Attached files
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EXCEL - IDEA: XBRL DOCUMENT - CARRIZO OIL & GAS INC | Financial_Report.xls |
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - CARRIZO OIL & GAS INC | ex3113q14.htm |
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - CARRIZO OIL & GAS INC | ex3123q14.htm |
EX-32.2 - SECTION 906 CERTIFICATION OF CFO - CARRIZO OIL & GAS INC | ex3223q14.htm |
EX-32.1 - SECTION 906 CERTIFICATION OF CEO - CARRIZO OIL & GAS INC | ex3213q14.htm |
EX-10.1 - RETIREMENT AND CONSULTING AGREEMENT FOR PAUL BOLING - CARRIZO OIL & GAS INC | ex101retirementandconsulti.htm |
UNITED STATES
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, 2014
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-29187-87
_________________________________________________
CARRIZO OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________
Texas | 76-0415919 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
500 Dallas Street, Suite 2300, Houston, Texas | 77002 | |
(Address of principal executive offices) | (Zip Code) |
(713) 328-1000
(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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of October 31, 2014 was 46,096,441.
CARRIZO OIL & GAS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
INDEX
PAGE | ||
Item 1. | Consolidated Financial Statements (Unaudited) | |
Notes to Consolidated Financial Statements | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CARRIZO OIL & GAS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (Unaudited) | ||||||||
September 30, 2014 | December 31, 2013 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $7,161 | $157,439 | ||||||
Accounts receivable, net | 113,107 | 111,195 | ||||||
Derivative assets | 20,594 | — | ||||||
Deferred income taxes | — | 4,201 | ||||||
Other current assets | 4,297 | 6,926 | ||||||
Total current assets | 145,159 | 279,761 | ||||||
Property and equipment | ||||||||
Oil and gas properties, full cost method | ||||||||
Proved properties, net | 1,747,845 | 1,408,484 | ||||||
Unproved properties, not being amortized | 499,722 | 377,437 | ||||||
Other property and equipment, net | 7,580 | 8,294 | ||||||
Total property and equipment, net | 2,255,147 | 1,794,215 | ||||||
Debt issuance costs | 20,631 | 22,899 | ||||||
Other assets | 19,897 | 13,885 | ||||||
Total Assets | $2,440,834 | $2,110,760 | ||||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $102,579 | $57,146 | ||||||
Revenues and royalties payable | 85,943 | 79,136 | ||||||
Accrued capital expenditures | 89,022 | 87,031 | ||||||
Accrued interest | 24,899 | 17,430 | ||||||
Advances for joint operations | 4,391 | 19,967 | ||||||
Liabilities of discontinued operations | 8,017 | 10,936 | ||||||
Derivative liabilities | 135 | 9,947 | ||||||
Deferred income taxes | 3,659 | — | ||||||
Other current liabilities | 54,881 | 41,242 | ||||||
Total current liabilities | 373,526 | 322,835 | ||||||
Long-term debt | 1,019,791 | 900,247 | ||||||
Liabilities of discontinued operations | 12,785 | 17,336 | ||||||
Deferred income taxes | 58,151 | 16,856 | ||||||
Asset retirement obligations | 10,041 | 6,576 | ||||||
Other liabilities | 4,661 | 5,306 | ||||||
Total liabilities | 1,478,955 | 1,269,156 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity | ||||||||
Common stock, $0.01 par value, 90,000,000 shares authorized; 46,087,406 issued and outstanding as of September 30, 2014 and 45,468,675 issued and outstanding as of December 31, 2013 | 461 | 455 | ||||||
Additional paid-in capital | 908,133 | 879,948 | ||||||
Retained earnings (Accumulated deficit) | 53,285 | (38,799 | ) | |||||
Total shareholders’ equity | 961,879 | 841,604 | ||||||
Total Liabilities and Shareholders’ Equity | $2,440,834 | $2,110,760 |
The accompanying notes are an integral part of these consolidated financial statements.
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CARRIZO OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenues | |||||||||||||||
Crude oil | $173,277 | $117,797 | $469,601 | $311,084 | |||||||||||
Natural gas liquids | 7,798 | 6,025 | 19,669 | 11,532 | |||||||||||
Natural gas | 15,150 | 20,507 | 57,642 | 67,838 | |||||||||||
Total revenues | 196,225 | 144,329 | 546,912 | 390,454 | |||||||||||
Costs and Expenses | |||||||||||||||
Lease operating | 21,019 | 12,934 | 51,002 | 34,926 | |||||||||||
Production taxes | 8,393 | 5,590 | 22,666 | 14,687 | |||||||||||
Ad valorem taxes | 2,235 | 2,125 | 5,569 | 6,848 | |||||||||||
Depreciation, depletion and amortization | 83,572 | 55,362 | 228,912 | 151,587 | |||||||||||
General and administrative | 9,538 | 19,715 | 65,481 | 53,722 | |||||||||||
(Gain) loss on derivatives, net | (71,783 | ) | 27,658 | (11,153 | ) | 16,486 | |||||||||
Interest expense, net | 12,201 | 13,402 | 36,557 | 42,367 | |||||||||||
Other (income) expense, net | 549 | (28 | ) | 1,536 | (95 | ) | |||||||||
Total costs and expenses | 65,724 | 136,758 | 400,570 | 320,528 | |||||||||||
Income From Continuing Operations Before Income Taxes | 130,501 | 7,571 | 146,342 | 69,926 | |||||||||||
Income tax expense | (47,504 | ) | (1,859 | ) | (53,510 | ) | (25,853 | ) | |||||||
Income From Continuing Operations | 82,997 | 5,712 | 92,832 | 44,073 | |||||||||||
Income (Loss) From Discontinued Operations, Net of Income Taxes | 792 | (1,191 | ) | (748 | ) | 23,599 | |||||||||
Net Income | $83,789 | $4,521 | $92,084 | $67,672 | |||||||||||
Net Income (Loss) Per Common Share - Basic | |||||||||||||||
Income from continuing operations | $1.83 | $0.14 | $2.05 | $1.10 | |||||||||||
Income (loss) from discontinued operations, net of income taxes | 0.02 | (0.03 | ) | (0.02 | ) | 0.59 | |||||||||
Net income | $1.85 | $0.11 | $2.03 | $1.69 | |||||||||||
Net Income (Loss) Per Common Share - Diluted | |||||||||||||||
Income from continuing operations | $1.80 | $0.14 | $2.01 | $1.09 | |||||||||||
Income (loss) from discontinued operations, net of income taxes | 0.02 | (0.03 | ) | (0.01 | ) | 0.58 | |||||||||
Net income | $1.82 | $0.11 | $2.00 | $1.67 | |||||||||||
Weighted Average Common Shares Outstanding | |||||||||||||||
Basic | 45,257 | 40,386 | 45,277 | 40,083 | |||||||||||
Diluted | 46,029 | 40,927 | 46,109 | 40,601 |
The accompanying notes are an integral part of these consolidated financial statements.
