Hsulin Peng - Robert W. Baird
Good morning everyone. So we will get started. My name is Hsulin with Robert Baird. So the next presenting company is Carrizo. With us is Andy Agosto, he is the VP of Business Development. Thank you.
Thank you, Hsulin. (Inaudible) over that, we will start here with our strategy. Thanks for the opportunity to speak today. Obviously here is our strategy. I will hit on a number of these points in detail throughout the presentation. But starting with the first bullet, most importantly, we look back and happily say that our transition to oil is just about complete. We are now over 50% liquids production -- oil production actually, up from virtually zero, two and a half years ago. So we think we have done a tremendous job there. We have managed to do this, while efficiently managing our budget and CapEx.
We recently announced the divestiture of several non-strategic assets and the last piece of our Barnett shale that should close later in October. And then last but not least, we are beginning our evaluation and development stage in the Utica.
So how we have done on the strategy. Early August we talked about our 2Q 2013 results, and you can see them here. Again, from our standpoint, we feel like this was the best quarter in the company's history. Really hitting on all cylinders, operationally, financially. We were able to do all these things operationally, stay within our spending budget. We bolted on acreage in both the Eagle Ford and the Utica plays; increased our oil production guidance year-over-year to 45%; raised our borrowing base and then did all this and at the same time, managed to clean up our balance sheet and lower net debt-to-EBITDA to under 2.5 times. Two years ago, that number was at about four times, obviously that was a different time period then, but again, we pay very careful attention to that, and have been very successful.
This is a map of our assets, for those of you who know our story -- very-very familiar to those of you who know our story. As I mentioned, the Barnett will be removed from this map at the end of October. I am not going to spend a lot of time talking about Barnett, suffice it to say, was our first play that we entered into, in the unconventional realm. We very effectively leveraged the learnings from that play into the other plays you see on the map, and again we looked around and based on what MLPs will pay and have been paying, we are producing assets, essentially paying a NPV10 for our production, and it just made sense for us to monetize that asset, in spite of the current gas price environment. So what we will be left with there, even for Niobrara and Utica on liquids side and the Marcellus on the dry gas side.
This is our performance in oil production, executing our oil strategy. You can see again, growing from 700 barrels a day to hopefully over 12,000 barrels a day net to Carrizo in about a two and a half year period, and very successful. I'd also like to point out in the light green or yellow, those bars represent the cash flow per barrel of our production mix. So you can see, also increasing that [earth gas] leftover in that. That number will increase, once we take the Barnett out. I'd also like to point out, that for the Eagle Ford alone, cash flow per barrel is over $75. So again, you can expect to see that move up as we remove some of our gas assets.
As you'd expect, both revenue and EBITDA grow in the same proportion as our oil production. You can see on the left, in green is the share of oil revenue, currently over 80% of the company total. Our oil production now represents about 55% of our production. Again you can see the very strong quarterly EBITDA growth.
This is probably the most exciting part of the story, reserves and valuation. What we show here are reserves by project, and then NPV10 valuation. The chart on the left are the individual projects. In light green are proved reserves, in dark green are probable. One of the really great things about these resource plays, is we view are probables as very low risk, and with an extremely high likelihood of converting to proved. And we think over the next several years, virtually all of the probable reserves you see here will be converted to proved.
On the valuation side, same story there. About $4.8 billion in current NPV10 valuation. Our current enterprise value is about $2.4 billion, so we feel like there is a tremendous amount of running room left in our stock (inaudible).
Our plan for 2013 looks like this; we are going to drill with three rigs in the Eagle Ford, two rigs in Niobrara. We are testing down spacing in both those plays. As you heard about from PDC, we are also looking at vertical expansion into the [A&C] in the Niobrara. We do have some wells left to drill in the Marcellus, to continue holding all that acreage.
One of the things in the resource plays you're probably aware of, is the completion and frac costs, those are roughly two-thirds of the costs. So we talk about managing our frac program, in other words, we work very closely with our service companies to control the number of stages we frac every day, every week, every month, and use that as a governor on our spending.
