Houston Aug 6, 2015 (Thomson StreetEvents) -- Edited Transcript of Carrizo Oil & Gas, Inc. earnings conference call or presentation Thursday, August 6, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Chip Johnson Carrizo Oil & Gas, Inc. - President & CEO * David Pitts Carrizo Oil & Gas, Inc. - CFO * Brad Fisher Carrizo Oil & Gas, Inc. - VP & COO * Jeffrey Hayden Carrizo Oil & Gas, Inc. - VP of IR ================================================================================ Conference Call Participants ================================================================================ * Will Green Stephens Inc. - Analyst * Brad Carpenter Cantor FItzgerald - Analyst * Brian Gamble Simmons & Co. - Analyst * Leo Mariani RBC Capital Markets - Analyst * Jeff Grampp Northland Capital Markets - Analyst * Marshall Carver Heikkinen Energy Advisors - Analyst * Mike Kelly Global Hunter Securities, LLC - Analyst * David Tameron Wells Fargo Securities, LLC - Analyst * Steve Berman Canaccord Genuity - Analyst * Neal Dingmann SunTrust Robinson Humphrey - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. Welcome to the Carrizo Oil & Gas second-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, August 6, 2015. I would now like to turn the conference over to Chip Johnson, President and CEO Carrizo Oil & Gas. Please go ahead -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [2] -------------------------------------------------------------------------------- Thank you, operator, and thank you all for calling in for the second-quarter call. As we have done in the past, David Pitts, our CFO will start off with the financials, and then I will do an operation summary, and then we will open it up to Q&A. So, David, do you want to get started? -------------------------------------------------------------------------------- David Pitts, Carrizo Oil & Gas, Inc. - CFO [3] -------------------------------------------------------------------------------- Picture, Chip. Thanks. Good morning, everyone. Oil production for this quarter with 22,284 barrels per day. This exceeded the high end of our guidance due primarily to the continued strong performance our Eagle Ford assets and an earlier than expected tie-in sales for wells in Utica. Gas and NGL production for the quarter was 83,006 Mcfe per day, which also exceeded the high end of our guidance, due primarily to lower-than-expected levels of voluntary curtailments in the Marcellus. Second-quarter revenues of $124 million included $111 million attributed to oil revenues. During the quarter we realized 95% of NYMEX for oil revenues, which was above the range of our guidance realizations, primarily due to improve differentials in the Eagle Ford. We realized 59% of NYMEX for gas and NGL revenues, which is below our guided realizations, primarily due to lower-than-expected levels of voluntary curtailments at lower-than-expected realizations in the Marcellus. Total cost and expenses for the quarter at $41 million were below guidance, primarily due to a decrease in our annual estimate of [Avalon] taxes. Adjusted net income was $20.4 million, or $0.39 per diluted share which exceeded consensus earnings estimates of $0.30 per diluted share. Drilling and completion capital expenditures for the quarter of approximately $118 million, 90% of which was in Eagle Ford. We ended the second quarter with net debt to adjusted EBITDA of 2.6 times, consistent with prior quarters. This ratio is computed in accordance with our credit facility and includes on a pro forma basis, the historical pre-acquistion EBITDA associated with the Eagle Ford minerals acquisition in the fourth quarter 2014. Included in the press release is our third quarter and full year 2015 guidance table. This table reflects our increased production guidance for the full year as discussed in the press release. A couple of the things that I wanted to call your attention to in this guidance table is, again in this quarter you will see that we are providing guidance for gas production realizations, separate from NGL production realizations. For the third quarter 2015, we expect to realize 91%% to 93% NYMEX for oil revenues. 17% to 22% of NYMEX for NGL revenues and 48% to 55% of NYMEX for national gas revenues. Also third quarter guidance for LOE is higher than in previous quarters due to a higher forecasted level of voluntary curtailments in the Marcellus which carry a lower operating cost per BOE. In addition, the third quarter and full-year guidance for Avalon taxes was reduced, reflecting a decrease in our annual estimate of Avalon taxes. Guidance for all other cost and expenses remained essentially unchanged. We currently have hedges in place for up to 70% of the oil production for the balance of 2015 consisting of collars on 16,200 barrels per day with floors of $50 and ceilings of $67. We also have hedges place for 2016 consisting of collars of 5,500 barrels per day with $51 floors and $75 ceilings. In addition to these three oil hedge positions, we also continue to receive the benefit from the offsetting crude hedge transactions we entered into in February 2015. During the second quarter we received $40 million related to these locked in positions and we will receive additional cash flows of approximately $79 million for the second half of 2015 and approximately $45 million in calendar 2016. Based on oil and gas prices as of yesterday, August 5, we expect to see $43 million to $44 million from derivative settlements during the third quarter 2015. This includes settlements on our existing oil and gas hedges as well settlements of those offsetting crude oil hedge positions. Please refer to our hedging tables included in the press release for further details. During the second quarter we refinanced our 600 million 8 5/8% senior notes due 2018, with 650 million 6 1/4% senior notes due 2023. As it relates to our credit facility