1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
---------- --------
Commission File Number 000-22915.
CARRIZO OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0415919
----- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14811 ST. MARY'S LANE, SUITE 148, HOUSTON, TEXAS 77079
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(281) 496-1352
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X*.] No [ ]
* The registant became subject to the reporting requirements of Section 13 of
the Securities Act of 1933 on August 5, 1997.
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of November 7, 1997, the latest practicable date, was
10,375,000.
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CARRIZO OIL & GAS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Combined Balance Sheets
- As of September 30, 1997 and December 31, 1996 2
Condensed Combined Statements of Operations
- For the three-month and nine-month periods ended September 30, 1997 and
1996 3
Condensed Combined Statements of Cash Flows
- For the nine-month periods ended September 30, 1997 and 1996 4
Notes to Condensed Combined Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
PART II. OTHER INFORMATION
Items 1-6. 14
SIGNATURES 17
3
CARRIZO OIL & GAS, INC., AND AFFILIATED ENTITIES
CONDENSED COMBINED BALANCE SHEETS
December 31, September 30,
1996 1997
---------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,492,603 $ 2,773,274
Accounts receivable 1,815,906 2,676,855
Advances to operators - 1,618,929
Other current assets 15,472 111,933
------------- ------------
Total current assets 3,323,981 7,180,991
PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and gas
properties) 15,205,587 35,789,742
OTHER ASSETS 339,789 211,897
------------- ------------
$ 18,869,357 $ 43,182,630
============= ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 4,326,299 $ 8,570,616
Other current liabilities 22,976 3,931
------------- ------------
Total current liabilities 4,349,275 8,574,547
NOTES PAYABLE TO RELATED PARTIES 2,773,935 -
LONG-TERM DEBT 6,910,000 -
DEFERRED INCOME TAXES - 2,086,115
OTHER LONG-TERM LIABILITIES 240,197 -
EQUITY:
Capital 4,261,000 32,973,796
Retained earnings (deficit) 334,950 (32,022)
Deferred compensation - (419,806)
-------------- ------------
4,595,950 32,521,968
------------- ------------
$ 18,869,357 $ 43,182,630
============= ============
The accompanying notes are an integral part of these financial statements.
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CARRIZO OIL & GAS, INC., AND AFFILIATED ENTITIES
UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS
For the Three For the Nine
Months Ended Months Ended
September 30 September 30
---------------------------- --------------------------
1996 1997 1996 1997
------------ ------------- ------------- -----------
OIL AND NATURAL GAS REVENUES $ 1,588,354 $ 2,069,237 $ 3,807,000 $ 6,234,261
COSTS AND EXPENSES:
Oil and natural gas operating expenses 564,606 583,361 1,628,438 1,779,154
Depreciation, depletion and amortization 356,940 647,295 793,265 1,635,319
General and administrative 155,932 388,227 316,165 992,988
----------- ----------- ----------- -----------
Total costs and expenses 1,077,478 1,618,883 2,737,868 4,407,461
----------- ----------- ----------- -----------
OPERATING INCOME 510,876 450,354 1,069,132 1,826,800
OTHER INCOME AND EXPENSES:
Interest income - 43,784 - 43,784
Interest expense (114,747) (172,261) (249,500) (641,921)
Interest expense, related parties (35,221) (51,664) (100,748) (137,067)
Capitalized interest 141,845 162,767 270,916 627,547
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 502,753 432,980 989,800 1,719,143
DEFERRED INCOME TAX EXPENSE - 151,543 - 2,086,115
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 502,753 $ 281,437 $ 989,800 $ (366,972)
=========== =========== =========== ===========
PRIMARY AND FULLY DILUTED EARNINGS
PER SHARE (Note 2) $ .03 $ (.04)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
(Note 2) 9,227,165 8,229,315
=========== ===========
The accompanying notes are an integral part of these financial statements.
