Carrizo Oil & Gas (CRZO) believes in the simple, logical strategy that if everyone is selling an identical product at the same price, one wins by having the lowest cost of bringing it to market. Following are the elements of this strategy the company applies to the oil and gas market, as it strives to be the efficient, low-cost producer.
Be the First to React
Many oil and gas companies have announced plans in the past year to become "oilier", shifting capital expenditures and drilling efforts away from natural gas and towards oil, in response to the significant drop in natural gas prices. Carrizo had the foresight to see this coming long before many competitors, and moved swiftly. In April of 2010, the shift began with a new business plan, and a few months later oil-rich land had been acquired in the Eagle Ford shale in south Texas. More oil-rich land was acquired in mid-2010 in Colorado's Niobrara formation. Carrizo added to these areas in 2011, and exited 2011 with 41,000 net acres in the Eagle Ford play and 58,000 net acres in the Niobrara play. Further, the company sold some of its natural gas-heavy interests in late 2010 for $13 million, and in 2011 for $98 million.
Those familiar with the Eagle Ford play know two things. First, the southern portion of the play produces mainly natural gas, while the northern portion produces mainly oil and condensate. Carrizo's land purchases in the Eagle Ford shale targeted the oil and condensate section, mainly in northern LaSalle county, with additional areas in northern Dimmit county and the southern edge of Atascosa county. The proved reserves Carrizo found in the Eagle Ford shale are 86% oil and liquids, and in the Niobrara proved reserves are 88% oil and liquids. Second, prices paid per acre for land in the oil and condensate section of the Eagle Ford shale have nearly doubled in the past two years. Carrizo's shift towards oil was both timely and strategically targeted.
Carrizo shifted both focus and spending to these new plays. In August of 2010, the company announced that it expected to be producing 5,000 barrels of oil per day by the end of 2011. This objective appeared bold and aggressive to some, as Carrizo was only producing 450 barrels per day at the time. In December of 2011, Carrizo announced that it had exceeded this goal, and was now producing over 6,000 barrels per day prior to year-end. In the fourth quarter of 2011, while some competitors were just announcing their intentions to switch towards oil, Carrizo had already increased daily oil production by 1,200%.
Efficient Exploration and Drilling
Carrizo applies some of the most technologically advanced methods in deciding where to drill, in order to increase the probability of a successful, low-cost well completion and to maximize the production rate of each additional well. First, Carrizo's land acquisitions target areas with known shale thickness and thermal maturity that are near existing pipelines. Next, Carrizo uses 3-D seismic data interpretation to reduce geologic risk and plan optimal drilling paths and well spacing. The company then employs sophisticated and proven horizontal drilling methods, multi-stage simultaneous hydraulic fracturing programs, and micro-seismic techniques to maximize production rates and recoverable reserves. This focus on efficiency has allowed Carrizo to achieve a 100% success rate on all wells drilled to date in both the Eagle Ford and Niobrara plays, as well as production rates which met or exceeded expectations on every completed well.
Carrizo has structured several joint ventures which allow the company to increase production faster than budget limitations would otherwise provide. Several of these are structured so that the partner company will pay a large share of the drilling and completion costs on a given set of wells in exchange for a small share of the eventual production from those wells. Another has allowed Carrizo to expand operations into the Utica shale located in Ohio and Pennsylvania. And another, between four companies, will expand Carrizo's oil production to the North Sea off the eastern coast of Scotland. Carrizo's share of the reserves in the North Sea project is estimated at 6 million barrels of oil equivalent, and these wells are expected to begin producing in the fourth quarter of 2012, eventually contributing another 4,500 barrels per day to Carrizo's growing production.
Results and Outlook
Carrizo's strategy, high success rate, and production rates that consistently exceed expectations have led to impressive results. 2011 saw record revenues for the company, and monthly oil revenues exceeded gas revenues towards the end of the year for the first time in company history. Carrizo's 2011 earnings per share increased more than 200% over 2010. The company will again spend over 75% of its capital budget on oil drilling in 2012. The 2011 production was accomplished with less than 20 wells in the Eagle Ford shale and only eight wells in the Niobrara formation. Carrizo has already identified another 400 future drilling locations in the Eagle Ford and another 210 in the Niobrara, setting the company on a path towards continued growth for years to come. Carrizo plans to drill 49 of these new Eagle Ford wells, as well as 12 in the Niobrara, in 2012. The North Sea project is also expected to add to production late in the year.
Carrizo's report for the first quarter of 2012 showed continuing success. Total revenues were again a company record, oil production had increased by 91% over the fourth quarter of 2011, and oil revenues now accounted for 74% of company totals. Earnings per share beat estimates handily, nearly doubling those of the prior quarter, and both oil and gas production came in above guidance.
Despite all of this, the CRZO stock price has struggled. After trading in a range between $18 and $44 in 2011, CRZO has traded between $23 and $31 in 2012 and currently sits near the low end of that range at $24.23. Many oil and gas stocks have been punished by the price drops in natural gas and then oil, but CRZO has taken a particularly rough beating. This may represent a solid entry price for a position in CRZO.
Disclosure: I am long CRZO.