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CARRIZO OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
Cash Flows From Operating Activities | |||||||
Net income | $92,084 | $67,672 | |||||
(Income) loss from discontinued operations, net of income taxes | 748 | (23,599 | ) | ||||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities from continuing operations | |||||||
Depreciation, depletion and amortization | 228,912 | 151,587 | |||||
Non-cash (gain) loss on derivatives, net | (36,652 | ) | 25,806 | ||||
Stock-based compensation | 28,209 | 19,338 | |||||
Deferred income taxes | 48,908 | 25,853 | |||||
Non-cash interest expense, net | 2,021 | 3,217 | |||||
Other, net | (1,705 | ) | 1,789 | ||||
Changes in operating assets and liabilities- | |||||||
Accounts receivable | (1,767 | ) | 1,910 | ||||
Accounts payable | 33,024 | 38,843 | |||||
Accrued liabilities | (771 | ) | 2,049 | ||||
Other, net | (4,324 | ) | (4,212 | ) | |||
Net cash provided by operating activities from continuing operations | 388,687 | 310,253 | |||||
Net cash used in operating activities from discontinued operations | (1,162 | ) | (400 | ) | |||
Net cash provided by operating activities | 387,525 | 309,853 | |||||
Cash Flows From Investing Activities | |||||||
Capital expenditures - oil and gas properties | (665,517 | ) | (548,049 | ) | |||
Capital expenditures - other property and equipment | (569 | ) | (687 | ) | |||
Proceeds from sales of oil and gas properties, net | 10,487 | 20,753 | |||||
Other, net | 1,418 | 24,582 | |||||
Net cash used in investing activities from continuing operations | (654,181 | ) | (503,401 | ) | |||
Net cash provided by (used in) investing activities from discontinued operations | (6,773 | ) | 126,223 | ||||
Net cash used in investing activities | (660,954 | ) | (377,178 | ) | |||
Cash Flows From Financing Activities | |||||||
Proceeds from borrowings and issuances | 646,000 | 437,000 | |||||
Debt repayments | (527,000 | ) | (419,325 | ) | |||
Payments of debt issuance costs | (594 | ) | (1,075 | ) | |||
Excess tax benefits from stock-based compensation | 4,602 | — | |||||
Proceeds from stock options exercised | 143 | 839 | |||||
Net cash provided by financing activities from continuing operations | 123,151 | 17,439 | |||||
Net cash provided by financing activities from discontinued operations | — | 3,000 | |||||
Net cash provided by financing activities | 123,151 | 20,439 | |||||
Net Decrease in Cash and Cash Equivalents | (150,278 | ) | (46,886 | ) | |||
Cash and Cash Equivalents, Beginning of Period | 157,439 | 52,614 | |||||
Cash and Cash Equivalents, End of Period | $7,161 | $5,728 |
The accompanying notes are an integral part of these consolidated financial statements.
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CARRIZO OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Carrizo Oil & Gas, Inc. is a Houston-based energy company which, together with its subsidiaries (collectively, the “Company”), is actively engaged in the exploration, development, and production of oil and gas primarily from resource plays located in the United States. The Company’s current operations are principally focused in proven, producing oil and gas plays primarily in the Eagle Ford Shale in South Texas, the Utica Shale in Ohio, the Niobrara Formation in Colorado, and the Marcellus Shale in Pennsylvania.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company after elimination of intercompany transactions and balances and are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company proportionately consolidates its undivided interests in oil and gas properties as well as investments in unincorporated entities, such as partnerships and limited liability companies where the Company, as a partner or member, has undivided interests in the oil and gas properties. The consolidated financial statements reflect all necessary adjustments, all of which were of a normal recurring nature and are in the opinion of management necessary to present fairly, in all material respects, the Company’s interim financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. The consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications had no material impact on prior period amounts.
Discontinued Operations
On February 22, 2013, the Company closed on the sale of Carrizo UK Huntington Ltd, a wholly owned subsidiary of the Company (“Carrizo UK”), and all of its interest in the Huntington Field discovery, including a 15% non-operated working interest and certain overriding royalty interests, to a subsidiary of Iona Energy Inc. (“Iona Energy”) for an agreed-upon price of $184.0 million, including the assumption and repayment by Iona Energy of the $55.0 million of borrowings outstanding under Carrizo UK’s senior secured multicurrency credit facility as of the closing date. The liabilities, results of operations and cash flows associated with Carrizo UK have been classified as discontinued operations in the consolidated financial statements. Unless otherwise indicated, the information in these notes relate to the Company’s continuing operations. Information related to discontinued operations is included in “Note 3. Discontinued Operations” and “Note 10. Condensed Consolidating Financial Information.”
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Certain of such estimates and assumptions are inherently unpredictable and will differ from actual results. The Company evaluates subsequent events through the date the financial statements are issued.
Significant estimates include volumes of proved oil and gas reserves, which are used in calculating depreciation, depletion, and amortization (“DD&A”) of proved oil and gas property costs, the present value of future net revenues included in the full cost ceiling test, estimates of future taxable income used in assessing the realizability of deferred tax assets, and the estimated costs and timing of cash outflows underlying asset retirement obligations. Oil and gas reserve estimates, and therefore calculations based on such reserve estimates, are subject to numerous inherent uncertainties, the accuracy of which, is a function of the quality and quantity of available data, the application of engineering and geological interpretation and judgment to available data and the interpretation of mineral leaseholds and other contractual arrangements, including adequacy of title, drilling requirements and royalty obligations. These estimates also depend on assumptions regarding quantities and production rates of recoverable oil and gas reserves, oil and gas prices, timing and amounts of development costs and operating expenses, all of which will vary from those assumed in the Company’s estimates. Other significant estimates are involved in determining impairments of unevaluated
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leasehold costs, fair values of derivative assets and liabilities, stock-based compensation, collectability of receivables, and in evaluating disputed claims, interpreting contractual arrangements (including royalty obligations and notional interest calculations) and contingencies. Estimates are based on current assumptions that may be materially affected by the results of subsequent drilling and completion, testing and production as well as subsequent changes in oil and gas prices, counterparty creditworthiness, interest rates and the market value and volatility of the Company’s common stock.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of three months or less. Certain of the Company’s cash accounts are zero-balance controlled disbursement accounts that do not have the right of offset against the Company’s other cash balances. The Company presents the outstanding checks written against these zero-balance accounts as a component of accounts payable in the consolidated balance sheets. Outstanding checks included as a component of accounts payable totaled $47.5 million and $2.2 million as of September 30, 2014 and December 31, 2013, respectively.
Accounts Receivable and Accounts Payable
The Company establishes an allowance for doubtful accounts when it determines that it will not collect all or a part of an accounts receivable balance. The Company assesses the collectability of its accounts receivable on a quarterly basis and adjusts the allowance as necessary using the specific identification method. The allowance for doubtful accounts was not significant at September 30, 2014 and December 31, 2013. Accounts receivable from related parties at September 30, 2014 and December 31, 2013 was $0.1 million and $6.6 million, respectively. Accounts payable to related parties at September 30, 2014 and December 31, 2013 was $1.3 million and $2.8 million, respectively.
Concentration of Credit Risk
The Company’s accounts receivable consists primarily of receivables from oil and gas purchasers and joint interest owners in properties the Company operates. This concentration of accounts receivable from customers and joint interest owners in the oil and gas industry may impact the Company’s overall credit risk in that these entities may be similarly affected by changes in economic and other industry conditions. The Company does not require collateral from its customers and joint interest owners. The Company generally has the right to withhold future revenue distributions to recover any non-payment of joint interest billings.
The Company’s derivative instruments in a net asset position also subject the Company to a concentration of credit risk. See “Note 8. Derivative Instruments.”
Oil and Gas Properties
Oil and gas properties are accounted for using the full cost method of accounting under which all productive and nonproductive costs directly associated with property acquisition, exploration and development activities are capitalized to cost centers established on a country-by-country basis. The internal cost of employee compensation and benefits, including stock-based compensation, directly associated with acquisition, exploration and development activities are capitalized and totaled $3.4 million and $3.8 million for the three months ended September 30, 2014 and 2013, respectively, and $14.1 million and $10.1 million for the nine months ended September 30, 2014 and 2013, respectively. Internal costs related to production, general corporate overhead and similar activities are expensed as incurred.
