A Fast-Growing Eagle Ford Play

 | Jun 18, 2013 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

tplm

,

crzo

I continue to be impressed and to profit by the continued production growth coming from the Bakken and the Eagle Ford shale regions of the United States.

One of my core energy holdings, Triangle Petroleum (TPLM), is up almost 40% in the last two weeks. Catalysts driving this recent rise include; a strong earnings report, continued solid production growth from its Bakken acreage and some recent positive comments from analysts. Another company that recently also delivered good results and upped production guidance this week because of its operations in the Eagle Ford is Carrizo Oil & Gas (CRZO). It is the subject on today's column.

Company Overview:

Carrizo Oil & Gas is a small ($1.2B market capitalization) exploration and production company with productive acreage in the Utica, Marcellus, Barnett, Niobara and Eagle Ford shale regions. Its main focus in growing production is currently in the Eagle Ford formation in Texas. ..

 

Production Growth:

Carrizo has roughly tripled production growth over the past five years. Analysts have struggled recently to keep up with these production increases on earnings. Carrizo easily blew through consensus earnings expectations each of the last three quarters. Not only has the company shown impressive production growth but the cash flow it receives from each barrel of oil equivalent has increased significantly over the past few years. One of the drivers of this cash flow growth is the greater proportion of revenues now coming from oil vs. natural gas (See Chart) driven by the company's capital allocation strategy.

Valuation:

Despite the stock's 40% rise over the past year, the shares are still cheap compared with its production growth. CRZO sells for just over 10x 2014's projected earnings. The stock sports minuscule five-year projected price/earnings to growth ratio (.43).

Analysts expect 23% revenue growth for both FY2013 and FY2014 and this was before the company's upward guidance early Monday (See next section). Look for earnings and revenues estimates for both FY2013 & FY2014 by analysts to be taken up significantly on the back of this revised guidance in the coming weeks.

With debt, Carrizo has an enterprise value of around $2B. This is close to 10-year net present value of its proven reserves. It is, however, less than half the 10-year net present value of its proven and probable reserves (See Chart). As Carrizo continues to deliver against its production plan and beat consensus growth estimates, I would look for the stock price of CRZO to march towards the latter figure.

I

Recent Catalysts:

The company came with revised production guidance Monday.  Carrizo currently is experiencing better-than-anticipated production growth, driven by its Eagle Ford acreage. It is increasing its production growth estimates to 40% Y/Y for 2013 up from 28% Y/Y previously.

It also sees production coming in at 11,200 barrels of 0il equivalent/D from 10,000 BOE/D previously. Encouraged by results, it is also raising its 2013 capital budget forecast to a range of $530 million to $540 million from $500 million previously.

In early May Carrizo released its quarterly earnings report. The company easily beat estimates both on the top and the bottom line on record production. In late April, Citadel Advisors disclosed a 4.6% "passive" stake in Carrizo and Suntrust initiated the shares of Carrizo as a "Buy".

Balance Sheet & Cash Flow:

Carrizo has grown its operating cash flow by more than 270% since the end of FY2010. It has a solid and financial flexible balance sheet with significant undrawn credit facilities. Given operating cash flow growth and solid liquidity, it has ample ability to continue to fund its drilling program. That is demonstrated by Monday's notice that is increasing its capital budget by $30 million to $40 million in 2013.

Summary:

Carrizo Oil & Gas has grown production at a 25% compound annual growth rate over the last 10 years with slightly better growth in reserves over that time period (See Chart). With its recent upwardly- revised production guidance, the company looks to be a solid bet to meet or beat those average growth figures over the next few years. An investor can pick up this fast-growing, well-managed energy producer for just over 10x next year's projected earnings and significantly under the net present value of its proven and probable reserves. BUY.

I

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