Tuesday, August 09, 2011
Carrizo O&G Inc.
Carrizo announced financial results for the second quarter of 2011, which included the following highlights:
Results for the Second Quarter of 2011
- Record production of 11.2 Bcfe, or 122,788 Mcfe/d
- Revenue of $50.7 million or adjusted revenue, of $54.1 million, including the impact of realized hedges
- Net Income of $7.7 million, or Adjusted Net Income, as defined below, of $9.5 million
- EBITDA, as defined below, of $41.8 million
Production volumes during the three months ended June 30, 2011 were a record 11.2 Bcfe, an increase of 1.9 Bcfe, or 20%, from second quarter 2010 production of 9.3 Bcfe and an increase of 0.5 Bcfe, or 5% from first quarter 2011 production of 10.7 Bcfe. The increase in production from the second quarter of 2010 and the first quarter 2011 to the second quarter of 2011 was primarily due to increased production from new wells in the Barnett Shale, Eagle Ford Shale and Niobrara Formation, partially offset by normal production decline and the sale of substantially all of our non-core area Barnett Shale properties to KKR Natural Resources ("KKR") in May 2011.
Adjusted revenues were $54.1 million for the second quarter of 2011, which includes oil and gas revenues of $50.7 million and realized hedge gains of $3.4 million, compared to $43.5 million for the second quarter of 2010, which includes oil and gas revenues of $32.9 million and realized hedge gains of $10.6 million. The increase in adjusted revenues was primarily driven by increased production, particularly higher oil and condensate production in the Eagle Ford Shale, and higher oil prices partially offset by lower realized hedge gains. Including the impact of realized hedges, the Company's average realized gas price decreased 13% to $3.83 per Mcfe for the second quarter of 2011 compared to $4.40 per Mcfe for the second quarter of 2010 and the average realized oil price increased 1% to $93.90 per barrel for the second quarter of 2011 compared to $93.30 per barrel for the second quarter of 2010. Revenues excluding the impact of realized hedges are presented in the table below.
Adjusted net income, which excludes certain non-cash items described in the statements of operations included below ("Adjusted Net Income"), was $9.5 million, or $0.25 and $0.24 per basic and diluted share, respectively, during the second quarter of 2011, including a $3.3 million benefit of cash distributions received from a joint venture partner as described below, as compared to $11.3 million, or $0.33 per basic and diluted share, during the second quarter of 2010. The Company reported net income of $7.7 million, or $0.20 per basic and diluted share, for the quarter ended June 30, 2011, as compared to net income of $1.8 million, or $0.05 per basic and diluted share, for the same quarter during 2010.
Earnings before interest, income tax, depreciation, depletion and amortization ("EBITDA") as defined in the Company's new U.S. senior secured revolving credit facility ("Credit Facility") and described in the statements of operations included below was $41.8 million, or $1.07 and $1.06 per basic and diluted share, respectively, during the second quarter of 2011, including the $3.3 million benefit of cash distributions received from a joint venture partner as described below, as compared to $31.6 million, or $0.93 and $0.92 per basic and diluted share, respectively, during the second quarter of 2010. During the second quarter of 2011, the Company received cash distributions of $3.3 million on its B Unit investment in ACP II Marcellus, LLC ("ACP II"), a joint venture partner in the Marcellus Shale that is an affiliate of Avista Capital Partners, LP, a private equity fund, as a result of ACP II's distribution to Avista of remaining proceeds from its sale of oil and gas properties to an affiliate of Reliance Industries Limited ("Reliance"). Although such cash distributions are included in EBITDA and Adjusted Net Income, such cash distributions are recognized as a reduction of oil and gas property costs under the full cost method of accounting and accordingly are not included in net income.
Lease operating expenses (including transportation costs of $1.6 million) were $7.4 million (or $0.66 per Mcfe) for the three months ended June 30, 2011 as compared to lease operating expenses (including transportation costs of $1.5 million) of $6.2 million (or $0.66 per Mcfe) for the second quarter of 2010. Lease operating expenses increased due to increased production primarily attributable to new wells in the Barnett Shale, Eagle Ford Shale and Niobrara Formation. Although we continued to experience a decrease in the operating cost per Mcfe of our Barnett Shale production, driven by comparatively less salt water disposal costs in the core area of the Barnett Shale as compared to production from other areas of the Barnett Shale, this decrease was offset by increased operating cost per Mcfe associated with higher cost oil production.
Production taxes were $1.5 million (or 2.89% of revenues) for the three months ended June 30, 2011 as compared to $0.9 million (or 2.69% of revenues) for the three months ended June 30, 2010. The increases in production taxes and the percentage of revenues are due to increased oil production, which has a higher effective production tax rate as compared to natural gas.
Ad valorem taxes increased to $1.0 million (or $0.05 per Mcfe) for the three months ended June 30, 2011 from $0.5 million ($0.09 per Mcfe) for the same period in 2010. The increase in ad valorem taxes is due to new oil and gas wells drilled in 2010 as well as a reduction in ad valorem taxes recorded in the second quarter of 2010 reflecting a true up of our first quarter 2010 estimate. The decrease in the per Mcfe amounts is due primarily to this true up of the first quarter 2010 estimate.