Capitalized oil and gas property costs within a cost center are amortized on an equivalent unit-of-production method, converting natural gas to barrels of oil equivalent at the ratio of six thousand cubic feet of gas to one barrel of oil, which represents their approximate relative energy content. The equivalent unit-of-production amortization rate is computed on a quarterly basis by dividing current quarter production by proved oil and gas reserves at the beginning of the quarter then applying such amortization rate to capitalized oil and gas property costs, which includes estimated asset retirement costs, less accumulated amortization, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values. Average DD&A per Boe of proved oil and gas properties was $26.75 and $19.75 for the three months ended September 30, 2014 and 2013, respectively, and $26.58 and $19.34 for the nine months ended September 30, 2014 and 2013, respectively.
Unproved properties, not being amortized, include unevaluated leasehold and seismic costs associated with specific unevaluated properties, the cost of exploratory wells in progress, and related capitalized interest. Exploratory wells in progress and individually significant unevaluated leaseholds are assessed on a quarterly basis to determine whether or not and to what extent proved reserves have been assigned to the properties or if an impairment has occurred, in which case the related costs along with associated capitalized interest are added to the oil and gas property costs subject to amortization. Factors the Company considers in its impairment assessment include drilling results by the Company and other operators, the terms of oil and gas leases not held by production and drilling and completion capital expenditure plans. The Company expects to complete its evaluation of the majority of its unevaluated leaseholds within the next five years and exploratory wells in progress within the next year. Individually insignificant unevaluated leaseholds are grouped by major area and added to the oil and gas property costs subject to amortization
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based on the average primary lease term of the properties. The Company capitalized interest costs associated with its unproved properties totaling $8.7 million and $7.5 million for the three months ended September 30, 2014 and 2013, respectively, and $25.0 million and $21.8 million for the nine months ended September 30, 2014 and 2013, respectively. The amount of interest costs capitalized is determined on a quarterly basis based on the average balance of unproved properties using a weighted-average interest rate based on outstanding borrowings.
Proceeds from the sale of proved and unproved oil and gas properties are recognized as a reduction of capitalized oil and gas property costs with no gain or loss recognized, unless the sale significantly alters the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center. For the three and nine months ended September 30, 2014, the Company did not have any sales of oil and gas properties that significantly altered such relationship.
Capitalized costs, less accumulated amortization and related deferred income taxes, are limited to the “cost center ceiling” equal to (i) the sum of (A) the present value of estimated future net revenues from proved oil and gas reserves, less estimated future expenditures to be incurred in developing and producing the proved reserves computed using a discount factor of 10%, (B) the costs of unproved properties not being amortized, and (C) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; less (ii) related income tax effects. If the net capitalized costs exceed the cost center ceiling, the excess is recognized as an impairment of oil and gas properties. An impairment recognized in one period may not be reversed in a subsequent period even if higher oil and gas prices in the future increase the cost center ceiling applicable to the subsequent period.
The estimated future net revenues used in the cost center ceiling are calculated using the average realized prices for sales of oil and gas on the first calendar day of each month during the preceding 12-month period prior to the end of the current reporting period. Prices are held constant indefinitely and are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts. Prices do not include the impact of derivative instruments because the Company elected not to meet the criteria to qualify its derivative instruments for hedge accounting treatment.
Depreciation of other property and equipment is recognized using the straight-line method based on estimated useful lives ranging from five to ten years.
Debt Issuance Costs
Debt issuance costs associated with the revolving credit facility are amortized to interest expense on a straight-line basis over the term of the facility. Debt issuance costs associated with the senior notes are amortized to interest expense using the effective interest method over the terms of the related notes.
Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, receivables, payables, derivative assets and liabilities and long-term debt. The carrying amounts of cash and cash equivalents, receivables and payables approximate fair value due to the highly liquid or short-term nature of these instruments. The fair values of the Company’s derivative assets and liabilities are based on a third-party industry-standard pricing model that uses market data obtained from third-party sources, including quoted forward prices for oil and gas, discount rates and volatility factors. The carrying amounts of long-term debt under the Company’s revolving credit facility approximate fair value as borrowings bear interest at variable rates of interest. The carrying amounts of the Company’s senior notes and other long-term debt may not approximate fair value because carrying amounts are net of any unamortized discount and the notes bear interest at fixed rates of interest. See “Note 6. Long-Term Debt” and “Note 9. Fair Value Measurements.”
Asset Retirement Obligations
The Company’s asset retirement obligations represent the present value of the estimated future costs associated with plugging and abandoning oil and gas wells, removing production equipment and facilities and restoring the surface of the land in accordance with the terms of oil and gas leases and applicable local, state and federal laws. Determining asset retirement obligations requires estimates of the costs of plugging and abandoning oil and gas wells, removing production equipment and facilities and restoring the surface of the land as well as estimates of the economic lives of the oil and gas wells and future inflation rates. The resulting estimate of future cash outflows are discounted using a credit-adjusted risk-free interest rate that corresponds with the timing of the cash outflows. Cost estimates consider historical experience, third party estimates, the requirements of oil and gas leases and applicable local, state and federal laws, but do not consider estimated salvage values. Asset retirement obligations are recognized when the well is drilled or when the production equipment and facilities are installed with an associated increase in oil and gas property costs. Asset retirement obligations are accreted to their expected settlement values with any difference between the actual cost of settling the asset retirement obligations and recorded amount being recognized as an adjustment to proved oil and gas property costs. On an interim basis, when indicators suggest there have been material changes in the estimates underlying the obligation, the Company reassesses its asset retirement obligations to determine whether any revisions to the obligations are
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necessary. At least annually, the Company reassesses all of its asset retirement obligations to determine whether any revisions to the obligations are necessary. Revisions typically occur due to changes in estimated costs or well economic lives, or if federal or state regulators enact new requirements regarding plugging and abandoning oil and gas wells.
Commitments and Contingencies
Liabilities are recognized for contingencies when (i) it is both probable that an asset has been impaired or that a liability has been incurred and (ii) the amount of such loss is reasonably estimable.
Revenue Recognition
Oil and gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectability is reasonably assured. The Company follows the sales method of accounting whereby revenues from the production of natural gas from properties in which the Company has an interest with other producers are recognized for production sold to purchasers, regardless of whether the sales are proportionate to the Company’s ownership interest in the property. Production imbalances are recognized as an asset or liability to the extent that the Company has an imbalance on a specific property that is in excess of its remaining proved reserves. Sales volumes are not significantly different from the Company’s share of production and as of September 30, 2014 and December 31, 2013, the Company did not have any material production imbalances.
Derivative Instruments
The Company uses commodity derivative instruments, primarily fixed price swaps and costless collars, to reduce its exposure to commodity price volatility for a substantial, but varying, portion of its forecasted oil and gas production up to 36 months and thereby achieve a more predictable level of cash flows to support the Company’s drilling and completion capital expenditure program. All derivative instruments are recorded on the consolidated balance sheets as either an asset or liability measured at fair value. The Company nets its derivative instrument fair value amounts executed with the same counterparty pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract. Although the derivative instruments provide an economic hedge of the Company’s exposure to commodity price volatility, because the Company elected not to meet the criteria to qualify its derivative instruments for hedge accounting treatment, gains and losses as a result of changes in the fair value of derivative instruments are recognized as (gain) loss on derivative instruments, net in the consolidated statements of income in the period in which the changes occur. The net cash flows resulting from the payments to and receipts from counterparties as a result of derivative settlements are classified as cash flows from operating activities. The Company does not enter into derivative instruments for speculative or trading purposes.
The Company’s Board of Directors establishes risk management policies and reviews derivative instruments, including volumes, types of instruments and counterparties, on a quarterly basis. These policies require that derivative instruments be executed only by the President or Chief Financial Officer after consultation with and concurrence by the President, Chief Financial Officer and Chairman of the Board. See “Note 8. Derivative Instruments” for further discussion of the Company’s derivative instruments.
