Energy Prospectus

I am working on the forecast model for Sweet 16 member Carrizo Oil & Gas (CRZO) this morning and I will have it posted to the website this afternoon. Below is a very important item that investors need to understand. This is just one more reason why investors in E&P companies must focus on cash flows and reserve growth. Earnings are distorted by all the weird accounting rules.

During the third quarter of 2010, the Company received cash distributions of $20.8 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 ("Avista"), a private equity fund, as a result of ACP II's distribution to Avista of 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.

CRZO's 3rd quarter results did come in slightly below my forecast, primarily due to lower production. However, they still have very significant production and reserve growth locked in. Their Marcellus Shale drilling program kicks into high gear next year.

Carrizo's President and CEO, S. P. "Chip" Johnson, IV, commented, "Production performance from new and recently completed wells in all our areas of operation continues to meet or exceed our expectations, as we brought on five gross Eagle Ford Shale, two Niobrara Formation and eight Barnett Shale wells in the third quarter. The largest contributor to our production short-fall came from lower than forecasted production from our non-operated Barnett Shale properties and a steeper than anticipated decline in our approximately 10 Mmcfe per day of Gulf Coast production. Delays in the completion of gas gathering systems in the Eagle Ford and Marcellus Shales also negatively impacted our gas production. Our oil production was within the range of our expectations despite delayed Eagle Ford Shale completions caused by a service company's equipment problems.

"Our expectation for the fourth quarter calls for a large increase in Eagle Ford Shale production as 13 gross new wells are scheduled to come on production. Our first operated Marcellus production began from two gross wells in mid-October and gas production should benefit from the addition of three gross wells in December, all from Susquehanna County. Niobrara production should increase with the addition of two gross new wells that came on production the last day of the third quarter and one additional gross well that should come on production in December. The combined effect of these new wells, offset by the volumes associated with the interest in the Eagle Ford Shale properties transferred to GAIL (INDIA) LIMITED in our recently announced joint venture, leads to our guidance for production in the quarter to range between 137 and 143 Mmcfe per day. We continue to believe that we will achieve our previous goal of 5,000 net barrels per day of oil production before the end of the quarter."

Carrizo Oil & Gas (CRZO) reported 3rd quarter results slightly below our forecast. Production is ramping up into year-end with a significant increase in produced liquids expected. An updated forecast model, which includes our adjusted Fair Value estimate, is available under the Sweet 16 Tab.

Global Hunter Securities follows CRZO closely. On Nov. 9 they upgraded CRZO to a BUY. It is trading well below my Fair Value estimate. CRZO is going to have a significant increase in cash flow per share in 2012 as a much higher percentage of their production will be from liquids next year. This is what I like most about the stock.

Cash Flow per year:
2009 = $0.75
2010 = $3.13
2011 = $4.29 < My forecast compared to First Call CFPS estimate of $3.92
2012 = $8.76 < My forecast compared to First Call CFPS estimate of $8.30

IMO a very conservative valuation is 6X CFPS. You can do the math and see that this one has a lot of upside for investors.