 basis, while revenue growth soared 92.7% year over year. This was mostly due to a huge increase in oil production, which increased 190% year over year, while oil prices remained elevated for most of the year. The company also reported record revenues of $107.5 M and 116.7 M on an adjusted basis after hedging, a 12% increase from the 3rd quarter, and a 93% increase over the fourth quarter of 2011.

  • President and CEO Chip Johnson stated in the press announcement:

"Our staff has done a remarkable job of managing both our rapid growth and our changing production mix. This quarter we exceeded the high end of guidance for both oil and gas production. We grew our EBITDA to $93.0 million for the quarter, an increase of 90% from the fourth quarter of 2011, and to $319.0 million for the year, an increase of 85% from 2011.

Undoubtedly the company's shift from gas to oil is paying off big time. But why could the company be significantly undervalued at $22/share?

Cramer Interview:

On February 26th, Chip Johnson, the CEO, was featured on Jim Cramer's Mad Money. In the interview with Cramer, Mr. Johnson highlighted undervalued reserves, excellent oil profit margins in the Eagleford, and "overblown" concerns regarding capital expenditures due to a solid business model.

  • Reserve Value:

Oil proved reserves were increased 58% from a year ago, however the market may be understating the total value of these reserves. Mr Johnson stated the current value of proved reserves are worth $1.4B, while the unproved reserves, which are mostly in the Eagle Ford, could be valued at $1.2B once proven, bringing the total up to $3.6B for these assets.

I must say it will take some time to prove the Eagleford acreage as well as plenty of money. However, if this volume of oil is proven and CRZO is still valued at $900 M, this creates for a healthy buyout candidate.

  • Eagle Ford has 75% oil profit margin:

In the interview, Jim highlighted incredible margins for its oil production in the Eagleford, which Mr Johnson explained:

"We can lease and drill the wells for about $20 to $22 per barrel, and that costs about $8 a barrel in operating costs...taxes add up to about $2 per barrel, so you're up to 30, and we're selling it for $100...right now are margins are $75 a barrel in the Eagle Ford.

In the earnings release, Mr Johnson stated:

Our EBITDA margin per Boe expanded once again to $39.08 from $36.73 last quarter and from $24.55 for the fourth quarter of 2011. Our EBITDA margin came in at 80% this quarter, even higher than the 74% reported for the fourth quarter of 2011.

These statistics are impressive, as other industries are hard pressed to create this type of profit margin.

  • Carrizo is "Taking on Less Risk":

Mr. Johnson explained that oil production is 95% hedged through 2013 at prices over $90 per barrel, providing reduced risk and almost guarantees attractive selling prices. However, he did admit CRZO is spending and drilling more cash than it is taking in, while utilizing 7.5% long term debt to help fund production. Perhaps this is why the market is undervaluing the stock. So, is this method of funding drilling operations sustainable? I feel it is for this company, since they have promising acreage, and have simplified operations while deleveraging somewhat. In the conference call, the company stated:

We almost doubled our revenue and EBITDA in the last 12 months and almost tripled our net income, while we reduced our debt to EBITDA from over 4 to close to 2.5 today. We also greatly simplified our story by exiting the Gulf Coast and the Huntington project in the North Sea.

The company also plans to keep capex under control in 2013:

We're not planning to flex our CapEx at all. We kind of zeroed in on a combination of oil production growth and reduction in debt to EBITDA. And that's where we want to be. So we might be able to reduce a little bit of CapEx by dropping our unfrac-ed inventory by the end of the year. We actually drill more net wells than we frac in the Eagle Ford this year, part of that is holding acreage, so we might be able to trim that back. Later in the year, we'll be looking at that.


I feel the actions of deleveraging, keeping capex under control, and a solid hedging program, have made the company's goals more clear for investors, while removing some risk which may have scared some away from the stock in the past. It is my opinion that if the company continues to execute, it's just a matter of time before more acreage is developed, more revenue growth is realized, and therefore either the market prices shares appropriately, or as Cramer thought, the company is acquired.

Disclosure: I am long CRZO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.