and May it was amended to establish an approved borrowing base of $685 million, which was equal to our due to our previously elected commitment amount and as of July 31, we have $133 million outstanding under the revolver. Based on the most recent bank price deck which was issued late July which reflected an average decrease of $4 per barrel, we expect the fall redetermination to result in a borrowing base of approximately $725 million, this is slightly lower than the $735 million we forecasted earlier this year as the impact of the lower price deck was largely offset by a higher number of wells to be brought in line than what was included in our previous forecast. We believe our borrowing base will provide us with ample liquidity as we head into 2016. With that, I will turn the call back over to Chip for the operations numbers. Thanks, David. Despite the challenging environment during the quarter, our management team is pleased to report another outstanding quarter for the Company. Our net oil production of 22,284 BOPD was up 21% year over year, and while we are not aggressively trying to grow our crude oil production in the current environment, we do expect to see sequential production growth for the remainder of this year and into next year. With our combination of high return assets, operational flexibility and strong balance sheet, we're well-positioned to accelerate production growth as commodity prices improve. In the Eagle Ford we are producing from 232 gross or 203 net wells with three drilling rigs running in one 24/7 frac crew. During the second quarter Carrizo drilled 20 gross, or 16.8 net operated wells and completed 17 gross, or 14.1 net wells. Crude oil production from the play was more than 18,900 barrels a day for the quarter. At the end of the quarter we had 26 gross, or 21.6 net operated Eagle Ford shale wells awaiting completion, equating to net crude oil production of approximately 8,100 barrels a day. During the quarter we made significant strides on the efficiency front, improving our drilling efficiency by approximately 25% versus the first quarter average with performance continuing to improve. As a result, we now plan to drop a rig in the Eagle Ford later this quarter, but still expect to drill about 5% more wells in the play during 2015 than initially planned. We currently expect to drill approximately 69 gross, or 62 net operated wells and frac 65 gross, or 58 net wells in the play during 2015. We are currently developing our Eagle Ford acreage on a combination of 330-foot and 500-foot spacing, with approximately 65% of our drilling inventory based on 330-foot spacing. Downspacing to 330 feet on our remaining Eagle Ford acreage would add another approximately 130 net locations to our drilling inventory. We currently have seven pads online in these pilot areas and continue to be pleased with the early production data as the performance from these wells looks similar to that of wells drilled at wider spacing. We have also began testing the stagger stack concept in the lower Eagle Ford, which may allow us to further reduce effective lateral spacing in the lower Eagle Ford below 330 feet. We have four pads drilled, we're drilling to test various stagger stack configurations which could increase our drilling inventory by up to 80%, relative to full development plan of 330-foot spacing. Additionally, we are drilling our initial test of the upper Eagle Ford on our acreage. We think approximately 25% of our acreage could be perspective for the upper Eagle Ford. We have continued to add bolt-on acres to our position in Eagle Ford and our position in the trend now stands at more than 84,000 net acres. In the Utica shale, we looked at our two well Wagler pad up to sales during the second quarter, which was earlier than we had expected. We continue to be pleased with the results as they averaged more than 470 barrels per day of condensate per well on a restricted choke over the first 90 days of production and are currently producing nearly 500 barrels per condensate per well. In the Delaware basin, we recently spud our first operated well in the play, the Mustang State 18. We are optimistic about the results from the well at it is located near strong industry wells, including the BHB Horseshoe Springs 113-10 which produced over 116,000 barrels per day in its first year. We continue to expand our position the Delaware basin and currently hold more than 26,000 net acres within the Wolfcamp trend. As a result of the additional acreage acquisitions, we now expect to expect four additional Wolfcamp wells this year. In the Niobrara, we're producing from 115 gross, or 49 net wells with 17 gross, or 9.6 net wells waiting on completion at the end of the quarter, representing about 2,500 net BOPD of potential initial production. During the quarter, we added over 1,300 net acres in area 1 to our position. This adds more than 45 net locations to our inventory in the highest return area of the Niobrara play. We continue to monitor industry wells targeting the deeper Codell formation as this could materially increase our drilling inventory. Nearby industry wells have targeted Codell thicknesses of 10 to 13 feet of pay and more than 13% of our Niobrara position has at least 10 feet of Codell thickness. In the Marcellus, we are producing from 82 gross, or 26.3 net wells in Susquehanna and Wyoming counties Pennsylvania. With gas sales into all three major pipelines, we continue to limit our production volumes from the area due to lower market prices and have a production capacity from the area well above our current rates. For the third quarter, total Company oil production is expected to range between 22,400 and 22,700 net barrels oils per day. For gas and NGLs, third quarter production should range between 64 net million and 70 net million cubic feet equivalent per day. Our 2015 drill and complete budget remains unchanged at $470 million to $490 million, as the incremental drilling activity is offset by lower costs. 