Despite a more than nine-fold increase in production in the Permian Basin’s Delaware sub-basin, Carrizo Oil & Gas Inc. said it plans to shift rigs and capital to the Eagle Ford Shale over the next 18 months to take advantage of superior returns in South Texas.

The Houston-based independent was running four rigs in the Delaware and two in the Eagle Ford at the end of 1Q2018, but it moved one Delaware rig to the Eagle Ford in 2Q2018 and recently added a fourth, leaving two Delaware rigs and four Eagle Ford rigs.

Carrizo plans to keep that rig number until 3Q2019, to coincide with an anticipated improvement in Permian crude oil prices. Should better prices materialize, Carrizo would move two rigs from the Eagle Ford back to the Delaware.

During an earnings call Tuesday to discuss 2Q2018, CEO Chip Johnson said the decision to shift focus to the Eagle Ford was made "once it appeared Permian Basin differentials were widening sooner, and to a greater degree, than we had originally expected. This shift is expected to enhance our overall financial metrics, as returns in the Eagle Ford Shale are currently significantly higher than returns to the Delaware Basin."

Johnson said deploying additional rigs in the Eagle Ford would help Carrizo rebuild an inventory of drilled but uncompleted (DUC) wells in the play. The company plans to have an inventory of more than 40 DUCs in the Eagle Ford by the end of the year, setting up plans for the play to be the primary driver of production growth in 2019.

According to Johnson, the shift would start a ramp-up in oil production by 4Q2018.

"We don't get a lot of impact from the shift in the third quarter," Johnson said. Most of the wells fractured (fracked) in the second quarter “were in the Permian. As we start fracking more wells in the Eagle Ford, the production will start coming out in the Eagle Ford. Permian [production] will decline more than we thought, or more than we had planned...

"We haven't worked out how all these pads are going to come on next year. In the Eagle Ford, everything is done on pads. The smallest we do are probably three-well pads and we've done 16-well pads. So the production is lumpier. We haven't mapped all that out, but we know basically what we'll do for the year."

The shift to the Eagle Ford appears to go against the wishes of Kimmeridge Energy Management Co., a top Carrizo shareholder that urged the company last April to either sell its South Texas portfolio or merge with a competitor in the Permian to increase shareholder value.

Since June 2017, Carrizo has signed agreements to nearly double its position in the Permian, while also divesting assets in the Utica, Marcellus and Eagle Ford shales and the Denver-Julesburg Basin.

Carrizo reported total production of 5.19 million boe (57,077 boe/d) in 2Q2018, besting its guidance (53,800-54,800 boe/d) and 1Q2017 production by 11.9%. Crude oil production totaled 3.45 million bbl (37,860 b/d) a 12.6% increase year/year.

Although natural gas liquids (NGL) production increased 88% to 853,000 bbl (9,379 b/d) in 2Q2017, natural gas production fell 20.7% to 5.37 Bcf (59,029 Mcf/d).

The surge in Delaware production to 19,783 boe/d from 2,151 boe/d in the year-ago quarter was more than enough to offset a slight decline in production from the Eagle Ford, where output averaged 37,039 boe/d, down 2.6%.

Net income was $30.1 million (36 cents/share) in 2Q2018, compared with $56.3 million (85 cents) in the year-ago quarter. Total revenues were $264 million, compared with $166.5 million a year ago.