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CARRIZO OIL & GAS, INC., AND AFFILIATED ENTITIES
UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
For the Nine
Months Ended
September 30
-----------------------------------
1996 1997
------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 989,800 $ (366,972)
Adjustment to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation, depletion and amortization 793,265 1,635,319
Deferred income taxes - 2,086,115
Changes in assets and liabilities-
Accounts receivable (1,320,001) (860,949)
Advance to operators - (1,618,929)
Other current assets (8,580) (96,461)
Accounts payable, trade 1,424,095 (618,303)
Interest payable to related parties 81,185 (240,197)
Other current liabilities - (19,045)
----------- ------------
Net cash provided by
operating activities 1,959,764 (99,422)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, accrual basis (4,579,856) (21,951,646)
Adjustment to cash basis - 4,862,620
----------- ------------
Net cash used in (4,579,856) (17,089,026)
----------- ------------
investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock - 28,243,054
Proceeds from long-term debt 1,826,316 10,594,454
Debt repayments - (20,408,934)
Proceeds from related-party notes payable 1,403,285 130,545
Contributions 450,000 -
Distributions (45,000) (90,000)
----------- ------------
Net cash provided by
financing activities 3,634,601 18,469,119
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,014,509 1,280,671
CASH AND CASH EQUIVALENTS, beginning of period
69,536 1,492,603
----------- ------------
CASH AND CASH EQUIVALENTS, end of period
$ 1,084,045 $ 2,773,274
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amounts capitalized) $ - $ 151,441
=========== ============
The accompanying notes are an integral part of these financial statements.
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CARRIZO OIL & GAS, INC., AND AFFILIATED ENTITIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND
PRINCIPLES OF COMBINATION:
The condensed combined financial statements included herein have been prepared
by Carrizo Oil & Gas, Inc. (Carrizo, or together with its affiliates and
predecessors, the Company), and are unaudited, except for the balance sheet at
December 31, 1996, which has been prepared from the audited financial
statements at that date. The financial statements reflect necessary
adjustments, all of which were of a recurring nature, and are in the opinion of
management necessary for a fair presentation. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). The
Company believes that the disclosures presented are adequate to allow the
information presented not to be misleading. The condensed combined financial
statements included herein should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Registration
Statement on Form S-1 (No. 333-29187).
In August 1997, Carrizo completed its initial public offering (the Offering) of
2,500,000 shares of its common stock at a public offering price of $11.00 per
share. The Offering provided the Company with proceeds of approximately $24.3
million, net of expenses. In September 1997, the underwriters for the Offering
exercised their overallotment option to purchase an additional 375,000 shares
of the Company's common stock at a public offering price of $11.00 per share.
Net proceeds received by the Company were approximately $3.8 million.
The Company was formed in 1993 and is the surviving entity after a series of
combination transactions (the Combination) consummated at the time of the
Offering. The Combination included the following transactions: (a) Carrizo
Production, Inc. (a Texas corporation and an affiliated entity with ownership
substantially the same as Carrizo), was merged into Carrizo and the outstanding
shares of capital stock of Carrizo Production, Inc., were exchanged for an
aggregate of 343,000 shares of common stock of Carrizo; (b) Carrizo acquired
Encinitas Partners Ltd. (a Texas limited partnership of which Carrizo
Production, Inc., served as the general partner) as follows: Carrizo acquired
from the shareholders who serve as directors of Carrizo their limited partner
interests in Encinitas Partners Ltd. for an aggregate consideration of 468,533
shares of common stock and, on the same date, Encinitas Partners Ltd. was
merged into Carrizo and the outstanding limited partner interests in Encinitas
Partners Ltd. were exchanged for an aggregate of 860,699 shares of common
stock; (c) La Rosa Partners Ltd. (a Texas limited partnership of which Carrizo
served as the general partner) was merged into Carrizo and the outstanding
limited partner interests in La Rosa Partners Ltd. were exchanged for an
aggregate of 48,700 shares of common stock; and (d) Carrizo Partners Ltd. (a
Texas limited partnership of which Carrizo served as the general partner) was
merged into Carrizo and the outstanding limited partner interests in Carrizo
Partners Ltd. were exchanged for an aggregate of 569,068 shares of common
stock. The Combination was completed concurrently with the Offering.
The Combination was accounted for as a reorganization in accordance with SEC
Staff Accounting Bulletin (SAB) No. 47 because of the high degree of common
ownership among, and the common control of, the combining entities.
Accordingly, the accompanying combined accounts have been prepared using the
historical costs and results of operations of the affiliated entities. There
were no significant differences in accounting methods or their application
among the combining entities. All intercompany balances have been eliminated.