2015 land CapEx rises to $45 million from $35 million due to larger than expected acreage acquisitions during the second quarter. Looking out into 2016, our focus is on managing our balance sheet and maintaining the flexibility to respond quickly to commodity price changes. Given the current outlook for commodity prices, we would most likely maintain a two rig program in Eagle Ford in 2016 which would allow us to grow oil production by more than 10%. We would also be able to respond to lower commodity prices by constructing a highly efficient capital program to hold our fourth-quarter production flat or respond to higher prices by using our well backlog to accelerate production growth without adding additional rigs. So, with that said, we'd like to open it up to questions and answers. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Will Green, Stephens. -------------------------------------------------------------------------------- Will Green, Stephens Inc. - Analyst [2] -------------------------------------------------------------------------------- I wonder if we could follow on that last point you made, Chip, on the activity heading into next year. You mentioned in the current environment you guys would look to keep those two rigs running in Eagle Ford and still could probably grow 10%. Can you walk us through what happens with the backlog between now and then if that is the plan? What would you guys be assuming for backlog being carried into 2016, and then would that assume a drawdown to get to that 10%? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [3] -------------------------------------------------------------------------------- Yes. I think that we are expecting right now to have an inventory of 30 wells at the end of the year, which is up from where we are, even after dropping the third rig in September. So that gives us a big lead over next year, and if we run two rigs all year next year in the Eagle Ford, which is the plan, we should not have a big a drawdown on that inventory. It comes down some, but it does not come down a lot. -------------------------------------------------------------------------------- Will Green, Stephens Inc. - Analyst [4] -------------------------------------------------------------------------------- Got you. And like you said, that 30, that backlog would purely be for whenever you guys see some light at the end of the tunnel on commodity prices and you can start to turn some of those on. -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [5] -------------------------------------------------------------------------------- Yes, it could either be an upside accelerator or it could fill in a gap if prices keep dropping, and we want to come up with some sort of lower gross scenario and maybe cut another drilling rig or move another drilling rank -------------------------------------------------------------------------------- Will Green, Stephens Inc. - Analyst [6] -------------------------------------------------------------------------------- Great. And then you mentioned some of the numbers on how many wells you guys are drilling this year with the Eagle Ford, but obviously it sounds like you guys have gained some efficiency through the year and have sped up a little bit. How should we think about maybe a spud to sales per rig or? What I'm trying get at is how many wells do you think those two rigs could get to sales next year just on their own without having to touch the backlog. -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [7] -------------------------------------------------------------------------------- I think I will turn it over to Brad and Scott. They've been working a lot on trying to quantify these results because the improvements have been happening very fast and are basically higher than we thought we would get -------------------------------------------------------------------------------- Brad Fisher, Carrizo Oil & Gas, Inc. - VP & COO [8] -------------------------------------------------------------------------------- Bill, this is Brad Fisher. Is to expound on what we said in the press release. We're looking right now, first quarter of the year we were basically on a per rig basis, putting out about 2 wells per rig per month. For the balance of the year, we are anticipating about 2.5, maybe up to 2.6 wells per rig per year. Now, we're not going to change the number that we frac that we currently have in the plan. As Chip said, that's going to build a little bit of inventory from now through the end of the year, so I think that's a pretty easy way to think about it -------------------------------------------------------------------------------- Will Green, Stephens Inc. - Analyst [9] -------------------------------------------------------------------------------- Okay. Thanks for that color, guys. That's all I had. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Brad Carpenter, Cantor Fitzgerald. -------------------------------------------------------------------------------- Brad Carpenter, Cantor FItzgerald - Analyst [11] -------------------------------------------------------------------------------- Nice quarter. Chip, I appreciate the color on the 2016 framework, both on the call and what you provided in the press release. Going back to that, could you help us frame that two rig Eagle Ford program? You mentioned what it might look like in 2016. Is that -- are you thinking about 2016, two rigs at current strip for 2016? Just trying to help compare your increased activity versus your lower commodity price scenario, basically put that into context as it seems to be a moving target every day. -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [12] -------------------------------------------------------------------------------- Well, you