Saturday, December 17, 2016

An AIM Equity Holding: Carrizo Oil & Gas (CRZO) by Casey McCelland. "Higher Oil Prices Should Send Carrizo Soaring"

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.

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 weve 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!

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