Carrizo Oil & Gas - Breakeven Point Could Reach $60 As Hedges Roll Off

| About: Carrizo Oil (CRZO)

Summary

Carrizo has benefited from hedges and proceeds from fixed derivative settlements, but those will be mostly gone in 2017.

At $50 oil in 2017, Carrizo may burn $72 million if it wants to keep oil production flat.

It has an undrawn credit facility, but the debt to EBITDA covenants will likely limit the facility's usefulness at $55 or under oil.

Thus oil production is likely to stay flat or potentially decline in the future unless oil is at $60+.

Carrizo may also turn to another stock offering to fund production growth.

Carrizo Oil & Gas (NASDAQ:CRZO) is a company that I've covered before, mentioning that its hedges may have negative value in the future, while production growth was expected to start slowing. I estimated that its value was around $25 to $32 based on a long-term oil price of $65. However, with Carrizo scaling back its 2016 capital expenditure plans (from an unofficial estimate of $425 million to $295 million) and oil slumping since that previous article, it is worth revisiting Carrizo.

2016 Outlook

At $40 WTI oil and $2.50 Henry Hub natural gas in 2016, Carrizo may end up with $496 million in revenue. However, only $357 million of this is from oil and gas revenue, with the remaining $139 million coming from hedges and fixed derivative settlements. After 2016, Carrizo only has a limited amount of hedges and proceeds from fixed derivative settlements.

Type

Barrels/Mcf

$ Per Barrel/Mcf

Revenue ($ Million)

Oil (Barrels)

9,150,000

$34.00

$311

NGLs (Barrels)

1,409,100

$10.00

$14

Natural Gas [Mcf]

19,215,000

$1.66

$32

Fixed Derivative Settlements

   

$45

Hedge Value

   

$94

Total Revenue

   

$496

Click to enlarge

Carrizo is expected to have $546 million in cash expenditures in 2016 based on its guidance and $40 oil. This would mean that Carrizo will burn approximately $50 million. As Carrizo had $43 million in cash at the end of 2015, it will likely end 2016 with minimal cash, but also minimal credit facility borrowings (as it had zero borrowings under its credit facility at the end of 2015).

Expense

$ Million

Lease Operating Expense

$95

Production Taxes

$16

Ad Valorem Taxes

$10

Cash G&A

$44

Cash Interest

$86

Capital Expenditures

$295

Total Cash Expenditures

$546

Click to enlarge

2017 Outlook

I am assuming that production trends from 2016 continue into 2017, with oil production mostly flat (with potential for a small increase), while natural gas production decreases significantly. At $50 WTI oil and $3.00 Henry Hub natural gas in 2017, Carrizo would end up with $439 million in estimated oil and gas revenue. It only receives $3 million in fixed derivative settlements and its hedges are breakeven.

Type

Barrels/Mcf

$ Per Barrel/Mcf

Revenue ($ Million)

Oil (Barrels)

9,125,000

$42.50

$388

NGLs (Barrels)

1,387,000

$12.00

$17

Natural Gas [Mcf]

16,425,000

$2.05

$34

Fixed Derivative Settlements

   

$3

Hedge Value

   

$0

Total Revenue

   

$442

Click to enlarge

If we assume that Carrizo's capital expenditure requirements decrease by $30 million, then it will have $514 million in cash expenditures at $50 oil. This results in $72 million in potential cash burn.

Expense

$ Million

Lease Operating Expense

$93

Production Taxes

$19

Ad Valorem Taxes

$10

Cash G&A

$41

Cash Interest

$86

Capital Expenditures

$265

Total Cash Expenditures

$514

Click to enlarge

Carrizo's breakeven point appears to be around $60 oil and $3 natural gas with around 36,300 BOEPD production (including 25,000 barrels per day in oil production). The upside for natural gas is limited by the high amount of call options that Carrizo has sold for the next few years.

Credit Facility

Carrizo currently has an undrawn credit facility with a $685 million borrowing base. The borrowing base is likely to be reduced during the Spring 2016 redetermination, but there should still be a large borrowing base remaining. Of greater importance is the credit facility covenants, which include a requirement for total debt to EBITDA to be no more than 4.75 to 1.00 in 2016, declining to 4.375 to 1.00 in 2017 and 4.0 to 1.00 thereafter.

This shouldn't be an issue in 2016. However, it appears that Carrizo could face issues with this covenant if oil is in the low $50s or below in 2017 or below $55 in 2018. Therefore, if it wants to maintain production levels at those oil prices, it will either need to get the debt to EBITDA covenant relaxed again, or sell assets. Otherwise the alternative is to reduce production. Despite the appearance of a large borrowing base, the credit facility does not appear to have much functional availability until oil gets above $55. At $55 oil, Carrizo is near breakeven anyway, so the main use of the credit facility appears to be for funding production expansion at $60+ oil.

Valuation And Conclusion

I had previously estimated Carrizo's value at $25 to $32 per share based on $65 long-term oil. Revising the long-term oil price down to $60 and using the lower production levels (compared to earlier expectations) for 2016 and 2017 would result in Carrizo's estimated value falling to around $22.

Carrizo has a fair amount of debt, but also no liquidity concerns at the moment. However, its debt level is high enough to make it unable to take on more debt at below $55 oil without potentially violating the credit facility covenants. Thus its oil production levels may decline or stay flat unless oil gets back toward $60 and above. With its debt to EBITDA (excluding hedges and fixed derivative settlements) at over 4x at $50, I think there is a significant chance that Carrizo will end up doing another share offering to help reduce its debt, as Carrizo did a couple share offerings in 2015.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in CRZO over the next 72 hours.

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.