HOUSTON--(BUSINESS WIRE)-- Carrizo Oil & Gas, Inc. (Nasdaq: CRZO) today announced the Company's financial results for the second quarter of 2018 and provided an operational update, which includes the following highlights:
Carrizo reported second quarter of 2018 net income attributable to common shareholders of $30.1 million, or $0.37 and $0.36 per basic and diluted share, respectively, compared to net income attributable to common shareholders of $56.3 million, or $0.86 and $0.85 per basic and diluted share, respectively in the second quarter of 2017. The net income attributable to common shareholders for the second quarter of 2018 and the second quarter of 2017 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 included below, for the second quarter of 2018 was $66.6 million, or $0.79 per diluted share, compared to $20.0 million, or $0.30 per diluted share, in the second quarter of 2017.
For the second quarter of 2018, Adjusted EBITDA was $178.9 million. Adjusted EBITDA and the reconciliation to net income attributable to common shareholders are presented in the non-GAAP reconciliation tables included below.
Production volumes during the second quarter of 2018 were 5,193 MBoe, or 57,077 Boe/d, an increase of 12% versus the second quarter of 2017. The year-over-year comparison is impacted by a significant amount of acquisition and divestiture (A&D) activity, including the acquisition of properties in the Delaware Basin and the divestiture of the Company's Appalachia, DJ Basin, and downdip Eagle Ford Shale assets. Pro forma for this A&D activity, the Company's production increased by more than 30% versus the second quarter of 2017, driven by development in the Eagle Ford Shale and Delaware Basin. Crude oil production during the second quarter of 2018 averaged 37,860 Bbls/d, an increase of 13% versus the second quarter of 2017; natural gas and NGL production were 59,029 Mcf/d and 9,379 Bbls/d, respectively, during the second quarter of 2018. Second quarter of 2018 production exceeded the high end of the Company's guidance range of 53,800-54,800 Boe/d.
Drilling, completion, and infrastructure capital expenditures for the second quarter of 2018 were $218.0 million. Nearly 55% of the second quarter drilling, completion, and infrastructure spending was in the Delaware Basin, with the balance in the Eagle Ford Shale. Land and seismic expenditures during the quarter were $6.1 million, and were primarily focused in the Delaware Basin.
In early July, Carrizo closed on the divestiture of non-operated assets in its Ford West area of the Delaware Basin. The divested assets included approximately 1,700 net acres and had associated net production during the second quarter of 2018 of approximately 820 Boe/d (34% oil, 62% liquids).
Given the relative outlook for crude oil prices in the Eagle Ford Shale and Delaware Basin over the next 18 months, Carrizo has elected to shift capital to the Eagle Ford Shale in order to take advantage of the superior returns offered from the play in the current environment. At the end of the first quarter, Carrizo was running four rigs in the Delaware Basin and two rigs in the Eagle Ford Shale. The Company moved one of its rigs to the Eagle Ford Shale during the second quarter and recently added a fourth rig to the play. For the balance of the year, Carrizo currently plans to run an average of six rigs, with four located in the Eagle Ford Shale and two located in the Delaware Basin, and two to three completion crews. Given the faster cycle times in the Eagle Ford Shale, as well as the Company's decision to maintain a six-rig program for the remainder of the year, Carrizo now expects to drill 123-132 gross (112-121 net) operated wells and complete 108-117 gross (93-102 net) operated wells during the year. This compares to the Company's estimate of 93-103 gross (82-91 net) operated wells drilled and 113-123 gross (96-105 net) operated wells completed under the prior plan. As a result of the increased drilling activity, Carrizo is increasing its 2018 drilling, completion, and infrastructure capital expenditure guidance to $800-$825 million from $750-$800 million.
Despite the impact of the Company's non-operated divestiture as well as its expectation of an accelerated payout at the Brown Trust multipad as described below, Carrizo is maintaining the upper end of its 2018 production guidance range and tightening it to 58,700-60,100 Boe/d from 58,500-60,100 Boe/d. Crude oil is still expected to account for 65%-67% of the Company's production for the year, while total liquids are expected to account for 81%-84%. This equates to annual production growth of more than 10% using the midpoint of the range. Pro forma for the Company's A&D activity, 2018 guidance equates to year-over-year production growth of more than 30%, with crude oil production growth of more than 20%. For the third quarter of the year, Carrizo expects production to be 62,000-63,000 Boe/d; crude oil is expected to account for 65% of production, while total liquids are expected to account for 82%. A full summary of Carrizo's guidance is provided in the attached tables.