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2. EARNINGS PER SHARE:
Net income (loss) per share has been computed by dividing net income (loss) per
share by the weighted average number of shares of common stock outstanding
during the periods. The weighted average number of shares of common stock used
in the computation was 9,227,165 and 8,229,315 for the three and nine month
period ended September 30, 1997, respectively. In accordance with Staff
Accounting Bulletin Number 83 of the Securities and Exchange Commission, the
common stock equivalents that were issued preceding the initial public offering
at prices below the expected offering price have been included in the Company's
computation through the date of the initial public offering and treated as if
they had been issued at the Company's inception. Shares issued in the
Combination transactions have also been treated as if they were outstanding
since the Company's inception. Subsequent to the initial public offering, the
actual number of shares outstanding have been considered, including the exercise
of the underwriter's overallotment.
3. INCOME TAXES:
Historical income taxes for the nine months ended September 30, 1997, reflect a
one-time charge of $1,623,268 for the termination of the Company's pass-through
tax status. The following includes pro forma income taxes, net income and
earnings per share for the three- and nine-month periods ended September 30,
1996 and 1997, using the incremental statutory federal income tax rate which
would have been provided had the Company been a taxpaying entity for all
periods presented.
For the Three For the Nine
Months Ended Months Ended
September 30 September 30
------------------------- --------------------------
1996 1997 1996 1997
---------- ----------- ---------- -----------
Income before income taxes $ 502,753 $ 432,980 $ 989,800 $ 1,719,143
Pro forma income taxes 180,991 151,543 356,328 601,700
---------- ----------- ---------- -----------
Pro forma net income $ 321,762 $ 281,437 $ 633,472 $ 1,117,443
========== =========== ========== ===========
Pro forma primary and fully diluted earnings per
share $.04 $.03 $.08 $.13
==== ==== ==== ====
4. RECENT EVENTS:
Stock Incentive Plan
In June 1997, the Company adopted the Incentive Plan of Carrizo Oil & Gas,
Inc., and reserved for issuance pursuant to such plan 1,000,000 shares of
common stock. Upon completion of the Offering, the Company granted 220,000
options to employees under the plan and granted 30,000 options to nonemployee
directors, all of such options with an exercise price equal to the fair market
value on the date of the grant (the $11.00 public offering price in the
Offering).
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected certain aspects of the Company's financial position
and results of operations during the periods included in the accompanying
unaudited condensed combined financial statements. This discussion should
be read in conjunction with the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the annual
combined financial statements included in the Company's Registration Statement
on Form S-1, as amended (Registration No. 333- 29187) (the "Registration
Statement"), relating to the Company's initial public offering (the "Offering")
and the accompanying unaudited condensed combined financial statements.
Unless otherwise indicated by the context, references herein to "Carrizo" mean
Carrizo Oil & Gas, Inc., a Texas corporation that is the registrant, and
references herein to the "Company" mean Carrizo and its corporate and
partnership affiliates and predecessors.
GENERAL OVERVIEW
The Company began operations in September 1993 and initially focused on the
acquisition of producing properties. As a result of the increasing availability
of economic onshore 3 D seismic surveys, the Company began to obtain 3 D seismic
data and options to lease substantial acreage in 1995 and began to drill its 3 D
based prospects in 1996. The Company drilled 20 wells in 1996 and 53 wells
through the nine months ended September 30, 1997 and is continuing to accelerate
its exploration pace. The Company initially budgeted to drill a total of 67
gross wells (26.9 net) in 1997 and 147 gross wells (67.5 net) in 1998. As a
result of the acceleration of its drilling program, the company now expects to
drill 6 gross wells (1.8 net) in addition to those wells previously budgeted for
the fourth quarter of 1997. Accordingly, depreciation, depletion and
amortization, oil and gas operating expenses, and production are expected to
increase. The Company has typically retained the majority of its interests in
shallow, normally pressured prospects and sold a portion of its interests in
deeper, overpressured prospects.
The combined financial statements are prepared on the basis of a combination of
Carrizo and the entities that were a party to the Combination Transactions.
Carrizo and the entities combined with it in the Combination Transactions were
not required to pay federal income taxes due to their status as partnerships or
Subchapter S Corporations, which are not subject to federal income taxation.
Instead, taxes for such periods were paid by the shareholders and partners of
such entities. On May 16, 1997, Carrizo terminated its status as an S
corporation and thereafter became subject to federal income taxes. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," the Company established a deferred tax liability
in the second quarter of 1997 which resulted in a noncash charge to income of
approximately $1.6 million.