Stock-Based Compensation
The Company recognized the following stock-based compensation expense (benefit) associated with stock appreciation rights to be settled in cash (“SARs”), restricted stock awards and units and performance share awards for the periods indicated which is reflected as general and administrative expense in the consolidated statements of income:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands) | ||||||||||||||||
Stock appreciation rights | ($8,935 | ) | $6,752 | $10,637 | $10,691 | |||||||||||
Restricted stock awards and units | 8,592 | 5,232 | 22,517 | 13,551 | ||||||||||||
Performance share awards | 592 | — | 925 | — | ||||||||||||
249 | 11,984 | 34,079 | 24,242 | |||||||||||||
Less: amounts capitalized | (1,179 | ) | (2,112 | ) | (5,870 | ) | (4,904 | ) | ||||||||
Total stock-based compensation expense (benefit) | ($930 | ) | $9,872 | $28,209 | $19,338 | |||||||||||
Income tax benefit (expense) | ($326 | ) | $3,627 | $9,874 | $7,097 |
Stock Appreciation Rights. For SARs, stock-based compensation expense is based on the fair value liability (using the Black-Scholes-Merton option pricing model) remeasured at each reporting period, recognized over the vesting period (generally three years) using the graded vesting method. For periods subsequent to vesting and prior to exercise, stock-based compensation expense is based on the fair value liability remeasured at each reporting period based on the intrinsic value of the SAR. The liability for SARs are classified as “Other current liabilities” for the portion of the awards that are vested or are expected to vest within the
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next 12 months, with the remainder classified as “Other liabilities.” SARs typically expire between four and seven years after the date of grant.
Restricted Stock Awards and Units. For restricted stock awards and units granted to employees, stock-based compensation expense is based on the price of the Company’s common stock on the grant date and recognized over the vesting period (generally one to three years) using the straight-line method, except for award or units with performance conditions, in which case the Company uses the graded vesting method. For restricted stock awards and units granted to independent contractors, stock-based compensation expense is based on fair value remeasured at each reporting period and recognized over the vesting period (generally three years) using the straight-line method.
Performance Share Awards. For performance share awards, stock-based compensation expense is based on the grant-date fair value (using a Monte Carlo valuation model) and recognized over the three year vesting period using the straight-line method. The number of shares of common stock issuable upon vesting range from zero to 200% of the number of performance share awards granted based on the Company’s total shareholder return relative to an industry peer group over a three year performance period.
Income Taxes
Income taxes are recognized based on earnings reported for tax return purposes in addition to a provision for deferred income taxes. Deferred income taxes are recognized at each reporting period for the future tax consequences of cumulative temporary differences between the tax bases of assets and liabilities and their reported amounts in the Company’s financial statements based on existing tax laws and enacted statutory tax rates applicable to the periods in which the temporary differences are expected to affect taxable income. The Company routinely assesses the realizability of its deferred tax assets by taxing jurisdiction and considers its estimate of future taxable income based on production of proved reserves at estimated future pricing in making such assessments. If the Company concludes that it is more likely than not that some portion or all of the benefit from deferred tax assets will not be realized, the deferred tax assets are reduced by a valuation allowance. The Company classifies interest and penalties associated with income taxes as interest expense.
Income From Continuing Operations Per Common Share
Supplemental income from continuing operations per common share information is provided below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Income From Continuing Operations | $82,997 | $5,712 | $92,832 | $44,073 | ||||||||||||
Basic weighted average common shares outstanding | 45,257 | 40,386 | 45,277 | 40,083 | ||||||||||||
Effect of dilutive instruments | 772 | 541 | 832 | 518 | ||||||||||||
Diluted weighted average common shares outstanding | 46,029 | 40,927 | 46,109 | 40,601 | ||||||||||||
Income From Continuing Operations Per Common Share | ||||||||||||||||
Basic | $1.83 | $0.14 | $2.05 | $1.10 | ||||||||||||
Diluted | $1.80 | $0.14 | $2.01 | $1.09 |
Basic income from continuing operations per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted income from continuing operations per common share is based on the weighted average number of common shares and all potentially dilutive common shares outstanding during the period which include restricted stock awards and units, performance share awards, stock options and warrants. The Company excludes the number of awards, units, options and warrants from the calculation of diluted weighted average shares outstanding when the grant date or exercise prices are greater than the average market prices of the Company’s common stock for the corresponding period as the effect would be antidilutive to the computation. The Company includes the number of potentially dilutive common shares attributable to the performance share awards based on the number of shares, if any, that would be issuable as if the end of the period was the end of the performance period. The number of awards, units, options, warrants and performance share awards excluded for the three and nine months ended September 30, 2014 and 2013 were not significant.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and industry specific guidance in Subtopic 932-605, Extractive Activities- Oil and Gas- Revenue Recognition. This ASU requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods and services. This ASU is effective for annual and interim periods
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beginning in 2017, and is required to be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption, with no early adoption permitted. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.
3. Discontinued Operations
On February 22, 2013, the Company closed on the sale of Carrizo UK, and all of its interest in the Huntington Field discovery, including a 15% non-operated working interest and certain overriding royalty interests, to a subsidiary of Iona Energy for an agreed-upon price of $184.0 million, including the assumption and repayment by Iona Energy of the $55.0 million of borrowings outstanding under Carrizo UK’s senior secured multicurrency credit facility as of the closing date. The liabilities of discontinued operations of $20.8 million and $28.3 million as of September 30, 2014 and December 31, 2013, respectively, relate to an accrual for estimated future obligations related to the sale. See “Note 2. Summary of Significant Accounting Policies—Use of Estimates” for further discussion of estimates and assumptions that may affect the reported amounts of liabilities related to the sale of Carrizo UK.
The following table summarizes the amounts included in income (loss) from discontinued operations, net of income taxes presented in the consolidated statements of income for the three and nine months ended September 30, 2014 and 2013:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands) | ||||||||||||||||
Revenues | $— | $— | $— | $— | ||||||||||||
Costs and Expenses | ||||||||||||||||
General and administrative | 259 | 408 | 1,162 | 709 | ||||||||||||
Accretion related to asset retirement obligations | — | — | — | 36 | ||||||||||||
Gain on sale of discontinued operations | — | — | — | (37,294 | ) | |||||||||||
Increase (decrease) in estimated future obligations | (2,144 | ) | 1,187 | (696 | ) | (1,378 | ) | |||||||||
Loss on derivatives, net | 16 | 18 | 34 | 93 | ||||||||||||
Other (income) expense, net | — | (106 | ) | — | (438 | ) | ||||||||||
Income (Loss) From Discontinued Operations Before Income Taxes | 1,869 | (1,507 | ) | (500 | ) | 38,272 | ||||||||||
Income tax (expense) benefit | (1,077 | ) | 316 | (248 | ) | (14,673 | ) | |||||||||
Income (Loss) From Discontinued Operations, Net of Income Taxes | $792 | ($1,191 | ) | ($748 | ) | $23,599 |
Income Taxes
Carrizo UK is a disregarded entity for U.S. federal income tax purposes. Accordingly, the income tax (expense) benefit reflected above includes the Company’s U.S. deferred income tax (expense) benefit associated with the income (loss) from discontinued operations before income taxes. The related U.S. deferred tax assets and liabilities have been classified as deferred income taxes of continuing operations in the consolidated balance sheets.
