Carrizo Oil & Gas (CRZO) Q2 Results - August 8

[dan_s]

Second Quarter 2019 Highlights with my comments in blue.

Total production of 65,643 Boe/d, 15% above the second quarter of 2018 and 6% above the prior quarter < Compares to my Q2 production forecast of 65,600 Boepd.

Crude oil production of 44,413 Bbls/d, 17% above the second quarter of 2018 and 9% above the prior quarter

Net income attributable to common shareholders of $102.2 million, or $1.10 per diluted share, and Net cash provided by operating activities of $176.7 million < Compares to my operating cash flow forecast of $176.6 ($1.91/share).

Adjusted net income attributable to common shareholders of $65.9 million, or $0.71 per diluted share, and Adjusted EBITDA of $188.4 million < Adjusted net income compares to my forecast of $67.2 million ($0.73/share).

Operational Highlights

Production from new multipads in the Eagle Ford Shale deliver strong results
Delaware Basin well costs averaged less than $7.5 million during the second quarter, below guidance of $7.8-$8.2 million
Reducing 2019 DC&I capital expenditure guidance by approximately 5% while reiterating 2019 production guidance < Very good.

Entered into a definitive merger agreement pursuant to which Callon Petroleum Company (CPE) (“Callon”) will acquire Carrizo in an all-stock transaction valued at approximately $3.2 billion as of the date of public announcement of the merger agreement, inclusive of Carrizo’s net debt.

Carrizo reported second quarter of 2019 net income attributable to common shareholders of $102.2 million, or $1.10 per basic and diluted share, compared to net income attributable to common shareholders of $30.1 million, or $0.37 and $0.36 per basic and diluted share, respectively, in the second quarter of 2018. The net income attributable to common shareholders for the second quarter of 2019 and the second quarter of 2018 include certain items typically excluded from published estimates by the investment community. Adjusted net income attributable to common shareholders, which excludes the impact of these items as described in the non-GAAP reconciliation tables below, for the second quarter of 2019 was $65.9 million, or $0.71 per diluted share, compared to $66.6 million, or $0.79 per diluted share, in the second quarter of 2018.

For the second quarter of 2019, Adjusted EBITDA was $188.4 million. Adjusted EBITDA and the reconciliation to net income attributable to common shareholders and net cash provided by operating activities are presented in the non-GAAP reconciliation tables below.

Production volumes during the second quarter of 2019 were 5,974 MBoe, or 65,643 Boe/d, 15% higher than the second quarter of 2018 and 6% above the prior quarter. As previously disclosed in the “Second Quarter Update” portion of the Company’s July 15, 2019 press release, total production was slightly below the Company’s original guidance range of 66,500-67,500 Boe/d due to unexpected downtime at third-party midstream facilities, which negatively impacted second quarter production by more than 4,000 Boe/d. Adjusting for this impact, total production for the quarter would have exceeded the high end of the Company’s guidance range. The year-over-year growth was driven by strong production from both of the Company’s core plays. Crude oil production during the second quarter of 2019 averaged 44,413 Bbls/d, 17% higher than the second quarter of 2018 and 3% above the high end of the Company’s guidance range; natural gas and NGL production were 64,805 Mcf/d and 10,429 Bbls/d, respectively, during the second quarter of 2019.

Drilling, completion, and infrastructure (DC&I) capital expenditures for the second quarter of 2019 were $131.1 million, at the low end of the Company’s original guidance range of $130-$150 million. Approximately 66% of the second quarter DC&I spending was in the Eagle Ford Shale, with the balance in the Delaware Basin. Land and seismic capital expenditures during the quarter were $3.6 million, and were primarily focused in the Delaware Basin.

Based on efficiencies achieved year to date, Carrizo is reducing its 2019 DC&I capital expenditure guidance to $500-$550 million from $525-$575 million. The Company’s 2019 development plan continues to call for it to run an average of 3-4 rigs during the year between its assets in the Eagle Ford Shale and Delaware Basin. Based on this level of activity, Carrizo is reiterating its 2019 production guidance. < Carrizo's production guidance stays at 66,800 to 67,800, but good results in Q2 push my production forecast to the high end of their guidance and increase the percentage of crude oil.