are right. It is a moving target and it is moving today. But right now we think with the strip we would run two rigs next year. We would frac enough of the inventory to grow with whatever rate we want to grow at. If oil prices go lower we could reduce the number of wells we drilled even further. We can hold all the encouragement we have with less than one drilling right now. So we have a lot of flexibility from that standpoint. And we are kicking off this Permian program we are drilling a few wells out there, a lot of that is through test acreage and hold acreage that that could be an option to split up our rigs and one out there for a while if we needed to do that at this point we don't think we need to do that -------------------------------------------------------------------------------- Brad Carpenter, Cantor FItzgerald - Analyst [13] -------------------------------------------------------------------------------- Okay. At this point, you're not comfortable talking about what constitutes higher above the strip or lower for next year? -------------------------------------------------------------------------------- Jeffrey Hayden, Carrizo Oil & Gas, Inc. - VP of IR [14] -------------------------------------------------------------------------------- Hey, Brad. It is Jeff. The best way to think about it is this. As far as number of wells we plan to drill and complete in the various commodity price scenarios, that has not really changed. As far as the expectations we have been talking to you guys about, it is just we can now accomplish those plans with two rigs in Eagle Ford versus three rigs previously -------------------------------------------------------------------------------- Brad Carpenter, Cantor FItzgerald - Analyst [15] -------------------------------------------------------------------------------- Got you. Okay. Okay. And I guess then on commodity prices in 2016, it's good to see you guys at some hedges in the first quarter. Is there general price level at which you look to add prices from 2016 production from here, and do you have a target percent hedged on 2016 production? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [16] -------------------------------------------------------------------------------- I think if we could put more hedges in place like the ones that we did with something where the floors are $55 to $55 we would do that. We would probably rather be over 50% hedged at least in the first part of next year -------------------------------------------------------------------------------- Brad Carpenter, Cantor FItzgerald - Analyst [17] -------------------------------------------------------------------------------- Okay. That's helpful. Thank you. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Brian Gamble, Simmons. -------------------------------------------------------------------------------- Brian Gamble, Simmons & Co. - Analyst [19] -------------------------------------------------------------------------------- Good quarter. Wanted to touch on the Delaware side. The additional wells in the back half of the year. Is that the same sort of agreement we got the first time as far as being a farm-in, and is there any additional upside to that particular acreage yet? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [20] -------------------------------------------------------------------------------- Actually, the wells we would drill later in the year are to hold acreage that we've already bought and that we think has good potential. On those wells we are not even sure whether we would drill a vertical well to hold it or drill a horizontal well to hold it when we would frac it. We are just to get those plans put together now, but we've put placeholders in on the drilling schedule and in the CapEx schedule to start drilling out there and drill a total of five wells this year to make sure we hold that acreage -------------------------------------------------------------------------------- Brian Gamble, Simmons & Co. - Analyst [21] -------------------------------------------------------------------------------- Does that vertical versus horizontal decision depend on the result from your first well that you are working on? Or are you working just because of the geography that is involved that offset operator wells? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [22] -------------------------------------------------------------------------------- No. It would be based more on how do you hold acreage with the least amount of capital, especially if you are trying to put big drilling units together where you can drill long laterals. So, you'd probably drill some wells, you might not frac them until you had to, or you might drill them so you can later come back and sidetrack them -------------------------------------------------------------------------------- Brian Gamble, Simmons & Co. - Analyst [23] -------------------------------------------------------------------------------- Great. And then to follow up on the M&A markets, things have been falling apart pretty quickly. Some operators in worse shape than others from a balance sheet standpoint. What are the anticipations for the back half of the year? What sort of opportunities may present themselves, if any? Or how dire do think it could be for some guys coming to the end of the year? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [24] -------------------------------------------------------------------------------- Well, I think it is pretty dire already, and there have been some interesting companies and acreage blocks pop up. So, we are looking at all of them. It seems like the bid ask is still a little far apart, but we will be in there looking at everything -------------------------------------------------------------------------------- Brian Gamble, Simmons & Co. - Analyst [25] -------------------------------------------------------------------------------- Great. Appreciate it, guys. