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Carrizo Oil & Gas, Inc. has been grappling with low liquidity and high leverage issues. Over the past year, shares of Carrizo have plunged 39%, underperforming the broader industry’s decline of 12.7%.
Despite weak financials, the company has plans to incur capital expenditure of around $700-$800 million in 2018, owing to a double-digit rise in the oilfield services cost. Notably, the projected capex is higher than $695.7 million spent in 2017. Further, the production outlook of the company also doesn’t look very promising. Carrizo expects first-quarter 2018 production to lie between 48,600 and 49,800 barrels of oil equivalent per day (Boe/d), lower than the prior-quarter’s output of 62,417 Boe/d.
Driven by the concerns, private-equity firm Kimmeridge Energy Management Company has recently boosted its stake in Carrizo to put pressure on the company, for pursuing asset sales and other strategic initiatives to buoy its staggering financials and share price.
Activist Investor Kimmeridge increased its stake in Carrizo to 8.1%, reflecting a 65% jump from the previously held 4.9%. Post the development, shares of Carrizo have moved up 11.5% to eventually close at $17.15 on Apr, 5.
Carrizo is burdened with a heavy debt pile of around $1.63 billion, which is even higher than the company’s market capitalization. Notably, the company’s debt levels witnessed a year-over-year increase of 22.5% in 2017. Carrizo currently carries a debt-to-capitalization ratio of 81.5% that limits its growth and restricts financial flexibility. The low liquidity of the company, which stands at 0.33, also raises concern over its asset-management practices, considering it as a small-cap company.
Kimmeridge wants the company to divest its assets in the Eagle Ford Shale to delever its balance sheet. The private equity company either wants Carrizo to exit entirely from its Eagle Ford Holdings for debt reduction or if not all, then part of its holdings to use the proceeds for share buyback purposes.
Notably, the company closed the divestment of its non-core Eagle Ford assets in February for $245 million. In fact, over the past few quarters, the company has been concentrating to streamline its portfolio, and made various non-core divestitures in Marcellus, Utica, Appalachia and DJ Basin.
However, Carrizo still owns around 78,500 acres in the Eagle Ford Play, which the activist investor does not view as a promising region owing to operational issues and estimated production decline from these holdings. As such, it wants the company to divest its remaining Eagle Ford properties to shore up the financials, and in the process, become a Pure-Permian play that offers more lucrative prospects.
Importantly, last year Carrizo acquired Delaware Basin assets for $648 million to increase its core position in one of the highest-return plays in North America. The company currently owns 43,600 net acres in the Delaware Basin, which is part of the Permian Basin. Oil production in the Permian region has been witnessing significant growth, with current capacity of churning around 3 million barrels per day (Bpd), which is expected to rise by another 2 million Bpd within 2025. Kimmeridge appreciates the attractive economics of the Permian region, owing to the low cost-high margin operational structure, and hence wants the company to become a Permian pure play that will help it to drive its production.
However, of late, with many oil producers entering the Permian and surging production, a lack of pipeline takeaway capacity has pushed crude prices in the region to trade at a discount to the U.S. benchmark.
Thus, Kimmeridge believes that merger with some other Permian-focused rival will turn out to be a prudent strategy for Carrizo, owing to its small scale and weak financials. A merger will bolster its scale and position in the Permian, along with enhancing buying power in securing services in the region. The financial, operation and commercial synergies from a strategic acquisition will also position the company better.
While Kimmeridge is putting pressure on Carrizo to make some serious strategic changes for boosting its value, whether the upstream player will give in to the activist investors’ demands or not is a wait and watch story.
Zacks Rank and Key Picks
Carrizo carries a Zacks Rank #3 (Hold).
Some better-ranked players in the energy space include Concho Resources Inc. , Pioneer Natural Resources Company (PXD - Free Report) and Continental Resources, Inc , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Concho topped earnings estimates in each of the preceding four quarters, with an average of 48.89%.
Pioneer Natural surpassed earnings estimates in each of the last four quarters, with an average of 66.92%.
Continental Resources delivered an average positive earnings surprise of 64.93% in the trailing four quarters.