The Company has primarily grown through the internal development of properties
within its exploration project areas, although the Company acquired properties
with existing production in the Camp Hill Project in late 1993, the Encinitas
Project in early 1995 and the La Rosa Project in 1996. The Company made these
acquisitions through the use of limited partnerships with Carrizo or Carrizo
Production, Inc., as the general partner. However, as operations have
expanded, the Company has increasingly funded its activities through bank
borrowings and cash flow from operations in order to retain a greater portion
of the interests it develops.
The Company's revenues, profitability, future growth and ability to borrow funds
or obtain additional capital, and the carrying value of its properties are
substantially dependent on the success of the Company's exploration program and
the prevailing prices of oil and natural gas. It is impossible to predict
future oil and natural gas price movements with certainty. Declines in prices
received for oil and natural gas may have an adverse effect on the Company's
financial condition, liquidity, ability to finance capital expenditures, and
results of operations. Lower prices may also impact the amount of reserves that
can be produced economically by the Company.
Due to the instability of oil and natural gas prices, in 1995 the Company began
utilizing, from time to time, certain hedging instruments (e.g., NYMEX futures
contracts) for a portion of its oil and gas production to achieve a more
predictable cash flow, as well as to reduce the exposure to price fluctuations.
The Company's hedging arrangements apply to only a portion of its production,
provide only partial price protection against declines in oil and natural gas
prices and limit potential gains from future increases in prices. Such hedging
arrangements may expose the Company to risk of financial loss in certain
circumstances, including instances where production is less than expected, the
Company's customers fail to purchase contracted quantities of oil or natural
gas, or a sudden unexpected event materially impacts oil or natural gas prices.
The Company accounts for all these transactions as hedging activities and,
accordingly, gains and losses from hedging activities are included in oil and
gas revenues during the period the hedged transactions occur. Historically,
gains and losses from hedging activities have not been material. The Company
expects that the amount of
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hedges that it has in place will vary from time to time. The Company had no
outstanding hedge positions as of December 31, 1996 or September 30, 1997.
Subsequent to September 30, 1997 the Company entered into forward sales
arrangements covering 150 Mmcf for the fourth quarter of 1997 and the
first quarter of 1998 at an average field price of $2.86 and $2.72,
respectively. The Company also entered into hedging transactions covering 60
Mmcf for the fourth quarter of 1997 and 180 Mmcf for the first quarter of 1998
at an average price (Houston Ship Channel) of $3.46 and $2.99, respectively.
Prior to the Offering, Carrizo conducted its oil and natural gas operations
directly, with industry partners and through the following affiliated entities:
Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd.,
Carrizo Partners Ltd. and Placedo Partners Ltd. Concurrently with the closing
of the Offering, the following transactions (the "Combination Transactions")
were closed: (i) Carrizo Production, Inc. merged into Carrizo; (ii) Carrizo
acquired Encinitas Partners Ltd. in two steps: (a) Carrizo acquired the limited
partner interests in Encinitas Partners Ltd. held by certain of the Company's
directors and (b) Encinitas Partners Ltd. merged into Carrizo; (iii) La Rosa
Partners Ltd. merged into Carrizo; and (iv) Carrizo Partners Ltd. merged into
Carrizo. As a result of the merger of Carrizo and Carrizo Partners Ltd., Carrizo
became the owner of all of the partnership interests in Placedo Partners Ltd.
The Company uses the full-cost method of accounting for its oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including any general and administrative costs that are directly
attributable to the Company's acquisition, exploration and development
activities, are capitalized in a "full-cost pool" as incurred. The Company
records depletion of its full-cost pool using the unit-of-production method.
To the extent that such capitalized costs in the full-cost pool (net of
depreciation, depletion and amortization and related deferred taxes) exceed the
present value (using a 10 percent discount rate) of estimated future net
after-tax cash flows from proved oil and gas reserves, such excess costs are
charged to operations. The Company has not been required to make any such
write-downs. Once incurred, a write-down of oil and gas properties is not
reversible at a later date.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997,
Compared to the Three Months Ended September 30, 1996
Oil and natural gas revenues for the three months ended September 30, 1997,
increased 30 percent to $2,069,000 from $1,588,000 for the same period in 1996.
Production volumes for natural gas during the three months ended September 30,
1997, increased 52 percent to 694,873 Mcf from 458,434 Mcf for the same period
in 1996. Average gas prices increased 2 percent to $2.14 per Mcf in the third
quarter of 1997 from $2.09 per Mcf in the same period in 1996. Production
volumes for oil in the third quarter of 1997 increased 1 percent to 33,104 Bbls
from 32,737 Bbls for the same period in 1996. Average oil prices decreased 8
percent to $17.66 per barrel in the third quarter of 1997 from $19.28 per barrel
in the same period in 1996. The increase in natural gas production was due
primarily to production from new wells drilled and completed in the last quarter
of 1996 and during 1997.