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4. Property and Equipment, Net
As of September 30, 2014 and December 31, 2013, total property and equipment, net consisted of the following:
September 30, 2014 | December 31, 2013 | |||||||
(In thousands) | ||||||||
Proved properties | $2,747,915 | $2,182,226 | ||||||
Accumulated depreciation, depletion and amortization | (1,000,070 | ) | (773,742 | ) | ||||
Proved properties, net | 1,747,845 | 1,408,484 | ||||||
Unproved properties, not being amortized | ||||||||
Unevaluated leasehold and seismic costs | 388,169 | 302,232 | ||||||
Exploratory wells in progress | 49,171 | 30,196 | ||||||
Capitalized interest | 62,382 | 45,009 | ||||||
Total unproved properties, not being amortized | 499,722 | 377,437 | ||||||
Other property and equipment | 15,855 | 15,260 | ||||||
Accumulated depreciation | (8,275 | ) | (6,966 | ) | ||||
Other property and equipment, net | 7,580 | 8,294 | ||||||
Total property and equipment, net | $2,255,147 | $1,794,215 |
5. Income Taxes
The Company’s estimated annual effective income tax rates are used to allocate expected annual income tax expense to interim periods. The rates are the ratio of estimated annual income tax expense to estimated annual income before income taxes by taxing jurisdiction, except for discrete items, which are significant, unusual or infrequent items for which income taxes are computed and recorded in the interim period in which the discrete item occurs. The estimated annual effective income tax rates are applied to the year-to-date income before income taxes by taxing jurisdiction to determine the income tax expense allocated to the interim period. The Company updates its estimated annual effective income tax rates at the end of each quarterly period considering the geographic mix of income based on the tax jurisdictions in which the Company operates. Actual results that are different from the assumptions used in estimating the annual effective income tax rates will impact future income tax expense. Income tax expense differs from income tax expense computed by applying the U.S. federal statutory corporate income tax rate of 35% to income from continuing operations before income taxes as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(In thousands) | ||||||||||||||||
Income tax expense at the statutory rate | ($45,675 | ) | ($2,650 | ) | ($51,220 | ) | ($24,474 | ) | ||||||||
State income taxes, net of U.S. federal income tax effect | (2,560 | ) | 791 | (2,974 | ) | (1,275 | ) | |||||||||
Other, net | 731 | — | 684 | (104 | ) | |||||||||||
Income tax expense | ($47,504 | ) | ($1,859 | ) | ($53,510 | ) | ($25,853 | ) |
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6. Long-Term Debt
Long-term debt consisted of the following as of September 30, 2014 and December 31, 2013:
September 30, 2014 | December 31, 2013 | |||||||
(In thousands) | ||||||||
8.625% Senior Notes due 2018 | $600,000 | $600,000 | ||||||
Unamortized discount for 8.625% Senior Notes | (3,634 | ) | (4,178 | ) | ||||
7.50% Senior Notes due 2020 | 300,000 | 300,000 | ||||||
Other long-term debt due 2028 | 4,425 | 4,425 | ||||||
Senior Secured Revolving Credit Facility due 2018 | 119,000 | — | ||||||
Total long-term debt | $1,019,791 | $900,247 |
Senior Secured Revolving Credit Facility
The Company is party to a senior secured revolving credit facility with Wells Fargo Bank, National Association as the administrative agent. The revolving credit facility provides for a borrowing capacity up to the lesser of (i) the borrowing base (as defined in the senior credit agreement governing the revolving credit facility) and (ii) $1.0 billion. The revolving credit facility matures on July 2, 2018. The revolving credit facility is secured by substantially all of the Company’s U.S. assets and is guaranteed by all of the Company’s existing Material Domestic Subsidiaries (as defined in the credit agreement governing the revolving credit facility). As of September 30, 2014, the Company’s borrowing base was $570.0 million. The amount the Company is able to borrow with respect to the borrowing base is subject to compliance with the financial covenants and other provisions of the credit agreement governing the revolving credit facility. See “Note 11. Subsequent Events” for further discussion of the borrowing base.
The Company is subject to certain covenants under the terms of the revolving credit facility, as amended, which include the maintenance of the following financial covenants determined as of the last day of each quarter: (1) a ratio of Total Debt to EBITDA of not more than 4.00 to 1.00; and (2) a Current Ratio of not less than 1.00 to 1.00; (each of the capitalized terms used in the foregoing clauses (1) and (2) being as defined in the credit agreement governing the revolving credit facility). As of September 30, 2014, the ratio of Total Debt to EBITDA was 2.02 to 1.00 and the Current Ratio was 1.68 to 1.00. As defined in the credit agreement governing the revolving credit facility, Total Debt is net of cash and cash equivalents and the Current Ratio includes an add back of the available borrowing capacity. Because the calculation of the financial ratios are made as of a certain date, the financial ratios can fluctuate significantly period to period as the amounts outstanding under the revolving credit facility are dependent on the timing of cash flows from operations, capital expenditures, sales of oil and gas properties and securities offerings.
As of September 30, 2014, the Company had $119.0 million of borrowings outstanding under the revolving credit facility with a weighted average interest rate of 2.01%. As of September 30, 2014, the Company also had $0.6 million in letters of credit outstanding which reduced the amounts available under the revolving credit facility. The amount available for borrowing with respect to the borrowing base is subject to compliance with the financial covenants and other provisions of the credit agreement governing the revolving credit facility. The revolving credit facility is generally used to fund ongoing working capital needs and the Company’s capital expenditure plan to the extent such amounts exceed cash flows from operations, proceeds from the sale of oil and gas properties and securities offerings.
7. Commitments and Contingencies
From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not currently expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.
The results of operations and financial position of the Company continue to be affected from time to time in varying degrees by domestic and foreign political developments as well as legislation and regulations pertaining to restrictions on oil and gas production, imports and exports, natural gas regulation, tax increases, environmental regulations and cancellation of contract rights. Both the likelihood and overall effect of such occurrences on the Company vary greatly and are not predictable.
8. Derivative Instruments
The Company uses commodity derivative instruments, primarily fixed price swaps and costless collars, to reduce its exposure to commodity price volatility for a substantial, but varying, portion of its forecasted oil and gas production up to 36 months and thereby achieve a more predictable level of cash flows to support the Company’s drilling and completion capital expenditure program. Costless collars are designed to establish floor and ceiling prices on anticipated future oil and gas production. While the use of these derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements. The Company does not enter into derivative instruments for speculative or trading purposes.
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The Company typically has numerous hedge positions that span several time periods and often result in both fair value asset and liability positions held with that counterparty, which positions are all offset to a single fair value asset or liability at the end of each reporting period. The Company nets its derivative instrument fair value amounts executed with the same counterparty pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract. The fair value of derivative instruments where the Company is in a net asset position with its counterparties as of September 30, 2014 and December 31, 2013 totaled $36.0 million and $9.3 million, respectively, and is summarized by counterparty in the table below:
Counterparty | September 30, 2014 | December 31, 2013 | ||||
Wells Fargo | 41 | % | 23 | % | ||
Credit Suisse | 23 | % | 46 | % | ||
Societe Generale | 22 | % | 31 | % | ||
Regions | 8 | % | — | % | ||
Union Bank | 4 | % | — | % | ||
Royal Bank of Canada | 2 | % | — | % | ||
Total | 100 | % | 100 | % |
The counterparties to the Company’s derivative instruments are lenders under the Company’s credit agreement. Because each of the lenders have investment grade credit ratings, the Company believes it has minimal credit risk and accordingly does not currently require its counterparties to post collateral to support the net asset positions of its derivative instruments. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties to its derivative instruments. Although the Company does not currently anticipate such nonperformance, it continues to monitor the financial viability of its counterparties.
The fair value of derivative instruments where the Company is in a net liability position with its counterparties as of September 30, 2014 and December 31, 2013 totaled $0.2 million and $10.1 million, respectively.
For the three months ended September 30, 2014 and 2013, the Company recorded in the consolidated statements of income a gain on derivative instruments, net of $71.8 million and a loss on derivative instruments, net of $27.7 million, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded in the consolidated statements of income a gain on derivative instruments, net of $11.2 million and a loss on derivative instruments, net of $16.5 million, respectively.
