Carrizo Oil & Gas Inc. beat its guidance and achieved record production and revenue during the second quarter of 2012, thanks in large part to new liquids production in the Eagle Ford Shale and a flatter-than-expected decline in natural gas production from new wells in the Marcellus Shale.
Meanwhile, the Houston-based company said negotiations were continuing over separate and unrelated deals to both acquire and sell acreage in the Utica Shale, and efforts were advancing in finding a joint venture (JV) partner to collaborate in the Niobrara Shale.
Carrizo said the record production "more than offset" the volumes lost in the sale of 277 Bcfe of proved reserves and undeveloped drilling locations in the Barnett Shale to Atlas Resource Partners LP for $190 million (see NGI, March 19). The deal took effect on May 1. The company achieved record oil and condensate equivalent production of 2,393 Mboe in 2Q2012, a 3.5% increase from sequential quarter production of 2,311 Mboe, and a 28.5% increase from the 1,862 Mboe produced in 2Q2011. Natural gas production was flat year/year, holding at 9.8 Bcf, but natural gas equivalent output rose 28.4%, from 11.2 Bcfe in 2Q2011 to 14.4 Bcfe in 2Q2012.
Revenue from oil and condensate sales also hit a record during this year's second quarter, $68.6 million, which amounted to 82% of total revenue. That amount is more than 341% higher than the $15.5 million in revenue brought in during 2Q2011. For Carrizo's shareholders, the company's success translates into an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) $1.73/share in 2Q2012, up 63% from the $1.06/share earned during the year-ago quarter.
During an earnings conference call last week, CEO Chip Johnson said the company and Utica JV partner Avista Capital Partners had closed on the sale of about 29,000 liquids-rich acres in the northern counties of the play and were poised to close on another 15,000 acres. Last October the companies bought 15,000 net acres in eastern Ohio and northwestern Pennsylvania from Cobra Resources LLC (see NGI, Oct. 3, 2011).
"Multiple acceptable bids were received, and we are joining with Avista to begin working on the sales documents with a potential third quarter closing," Johnson said of the sale. "We currently expect that we will ultimately receive net proceeds of approximately $40 million as a consequence of this sale."
The company also is trying to buy acreage in the southern counties of the Utica, he said. "It's gotten very competitive, so we might be running up against a wall here," Johnson said. "The majors are now in the courthouse with us, along with all the normal competitors we have in the independent world.
"So that money we bring [from the sale of acreage in the northern Utica counties], we'll just use that immediately to pay down the revolver and then we will think about what to do with it next. We've been trying to work on a drill site that would get us some good information since there's not a lot of great public information there aside from press releases, but we haven't made a decision yet to drill that well."
Investor Relations chief Richard Hunter said the company's simultaneous moves in the Utica were not dependent on each other. "We don't want it to look like we're selling the acreage in the north and reinvesting it in the south," Hunter said. "That's not what's happening. We hope to be selling a chunk of acreage in the northern portion, somewhere between 18,000 and 19,000 acres, which the JV controls. At the time of the sale we would own half of that, about 9,000 acres."
Under the terms of the Cobra sale, interest in the properties was divided 90-10%, with Avista being the majority holder. But Carrizo holds two purchase options to increase its interest to 50% over the next 18 months.
Hunter said the northern Utica acreage in question was almost entirely in Trumbull County, OH, and Mercer County, PA. He added that the acreage was not on very contiguous blocks, making it difficult for Carrizo to ever be the operator. And he echoed Johnson's concern that there was little data on what natural resources the northern acreage holds. "We have no idea what's there," Hunter said. "There's just no data to tell us anything about the northern acres, no incremental data in the last year and half. Everyone has the same historic data from the wells in the State of Ohio Geological Survey, which indicated it should be prospective. But we don't know any more than what everyone else knows.
"Avista said they were getting calls from folks who wanted to buy out our interest and said it 'looks good.' So we're thinking about doing it, too," Hunter said. He added that Carrizo was eyeing acreage in Guernsey County, OH, in the southern Utica, for acquisition.
Hunter confirmed that there were "advanced conversations with some interested parties" in forming a JV in the Niobrara Shale, where Carrizo has one rig and where Johnson said Carrizo's stake in a JV would be between 25% and 30%.
"We have the capital to [add a rig in the Niobrara]," Johnson said. "We might be comfortable enough there now, knowing where the sweet spots are, to spend more capital there. Our choice would be spend capital in Eagle Ford or spend capital there...[a JV] could have some bearing on what we do in the Niobrara next year."
Johnson said Carrizo was purchasing acreage in the Niobrara at about $3,000/acre, and between $4,500 and $5,000/acre in the Eagle Ford. Boling said domestic capex totaled $183 million during 2Q2012, with $41 million spent on disclosed acreage purchases.
In the Marcellus, where Carrizo has a JV with India's Reliance Industries Ltd. (see NGI, April 12, 2010), Johnson said the company planned to keep one rig running through the end of 2012. He said a rig and frack crew were operating in Wyoming County, PA, preparing wells to go online and eventually connect to the Laser Northeast Gathering System, which he said Williams Partners LP should have operational in October (see NGI, Feb. 27).
"Some of our Wyoming County wells tested [at more than] 10 MMcf/d," Johnson said. "All of our current JV gas with Reliance is being sold north on the Laser pipeline to Millennium Pipeline [Co. LLC], which is not as backed-up as the Tennessee Pipeline. So we are netting about a $1 per Mcf better than the Tennessee Pipeline, which has been in the news..."
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