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Carrizo Falling Back to Eagle Ford to Weather Commodities Downturn

Carrizo Oil & Gas Inc. is retreating to its core acreage in South Texas' Eagle Ford Shale this year, electing to reduce its activity in Colorado, suspend drilling in the Utica Shale and voluntarily curtail natural gas volumes in the Marcellus Shale.

Responding to stagnant commodities prices, Carrizo expects its natural gas and natural gas liquids volumes to remain flat this year, but it will rely on the gains its made in the Eagle Ford to drive up year-over-year oil production by 17% (see Shale Daily, Jan. 27).

"For us, the Utica was an area where we were still early on spending and not producing -- we don't have midstream yet -- so that was an easy one to cut back," said CEO Chip Johnson. "In the Niobrara, the economics just weren't as high as the Eagle Ford once you get down around $50/bbl oil and nearly all the acreage there is [held by production]. In the Eagle Ford, we'd probably have to keep running one rig just to hold our acreage. But the acreage there is the easiest and most profitable logistically."

The company said most of its acreage in South Texas would remain profitable this year at $44/bbl. For the 17th quarter in a row, Carrizo reported record fourth quarter oil production of 22,130 bbl/d, up 70% from the year-ago period. Most of that, or 19,700 bbl/d, came from the Eagle Ford, where service costs continue to fall with low oil prices.

"We've cut back on our activity. We're waiting to see how far service costs will decline, but we are not going to shut all the way down," Johnson said of the company's Eagle Ford assets during an earnings conference call with financial analysts on Tuesday. "Actually, today, we're down to one drilling rig and only one frack crew, although the long-term drilling rigs we've signed-up will be showing up shortly."

Even though it plans to drill 54 operated wells in the Eagle Ford this year, the company has reduced the number of frack crews it has working in the play and will keep an inventory of about 22 uncompleted wells so it can ramp-up production if oil prices rebound anytime soon. That, combined with reduced activities in Ohio, Colorado and Pennsylvania, will keep first quarter production flat with fourth quarter levels. Carrizo will run three rigs in the Eagle Ford this year and one rig in the Niobrara Formation, where it plans to drill four operated wells.

While its wells in the Utica Shale have met its expectations, management said it has already idled its drilling rig there and is instead focused on building out its midstream infrastructure so it can ramp up quickly when drilling resumes (see Shale Daily, Jan. 28).

"I think we've got two factors going on...we need to get the pipe in the ground and that will immediately help some of the pads," Johnson said. "The rest will just be cash flow and budget considerations. We have about a dozen wells set with surface pipe, so we can move fairly quickly and pull the trigger once we move in a rig. But it's still all going to be very dependent on debt levels and the balance sheet."

Carrizo was already curtailing its natural gas volumes in the Marcellus Shale to offset lower prices there. The company produced 52.2 MMcf/d in the play last quarter, but weakening basis has the company planning to shut-in more gas this year, which will keep volumes well below the company's production capacity of 90 MMcf/d.

Carrizo produced 37,696 boe/d in the fourth quarter, up from 24,772 boe/d in the year-ago period. Sequential production increased 12%, while full-year production increased to 32,816 boe/d from 27,395 boe/d in 2013.

COO Brad Fisher also said the company would not drastically tweak its completion techniques in the Eagle Ford this year. He added, however, that the company could test a well with 2,000 pounds of proppant per lateral foot. Carrizo is currently completing its wells with 1,500-1,600 pounds per foot. The company has also been testing staggered stacked laterals to more effectively drain the shale, but management said it's too early to tell if the technique would increase type curves in the play.

"If you can land one of your wells higher in the zone, the potential would be to bring in two lower wells closer together and kind of with that three well combination most effectively drain the entire lower Eagle Ford," said Vice President of Business Development Andy Agosto. "We're real early in the process in terms of collecting data, we've just brought online our first stagger stack. The very early production data looks fine, but I'm talking about less than a month of production data at this point.

Fourth quarter revenue increased 26% to $163.3 million, while full-year revenue went from $520.2 million in 2013 to $710.2 million last year. The company reported income from continuing operations of $129.5 million ($2.84/share) in the fourth quarter, up from a loss of $22.2 million (52 cents/share) at the same time in 2013. Full-year income was up to $222.3 million ($4.90/share) from $21.9 million (54 cents/share) in 2013.

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