The following sets forth a summary of the Company’s crude oil derivative positions at average NYMEX prices as of September 30, 2014:
Period | Type of Contract | Volumes (in Bbls/d) | Weighted Average Floor Price ($/Bbl) | Weighted Average Ceiling Price ($/Bbl) | Weighted Average Short Put Price ($/Bbl) | Weighted Average Put Spread ($/Bbl) | |||||||||||||||
October - December 2014 | Fixed Price Swaps | 11,500 | $93.55 | ||||||||||||||||||
Costless Collars | 3,000 | $88.33 | $104.26 | ||||||||||||||||||
Three-way Collars | 500 | $85.00 | $107.75 | $65.00 | $20.00 | ||||||||||||||||
January - December 2015 | Fixed Price Swaps | 10,370 | $92.97 | ||||||||||||||||||
Costless Collars | 700 | $90.00 | $100.65 | ||||||||||||||||||
Three-way Collars | 1,000 | $85.00 | $105.00 | $65.00 | $20.00 | ||||||||||||||||
January - December 2016 | Fixed Price Swaps | 3,000 | $91.09 | ||||||||||||||||||
Three-way Collars | 667 | $85.00 | $104.00 | $65.00 | $20.00 |
The following sets forth a summary of the Company’s natural gas derivative positions at average NYMEX prices as of September 30, 2014:
Period | Type of Contract | Volumes (in MMBtu/d) | Weighted Average Floor Price ($/MMBtu) | Weighted Average Ceiling Price ($/MMBtu) | |||||||||
October - December 2014 | Fixed Price Swaps | 54,380 | $4.16 | ||||||||||
Calls | 10,000 | $5.50 | |||||||||||
January - December 2015 | Fixed Price Swaps | 30,000 | $4.29 |
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9. Fair Value Measurements
Accounting guidelines for measuring fair value establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
Level 1 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Other inputs that are observable directly or indirectly such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize the location and amounts of the Company’s assets and liabilities measured at fair value on a recurring basis as presented in the consolidated balance sheets as of September 30, 2014 and December 31, 2013. All items included in the tables below are Level 2 inputs within the fair value hierarchy:
September 30, 2014 | ||||||||||||
Gross Amounts Recognized | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts Presented in the Consolidated Balance Sheets | ||||||||||
(In thousands) | ||||||||||||
Derivative assets | ||||||||||||
Derivative assets | $22,873 | ($2,279 | ) | $20,594 | ||||||||
Other assets | 16,328 | (921 | ) | 15,407 | ||||||||
Derivative liabilities | ||||||||||||
Derivative liabilities | (2,414 | ) | 2,279 | (135 | ) | |||||||
Other liabilities | (986 | ) | 921 | (65 | ) | |||||||
Total | $35,801 | $— | $35,801 |
December 31, 2013 | ||||||||||||
Gross Amounts Recognized | Gross Amounts Offset in the Consolidated Balance Sheets | Net Amounts Presented in the Consolidated Balance Sheets | ||||||||||
(In thousands) | ||||||||||||
Derivative assets | ||||||||||||
Derivative assets | $2,389 | ($2,389 | ) | $— | ||||||||
Other assets | 11,709 | (2,425 | ) | 9,284 | ||||||||
Derivative liabilities | ||||||||||||
Derivative liabilities | (12,336 | ) | 2,389 | (9,947 | ) | |||||||
Other liabilities | (2,613 | ) | 2,425 | (188 | ) | |||||||
Total | ($851 | ) | $— | ($851 | ) |
The fair values of the Company’s derivative assets and liabilities are based on a third-party industry-standard pricing model that uses market data obtained from third-party sources, including quoted forward prices for oil and gas, discount rates and volatility factors. The fair values are also compared to the values provided by the counterparty for reasonableness and are adjusted for the counterparties’ credit quality for derivative assets and the Company’s credit quality for derivative liabilities. To date, adjustments for credit quality have not had a material impact on the fair values.
The derivative asset and liability fair values reported in the consolidated balance sheets are as of a particular point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. The Company typically has numerous hedge positions that span several time periods and often result in both derivative assets and liabilities with the same counterparty, which positions are all offset to a single derivative asset or liability in the consolidated balance sheets. The Company nets the fair values of its derivative assets and liabilities associated with derivative instruments executed with the same counterparty pursuant to ISDA master agreements, which provide for net settlement over the term of the
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contract and in the event of default or termination of the contract. The Company had no transfers in or out of Levels 1 or 2 for the nine months ended September 30, 2014 or 2013.
Fair Value of Other Financial Instruments
The Company’s other financial instruments consist of cash and cash equivalents, receivables, payables and long-term debt which are classified as Level 1 under the fair value hierarchy. The carrying amounts of cash and cash equivalents, receivables, and payables approximate fair value due to the highly liquid or short-term nature of these instruments. The following table presents the carrying amounts and fair values of the Company’s senior notes and other long-term debt, based on quoted market prices, as of September 30, 2014 and December 31, 2013.
September 30, 2014 | December 31, 2013 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
8.625% Senior Notes due 2018 | $596,366 | $627,750 | $595,822 | $644,978 | ||||||||||||
7.50% Senior Notes due 2020 | 300,000 | 312,750 | 300,000 | 327,000 | ||||||||||||
Other long-term debt due 2028 | 4,425 | 4,027 | 4,425 | 4,115 |
10. Condensed Consolidating Financial Information
The rules of the SEC require that condensed consolidating financial information be provided for a subsidiary that has guaranteed the debt of a registrant issued in a public offering, where the guarantee is full, unconditional and joint and several and where the voting interest of the subsidiary is 100% owned by the registrant. The Company is, therefore, presenting condensed consolidating financial information as of September 30, 2014 and December 31, 2013, and for the three and nine months ended September 30, 2014 and 2013 on a parent company, combined guarantor subsidiaries, combined non-guarantor subsidiaries and consolidated basis and should be read in conjunction with the consolidated financial statements. The financial information may not necessarily be indicative of results of operations, cash flows, or financial position had such guarantor subsidiaries operated as independent entities.
Investments in subsidiaries are accounted for by the respective parent company using the equity method for purposes of this presentation. Results of operations of subsidiaries are therefore reflected in the parent company’s investment accounts and earnings. The principal elimination entries set forth below eliminate investments in subsidiaries and intercompany balances and transactions. Typically in a condensed consolidating financial statement, the net income and equity of the parent company equals the net income and equity of the consolidated entity. The Company’s oil and gas properties are accounted for using the full cost method of accounting whereby impairments and DD&A are calculated and recorded on a country by country basis. However, when calculated separately on a legal entity basis, the combined totals of parent company and subsidiary impairments and DD&A can be more or less than the consolidated total as a result of differences in the properties each entity owns including amounts of costs incurred, production rates, reserve mix, future development costs, etc. Accordingly, elimination entries are required to eliminate any differences between consolidated and parent company and subsidiary company combined impairments and DD&A.
