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Carrizo 4Q: Oilier Is Better

The fourth quarter was Carrizo Oil & Gas Inc.'s ninth consecutive quarter of revenue growth and one during which it charted record oil production and oil revenue, affirming the wisdom of management's decision to transform Carrizo into an oil company, CEO Chip Johnson said.

"Thanks to our record oil production, we reported the highest quarterly revenue and EBITDA [earnings before interest, taxes, depreciation and amortization] in the history of the company," Johnson said. "We have now reported sequential revenue growth for the last nine quarters and remain confident that this growth trend will continue.

"...[W]e are seeing dramatic benefits from our transformation to a more oily company. Our EBITDA margin per boe expanded once again to $39.08 from $36.73 last quarter and from $24.55 for the fourth quarter of 2011. Our EBITDA margin came in at 80% this quarter, even higher than the 74% reported for the fourth quarter of 2011."

Ryder Scott recently completed an evaluation of Carrizo's reserves. With that in hand, Johnson said, in response to an analyst's question during a conference call, that the company would begin to evaluate what it might be able to get in the marketplace for its Barnett Shale assets and what effect a sale might have on cash flow. Johnson was asked what he would sell in order to buy more acreage in the emerging Utica Shale.

"Probably the most obvious thing would be the Barnett, just because we don't have much near-term upside there," he said. "We need gas prices to go up before the rate of return on that drilling can compete with the oily plays or even the Marcellus, so that would probably be the most obvious [to sell].

"I think [of] our other shale plays, none of them have gotten to the point where we have really flat production rates because we're still drilling and adding production, which makes them less attractive to MLPs [master limited partnerships], which seems to be where most of the capital is coming from right now."

Carrizo is active in the Marcellus, Utica, Barnett, Eagle Ford and Niobrara shales. The company recently said the majority of this year's capital spending of about $500 million would be dedicated to the Eagle Ford (see Shale Daily, Jan. 16).

Proved reserves in the United States at the end of last year were 115.1 million boe, an increase of 20% from year-end 2011. They were made up of 39.1 million bbl of oil, a 58% increase over 2011; 5.4 million boe of NGLs, a 71% increase over 2011; and 423.7 Bcf of natural gas, a 4% increase over 2011.

Record full year 2012 production included 2.9 million boe from the Eagle Ford, 352% above 2011, and 7.9 Bcf of natural gas from the Marcellus, compared to 0.3 Bcf in 2011.

Fourth quarter 2012 production of 2.4 million boe consisted of 831,000 bbl of oil or 9,033 b/d, 4% above the third quarter 2012 and 4% above the high end of guidance; and 9,285 MMcfe of natural gas and NGLs, or 100.9 MMcfe/d, essentially flat compared to the third quarter of 2012 and 2% above the high end of guidance.

"As the company shifts its focus from the Barnett towards the emerging Eagle Ford, Marcellus, Niobrara and Utica plays, we believe Carrizo will see an impressive production growth profile over the next few years while changing the production mix to be more weighted towards liquids," said Wells Fargo Securities analysts in a note Tuesday. "We believe this growth coupled with cash flow to cover anticipated capital needs will drive shares to 'outperform' peers."

Adjusted net income was $21.7 million (54 cents/share) during the fourth quarter, compared to $9.1 million (23 cents/share) during the fourth quarter of 2011. The company reported net income of $18.5 million (46 cents/share), compared to net income of $6.5 million (16 cents/share) for the fourth quarter of 2011.

Adjusted revenues were $116.7 million for the fourth quarter, which includes oil and gas revenues of $107.5 million and realized hedge gains of $9.2 million, compared to adjusted revenues of $66.3 million for the fourth quarter of 2011, which includes oil and gas revenues of $55.8 million and realized hedge gains of $10.5 million. The increase in adjusted revenues was primarily driven by the significant increase in oil production partially offset by lower gas production, the company said.

For the full year, adjusted net income was $67.5 million ($1.69/share), compared to $38.7 million (98 cents/share) in 2011. Net income was $55.5 million ($1.39/share) for 2012, compared to $36.6 million (92 cents/share) for the same period of 2011. An unrealized loss on derivatives of $7.2 million was recorded during 2012, compared to an unrealized gain on derivatives of $15.7 million in 2011.

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