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Leo Mariani, RBC Capital Markets. -------------------------------------------------------------------------------- Leo Mariani, RBC Capital Markets - Analyst [27] -------------------------------------------------------------------------------- I was hoping you could talk a little bit more about what you're Delaware basin joint obligations are as you work your way into 2016 and 2017? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [28] -------------------------------------------------------------------------------- We've got -- some of the farm outs we already have will required a couple more wells in late 2016. Some of the acreage that we have recently purchased has expiries early in 2016. And the bulk of the acreage can be held easily, but we are trying to figure out if there is some way to snake horizontal wells through such a way that we can hold a lot of 10-acre and 20 tracts at the same time. If we don't get those done there might be a way to just extend them, or they are not that critical and we could let them go. I think we will probably figure out a way to do it. We have been able to do that in the past -------------------------------------------------------------------------------- Leo Mariani, RBC Capital Markets - Analyst [29] -------------------------------------------------------------------------------- Okay. And I guess with respect to your kind of hypothetical 2016 talking about two rigs in the Eagle Ford. We are assuming there is no other activity, no Utica, no Niobrara and some limited Delaware basin? And can you provide a rough CapEx estimate around 2016 around that activity? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [30] -------------------------------------------------------------------------------- No, we won't, and we haven't yet. (Laughter) You are probably right though, at these prices, there is not going to be much capital that goes into Marcellus, Utica and Niobrara. In the Delaware it will depend on the well results and the success in tying up acreage that we can use our drilling dollars to solidify -------------------------------------------------------------------------------- Leo Mariani, RBC Capital Markets - Analyst [31] -------------------------------------------------------------------------------- Okay, and obviously you guys were successful at adding acreage here of late in the Delaware basin. Where do you think that 26,000 acres can go over the next, call it 12 months? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [32] -------------------------------------------------------------------------------- I think our goal is still to get over 50,000 acres. In the foothold we started in, we've been able to start expanding now away from that. And we've got plans to basically establish a foothold in two other areas where then we can start trying to get farm outs and put units together with bigger companies, so it seems to be working. It never works fast enough. And never seems like we got a shot at a 20,000-acre deal, but we seem to be getting a lot of 500- to 2000-acre opportunities, and we've been moving on those -------------------------------------------------------------------------------- Leo Mariani, RBC Capital Markets - Analyst [33] -------------------------------------------------------------------------------- All right. Thanks, guys. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Jeff Grampp, Northland Capital Markets. -------------------------------------------------------------------------------- Jeff Grampp, Northland Capital Markets - Analyst [35] -------------------------------------------------------------------------------- I wanted to touch base on the well costs reductions. Great job in continuing to push those down. I'm wondering what the line of site for any further decreases, either through efficiencies or maybe on the service help side. And then just building on that, does what you have been able to achieve on that decrease what oil price you may need to see to reaccelerate development in Eagle Ford? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [36] -------------------------------------------------------------------------------- I think I will pass that onto Brad -------------------------------------------------------------------------------- Brad Fisher, Carrizo Oil & Gas, Inc. - VP & COO [37] -------------------------------------------------------------------------------- Okay. This is Brad Fisher. As far as the additional service cost reductions, I think if we continue to see this sub $50 oil market, yes, we are going to see additional service cost reductions here. From an efficiency standpoint, we have been able to do a very good job of matching these gen-3 rigs up with some new bottom hole assemblies that really take advantage of the power that these rigs generate. So I do actually expect as they continue to increase over this 2.5 wells per rig per month. Where that will cap out, not completely sure. But we are seeing some very strong results, we're finishing wells and in less than nine days now, which would point us towards higher number. I hope that answers your question -------------------------------------------------------------------------------- Jeff Grampp, Northland Capital Markets - Analyst [38] -------------------------------------------------------------------------------- That's great color. And then on the second part being, does this lower the oil price you would need to see to get excited about reaccelerating? I know before you guys talked about 60 to 65, if that was sustained number. Does maybe 55 or something like that get you excited, or is it still where you guys were thinking before? