Carrizo Oil & Gas - A Review of 2011

By Eric Fox | December 20, 2011 AAA

Carrizo Oil & Gas (NYSE:CRZO) continued to transition away from natural gas development in 2011 through increased investments in the Eagle Ford Shale and other plays that produce crude oil and other liquids. The company also divested part of its Barnett Shale natural gas assets and initiated a position prospective for the Utica Shale in Ohio. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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Eagle Ford Shale
Carrizo Oil & Gas accelerated development of this play in 2011 as part of its strategy to increase crude oil and other liquids. The company made several acquisitions here during the year and reported a position of 41,000 acres as of December 2011.

Wells here produce a mix of crude oil, natural gas liquids and natural gas, and Carrizo Oil & Gas estimates that 94% of the revenue from an average well will be derived from crude oil and natural gas liquids.

EOG Resources (NYSE:EOG) is one of the most active operators working in the Eagle Ford Shale. The company recently reported a horizontal well here with an initial production rate of 3,090 barrels of oil per day.

Niobrara
Carrizo Oil & Gas has approximately 62,000 net acres exposed to the Niobrara formation in Colorado. This play also produces oil and other liquids and the company drilled seven wells here in 2011.

2011 Capital Budget
In 2011, Carrizo Oil & Gas spent $200 million of its $360 million drilling capital budget in the Eagle Ford shale, and an additional $40 million on the Niobrara. Last year, the company budgeted a combined spending level of only $42 million on these two areas.

Natural Gas Divestiture
In April 2011, Carrizo Oil & Gas sold 13,000 net acres of properties in the Barnett Shale to a private equity firm. The company classified this acreage as Tier One and kept more productive properties in the core area of this play.

Carrizo Oil & Gas received $104 million for these assets and used the proceeds to pay down debt and add to its oil and liquids acreage.

Other companies that are divesting Barnett Shale assets include Quicksilver Resources (NYSE:KWK). The company recently announced that it would form a master limited partnership and sell its assets to this entity.

Joint Ventures
Carrizo Oil & Gas entered into two separate joint ventures in 2011 to help share the cost and risk of developing the company's oil and liquids properties.

In the Eagle Ford Shale, Carrizo Oil & Gas entered into a joint venture with GAIL (INDIA) LIMITED on a 20,200 net acre position. The company received $95 million, with $63.7 million in cash and $31.4 million in the form of a drilling carry.

Carrizo Oil & Gas will retain an 80% ownership in this joint venture and will have part of its 2012 expenses covered by its partner.

Utica Shale
Carrizo Oil & Gas and Avista Capital Partners formed a joint venture to acquire and develop acreage in the Utica Shale in Ohio and Pennsylvania. The joint venture made an initial acquisition of 15,000 net acres at an average cost of $1,500 per acre. Carrizo Oil & Gas has only a 10% interest in this joint venture but has two purchase options to increase the company's ownership to 50%.

Carrizo Oil & Gas reports that its Utica Shale acreage is in the condensate portion of the play, and will leverage these properties in 2012 as a third area to increase oil and liquids production.

Joint ventures are a common method of securing financing in the energy industry. Consol Energy (NYSE:CNX) and Noble Energy (NYSE:NBL) recently closed on a joint venture to develop 628,000 acres prospective for the Marcellus Shale.

The Bottom Line
Carrizo Oil & Gas loves oil and other liquid hydrocarbons and is accelerating development of these types of plays as it moves away from the company's roots as a natural gas producer. This is a popular trend in the energy sector and only the passage of time will solve the mystery of whether this strategy is correct in the long term. (For additional reading, check out A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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