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Carrizo Makes Delaware Basin Deal, Is Eyed as Takeout Target

Carrizo Oil & Gas Inc. (CRZO) on Tuesday announced a Delaware Basin farm-out agreement and updated spending plans one day after the company was tipped by an analyst as potentially the next small cap takeout target following Monday's Noble Energy Inc.-Rosetta Resources Inc. deal.

"We've been watching the Delaware Basin for a few years now and are excited to be drilling our first operated well later this year," said CEO Chip Johnson. "This farm-out deal fits perfectly with some of our existing acreage, and we're optimistic about the potential as it is located near strong industry results. We continue to work on other acreage deals in the area and hope to materially grow our position in the basin over time."

Carrizo's farm-out deal is with an undisclosed larger operator and provides it the right to earn about 2,800 net acres in eastern Culberson County. It brings Carrizo's position in the play to more than 20,000 net acres and offsets its existing position in eastern Culberson County, allowing the Company to build a contiguous nine-section unit where it has the potential to drill about 30 long-lateral wells on 1,000-foot spacing in the Upper Wolfcamp zone.

Plans are to bring a rig into the play during the third quarter and drill three horizontal wells by year-end. Due to the timing of completion and hook-up of the wells, Carrizo said there won't be material production from the play this year. Carrizo will be the operator of the wells and expects to have an average working interest of at least 80%. As part of the acreage acquisition cost, Carrizo will carry its partner on the wells.

To fund the Delaware program -- at a cost of about $30 million -- Carrizo raised its planned spending for 2015 to $470-490 million from previous guidance of $440-460 million. Land and seismic spending for this year is unchanged at $35 million.

Houston-based Carrizo is focused on the Eagle Ford, Marcellus and Utica shales, and the Niobrara Formation. In a note Monday, BMO Capital Markets analysts suggested that the company could be the next takeout target following Noble Energy's announced acquisition of Rosetta Resources, which has 46,000 Delaware Basin acres (see Shale Daily, May 11).

"We can only lean on fundamentals, and the one that stands out where the story is strong and, thus, should be desired is outperform-rated CRZO," BMO said.

"Simple math puts the implied value of CRZO shares at about $65 using the acquisition multiple on consensus 2016 numbers (excluding outliers) and applying our balance sheet estimates. That's where we're taking our target price, representing a 25% premium to Monday's closing price. So what? [Noble] acquired [Rosetta]. We get it. Our point -- as it's been in viewing the equities in isolation -- is that the value proposition is great(er) with CRZO."

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