Carrizo Oil &
Gas (CRZO, $41.29): “Fly
Eagle Ford Fly”
By: Casey
McClelland, AIM Student at Marquette University
Disclosure: The AIM
Equity Fund currently holds this position. This article was written by myself,
and it expresses my own opinions. I am not receiving compensation for it and I
have no business relationship with any company whose stock is mentioned in this
article.
Summary
•
Carrizo Oil &
Gas (NYSE:CRZO) Operates as an oil and gas, exploration and production company
(E&P), headquartered in Houston, Texas. The company operates primarily in
South Texas, specifically in the low cost Eagle Ford Shale Formation.
•
CRZO is benefiting
mightily from the oil price rebound ($50+) due to the recent OPEC agreement on the
production cap for the major oil producing countries.
•
CRZO completed a
bolt on acquisition with Sanchez Energy to expand their premier acreage in the
low cost Eagle Ford play.
•
Due to the positive
sentiment in the market and the quality land positions that CRZO has to offer,
the company is looking to add a third rig to their production which will push
their growth to over 20% next year.
Key points: Carrizo is the
owner of some of the best low cost assets available in the premier Eagle Ford.
They have expanded this asset in the last quarter by making an acquisition with
Sanchez energy to buy their Eagle ford assets.
The company has made a bullish
stance on oily specific plays and this acquisition is further proof of their
stance. With weighted average break even points on their Eagle Ford assets
being $35 a barrel, they are positioned to be profitable on these assets in the
near term due to the rebound in prices.
Along with their
continued development of their main asset in the Eagle Ford, CRZO is continuing
to see improvements on their Delaware Basing play as management stated that
during the last quarter in the Delaware, “we are drilling
more wells than we planned because we’ve seen results
come in better than we thought on the west side of our acreage.” This continued
improvement and development of the basin can lead to a growth in their reserves
potential or as a good sell off asset to help improve their Eagle Ford play or
pay down their debt.
The major news for
the industry as a whole was the OPEC agreement that was made on November 30th
this year. This deal surprised many experts as leading up to the deal there was
a lot of skepticism on how the deal would be able to be constructed with none
of the countries wanting to have to share the burden. Some of the biggest
drivers for the deal was the unexpected cooperation by the Russian government
and Iraq taking on its first quotas since the 1990s. Though this deal does not
sure up the whole oil glut because the U.S. shale producers are outside of the
agreement, it is a step in the right direction and should provide more
stability in the commodity market.
With the addition
of a third rig in the next year, CRZO has made an aggressive stance on
production for the next year and their increase in CapEx spending is indicative
of that. The OPEC agreement compounded with their further development of their oily
assets has pushed the company to ramp up production in the hopes of capturing
the positive sentiment in the market.
What has the stock
done lately?
In the past 3
months, the stock has performed moderately well with a 9.26% return over that
time frame. This recent uptick is due to the OPEC deal that surprised many investors.
Along with the recovery, CRZO reported impressive numbers and had a positive
outlook on their position in the market.
Source: FactSet
Past Year
Performance: Since the introduction of CRZO in to the portfolio, the stock has
performed extremely well and surpassed its price target early in its time in
the portfolio. The oil price rebound due to the OPEC meeting has been extremely
beneficial for the stock as this provides stability in the market. Our low cost
E&P stocks have been great performers for the portfolio due to the entry to
the positions being right at the beginning of the oil rebound.
My Takeaway
Carrizo currently
is in a favorable position due to its premium assets and stable financial condition.
With Net Debt/EBITDA at a manageable 3x and down from the previous quarter,
they are financially stable for their near term and have plenty of assets to
help pay down the debt in the long term. With the OPEC deal in place, low cost
E&P companies are positioned to thrive with stabilized prices going
forward.
I believe that are current portfolio weighting towards low cost
players is justified and feel that going forward it will continue to reap the
portfolio positive rewards. And the higher oil prices certainly help too!
