A newly formed joint venture (JV) of Carrizo Oil & Gas Inc. and Avista Capital Partners has closed its first acquisition: 15,000 net acres in the Utica Shale in eastern Ohio and northwestern Pennsylvania at an average cost of less than $1,500/acre, Carrizo said. The deal is the second announcement from the company in the same week as it strengthens its finances to plow ahead in the shales.

The acreage was acquired from Cobra Resources LLC of Canfield, OH, according to Carrizo's Richard Hunter, vice president of investor relations, who said the deal had been in the works for a number of months.

Houston-based Carrizo will own an initial 10% interest in the JV properties with Avista owning the remaining 90%. Avista has the right to contribute aggregate funds of up to $130 million to the JV, with the ability to raise this amount by an incremental $70 million.

Carrizo holds two purchase options to increase its interest to 50% in the properties acquired by the JV over the next 18 months. If the purchase options are not exercised, it will be entitled to share in cash distributions by Avista to its partners, provided specified return on investment thresholds on Avista's investment are achieved.

Analysts at Tudor, Pickering, Holt & Co. said initial capital commitment to the JV for "cash-strapped" Carrizo is low and the deal provides "nice optionality on [the] Utica at a low entry price."

Chesapeake Energy Corp. recently reported "strong initial production" from its first Utica wells (see Shale Daily, Sept. 29). While its results were some of the first hard data after months of speculation, the information does not cover the oil window of the play, which led Chesapeake CEO Aubrey McClendon to tout the Utica as the most promising shale play in the country (see Shale Daily, Sept. 22; Aug. 1).

"We are very much on the same page as Aubrey..." Hunter said. "We are optimistic [the acreage] may be as good as our acreage in LaSalle county [TX], which is in the condensate zone of the Eagle Ford, and we believe we're buying acres that are in the condensate zone of the Utica."

The acquired acreage is mainly in Mercer and Trumbull counties, Hunter said. "We have a hope of being able to invest the entire amount that Avista has dedicated to this project. That's our long-term goal," he said.

Carrizo will initially serve as operator of the JV properties and will provide management services to Avista. The partners are not strangers, having worked together in the Marcellus Shale. In 2008 Avista said it would invest up to $150 million with Carrizo to acquire and develop Marcellus acreage.

"Avista is pleased to continue its partnership with the Carrizo team and build upon the great success we have achieved together in the Marcellus Shale," said Avista Partner Robert L. Cabes Jr.

Once the Carrizo-Avista Marcellus JV reached critical mass in acreage, Avista sold the majority of its interest to Reliance Industries Ltd. of India in August 2010, retaining a "stub that Reliance didn't want to buy," Hunter said. "We expect Avista's exit plan to be similar to the one we had with them in the Marcellus."

The latest JV is the second Carrizo announcement in recent days as the company moves to deepen its pockets with the help of partners and expand its opportunities. On Wednesday Carrizo and a unit of India's Gail (India) Ltd. said they closed on a JV that gives Gail 20% of Carrizo's interest in about 20,200 net acres in the condensate zone of the Eagle Ford Shale for $95 million (see Shale Daily, Sept. 30).

To BMO Capital Markets analyst Dan McSpirit the Utica JV is more good news from "this not-so-capital-rich company." He said "reinvention" is what Carrizo has been about.

"This [Utica JV] is a more timely reinvention," McSpirit said in a note Friday. "We think of it as Carrizo writing the next growth chapter without stretching the balance sheet. Opportunity richer, less capital-poor, in other words. We wrote [about the Gail JV] that one of our 'favorite things' is a plan executed as stated by management; more evidence of the same here."