In light of the pending merger with Callon, Carrizo does not, in general, plan to provide or update guidance on commodity price realizations or expenses during the pendency of the merger. In addition, investors are cautioned not to rely on any prior forward-looking statements regarding these items, as they spoke only as of the date provided and were subject to the specific risks and uncertainties that accompanied such statements.

S.P. “Chip” Johnson, IV, Carrizo’s President and CEO, commented on the results, “The second quarter was another strong quarter for Carrizo. Despite the impact of a material amount of weather-related downtime at a third-party midstream facility in June, we still delivered crude oil production that exceeded the high end of our guidance range. Our shift to large-scale multipad developments continues to pay dividends as these projects have delivered strong production and further efficiency gains. This can be seen in our capital spending so far this year, which has come in below our budgeted expectations. As a result, we are reducing our 2019 capex guidance range by approximately 5% while maintaining our production guidance for the year.

[dan_s]

Stifel's take on Carrizo as of 8-8-2019

Carrizo Oil & Gas, Inc. (CRZO, $9.20, Buy; Target $28.00) by Michael S. Scialla

CRZO - 2019 Budget Reduced, Production Guide Unchanged

We view the release as slightly positive. The positives include: i) 2Q oil production beat consensus by 1% despite significant curtailments due to damage at a 3rd party Delaware Basin gas processing plant; ii) 2Q DC&I capex was 9% below consensus; iii) 2019 DC&I capex guidance was reduced 5% while 2019 production guidance was unchanged; iv) 2Q Delaware well costs were 6% below plan.
The negatives include: i) 2Q CFPS was 1% below consensus primarily due to higher than expected cash costs/Boe

[dan_s]

CRZO should trade in lock-step with CPE based on the terms of the merger: Shareholders of Carrizo will receive 2.05 shares of Callon common stock in exchange for each share of Carrizo common stock, and will own approximately 46% of the combined company, on a fully-diluted basis, immediately following the close of the merger. The transaction is expected to close in the fourth quarter of 2019, subject to the approval of both Carrizo and Callon shareholders, the satisfaction of certain regulatory approvals, and other customary closing conditions.

I have updated my forecast/valuation model for Carrizo as a stand-alone company. My valuation is $30/share, up $0.50 from what I put in our 8/6 newsletter.

Carrizo in a nutshell.
> 2/3 of Carrizo's production is from the Eagle Ford where oil sells at a premium to WTI.
> The other 1/3 is from the Permian Basin. All of Callon's production comes from the Permian Basin.
> Q2 production of 65,643 Boepd (67.6% crude oil) should ramp to over 72,000 Boepd by year-end. Note that Carrizo's production exceeds Callon's production.
> Carrizo is now generating more than enough cash flow from operations to cover 100% of their capex in 2H 2019.
> The merger with Callon will be immediately accretive to Net Income and Cash Flow from Operations. Plus, there are multiple synergies that will cut their combined expenditures by $100 million or more in 2020. Size does matter in this business and "New Callon" will have over 100,000 Boepd of production on the day the merger closes.

[bobs]

Any thoughts on the merger share ratio after CRZO strong results compared to CPE which is entirely in the Permian which as of
recently doesnt look as strong a place to be compared to 6 months ago?

[dan_s]

I doubt they based the merger terms on one quarter. Carrizo does have more production and the Eagle Ford oil does sell at a premium to Permian oil today, but that will work itself out. Within six months the takeaway capacity issues in West Texas should be nearly resolved. As I posted above this is a "win-win" merger where 1+1 = more than 2.

The Eagle Ford assets are almost fully developed and therefore have less upside from here.

I think the Carrizo management team just wanted to sell or roll-up the company into a larger entity. A sale for a cash at a low point in the cycle would not have been a good thing for their shareholders. Post-merger, "New Callon" is going to have a lot of upside and it should draw a lot more of Wall Street's attention.

We are going to publish profiles on both companies. In the Callon profile, I will include a "Proforma Forecast" of what the company will look like in 2020.