General and administrative expense was $5.7 million during the three months ended June 30, 2011 as compared to $4.3 million during the three months ended June 30, 2010. The increase was primarily due to increased compensation costs related to an increase in the number of employees in the second quarter of 2011.
Depreciation, depletion and amortization ("DD&A") expense for the three months ended June 30, 2011 increased to $20.6 million (or $1.84 per Mcfe) from $11.1 million (or $1.19 per Mcfe) for the same period in 2010. The increases in DD&A and the related per Mcfe amounts were primarily due to increased production during the second quarter of 2011 as compared to the same period in 2010 and increased future development costs associated with crude oil and natural gas liquids reserves in the Eagle Ford which were added during the fourth quarter of 2010 and have a higher future development cost per equivalent unit than the Company's proved gas reserves. The increase in the second quarter 2011 forecasted DD&A of $1.58 per Mcfe to the actual DD&A of $1.84 per Mcfe is largely due to increased production in the second quarter of 2011 as compared to the first quarter of 2011 as well as an increase in prior year's estimated future development costs in the Eagle Ford.
Cash interest expense, net of amounts capitalized, increased to $6.1 million for the second quarter of 2011 compared to $2.9 million for the second quarter of 2010. The increase was primarily attributable to interest on the $400 million aggregate principal amount of Senior Notes issued in the fourth quarter of 2010 partially offset by decreased interest attributable to the $300 million aggregate principal amount of Convertible Senior Notes repurchased in a tender offer during the fourth quarter of 2010.
An unrealized gain on derivatives of $8.1 million was recorded for the second quarter of 2011 compared to an unrealized loss on derivatives of $7.4 million for the second quarter of 2010 due to the change in fair value of our open derivative positions during those periods.
Non-cash, stock-based compensation expense increased to $6.8 million for the three months ended June 30, 2011 from $3.2 million for the same period in 2010. The increase was largely attributable to additional stock appreciation rights as well as stock appreciation rights that increased in fair value.
Non-cash interest expense, net of amounts capitalized, decreased to $0.7 million for the second quarter of 2011 compared to $1.9 million for the second quarter of 2010, primarily due to decreased amortization of the discount as a result of the $300 million aggregate principal amount of the Convertible Senior Notes repurchased in a tender offer during the fourth quarter of 2010.
During the second quarter of 2011, we contributed $1.0 million in common stock to the Carrizo Oil & Gas, Inc. endowed scholarship fund at the University of Texas at Arlington ("UTA") where we are producing natural gas from a number of wells in the Barnett Shale play.
The effective income tax rate was 31.8% for the second quarter of 2011 and 15.0% for the second quarter of 2010. Our estimated annual effective income tax rate for 2011 is approximately 37%, substantially all of which we expect to be deferred. The effective income tax rate for the second quarter of 2011 was lower than 37% primarily due to the true up of prior estimates of the foreign tax benefit associated with the Company's UK Huntington field development. The lower rate in the second quarter of 2010 was due to a true up of prior estimates of state income tax.
Carrizo's President and CEO, S. P. "Chip" Johnson, IV, commented on recent activity, "In late July we initiated sales from a three well pad producing from the Eagle Ford Shale on our Mumme lease in La Salle County, Texas, and from our Orlando Hill well in the Niobrara Formation. These events marked an inflection point in our liquids production growth ramp. We anticipate the oil production from these new wells to be followed by a fairly steady increase for the remainder of the year, with each month's oil production sequentially higher than the last, as a sufficient inventory of drilled wells has been built in the Eagle Ford and Niobrara to allow the execution of a continuous completion program.
"While still flowing back significant quantities of completion fluid, the Mumme 30H, 31H and 32H have each reached rates between 920 BOE per day and 1,184 BOE per day, consisting of 720-984 barrels of oil and approximately 1,200 Mcf of high BTU natural gas which went directly to sales in the existing lease gas gathering system. Following stabilization, we intend to flow these wells at constrained rates to maximize ultimate recoveries. We expect to begin completion of a three well pad on the Glover lease in Atascosa County later this month and anticipate first sales to occur in mid-September. Our recently completed well in the Niobrara Formation, the Orlando Hill 26-44-8-61 in Weld County, Colorado, reached a peak 24 hour production rate of 650 bopd on July 17th and averaged 580 bopd over the following week. The Nelson 17-44-9-60 well has also been completed and is currently flowing back completion fluid with a strong oil cut. An additional Niobrara well, the Wickstrom 7-11-5-60, has been drilled to total depth and is scheduled for completion later this month. We continue to be satisfied with the results of our Niobrara program and expect to be able to average adding a new well to production each month for the rest of 2011.
"The production contribution from our Eagle Ford completion program and our Niobrara activity should allow us to exit the year 2011 at or above our previous guidance of 5,000 net bopd. This growth in liquids production, in addition to the improved well performance from the Barnett Shale, gives us confidence in meeting our 2011 production growth forecast of 32% (after adjustment for the sale of a portion of our Barnett Shale properties to KKR earlier this year)."
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