Based on the Company's expectation that additional pipeline capacity out of the Permian Basin will be operational in late 2019, resulting in a more normalized spread between local oil prices in the Eagle Ford Shale and Permian Basin, Carrizo currently expects to begin shifting activity back to the Delaware Basin in the second half of 2019. Carrizo maintains a significant amount of flexibility to shift capital between its plays in 2019; thus, should the announced pipelines be delayed causing local Permian Basin oil prices to remain weak, the Company has the flexibility and inventory depth to keep its activity weighted to the Eagle Ford Shale.
S.P. “Chip” Johnson, IV, Carrizo's President and CEO, commented on the results, “The second quarter was another outstanding operational and financial quarter for the Company as we delivered production 4% above the high end of our guidance range, operating expenses 3% below the low end of our guidance range, and expanded our EBITDA margin by 17% from the first quarter to $34/Boe. During the quarter, we also successfully executed our initial capital shift from the Delaware Basin to the Eagle Ford Shale, where our margins benefit from premium Gulf Coast pricing.
“The current environment highlights the advantages of having complementary acreage positions in the Eagle Ford Shale and Delaware Basin. While we had previously taken steps to protect our Delaware Basin margins, such as placing basis hedges on a large percentage of our expected 2018 oil production at a $0.10 differential to NYMEX, we were able to quickly shift capital to the Eagle Ford Shale once it appeared that Permian Basin differentials were deteriorating sooner and to a greater degree than we had previously expected. This pivot allows us to avoid aggressively developing our valuable Delaware Basin inventory during a period of weak local market prices while at the same time enhancing our overall financial metrics as returns in the Eagle Ford Shale are significantly higher than returns in the Delaware Basin based on current strip prices.
“While our new plan should result in higher EBITDA during 2018, the bigger benefit should be realized in 2019. Our new plan allows us to build our inventory of drilled, uncompleted wells in the Eagle Ford Shale up to more than 40 by year-end, setting us up for strong growth from the play in 2019. We currently expect the Eagle Ford Shale to be the primary driver of our production growth next year. And with the higher margins that are expected to be generated by Eagle Ford Shale production based on current strip prices, we believe our new plan should result in more than $100 million of incremental EBITDA through the end of 2019. This should accelerate our leverage reduction as well as enhance our ROCE.
“Our decision to shift capital out of the Delaware Basin is entirely a returns-focused, economical decision given weak regional pricing. We continue to be very pleased with the results from our Delaware Basin position and are in an excellent position from a midstream standpoint. We recently executed a deal with a major crude purchaser that provides us with flow assurance for 100% of our oil production through mid-2020 while not subjecting us to any minimum volume commitments. Our wells continue to deliver strong results, as we brought online multiple Wolfcamp A wells during the quarter that achieved crude oil production rates of more than 1,000 Bbls/d on restricted chokes.”
In the Eagle Ford Shale, where the Company holds approximately 77,300 net acres, Carrizo drilled 19 gross (18 net) operated wells during the second quarter and completed 18 gross (16 net) operated wells. Production from the play was more than 37,000 Boe/d, up 4% versus the prior quarter as production from new wells, including the Brown Trust multipad, more than offset the impact of the downdip asset sale during the prior quarter. Crude oil production during the second quarter was nearly 29,200 Bbls/d, accounting for 79% of the Company's production from the play. At the end of the quarter, Carrizo had 15 gross (14 net) operated Eagle Ford Shale wells waiting on completion. Carrizo currently expects to drill 95-100 gross (90-95 net) operated wells and complete 85-90 gross (75-80 net) operated wells in the play during 2018.
Production from the Company's first large-scale multipad project in the Eagle Ford Shale, located in its Brown Trust project area, continues to be strong. Production from the multipad has now been online for more than 120 days, and continues to produce more than 14,000 Boe/d (88% oil) on restricted chokes. The multipad consists of 16 wells on three pads, with an average lateral length of approximately 9,100 ft. and frac stage spacing of 150-180 ft. Given the strong performance from this project, as well as higher-than-expected commodity prices, the multipad is now expected to pay out during the second half of 2018 versus the Company's prior expectation of early 2019. Upon payout, Carrizo's average working interest in the wells will decline to 54% from 79%. The expected impact of this is a reduction to the Company's full-year 2018 production of more than 200 Boe/d.