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CARRIZO OIL & GAS, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
(Unaudited)
September 30, 2014 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Assets | ||||||||||||||||||||
Total current assets | $1,884,949 | $255,806 | $— | ($1,995,596 | ) | $145,159 | ||||||||||||||
Total property and equipment, net | 21,518 | 2,179,872 | 27,091 | 26,666 | 2,255,147 | |||||||||||||||
Investment in subsidiaries | 209,557 | — | — | (209,557 | ) | — | ||||||||||||||
Other assets | 116,135 | — | — | (75,607 | ) | 40,528 | ||||||||||||||
Total Assets | $2,232,159 | $2,435,678 | $27,091 | ($2,254,094 | ) | $2,440,834 | ||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||
Current liabilities | $245,703 | $2,096,326 | $27,094 | ($1,995,597 | ) | $373,526 | ||||||||||||||
Long-term liabilities | 1,037,586 | 129,792 | — | (61,949 | ) | 1,105,429 | ||||||||||||||
Total shareholders’ equity | 948,870 | 209,560 | (3 | ) | (196,548 | ) | 961,879 | |||||||||||||
Total Liabilities and Shareholders’ Equity | $2,232,159 | $2,435,678 | $27,091 | ($2,254,094 | ) | $2,440,834 |
December 31, 2013 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Assets | ||||||||||||||||||||
Total current assets | $1,820,069 | $168,718 | $— | ($1,709,026 | ) | $279,761 | ||||||||||||||
Total property and equipment, net | 2,797 | 1,768,553 | 2,058 | 20,807 | 1,794,215 | |||||||||||||||
Investment in subsidiaries | 61,619 | — | — | (61,619 | ) | — | ||||||||||||||
Other assets | 69,686 | — | — | (32,902 | ) | 36,784 | ||||||||||||||
Total Assets | $1,954,171 | $1,937,271 | $2,058 | ($1,782,740 | ) | $2,110,760 | ||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||
Current liabilities | $201,486 | $1,828,314 | $2,061 | ($1,709,026 | ) | $322,835 | ||||||||||||||
Long-term liabilities | 922,571 | 47,335 | — | (23,585 | ) | 946,321 | ||||||||||||||
Total shareholders’ equity | 830,114 | 61,622 | (3 | ) | (50,129 | ) | 841,604 | |||||||||||||
Total Liabilities and Shareholders’ Equity | $1,954,171 | $1,937,271 | $2,058 | ($1,782,740 | ) | $2,110,760 |
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CARRIZO OIL & GAS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(in thousands)
(Unaudited)
Three Months Ended September 30, 2014 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Total revenues | $924 | $195,301 | $— | $— | $196,225 | |||||||||||||||
Total costs and expenses | (42,829 | ) | 116,622 | — | (8,069 | ) | 65,724 | |||||||||||||
Income from continuing operations before income taxes | 43,753 | 78,679 | — | 8,069 | 130,501 | |||||||||||||||
Income tax expense | (15,312 | ) | (27,538 | ) | — | (4,654 | ) | (47,504 | ) | |||||||||||
Equity in income of subsidiaries | 51,141 | — | — | (51,141 | ) | — | ||||||||||||||
Income from continuing operations | 79,582 | 51,141 | — | (47,726 | ) | 82,997 | ||||||||||||||
Income from discontinued operations, net of income taxes | 792 | — | — | — | 792 | |||||||||||||||
Net income | $80,374 | $51,141 | $— | ($47,726 | ) | $83,789 |
Three Months Ended September 30, 2013 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Total revenues | $2,428 | $141,901 | $— | $— | $144,329 | |||||||||||||||
Total costs and expenses | 57,308 | 79,358 | — | 92 | 136,758 | |||||||||||||||
Income (loss) from continuing operations before income taxes | (54,880 | ) | 62,543 | — | (92 | ) | 7,571 | |||||||||||||
Income tax (expense) benefit | 19,208 | (21,784 | ) | — | 717 | (1,859 | ) | |||||||||||||
Equity in income of subsidiaries | 40,759 | — | — | (40,759 | ) | — | ||||||||||||||
Income from continuing operations | 5,087 | 40,759 | — | (40,134 | ) | 5,712 | ||||||||||||||
Loss from discontinued operations, net of income taxes | (1,191 | ) | — | — | — | (1,191 | ) | |||||||||||||
Net income | $3,896 | $40,759 | $— | ($40,134 | ) | $4,521 |
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CARRIZO OIL & GAS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(in thousands)
(Unaudited)
Nine Months Ended September 30, 2014 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Total revenues | $3,696 | $543,216 | $— | $— | $546,912 | |||||||||||||||
Total costs and expenses | 90,811 | 315,619 | — | (5,860 | ) | 400,570 | ||||||||||||||
Income (loss) from continuing operations before income taxes | (87,115 | ) | 227,597 | — | 5,860 | 146,342 | ||||||||||||||
Income tax (expense) benefit | 30,491 | (79,659 | ) | — | (4,342 | ) | (53,510 | ) | ||||||||||||
Equity in income of subsidiaries | 147,938 | — | — | (147,938 | ) | — | ||||||||||||||
Income from continuing operations | 91,314 | 147,938 | — | (146,420 | ) | 92,832 | ||||||||||||||
Loss from discontinued operations, net of income taxes | (748 | ) | — | — | — | (748 | ) | |||||||||||||
Net income | $90,566 | $147,938 | $— | ($146,420 | ) | $92,084 |
Nine Months Ended September 30, 2013 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Total revenues | $6,075 | $384,379 | $— | $— | $390,454 | |||||||||||||||
Total costs and expenses | 99,422 | 220,967 | — | 139 | 320,528 | |||||||||||||||
Income (loss) from continuing operations before income taxes | (93,347 | ) | 163,412 | — | (139 | ) | 69,926 | |||||||||||||
Income tax (expense) benefit | 32,671 | (57,194 | ) | — | (1,330 | ) | (25,853 | ) | ||||||||||||
Equity in income of subsidiaries | 106,218 | — | — | (106,218 | ) | — | ||||||||||||||
Income from continuing operations | 45,542 | 106,218 | — | (107,687 | ) | 44,073 | ||||||||||||||
Income from discontinued operations, net of income taxes | 23,599 | — | — | — | 23,599 | |||||||||||||||
Net income | $69,141 | $106,218 | $— | ($107,687 | ) | $67,672 |
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CARRIZO OIL & GAS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended September 30, 2014 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by (used in) operating activities from continuing operations | ($132,889 | ) | $521,576 | $— | $— | $388,687 | ||||||||||||||
Net cash used in investing activities from continuing operations | (132,605 | ) | (632,160 | ) | (24,717 | ) | 135,301 | (654,181 | ) | |||||||||||
Net cash provided by financing activities from continuing operations | 123,151 | 110,584 | 24,717 | (135,301 | ) | 123,151 | ||||||||||||||
Net cash used in discontinued operations | (7,935 | ) | — | — | — | (7,935 | ) | |||||||||||||
Net decrease in cash and cash equivalents | (150,278 | ) | — | — | — | (150,278 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 157,439 | — | — | — | 157,439 | |||||||||||||||
Cash and cash equivalents, end of period | $7,161 | $— | $— | $— | $7,161 |
Nine Months Ended September 30, 2013 | ||||||||||||||||||||
Parent Company | Combined Guarantor Subsidiaries | Combined Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by (used in) operating activities from continuing operations | ($22,222 | ) | $332,475 | $— | $— | $310,253 | ||||||||||||||
Net cash used in investing activities from continuing operations | (170,725 | ) | (601,936 | ) | (1,624 | ) | 270,884 | (503,401 | ) | |||||||||||
Net cash provided by financing activities from continuing operations | 17,439 | 269,260 | 1,624 | (270,884 | ) | 17,439 | ||||||||||||||
Net cash provided by (used in) discontinued operations | 129,342 | — | (519 | ) | — | 128,823 | ||||||||||||||
Net decrease in cash and cash equivalents | (46,166 | ) | (201 | ) | (519 | ) | — | (46,886 | ) | |||||||||||
Cash and cash equivalents, beginning of period | 51,894 | 201 | 519 | — | 52,614 | |||||||||||||||
Cash and cash equivalents, end of period | $5,728 | $— | $— | $— | $5,728 |
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11. Subsequent Events
On October 7, 2014, a fifth amendment to the credit agreement governing the revolving credit facility (the “Fifth Amendment”) was executed. The Fifth Amendment (i) permitted the Company to increase or decrease the aggregate principal amount of the commitments of the lenders under the credit agreement governing the revolving credit facility provided that the aggregate commitments do not exceed the then existing borrowing base, (ii) increased the letter of credit facility from $15.0 million to $30.0 million, (iii) established an approved borrowing base of $675.0 million until the next redetermination and (iv) amended the availability of issuances of additional senior notes. As a result of the Fall 2014 borrowing base redetermination, effective October 7, 2014, the borrowing base was increased to $675.0 million from $570.0 million. However, the Company voluntarily elected to limit the lenders’ aggregate commitment to $585.0 million. Prior to giving effect to the amendment, the revolving credit facility provided availability for issuances of additional senior notes in the aggregate principal amount of up to $350.0 million. The amendment replaced this limitation to permit unlimited issuances of additional senior notes as long as, subject to certain other conditions described therein, after giving effect to the issuance of the additional senior notes, the Company is in compliance with our financial covenants under the credit agreement governing our revolving credit facility.