Although production increased in the third quarter of 1997 over the prior year's
period, the Company does not expect any significant increase for the fourth
quarter of 1997 over the third quarter of 1997 due to the curtailment of gas
production from the Wheeler wells in the Starr/Hildago Project Area. Production
in the fourth quarter, excluding the Wheeler wells, is expected to increase over
third quarter 1997, however the increase is expected to be sufficient only to
make up for Wheeler production curtailed, resulting in no significant net
increase. The Texas Railroad Commission ordered a temporary curtailment of the
gas production from the Wheeler wells in early August 1997 as a result of the
discovery of an oil zone downdip to the gas reservoir, which the Company
believes should significantly increase the total reserves in such wells, but
will delay current gas production until the oil can be produced. There can be
no assurance as to the duration or effect of this curtailment.
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The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
three months ended September 30, 1996 and 1997:
1997 Period
Compared to 1996 Period
------------------------
September 30 Increase % Increase
1996 1997 (Decrease) (Decrease)
------------ ------------ ---------- ----------
Production volumes-
Oil and condensate (Bbls) 32,737 33,104 367 1%
Natural gas (Mcf) 458,434 694,873 236,439 52%
Average sales prices-
Oil and condensate (per Bbl) $ 19.28 $ 17.66 $ (1.62) (8)%
Natural gas (per Mcf) 2.09 2.14 .05 2 %
Operating revenues-
Oil and condensate $ 631,182 $ 584,457 $ (46,725) (7)%
Natural gas 957,172 1,484,780 527,608 55 %
----------- ----------- -----------
Total $ 1,588,354 $ 2,069,237 $ 480,883 30 %
=========== =========== ===========
Oil and natural gas operating expenses for the three months ended September 30,
1997, increased 3 percent to $583,000 from $565,000 for the same period in 1996
primarily due to addition of new production offset by reduction in costs on
older producing fields. Operating expenses per equivalent unit decreased to
$.65 per Mcfe in the third quarter of 1997 from $.86 per Mcfe in the same
period in 1996 as a result of increased production of natural gas which had
lower per unit operating costs.
Depreciation, depletion and amortization (DD&A) expense for the three months
ended September 30, 1997, increased 81 percent to $647,000 from $357,000 for
the same period in 1996. This increase was due to increased production and
additional seismic and drilling costs. General and administrative expense for
the three months ended September 30, 1997, increased 149 percent to $388,000
from $156,000 for the same period in 1996 as a result of increases in the
number of employees and related benefits, increased office space and ramp-up
expenses and charges relating to the Offering.
Net interest expense for the three months ended September 30, 1997, increased
113 percent to $17,000 from $8,000 in the same period in 1996. Increases in
interest expense were due to increased debt levels in late 1996 and the first
half of 1997. Capitalized interest increased to $163,000 in the third quarter
of 1997 from $142,000 in the third quarter of 1996 as a result of increased
levels of exploration activity and higher levels of unevaluated property.
Income before income taxes for the three months ended September 30, 1997,
decreased 14 percent to $433,000 from $503,000 in the same period in 1996. Net
income for the three months ended September 30, 1997, decreased to income of
$281,000 from pro forma income (as if the Company had been a taxpaying entity
for the period) of $322,000 for the same period in 1996 primarily as a result
of deferred income tax expense, and increased DD&A and general and
administrative expense.
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Nine Months Ended September 30, 1997, Compared
To the Nine Months Ended September 30, 1996
Oil and natural gas revenues for the nine months ended September 30, 1997,
increased 64 percent to $6,234,000 from $3,807,000 for the same period in 1996.
Production volumes for natural gas during the nine months ended September 30,
1997, increased 126 percent to 2,123,056 Mcf from 937,914 Mcf for the same
period in 1996. Average gas prices decreased 2 percent to $2.21 per Mcf during
the nine months ended September 30, 1997 from $2.25 per Mcf in the same period
in 1996. Production volumes for oil during the nine months ended September 30,
1997, decreased to 81,654 Bbls from 81,666 Bbls for the same period in 1996 .
