Carrizo Oil Adopts Crude Plan For Financial Growth
If you've noticed how oil and natural gas prices have trended the last few years, it's easy to see why an oil and gas producer might want to increase its stake in the former and lower its exposure to the latter.
The price of light sweet crude oil has risen by about 28% over the last four years, even after prices tanked 15% on Sept. 10. Meanwhile, the price of natural gas has declined about 20%.
So it's no surprise thatCarrizo Oil & Gas ( CRZO ) has spent much of this decade increasing its stake in oil-rich areas while selling off some of its assets in natural gas plays.
Carrizo is engaged in the exploration and production of oil and natural gas in several areas of the U.S., including the Eagle Ford Shale in South Texas, the Niobrara Formation in Colorado, the Marcellus Shale in Pennsylvania and the Utica Shale in Ohio.
The company specializes in 3D seismic controlled horizontal drilling, also known as hydraulic fracturing, or "fracking."
Whale Of A Shale
The technique is used to extract both crude oil and natural gas from the ground. Lately, there has been a lot more crude flowing through Carrizo's pipes. For that, it can thank a 2010 initiative to expand its oil operation in crude-rich areas such as Eagle Ford and Niobrara.
"Carrizo has since been successfully executing its strategy, which has resulted in impressive oil growth and improving cash margins," noted Jeff Grampp, analyst at C.K. Cooper & Co.
That growth is reflected in Carrizo's recent production. During its second quarter, the company logged record oil production of 11,747 barrels per day, a 26% increase from the previous quarter and a 54% gain from the prior year.
Oil revenue during the quarter climbed 55% from the prior year to about $106 million and accounted for roughly 79% of total revenue.
The company has gotten a particular boost from the Eagle Ford Shale, a sedimentary rock formation that began producing oil and gas back in 2008.
"Their growth has been driven by a strong performance out of Eagle Ford," said Leo Mariani, an analyst at RBC Capital Markets. "Eagle Ford has been a really strong oil play with some of the best returns in the U.S. Carrizo has benefited from strong production results there."
While Carrizo has been expanding its operation in the Eagle Ford, Niobrara and Utica plays, it has moved in the opposite direction in the Barnett Shale, an onshore natural gas field in Texas.
On Sept. 4, Carrizo sold its remaining assets in the Barnett as well as non-core assets in the East Texas Shale and Marcellus Shale in Appalachia.
The firm said the deal was worth $268 million, including debt and contractual commitments assumed by the purchasers. Carrizo will use proceeds from the sale to pay down debt and finance expansion efforts, mainly in the Eagle Ford.
In a statement, Carrizo Chief Executive Chip Johnson said the sale of its Barnett and other assets represents "a natural step" in the company's ongoing shift toward oil and liquids-rich plays.
"This puts us in a strong position to continue our Eagle Ford Shale and Niobrara developments, as well as ramp up our Utica Shale activity in 2014," Johnson added.
The Utica Shale is a natural gas and oil play in the Appalachian Basin. Carrizo has already drilled and cored through its first well in the Utica play, says analyst Michael Glick of Johnson Rice.
"The company is now beginning to drill the horizontal portion of the well, with an initial production expected in the back half of the fourth quarter," Glick said.
Carrizo recently lifted its 2013 land and seismic capital spending plan to $140 million from $124 million as it looks to add acreage in the Eagle Ford Shale and Utica Shale.
The company also increased its 2013 oil production guidance to a range of 11,100 to 11,500 barrels a day from previous guidance of 10,600 to 11,200 barrels a day.
"They've always been good at getting in early and acquiring land in new and exciting plays," analyst Mariani said.
That skill has helped Carrizo remain solidly profitable through the years despite the volatile nature of the oil and gas business.
Over the past year and a half, the company has put together one of its strongest financial runs, delivering double-digit or better earnings and revenue growth in five of the last six quarters.
It logged second-quarter sales of $134.2 million, up 60% from the prior year and above consensus Wall Street estimates. Earnings more than doubled to 61 cents a share, topping views for 53 cents.
Carrizo shares touched a two-year high of 35.85 on Aug. 28 and are up by about two-thirds since the beginning of the year.
The company is one of the smaller players in IBD's Oil & Gas-U.S. Exploration & Production industry group, where the largest names by market capitalization areAnadarko Petroleum ( APC ),EOG Resources ( EOG ),Pioneer Natural Resources ( PXD ) andDevon Energy ( DVN ). The group is ranked No. 50 of 197 that IBD tracks.
Analysts expect Carrizo's full-year earnings to rise 51% to $2.56 a share. The company's profit for 2014 is seen climbing 26% to $3.22.