Last pull up then on the left hand side, we have drilled our initial well in Utica. We have drilled our initial well and are producing it in the Pearsall. I will talk about both of those in just a moment. What's (inaudible) on the right again, our production growth at 45%, about $0.5 billion capital program on the drilling side, sequential growth in EBITDA, go below 2.5 times on net debt-to-EBITDA and on the hedging side, we are actually in pretty good shape for 2013. PDC talked about as well, we are finding 2014 and 2015 to be challenging, given the shape of the futures curve there. So we are opportunistically adding on oil. With the departure of the Barnett next month, we will be a 100% hedged on the gas side, going into 2014.
This is our spending program for 2013, about $675 million. $530 million of that would be on the drilling and completion side, and you can see how that's split out on the pie chart. Each Eagle Ford rig burns through about $125 million a year in capital, so that's three rigs there. In the Niobrara, we show $60 million, we are getting the benefit of about $30 million (inaudible) from our partners, to do the transactions we executed last year.
And then on the land side, $140 million. You can see how that splits out, the lion's share of that has been in the Utica. We have upped our interest, we exercised an option to go from 10% to 50% in the acreage that we bought with our partner there, Avista Capital, so we are now 50-50 in about 32,000 acres. We did that at costs plus small premium, we think that was a very good deal for us.
Going forward into 2014, we are comfortable with this level of drilling and completion expenditure on the land side. I think we'd love to find the $140 million of stuff to buy in the Eagle Ford and Utica, obviously very competitive. At a minimum, what we are trying to do there is, as I mentioned earlier, find bolt-on acres and at least replace what we are drilling. So that's kind of the target for next year.
On a quarterly spending basis, for drilling, you can see in the first half of 2012, as we were drilling some extra wells to hold acreage, we got kind of a message from The Street there, that they wanted that moderated a little bit. You can see what we have done in the four quarters thereafter, we are very comfortable in this $130 million to $135 million per quarter spending range, and I think you have been looking -- a level like that going forward.
This is a busy table. I am not going to go through all these numbers, but what we have presented here is all the data you need to get from acres in the upper left to valuation in the lower right. The top table is acres and wells, and I am focusing on a couple of numbers there, most importantly in the Eagle Ford. This is in a 750-foot spacing. As I told you, we are now drilling down at 500-foot spacing in the Niobrara. This is in 80-acre spacing, in the B-bench only. So we are going to test both 60 and 40 acre spacing in the B-bench and then vertical expansion as well, and you will hear more about that lunch from Jim.
The lower [few] tables are reserves and then moving to valuation, you can see we get to that total $4.8 billion number I mentioned earlier. Over $3 billion is added in the Eagle Ford. The other thing I want to mention here, is because of our limit on capital spending, we played out the Eagle Ford and Niobrara on about a eight to nine year time horizon, bringing that forward, accelerating that even a couple of years at several hundred million dollars of NPV10 valuation. So again, given our current enterprise value, we think there is a lot of running left in the share price.
Let's talk about the assets here at the Eagle Ford to start. This shows our acreage position and the various windows of the play, red is gas, violet for oil [and light green and black oil in] dark green. You can see all of our acreage is in the volatile oil window. I have got some project names there. The yellow is the acreage, red stars are pads that are on production. You can see, we have drilled and are producing across our entire acreage position. We found it to be amazingly a very-very consistent production result.
We have drilled over 130 wells here. We have got a backlog of about 20 net wells in inventory, and we'd like to do that in the Eagle Ford, it gives us the ability to very quickly add production if we choose to spend a little bit more. As I said, we are testing 500-foot spacing here. We will drill 44 net wells this year and frac 34 new wells during 2013.
As I mentioned, we have now drilled wells across the entire position, so we have updated our type curve. What we have done is, for each of those project areas, highlighted on the prior slide, we have taken the actual production performance, built the type curve, then looked at our development across the entire Eagle Ford position, and come up with a weighted type curve for all of our future drilling.
