The following article is on a company
with a market cap of $1.84 billion and was originally published by TheStreet.
NEW YORK (TheStreet) -- Houston-based Carrizo Oil and Gas (CRZO_) is a small energy company with a market cap of $1.8
billion in exploration and production of mainly unconventional oil and gas.
The company owns acreage in Eagle Ford Shale, the Niobrara Formation, the
Marcellus Shale and the Utica Shale. The business has reported impressive
growth over the last couple of years due to an increase in oil production, a
trend also evident in its previous quarterly results released a week ago.
The company is now eying considerable growth
in production volumes in 2014. However, the recent weakness in oil prices can
have an adverse impact on Carrizo's ambitions. Investors should look into the
oil prices before betting on Carrizo's rally.
During
the third quarter, Carrizo's total production rose to record levels of 30,000
barrels of oil equivalents per day, showing a 17% increase from the same
quarter last year. This was largely due to a 41% increase in oil production
from 2012 to record level of more than 12,200 barrels per day. The company's
total oil and gas revenues rose 50% from last year to $144.3 million due to a
53% increase in oil revenues to $117.8 million. As a result, the business ended
the quarter with net income of $5.7 million, a significant improvement from a
loss of $1.9 million in the comparable quarter last year. In adjusted terms,
this translated into a 60% increase in earnings to 72 cents per share, 2 cents
above market's expectations.
Some of the growth of crude oil revenues can also be attributed to a 4%
increase in average realized prices (including the impact of derivatives) from
the same quarter last year. Although Carrizo missed the revenue estimates of
$146.5 million, overall this was a strong performance.
Carrizo
holds significant acreage in four of America's leading energy plays,
particularly the Eagle Ford where it now owns 58,000 net acres. Carrizo has
been working on improving its asset portfolio by selling its non-core acreage,
such as the Barnett Shale assets, and increasing its focus on its premier oil
assets, such as the Eagle Ford. In the previous quarter, Carrizo sold its
Barnett assets and acquired additional acreage at Eagle Ford and the liquids
rich area of Utica. Carrizo now owns 21,700 net acres at Utica which represents
around 120 potential drilling locations.
The investment at Utica will not yield any
meaningful impact in the short term, as Carrizo has no prior experience of
working in this region, but it goes well with its strategy to significantly increase
its oil output in the long run.
The business's capital and acquisition
expenditure is being fueled by its asset sale and through a stock offering of 4.5 million shares. The company's
priority is to develop its liquids rich assets. Carrizo spends more than 75% of
its drilling and completion expenditure on oil assets, such as its Eagle Ford
Shale acreage. As a result, the growth of Corizzo's oil output has easily
outpaced the growth of gas.
Due to slump in natural gas prices, most of
the exploration and production companies operating in
the U.S., including the natural gas giant Chesapeake
Energy (CHK_), have
shifted their focus towards oil from gas and natural gas liquids. This has led
towards a turnaround of fortunes of energy firms, particularly those that were
previously producing significant quantities of gas. For instance, in its
quarterly results announced a few days ago, Chesapeake Energy was able to beat market
expectations due to an unexpected increase in its oil output. Similarly,
Carrizo also owes its successful growth to the increase in oil production.
Due to this pro-oil strategy, crude is now
making a considerably bigger contribution to the company's revenue mix. In the
previous quarter, Carrizo earned more than 80% of its revenues from oil, a
significant shift from just 10% in FY2010. Similarly, in terms of production
volume, crude's contribution to the company's production mix has risen from 34%
in Q3 2012 to more than 40% in Q3 2013. With the strong levels of inventory
(discussed below), this trend will continue in the future.
The
company has amassed impressive inventory, including 552 potential wells at the
Eagle Ford. This could power the company's Eagle Ford production for the next
12 years. Carrizo currently has 24 net wells awaiting completion in this region
which could increase its output by 8,900 barrels per day. This would be a
significant increase for Carrizo, since it produces just around 12,000 barrels
per day.
On
the contrary, and not surprisingly, Carrizo is limiting its gas output from
Marcellus due to the weakness in pricing environment.
Carrizo's shares have been up more than 100%
this year. The stock is now slightly expensive as it is trading 34 times its
trailing earnings and 4 times trailing sales. However, I believe it can still
move higher due to the expected increase in production from its Eagle Ford
wells currently awaiting completion. For the current year, Carrizo has targeted
a 47% increase in oil production, followed by 40% increase in the next fiscal
year. This will translate into top and bottom line growth in the future.
However, there is a catch here; the recent drop in oil prices could hit Carrizo's
growth momentum.
The
domestic oil supplies have been growing for the last six weeks. Total oil
supplies now stand at 383.9 million barrels, their highest levels in more than
4 months. The increase in production and soft demand has dragged the oil
futures. The speculation related to Federal Reserve's tapering is adding to the
volatility in oil prices. If this negative trend continues, then it would be
bad news for Carrizo's investors.
To make matters worse, the international oil
market could witness an increase in supply from the Middle East due to the
improvement in relations with Iran and an uptake in production from Libya. If,
and when, that happens, then oil prices could tumble by as much as $15 per barrel.
At
the time of publication, the author held no position in any of the stocks
mentioned.
This article is
commentary by an independent contributor, separate from TheStreet's regular
news coverage.