Average oil prices decreased 9 percent to $18.97 per barrel during the nine
months ended September 30, 1997, from $20.82 per barrel in the same period in
1996. The increase in natural gas production was due primarily to production
from new wells drilled and completed in the last quarter of 1996 and early
1997.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
nine months ended September 30, 1996 and 1997:
1997 Period
Compared to 1996 Period
September 30 ------------------------
-------------------------- Increase % Increase
1996 1997 (Decrease) (Decrease)
--------- ------------ ---------- ----------
Production volumes-
Oil and condensate (Bbls) 81,666 81,654 (12) -
Natural gas (Mcf) 937,914 2,123,056 1,185,142 126 %
Average sales prices(1)
Oil and condensate (per Bbl) $ 20.82 $ 18.97 $ (1.85) (9)%
Natural gas (per Mcf) 2.25 2.21 (.04) (2)%
Operating revenues-
Oil and condensate $ 1,700,608 $ 1,549,056 $ (151,552) (9) %
Natural gas 2,106,392 4,685,205 2,578,813 122 %
----------- ----------- ------------
Total $ 3,807,000 $ 6,234,261 $ 2,427,261 64 %
=========== =========== ============
.-------------------------------------
(1) Including impact of hedging.
Oil and natural gas operating expenses for the nine months ended September 30,
1997, increased 9 percent to $1,779,000 from $1,628,000 for the same period in
1996. Oil and natural gas operating expenses increased primarily due to
increased production as described above, which was partially offset by a
decrease in operating expenses per equivalent unit to $.68 per Mcfe during the
nine months ended September 30, 1997, from $1.14 per Mcfe in the same period in
1996. The per unit cost decreased primarily as a result of increased
production of natural gas which had lower per unit operating costs than oil.
DD&A expense for the nine months ended September 30, 1997, increased 106
percent to $1,635,000 from $793,000 for the same period in 1996. This increase
was due to increased production from successful drilling.
General and administrative expense for the nine months ended September 30,
1997, increased 214 percent to $993,000 from $316,000 for the same period in
1996, as a result of increases in the number of employees and related benefits,
increased office space, and ramp-up expenses and charges related to the
Offering.
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Net interest expense for the nine months ended September 30, 1997, increased 37
percent to $108,000 from $79,000 in the same period in 1996. Increases in
interest expense were due to increased debt levels in late 1996 and early 1997.
Capitalized interest increased to $628,000 in the first three quarters of 1997
from $271,000 in the same period of 1996 as a result of increased levels of
exploration activity and higher levels of unevaluated property.
Income before income taxes for the nine months ended September 30, 1997,
increased 74 percent to $1,719,000 from $990,000 in the same period in 1996.
Net income for the nine months ended September 30, 1997, decreased to a loss of
$367,000 from pro forma income (as if the Company had been a taxpaying entity
for each period) of $633,000 for the same period in 1996 primarily as a result
of a one-time noncash charge of $1,623,000 reflecting the termination of the
Company's pass-through tax status.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have included funds generated by
operations, equity capital contributions and borrowings, primarily under
revolving credit facilities and proceeds from the Offering. A portion of the
proceeds from the Offering was used to repay the amounts outstanding under the
Company's revolving credit facilities and notes from certain of the Company's
directors and officers.
Cash flows (used in) provided by operations (after changes in working capital)
were $1,959,764 and $(99,422) for the nine months ended September 30, 1996 and
1997, respectively. The decrease in cash flows provided by operations in 1997
as compared to 1996 was due primarily to increase accounts receivable relating
to joint interest billings and prepayments on upcoming outside operated
drilling projects.
The Company initially budgeted capital expenditures in 1997 of approximately
$21.9 million, $12.6 million of which is expected to be used to fund 3-D
seismic surveys and land acquisitions and $9.3 million of which is expected to
be used for drilling activities in the Company's project areas. The Company
initially budgeted capital expenditures in 1998 of approximately $43.8 million.
The Company initially budgeted to drill approximately 67 gross wells (26.9 net)
in 1997 and 147 gross wells (67.5 net) in 1998. The Company plans to
accelerate its drilling program, and as such, now expects to drill 6 gross
wells (1.8 net) in addition to those wells previously budgeted for the fourth
quarter of 1997 and expects its 1997 capital expenditures to increase
accordingly. Actual amounts of capital expenditures and number of wells
drilled may differ significantly from such estimates.