That's what's shown in green. Daily production on the left hand axis; (inaudible) production on the right hand axis, and you can see in red was our prior type curve about -- at 720 days or two years of production, our new curve is over 20% higher than the original curve. So again, very-very positive production performance across the entire position. What does that look like for economics, focus you on the right hand column, our average well is an $8 million, 23.3 stage well going forward. We have over 400 of those locations, and no secret as to why everybody likes the Eagle Ford, you can see, at $100 NYMEX, almost 100% IRR.
Couple of other things I'd like to point out about our acreage position first, over 95% of our revenue is generated from oil production. The rest split between NGLs and gas. And then, where we are located, 97% of that oil is oil and not condensate, below 50 degree API. So again, not a whole lot of mystery here to the story, Eagle Ford story. We have got a great acreage position. Our wells are performing at or above expectations. Significant running room left, we get premium pricing, and there is -- has yet unproven upside in downspacing, and perhaps accelerating. So the focus for us here, is to continue what we have considered very excellent execution and then continue to educate the investor community on how much value we have locked up in this asset.
For the Niobrara, this is our acreage position. This is our resistivity map, blue below our cutoff, white, above our cutoff. As in the Eagle Ford, we have now drilled 70 wells across our entire acreage position, and we have been able to delineate the better and worst performing area. The shaded oval, represent areas of high grading, where we have drilled most of our future wells, because performance is better. For 2013, our budget has 85 wells, about 45 of those we operate, 40 of those we are in with Noble and Whiting.
From profitability and type curve standpoint, not as good as the Eagle Ford, but still very strong economics in the mid 50s, at $100 NYMEX. This type curve represents the average of all the wells we have drilled. So as we continue our high grading -- we should over the coming months, up the type curve as we drill more wells in the better producing areas. That type curve is about 235 MBOE.
Again, we are very excited about the potential here for both down spacing and vertical expansion. We think in the next six to 18 months, between what we do and what Noble and Whiting do, we are going to have a lot more color on how effective those processes are going to be.
Following up on what PDC said about the Utica, very similar map here. We show the producing windows, gas, also oil, black oil. The red outline represents an area where, within that red outline, all wells are tested at or above 1000 barrels of condensate per day. You can see our acreage in yellow, we have three distinct blocks in Northern block, and we are all in the southern part of the Utica here in Guernsey and Noble counties. The northern block offsets PDC, the middle block offsets -- excuse me, the northern block offsets Gulfport in the middle; PDC in the Southern block, Antero, obviously a very good neighborhood. Again, a total of 32,000 acres split between us and our partner Avista.
Our initial well, the Rector well drilled right here, it's an 8,000 foot lateral, and we should be fracking that well, the first two weeks in October, we will rest it for six days and have it on production in December.
This is our Marcellus project. Our acreage is in two pods. In Susquehanna county to the north, Wyoming county to the south. Cabot is sandwiched in between our position there. We also show our gas pipeline [takeaways]. This is almost fully developed. We will drill the remaining 32 wells this year, that will hold all the acreage. Not a whole lot of running room left here. Again dry gas, the economics are somewhat marginal. We like the well performance again, lot of pressure here on pricing. We have seen curtailments but on our firm capacity, and interruptible prices here have been as low as $0.30 to $0.25. So we think, given the gas macro, that's going to continue at least for the next several years.
PDC showed for their Marcellus, very similar here. Very good dry gas economics on a relative basis. The wells come on at higher rates, at relatively shallow declines, and at $3 NYMEX, profitable, but again not competitive with our other assets in the Eagle Ford, Niobrara and Utica.
So that's our story. Essentially mission complete as far as converting a gas company to an oil company. We have been very successful, and as I mentioned that, we are now at 55%, with very good production from oil. We have been able to do this, effectively managing spending at the same time, cleaning up our balance sheet. We think we have a lot of flexibility going forward in our capital program. We are very excited about additional upside in all the liquids plays that I have talked about, and again, we think for us, what we really need to do over the coming months, is to educate the investor community on some of that value that's not yet in the share price.
Again, thank you very much, and we will take questions in the breakout.
[No question and answer session for this conference.]
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