In the Delaware Basin, where it holds approximately 36,300 net acres, Carrizo drilled 9 gross (8 net) operated wells during the second quarter and completed 12 gross (9 net) operated wells. Production from the play was approximately 19,800 Boe/d for the quarter, up 30% versus the prior quarter. Crude oil production during the second quarter was approximately 8,500 Bbls/d, accounting for 43% of the Company's production from the play. At the end of the quarter, Carrizo had 10 gross (9 net) operated Delaware Basin wells waiting on completion. Carrizo currently expects to drill 28-32 gross (22-26 net) operated wells and complete 23-27 gross (18-22 net) operated wells in the play during 2018.
During the second quarter, Carrizo's completion activity was weighted towards wells drilled in the Wolfcamp A, with multiple wells achieving crude oil production rates of more than 1,000 Bbls/d on restricted chokes. Wolfcamp A highlights from the Company's primary Phantom area block include the following:
Two of the wells the Company drilled this quarter, the Zeman 40 Allocation C 11H and Dorothy 11H, were vertical stack tests of Wolfcamp A over existing Lower Wolfcamp B. The Zeman 11H was drilled over an existing Lower Wolfcamp B well that had been online for approximately 13 months. The vertical separation between the wells was approximately 460 ft. The Dorothy 11H was drilled over an existing Lower Wolfcamp B well that had been online for approximately eight months. The vertical separation between the wells was approximately 445 ft. Carrizo is very encouraged by the early results of these tests.
Carrizo also recently brought a very encouraging Wolfcamp A well online in its northeastern Phantom area acreage in Ward County. The SRO 551 Allocation A 100H began production in July, and while it has yet to achieve a peak 30-day rate, production has recently been more than 2,400 Boe/d (41% oil, 71% liquids) on a restricted choke from an approximate 7,400-ft. lateral. Carrizo's estimate of net de-risked drilling locations does not currently include many locations on this acreage position.
The Company has continued to enhance its portfolio of midstream contracts. Carrizo recently executed a deal with a major crude purchaser that provides it with flow assurance on 100% of its Delaware Basin crude oil production at a Midland-based price. The term of the contract is from September 2018 through July 2020, providing the Company with additional flow protection until new pipelines come online. Importantly, the agreement does not contain any minimum volume commitments, allowing Carrizo to maintain the flexibility to allocate capital between its plays in order to maximize its returns. For its natural gas production, Carrizo has continued to work with its third-party gas purchaser to increase firm capacity to WAHA and other points out of the basin. Carrizo and its third-party purchaser have currently executed contracts that have expanded firm takeaway to 60-65 MMcf/d from November 2018 through October 2019 and to 40-45 MMcf/d from November 2019 through March 2020. As the Company's third-party gathering solution connects to multiple outlets that provide access to Mexico, the West Coast, or the Gulf Coast, Carrizo remains confident that it will be able to market its gas production.
Carrizo currently has hedges in place for approximately 70% of estimated crude oil production for the remainder of 2018 (based on the midpoint of guidance); the Company's 2018 crude oil hedge portfolio includes both swaps and three-way collars. For 2019, the Company has three-way collars covering 15,000 Bbls/d. Additionally, Carrizo has swap contracts in place for more than 45% and 35% of its estimated NGL and natural gas production, respectively, for the remainder of 2018.
In order to further manage its commodity price exposure, Carrizo has also put various basis hedges in place. For the balance of the year, Carrizo has basis swaps locking in a $0.10/Bbl Midland-Cushing differential on 6,000 Bbls/d. The Company also has basis swaps locking in a $5.11/Bbl LLS-Cushing premium on 18,000 Bbls/d over the same period.
Please refer to the attached tables for full details of the Company's commodity derivative contracts.
Conference Call Details
The Company will hold a conference call to discuss 2018 second quarter financial results on Tuesday, August 7, 2018 at 10:00 AM Central Daylight Time. To participate in the call, please dial (800) 732-5617 (U.S. & Canada) or +1 (212) 231-2905 (Intl.) ten minutes before the call is scheduled to begin. A replay of the call will be available through Tuesday, August 14, 2018 at 12:00 PM Central Daylight Time at (800) 633-8284 (U.S. & Canada) or +1 (402) 977-9140 (Intl.). The reservation number for the replay is 21892918 for U.S., Canadian, and International callers.
A simultaneous webcast of the call may be accessed over the internet by visiting the Carrizo website at http://www.carrizo.com, clicking on “Upcoming Events”, and then clicking on the “Second Quarter 2018 Earnings Call” link. To listen, please go to the website in time to register and install any necessary software. The webcast will be archived for replay on the Carrizo website for 7 days.