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [39] -------------------------------------------------------------------------------- I don't think we are very excited about 55. I think we are still looking for 60 to 65 and understanding why it is at that level. And as this last three weeks has shown, this market has is still too volatile to make decisions to start ramping up CapEx. I think the people that did probably wished they hadn't -------------------------------------------------------------------------------- Jeff Grampp, Northland Capital Markets - Analyst [40] -------------------------------------------------------------------------------- Sure. Fair enough. And then wondering back on the Delaware side of things, you guys had bolted on some recent acreage. Just wondering what kind of prices you are seeing for the acreage you've been able to secure? And then is that building around those kind of pods of acreage you've laid out before? Or more color on where you are seeing these opportunities -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [41] -------------------------------------------------------------------------------- We've basically been building around the pods we started with three or four months ago. We bought some acreage in a state lease sale recently that might put us into a new area where we can start trying to build around. We are not paying anywhere near 35,000 an acre like Midland basin. Generally we are still under 5. That's about all we will see about it -------------------------------------------------------------------------------- Jeff Grampp, Northland Capital Markets - Analyst [42] -------------------------------------------------------------------------------- Okay. Great. Thanks for the color and good results. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Marshall Carver, Heikkinen Energy Advisors. -------------------------------------------------------------------------------- Marshall Carver, Heikkinen Energy Advisors - Analyst [44] -------------------------------------------------------------------------------- How many wells would two rigs potentially drill in Eagle Ford in 2016? What is a reasonable assumption? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [45] -------------------------------------------------------------------------------- Jeff or Andy or Brad? -------------------------------------------------------------------------------- Jeffrey Hayden, Carrizo Oil & Gas, Inc. - VP of IR [46] -------------------------------------------------------------------------------- Yes, Marshall, it's Jeff. I think the best way to think about it is just to use that 2.5 number. So, 2.5 wells per rig month would be 30 wells per rig per year. You can probably do 60 and we can get some improving efficiencies. Brad talked about we might be able to push that higher. You might be able to even get something higher than 60 wells next year with just two rigs. So I think when we went into this year, I think we were assuming that three rigs would do about 64 wells. And now we are doing over 60 with two. I think that is a key point. Us going from three rigs to two is not a deceleration. Had we stayed at three rigs, that would've been acceleration of activity which we just not view as prudent in the current commodity price environment -------------------------------------------------------------------------------- Marshall Carver, Heikkinen Energy Advisors - Analyst [47] -------------------------------------------------------------------------------- Okay. That's very helpful. And in terms of timing on results, would you expect results on that first Delaware test in the upper Eagle Ford well by the next conference call? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [48] -------------------------------------------------------------------------------- I think on the Delaware well, we just finished pouring it and I think we logged it, and so we should be able to complete that and frac it fairly quickly. So, maybe we will have some results on that around the first of November. On the upper Eagle Ford, I'm not sure we will have that by then. We might have some of the spacing numbers figured out, but we are thinking maybe we ought to just put all the Eagle Ford data out at once. We have got so much of that now that it is getting confusing, and we probably ought to just write a white paper put it out there -------------------------------------------------------------------------------- Marshall Carver, Heikkinen Energy Advisors - Analyst [49] -------------------------------------------------------------------------------- All right. Thank you. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities. -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities, LLC - Analyst [51] -------------------------------------------------------------------------------- Chip, if the stack stagger test in Eagle Ford comes back and it looks great, make claims to the inventories has gone up as much is 80%, how much with this change maybe this strategy going forward here company-wise? The Utica, the Niobrara become essential at that point? Nonessential? Just curious on your thoughts on strategy on that. Thanks -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [52] -------------------------------------------------------------------------------- I guess they become less essential. We would have enough drilling inventory in great IRR areas from existing infrastructure that that would take more and more of our capital. But the results in area one of the Niobrara, especially the latest leases we have bought that had a 1/8 loyalty, that's got some of the lowest breakeven cost in the industry. And some of the Utica, once we get some longer life on our UR curves could be very interesting as long as you are making condensate. I hope the stagger stack is so great that makes us forget about everything else, but still, those are pretty good assets and they were difficult to put together and they're worth a lot of money -------------------------------------------------------------------------------- Mike Kelly, Global Hunter Securities, LLC - Analyst [53] -------------------------------------------------------------------------------- Got it. That's all I got. Thanks. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- David Tameron, Wells Fargo. -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [55] -------------------------------------------------------------------------------- A couple of questions. Chip, how do you think about next year? Are you guys -- you talk about the two rig program at the strip. How are you thinking about debt metrics and that framework, so we can run some scenarios on our end. -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [56] -------------------------------------------------------------------------------- Well, our goal has been the standard three. It looks like if oil is down to $45, that's harder and harder to do just because the EBITDA is lower. But that is still our goal, is just to preserve the balance sheet and never have to push on the banks to give us anything, and that is the number one driver -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [57] -------------------------------------------------------------------------------- Okay. And then at the analyst day you guys gave us an outlook on where your borrowing base was headed. Do you care to speculate on it again or give us that quick snapshot? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [58] -------------------------------------------------------------------------------- I think I'll let David to that -------------------------------------------------------------------------------- David Pitts, Carrizo Oil & Gas, Inc. - CFO [59] -------------------------------------------------------------------------------- Hey David, this is David Pitts. As I'd mentioned in my comments, we expect our full borrowing base to be $725 million, which is largely in the range of what we'd previously forecasted. As long as the price deck remains the same, we still think we can grow that borrowing base, primarily with our Eagle Ford assets, at a rate of $40 million to $50 million at every redetermination. Obviously, the price deck can change. The recent price deck that came out in late July, a way to think about it is this is what you are looking for. That price deck came down by about $4 a barrel, and that took about $40 million off of our borrowing base. If that happens again, then we would expect another $40 million reduction in that forecast -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [60] -------------------------------------------------------------------------------- Helpful color. Thank you. And there's a couple more, and whoever wants to take this. Just when you talk about the downspace in the Eagle Ford, not a stagger stack, but the downspacing, you say the results are similar. Are you seeing any differences in the 330- versus the 500-foot spacing? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [61] -------------------------------------------------------------------------------- We have not seen any so far, we just don't think we've waited long enough to say we are certain that it's going to work. They are -- obviously for some amount of time you can downspace anything. But at some point you have to have interference, and then you are wasting capital at some discount rate, so that's what we're trying to figure out. So far, so good, and we are getting pretty far into it now. I think some of them have six months of data, so we're feeling pretty good about it -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [62] -------------------------------------------------------------------------------- Okay. And last question, you talked a little bit about this, about the bid ask, but it sounds like you are talking to whomever, that these -- there's better activities picking up in the M&A market. Better packages heading -- some of the smaller players that need to sell or whoever needs to sell have gotten a little more aggressive with marketing packages. Are you seeing the same thing? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [63] -------------------------------------------------------------------------------- Yes. The same whomever told us that, and that is true. (Laughter) No. We have seen some better assets on the market. Obviously, the Goodrich assets were good assets. And there some other ones out there, but there are still a lot more that we think will come on the market some time in the next year -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [64] -------------------------------------------------------------------------------- Okay. Last question. M&A market ship, how do you think about that as far as on the seller side? Marcellus and Niobrara has always been rumored to be -- or at least that's the chatter on the buy side, sell side, that those assets will hit the market at some point. Any comment on that? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [65] -------------------------------------------------------------------------------- Well, I think we've always said we would like to see higher prices before we sell something. We don't have to sell anything, we don't have to raise any money. But at the same time we want to know what the market price of everything is. About the only way we would be willing to sell an asset at what we feel like is the bottom of the market is if we are getting to buy another asset at the bottom of the market. We keep trying to find something interesting to buy, primarily in Eagle Ford or Permian. And in that case, we would probably be willing to sell something else and help pay for it. -------------------------------------------------------------------------------- David Tameron, Wells Fargo Securities, LLC - Analyst [66] -------------------------------------------------------------------------------- Okay. All right. Thanks. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- (Operator Instructions) Steve Berman, Canaccord Genuity. -------------------------------------------------------------------------------- Steve Berman, Canaccord Genuity - Analyst [68] -------------------------------------------------------------------------------- Just one question on the Mustang State well, if you could give us any color on the cost there, knowing it was the first well and there were some extra costs in there. And perhaps what you would expect the cost to be going forward as you get more normalized in drilling wells there. -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [69] -------------------------------------------------------------------------------- Yes, we knew this is going to be an expensive well because we took that core, and that's why we assumed an average cost of $10 million for the three wells. But as far as what we think we will have going forward, I would like Brad or Scott talk about that -------------------------------------------------------------------------------- Brad Fisher, Carrizo Oil & Gas, Inc. - VP & COO [70] -------------------------------------------------------------------------------- Steve, this is Brad Fisher. I would say it's very early in the game for us out there. But seeing how the drilling has progressed on this first well, I feel confident that we would, in a full-scale development out there, be comfortable with what other operators are reporting in the area. -------------------------------------------------------------------------------- Steve Berman, Canaccord Genuity - Analyst [71] -------------------------------------------------------------------------------- Okay. Very helpful. Thanks, guys. -------------------------------------------------------------------------------- Operator [72] -------------------------------------------------------------------------------- Neal Dingmann, SunTrust. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [73] -------------------------------------------------------------------------------- Chip, I'm just looking, there might be a little data now on the slide that shows the PV10 breakeven, two questions around that. One, now as your well costs continue to come down, I think on that side it mentioned about 80% of locations have a breakeven of 43 or less. My first question, how much lower that has, if you could update that. And then secondly, when I look at each of these areas, you still have a large percentage on some of the lower cost areas like the RPG or [Northland] sale in some of those. When you look at your activity for the remainder of this year and into next year, are you still pretty much delineating in your entire Eagle Ford, or are you focusing on one or two of these lower cost areas? -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [74] -------------------------------------------------------------------------------- Well, as far as breakeven costs, I was hoping you'd had an estimate that you and WIll would come up with (laughter). But this has happened fast enough that we have not adjusted. Maybe we will have that by Intercom. And we keep drilling across our acreage. We like to drill the most profitable areas more than the lease, but the lease obligations are spread across the whole thing. So, we are drilling pretty much in all of the areas year round -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [75] -------------------------------------------------------------------------------- All right, thanks, guys. -------------------------------------------------------------------------------- Operator [76] -------------------------------------------------------------------------------- There are no further questions at registered at this time -------------------------------------------------------------------------------- Chip Johnson, Carrizo Oil & Gas, Inc. - President & CEO [77] -------------------------------------------------------------------------------- Well, thank you all for calling in, and thanks to our management and staff for getting us through another quarter with excellent results even as prices are falling. I think we have some exciting things in front of us. Obviously the catalyst with our first Delaware basin well that will come online pretty soon is exciting. Also, what we are going to figure out about well costs, which could make a big difference out there. And in the Eagle Ford we've got down spacing tests, stagger stack tests, upper Eagle Ford initial well. And we are also trying different things with diversion agents and proppant loading and different fluids. There is just a lot going on out there that could produce some sort of milestone numbers. And then we just want to talk about our flexibility. Because of our balance sheet and the quality of the Eagle Ford we can drop rigs, add rigs, and still manage the balance sheet and basically zero in on whatever growth rate we want. These efficiencies from these generation three rigs are giving us the flexibility we did not count on. We knew they would be better, but they are a lot better. And so that is changing the metrics for us and giving us more choices for how we run the end of this year and next year in a wide variety of commodity prices. With that, thanks again for calling in, and hopefully we will have some of these catalyst results at the next call -------------------------------------------------------------------------------- Operator [78] -------------------------------------------------------------------------------- Ladies and gentlemen, that concludes the call for today. We thank you for your participation and ask that you please disconnect your line.
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