Houston-based Carrizo Oil & Gas Inc. last week announced two shale patch deals intended to strengthen its balance sheet and capture opportunities from growing liquids-rich gas production.

In the first, Carrizo and a unit of India’s Gail (India) Ltd. closed on a joint venture (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.

In the second, a newly formed JV of Carrizo Oil & Gas Inc. and Avista Capital Partners 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.

Both deals were praised by analysts for boosting Carrizo’s liquidity and being aligned with management’s previously stated plans.

The transaction with Carrizo marked Gail’s first acquisition of U.S. shale gas assets, accomplished through the newly formed subsidiary Gail Global (USA) Inc., and it anticipates future shale development in the company’s home country.

“Keeping in view the prospect of Indian shale gas bidding rounds opening within a couple of years, this experience will hopefully help Gail develop necessary skill sets for shale gas exploitation,” said Gail Chairman B.C. Tripathi. “Under the arrangement, Gail shall be sending secondees [transferred employees] to Carrizo to work on the Eagle Ford assets and Gail and Carrizo shall also work together in exploring shale gas opportunities in India and other countries outside of [the] U.S.”

The assets conveyed include about 4,040 net acres, primarily in La Salle County, TX, and a 20% interest in eight horizontal wells currently producing about 1,700 boe/d net (340 b/d net to Gail) and 3,800 Mcf/d net of rich gas (760 Mcf/d net to Gail). Carrizo’s internally estimated mid-year 2011 proved reserves allocated to the acreage amount to 13.8 million boe (2.76 million boe net to Gail), of which 2.5 million boe are classified as proved developed (0.5 million boe net to Gail).

The consideration to be paid by Gail is composed of $63.65 million in cash and a drilling carry worth $31.35 million. Carrizo said it used the cash proceeds to trim debt under its revolving credit facility.

“With the current uncertainty in the global financial markets, we felt it prudent to execute this transaction and take the opportunity to reduce our financial leverage and preserve our liquidity to be better prepared for whatever the future should hold,” said Carrizo CEO Chip Johnson. “As we continue to control the pace of substantially all of our development activities, we have the flexibility to adjust our capital requirements as necessary.”

Including the cash and drilling carry components of the deal, Gail said it expects to spend about US$300 million over the next five years, with a major portion coming from Gail Global (USA) earnings.

The JV is expected to drill an additional 139 wells on the acreage. A rig is in the process of drilling a four-well pad on the JV property, which is expected to be completed and brought on production near the end of this year. Houston-based Carrizo remains operator of the properties and said it expects the $31.35 million drilling carry to be fully realized in less than a year.

Gail is an integrated gas company with interests in exploration and production and liquefied natural gas (LNG). It is listed on India’s National Stock Exchange, the Bombay Stock Exchange and the London Stock Exchange. The government of India owns 57% of the company. Most of Gail’s business is in India, but it has holdings in China, Singapore and other countries.

“This transaction represents a major step in Gail’s efforts to establish its presence in North America,” Tripathi said. “As the next logical step, Gail Global (USA) Inc will consider expanding its business portfolio in the North American market by pursuing various upstream and midstream opportunities including LNG export to India.”

Gas demand in India is up substantially, rising 21.5% year over year in 2010, according to the 60th annual BP Statistical Review of World Energy (see NGI, June 13).

Under a memorandum of understanding signed between the United States and India last November when President Obama visited the country, U.S. State Department and Indian officials have been working on an initiative to launch shale gas development in India by the end of this year.

Last year India’s Reliance Industries Ltd. became a drilling partner of Atlas Energy Inc. in the Marcellus Shale in a deal worth $1.7 billion (see NGI, April 12, 2010). Atlas was later acquired by Chevron Corp. (see NGI, Feb. 21).

Carrizo recently struck deals to acquire additional Eagle Ford acreage (see NGI, June 13), but it will not be included in the JV, the company said. With the expected acquisition of new Eagle Ford acres and the JV the company’s Eagle Ford leasehold is expected to be about 41,000 net acres.

The Utica Shale acreage acquired by Carrizo and Avista came 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.

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 related story). 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 NGI, Sept. 26).

“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.

Once the Carrizo-Avista Marcellus JV reached critical mass in acreage, Avista sold the majority of its interest to Reliance 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.”

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 last 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.”

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