Carrizo Oil & Gas (CRZO)

TOP CONTRIBUTORS

Geoffrey Jordan

Carrizo Oil & Gas, Inc. (NASDAQ: CRZO) is an energy company engaged in the exploration, development and production of natural gas and oil. The company drills complex extended reach horizontal wells in resource shales in North America. Carrizo's core area is the Barnett Shale area in North Texas, but the company is also active in South Texas, Arkansas, West Texas, New Mexico, Mississippi, North Dakota, Kentucky, Illinois, Louisiana, Alabama, and the U.K. North Sea.^[1] Carrizo has shifted its focus from natural gas to oil due to high oil prices, despite new installations of natural gas pipelines.

Business Growth

Carrizo's production volume in the first quarter of 2011 increased 29% from the first quarter 2010.^[2] The increase in production was due to increased production from new wells in the Barnett Shale, Eagle Ford Shale, and Niobrara Formation, partially offset by normal production decline due to inclement weather in February 2011.^[2]

Carrizo's increase in revenue in the first quarter of 2011 was driven by increased oil and condensate production in the Eagle Ford Shale, and higher realized hedge gains partially offset by lower gas prices.^[2]

Trends and Forces

Drilling for crude oil is more profitable than drilling for natural gas

The economics of drilling oil are more favorable than those of drilling natural gas. The factors negatively affecting the natural gas pricing environment include the slow recovery of North American industrial activity following the recession, slow growth in consumer electrical power demand, and a drop in 2011 natural gas futures prices reflecting a more pessimistic out- look for gas by the marketplace.^[3] The fall in natural gas prices prevented Carrizo from securing attractive natural gas prices through price protective hedging contracts.^[3] Recently Carrizo announced its intent to increase the weighting of crude oil and liquids in its daily production by increasing the rate of production of oil while holding natural gas production volumes constant. The current economic value of a barrel of oil is about 20 times higher than a standard one-thousand cubic foot unit of natural gas (which contains one sixth the energy equivalent of a barrel of oil).^[3]

Construction of gas pipelines will enable Carrizo to expand in Pennsylvania

Carrizo plans to build six natural gas drilling rigs in the Marcellus shale development wells of Pennsylvania.^[3] This area lacks natural gas pipelines, which will restrict its sales of natural gas in this region. However, Carrizo expects the construction of natural gas pipelines in 2012 to increase its gas production and sales in the region.

Competition

• Swift Energy Company (SFY)
• Denbury Resources, Inc. (Holding Company) (DNR)
• GeoMet (GMET)
• Lucas Energy Inc (LEI)
• Evolution Petroleum (EPM)
• Crimson Exploration, Inc. (CXPO)
• Crusader Enrgy Group Inc (KRU)
• Dune Energy (DNE)
• Chesapeake Energy (CHK)

Carrizo competes with other oil and natural gas companies for control of land assets, including exploratory prospects and proven reserves. However, the oil and natural gas product that these drilling companies sell to refiners is a commodity that is sold at the spot price of oil or natural gas.

References

1. ↑ Google Finance: CRZO
2. ↑ ^{2.0 2.1 2.2} Carrizo Investor Relations: "Carrizo Oil & Gas, Inc. Announces First Quarter 2011 Financial Results" May 10, 2011
3. ↑ ^{3.0 3.1 3.2 3.3} Carrizo Oil & Gas 2010 Annual Report: Shareholder Letter, p. 5