The Company has continued to reinvest a substantial portion of its cash flows
into increasing its 3-D prospect portfolio, improving its 3-D seismic
interpretation technology and funding its drilling program. Oil and gas
capital expenditures were $10.1 million and $22.0 million for the three and
nine months ended September 30, 1997, respectively. The Company's drilling
efforts resulted in the successful completion of 18 gross wells (6.9 net) in
1996 and 41 gross wells (15.1 net) during the nine months ended September 30,
1997.
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The Company has experienced and expects to continue to experience substantial
working capital requirements primarily due to the Company's active exploration
and development programs and, to a much lesser extent, its technology
enhancement programs. The Company has accelerated its drilling program and
continues to pursue the acquisition of additional prospective acreage for
exploration. As a result of the acceleration of capital expenditures, combined
with the recent curtailment of production of the Company's Wheeler wells by the
Texas Railroad Commission and the uncertainty of anticipated cash flow from
wells yet to be drilled, the Company believes that additional financing will be
necessary to fund the Company's aggressive growth, development and exploration
program planned for 1997 and 1998. In the event such capital resources
are not available to the Company, its exploration and other activities may be
curtailed.
FINANCING ARRANGEMENTS
In connection with the Offering, the Company entered into an amended revolving
credit agreement with Compass Bank, (the "Company Credit Facility"), which
provides for a maximum loan amount of $25 million, subject to borrowing base
limitations. Prior to the Offering, the Company utilized various credit
facilities as well as borrowings from certain directors and officers of the
Company. Except for the Company Credit Facility, all of these facilities and
borrowings were terminated with the close of the Offering. Under the Company
Credit Facility, the principal outstanding is due and payable upon maturity in
June 1999 with interest due monthly. The interest rate for borrowings is
calculated at a floating rate based on the Compass index rate or LIBOR plus 2
percent. The Company's obligations are secured by certain of its oil and gas
properties and cash or cash equivalents included in the borrowing base.
Under the Company Credit Facility, Compass, in its sole discretion, will make
semiannual borrowing base determinations based upon the proved oil and natural
gas properties of the Company. Compass may redetermine the borrowing base and
the monthly borrowing base reduction at any time and from time to time. The
Company may also request borrowing base redeterminations in addition to its
required semiannual reviews at the Company's cost.
The Company is subject to certain covenants under the terms of the Company
Credit Facility, including, but not limited to, (a) maintenance of specified
tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net
income plus depreciation and other noncash charges, less noncash income) to
quarterly debt service (payments made for principal in connection with the
credit facility plus payments made for principal other than in connection with
such credit facility) of no less than 1.25 to 1.00. The Company Credit
Facility also places restrictions on, among other things, (a) incurring
additional indebtedness, loans and liens, (b) changing the nature of business
or business structure, (c) selling assets and (d) paying dividends.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by changing oil
and gas prices. If the price of oil and gas increases (decreases), there could
be a corresponding increase (decrease) in the operating cost that the Company
is required to bear for operations, as well as an increase (decrease) in
revenues. Inflation has had a minimal effect on the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
regarding accounting for the impairment of long-lived assets. The Company
adopted SFAS No. 121 effective January 1, 1996. However, its provisions are
not applicable to the Company's oil and gas properties as they are accounted
for under the full-cost method of accounting.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
which is a new standard of accounting for stock-based compensation that
establishes a fair value method of accounting for awards granted after December
31, 1995, under stock compensation plans. SFAS No. 123 encourages, but does
not require, companies to adopt the fair value method of accounting in place of
the existing method of accounting for stock-based compensation, whereupon
compensation costs are recognized only in situations where stock compensation
plans award intrinsic value to recipients at the date of grant. The Company has
elected not to adopt the fair value accounting of SFAS No. 123 and will account
for any plans under Accounting Principles Board (APB) Opinion No. 25, under
which no compensation costs have been recognized.
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14
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
regarding earnings per share. SFAS No. 128 cannot be adopted until December
15, 1997; however, pro forma disclosures are allowed to minimize the impact of
year-end adoption. As a result of the noncomplex nature of the Company's
capital structure and treatment of all stock options as outstanding for all
periods pursuant to Staff Accounting Bulletin No. 83, SFAS No. 128 would have
no current impact on the pro forma calculation of earnings per share.
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PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of business. The Company is not
currently a party to any litigation that it believes could have a
material adverse effect on the financial position of the Company.
Item 2 - Changes in Securities and Use of Proceeds
Use of Proceeds.
