Carrizo Oil & Gas

Carrizo Oil & Gas, Inc. ( CRZO - Snapshot Report ) reported second-quarter results this month that included year-over-year gains in EPS and revenue. This independent energy company has been a Zacks #1 Rank (Strong Buy) since July 25. With high quality assets, a long-term earnings growth projection of 28% and a PEG ratio of just 0.5, Carrizo Oil & Gas looks like a profitable opportunity.

Impressive 2Q, Solid Liquid Transition Story

On August 7, Carrizo Oil & Gas reported second quarter 2012 adjusted earnings of 30 cents per share (including stock based compensation), versus 20 cents a year ago. The result missed the Zacks Consensus Estimate due to higher depletion, depreciation and amortization expense, but the 50% year-over-year jump came from substantial growth in its oil production as well as higher realized hedge gains.

This Houston-based energy company recorded adjusted revenues of $92.0 million, up 70.1% from the year-ago level. Particularly strong oil production volume of 693 thousand barrels (up 339% year over year) was responsible for this stellar performance.

Carrizo Oil & Gas remains on track to shift its focus from the Barnett Shale towards the emerging Eagle Ford, Marcellus, and Niobrara plays, while changing the production mix to more liquids. Oil production contributed 75% to its second quarter total revenue. Meanwhile, third-quarter oil production is projected to grow 5% sequentially.

The company also raised its full year total production guidance to between 103.5 million and 106.5 million cubic feet equivalent per day (MMcfe/d) from its prior expectation of 96–100 MMcfe/d. It has a compound annual growth rate (CAGR) of 25% and 38% on its average daily production level and proved reserves for 2003–2011, respectively.

Earnings Growth Prospect

Based on the premier acreage and the aggressive switch to more oil/liquid production, analysts are predicting strong earnings growth for Carrizo Oil & Gas over the next couple of years. The Zacks Consensus Estimates are $1.73 for 2012 and $4.26 for 2013, indicating robust year-over-year growth of approximately 140.3% and 146.4%, respectively.

Valuation Premium Warranted

Valuation for Carrizo Oil & Gas looks relatively expensive. The current forward P/E of 14.5x implies a premium of 15.4% over the peer group average of 12.6x. The premium valuation is warranted as the company is likely to benefit from its JVs and asset sales. Moreover, the current price to sales ratio of 3.6 remains slightly below the peer group average of 3.7x, while the price to book ratio of 1.8 reflects a 11.9% discount to the peer group average of 2.0x.

Moreover, the company has a PEG ratio of 0.52, a 48% discount to the benchmark of 1 for a fairly priced stock.

Carrizo Oil & Gas has maintained its capital efficiency and high return structure by developing shale plays through successful JVs. In addition, the company continues to pursue several monetization options for 2012, which would help it to pay down debt.

Market Performance & Technicals

Although the stock showed a short span of volatility after reaching its 52-week high of $31.62 on March 19, it has been above the 50-day moving average for about a month.

Going forward, Carrizo’s outstanding organic growth in reserves and production and near-term monetization are expected to act as significant catalysts to its long-term earnings growth.

Founded in 1993, Houston-based Carrizo Oil & Gas is an independent energy company engaged primarily in various shale plays in the U.S. and U.K. Its operations are focused on the Barnett, Eagle Ford, Marcellus and Niobrara. Additionally, it holds interests in the Gulf Coast and North Sea oil and gas properties.