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Image: Bigstock
Activist Investor Plans Carrizo (CRZO) Shake-Up, Hikes Stake
Carrizo Oil & Gas, Inc. has been grappling with low liquidity and high leverage issues. Over the past year, shares of Carrizo have plunged 39%, underperforming the broader industry’s decline of 12.7%.
Despite weak financials, the company has plans to incur capital expenditure of around $700-$800 million in 2018, owing to a double-digit rise in the oilfield services cost. Notably, the projected capex is higher than $695.7 million spent in 2017. Further, the production outlook of the company also doesn’t look very promising. Carrizo expects first-quarter 2018 production to lie between 48,600 and 49,800 barrels of oil equivalent per day (Boe/d), lower than the prior-quarter’s output of 62,417 Boe/d.
Driven by the concerns, private-equity firm Kimmeridge Energy Management Company has recently boosted its stake in Carrizo to put pressure on the company, for pursuing asset sales and other strategic initiatives to buoy its staggering financials and share price.
Activist Investor Kimmeridge increased its stake in Carrizo to 8.1%, reflecting a 65% jump from the previously held 4.9%. Post the development, shares of Carrizo have moved up 11.5% to eventually close at $17.15 on Apr, 5.
Carrizo is burdened with a heavy debt pile of around $1.63 billion, which is even higher than the company’s market capitalization. Notably, the company’s debt levels witnessed a year-over-year increase of 22.5% in 2017. Carrizo currently carries a debt-to-capitalization ratio of 81.5% that limits its growth and restricts financial flexibility. The low liquidity of the company, which stands at 0.33, also raises concern over its asset-management practices, considering it as a small-cap company.
Kimmeridge wants the company to divest its assets in the Eagle Ford Shale to delever its balance sheet. The private equity company either wants Carrizo to exit entirely from its Eagle Ford Holdings for debt reduction or if not all, then part of its holdings to use the proceeds for share buyback purposes.
Notably, the company closed the divestment of its non-core Eagle Ford assets in February for $245 million. In fact, over the past few quarters, the company has been concentrating to streamline its portfolio, and made various non-core divestitures in Marcellus, Utica, Appalachia and DJ Basin.
However, Carrizo still owns around 78,500 acres in the Eagle Ford Play, which the activist investor does not view as a promising region owing to operational issues and estimated production decline from these holdings. As such, it wants the company to divest its remaining Eagle Ford properties to shore up the financials, and in the process, become a Pure-Permian play that offers more lucrative prospects.
Importantly, last year Carrizo acquired Delaware Basin assets for $648 million to increase its core position in one of the highest-return plays in North America. The company currently owns 43,600 net acres in the Delaware Basin, which is part of the Permian Basin. Oil production in the Permian region has been witnessing significant growth, with current capacity of churning around 3 million barrels per day (Bpd), which is expected to rise by another 2 million Bpd within 2025. Kimmeridge appreciates the attractive economics of the Permian region, owing to the low cost-high margin operational structure, and hence wants the company to become a Permian pure play that will help it to drive its production.
However, of late, with many oil producers entering the Permian and surging production, a lack of pipeline takeaway capacity has pushed crude prices in the region to trade at a discount to the U.S. benchmark.
Thus, Kimmeridge believes that merger with some other Permian-focused rival will turn out to be a prudent strategy for Carrizo, owing to its small scale and weak financials. A merger will bolster its scale and position in the Permian, along with enhancing buying power in securing services in the region. The financial, operation and commercial synergies from a strategic acquisition will also position the company better.
While Kimmeridge is putting pressure on Carrizo to make some serious strategic changes for boosting its value, whether the upstream player will give in to the activist investors’ demands or not is a wait and watch story.
Zacks Rank and Key Picks
Carrizo carries a Zacks Rank #3 (Hold).
Some better-ranked players in the energy space include Concho Resources Inc. , Pioneer Natural Resources Company (PXD - Free Report) and Continental Resources, Inc , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Concho topped earnings estimates in each of the preceding four quarters, with an average of 48.89%.
Pioneer Natural surpassed earnings estimates in each of the last four quarters, with an average of 66.92%.
Continental Resources delivered an average positive earnings surprise of 64.93% in the trailing four quarters.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
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