The Company's Registration Statement on Form S-1 (Registration No.
333-29187), as amended, with respect to the initial public offering of shares
of Company's Common Stock, par value $0.01 per share (the "Common Stock"), was
declared effective by the Securities and Exchange Commission on August 5, 1997.
The offering commenced on August 6, 1997, and has since terminated, resulting
in (i) the sale by the Company of 2,500,000 shares of Common Stock on August
11, 1997 and (ii) the sale by the Company of 375,000 shares of Common Stock
pursuant to the exercise of the underwriters' over-allotment option on
September 8, 1997. The shares sold constitute all of the shares of Common
Stock covered by the Registration Statement. The managing underwriters for the
Offering were Schroder & Co. Inc. and Jefferies & Company, Inc.
The aggregate price to the public for the shares sold in the Offering
was $31,625,000. The expenses incurred by the Company with respect to the
Offering were as follows:
Underwriter Discounts and Commissions . . . . . . . . . . . . . $ 2,213,750
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,308,132
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 3,521,882
=========
The amount of other expenses set forth above is a reasonable estimate of such
amount. None of such payments were direct or indirect payments to directors or
officers of the Company or their associates, to persons owning ten percent or
more of any class of equity securities of the Company or to affiliates of the
Company.
The net proceeds to the Company from the Offering were $28.1 million.
As of September 19, 1997, the Company has used such net proceeds as follows:
(i) to repay $ 16.5 million of indebtedness outstanding under the Company's
revolving credit facilities, (ii) to repay $ 3.2 million of promissory notes
outstanding to certain of the Company's directors and officers, (iii) to
provide $ 5.7 million in working capital and (iv) to make $ 3.0 million in
temporary investments. Except as set forth in clause (ii), none of such
payments were direct or indirect payments to directors or officers of the
Company or their associates, to persons owning ten percent or more of any class
of equity securities of the Company or to affiliates of the Company.
Item 3 - Defaults Upon Senior Securities
None
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Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
FORWARD LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, those relating to the Company's schedule, targets, estimates or
results of future drilling, budgeted wells, increases in wells, budgeted and
other future capital expenditures, use of offering proceeds, expected
production or reserves, increases in reserves, acreage working capital
requirements, hedging activities, the ability of expected sources of liquidity
to implement its business strategy, and any other statements regarding future
operations, financial results, business plans and cash needs and other
statements that are not historical facts are forward looking statements. When
used in this document, the words "anticipate," "estimate," "expect," "may,"
"project," "believe" and similar expression are intended to be among the
statements that identify forward looking statements. Such statements involve
risks and uncertainties, including, but not limited to, those relating to the
Company's dependence on its exploratory drilling activities, the volatility of
oil and natural gas prices, the need to replace reserves depleted by
production, operating risks of oil and natural gas operations, the Company's
dependence on its key personnel, factors that affect the Company's ability to
manage its growth and achieve its business strategy, risks relating to, limited
operating history, technological changes, significant capital requirements of
the Company, the potential impact of government regulations, litigation,
competition, the uncertainty of reserve information and future net revenue
estimates, property acquisition risks and other factors detailed in the
Registration Statement and the Company's other filings with the Securities and
Exchange Commission. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
Exhibit Description
Number -----------
------
+2.1 - Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas
- Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A.
Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6,
1997 (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+3.1 - Amended and Restated Articles of Incorporation of the Company (Incorporated herein by
- reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration
No. 333-29187)).
+3.2 - Amended and Restated Bylaws of the Company, as amended by Amendment No. 1 (incorporated
- herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A
(Registration No. 000-22915).
+4.1 - First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank
- dated August 28, 1997.
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27.1 - Financial Data Schedule.
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Carrizo Oil & Gas, Inc.
(Registrant)
Date: November 14, 1997 By: /s/S.P. Johnson IV
--------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1997 By: /s/Frank A. Wojtek
--------------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit Description
Number -----------
------
+2.1 - Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas
- Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A.
Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6,
1997 (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+3.1 - Amended and Restated Articles of Incorporation of the Company (Incorporated herein by
- reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration
No. 333-29187)).
+3.2 - Amended and Restated Bylaws of the Company, as amended by Amendment No. 1 (incorporated
- herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A
(Registration No. 000-22915).
+4.1 - First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank
- dated August 28, 1997.
27 - Financial Data Schedule.
+ Incorporated herein by reference as indicated.