On October 24, 2014, the Company completed the acquisition of oil and gas properties from Eagle Ford Minerals, LLC (“EFM”) primarily in LaSalle, Atascosa and McMullen Counties, Texas in the Eagle Ford Shale (the “Eagle Ford Shale Transaction”). The transaction had an effective date of October 1, 2014, with an adjusted purchase price of $243.0 million, which represents an agreed upon price of $250.0 million less working capital adjustments. The Company paid approximately $93.0 million at closing, which was funded from borrowings under the revolving credit facility that were repaid with net proceeds from the senior note offering discussed below. The Company is required to pay the remaining $150.0 million no later than February 16, 2015, which will be funded with borrowings under the revolving credit facility. Prior to the acquisition, the Company and EFM were joint working interest owners in the properties that were subject to the transaction, for which the Company acted as the operator and owned an approximate 75% working interest in nearly all of such properties. After giving effect to the transaction, the Company holds an approximate 100% working interest in nearly all of the acquired properties.
In conjunction with the Eagle Ford Shale Transaction described above, the borrowing base was increased to $800.0 million from $675.0 million. However, the Company voluntarily elected to limit the lenders’ aggregate commitment to $685.0 million. The lenders’ aggregate commitment can be increased at any time to the full $800.0 million by requesting one or more lenders to approve an increase to their commitment. The borrowing base will be redetermined by the lenders at least semi-annually on or around each May 1 and November 1, with the next redetermination expected in the Spring of 2015. The amount the Company is able to borrow with respect to the borrowing base is subject to compliance with the financial covenants and other provisions of the credit agreement governing the revolving credit facility.
On October 30, 2014, the Company issued $300.0 million aggregate principal amount of 7.50% Senior Notes due 2020 at a price to the initial purchasers of 100.50% of par in a private placement. These notes have substantially identical terms, other than with respect to certain transfer restrictions and registration rights, to the Company’s existing 7.50% Senior Notes due 2020 that were issued on September 10, 2012, although the new 7.50% Senior Notes were issued as a separate series of securities. The Company intends to use the net proceeds of approximately $299.8 million, net of offering costs, to fund the Eagle Ford Shale Transaction as described above, repay amounts outstanding under its revolving credit facility and for general corporate purposes.
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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 the significant factors that affected the Company’s financial position and results of operations during the periods included in the accompanying unaudited consolidated financial statements. You should read this in conjunction with the discussion under “Item 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, and the unaudited consolidated financial statements included in this quarterly report.
General Overview
For the third quarter of 2014, we recognized total revenues of $196.2 million and production of 3.1 MMBoe. The key drivers to our success for the three months ended September 30, 2014 included the following:
Drilling. See the table below for details of our operated drilling and completion activity in our primary areas of activity:
Three Months Ended September 30, 2014 | As of September 30, 2014 | ||||||||||||||||||||||||||
Drilled | Wells Brought on Production | Waiting on Completion | Producing | Rig count | |||||||||||||||||||||||
Region | Gross | Net | Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
Eagle Ford | 15 | 13.1 | 20 | 15.8 | 16 | 13.0 | 182 | 142.0 | 3 | ||||||||||||||||||
Niobrara | 9 | 3.5 | 7 | 3.3 | 4 | 1.3 | 107 | 44.2 | 1 | ||||||||||||||||||
Marcellus | — | — | — | — | 11 | 4.4 | 81 | 26.0 | — | ||||||||||||||||||
Utica | — | — | — | — | — | — | 1 | 0.9 | 1 | ||||||||||||||||||
Total | 24 | 16.6 | 27 | 19.1 | 31 | 18.7 | 371 | 213.1 | 5 |
Production. Our third quarter 2014 crude oil production of 1.8 MMBbls, or 20,000 Bbls/d, increased 64% from our third quarter 2013 production of 1.1 MMBbls, or 12,228 Bbls/d, primarily due to production from new wells in the Eagle Ford. Our third quarter 2014 natural gas production of 5.9 Bcf, or 63,630 Mcf/d, decreased 32% from our third quarter 2013 production of 8.6 Bcf, or 93,511 Mcf/d. This was primarily due to the sale of our remaining oil and gas properties in the Barnett to EnerVest Energy Institution Fund XIII-A, L.P., EnerVest Energy Institutional Fund XIII-WIB, L.P., EnerVest Energy Institutional Fund XIII-WIC, L.P., and EV Properties, L.P. (collectively, “EnerVest”) in October 2013 partially offset by production from new wells in Marcellus.
Prices. Our average realized crude oil price during the third quarter of 2014 was $94.17 per Bbl, a 10% decrease as compared to our average realized price of $104.71 per Bbl in the same period in 2013. Our average realized natural gas price during the third quarter of 2014 increased 9% to $2.59 per Mcf from $2.38 per Mcf in the same period in 2013. Commodity prices are affected by changes in market demand, overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. Our financial results are largely dependent on commodity prices, which are beyond our control and have been and are expected to remain volatile.
Recent Developments
The Eagle Ford Shale Transaction. On October 24, 2014, we completed the acquisition of additional leasehold and producing interests in the Eagle Ford Shale (the “Eagle Ford Shale Transaction”) from Eagle Ford Minerals, LLC (“EFM”). The properties acquired in the Eagle Ford Shale Transaction include approximately 6,820 net acres and 20.1 net producing wells located primarily in LaSalle, Atascosa and McMullen Counties, Texas. We estimate that net production from the acquired interests in the properties was approximately 2,260 Bbls/d and 2,457 Mcfe/d for the three months ended September 30, 2014.
Prior to the acquisition, we and EFM were joint working interest owners in the properties that were the subject of the transaction, for which we acted as the operator and owned a 75% working interest in nearly all of such properties. After giving effect to the transaction, we hold an approximate 100% working interest in all of the acquired properties. The transaction had an effective date of October 1, 2014, with a purchase price of $243.0 million in cash, net of working capital adjustments, of which we paid EFM approximately $93.0 million on October 24, 2014 and are required to pay the remaining $150.0 million no later than February 16, 2015. The agreement provides for post-closing purchase price adjustments and indemnities.
We intend to use the net proceeds from the offering described below to fund the Eagle Ford Shale Transaction purchase price of $243.0 million, net of working capital adjustments, and for general corporate purposes. $93.0 million of the Eagle Ford Shale Transaction purchase price was paid at the closing of such transaction, and was funded from borrowings under our revolving credit facility that were repaid with net proceeds from the senior notes offering described below. The remaining $150.0 million will be paid on a deferred basis no later than February 16, 2015 with borrowings under the revolving credit facility. Until net proceeds
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are used to pay the deferred portion of the Eagle Ford Shale Transaction purchase price, net proceeds of such offering will be used to repay amounts outstanding under our revolving credit facility.
Senior Notes Offering. On October 30, 2014, we completed a private placement of $300.0 million aggregate principal amount of 7.50% Senior Notes due 2020 at a price equal to 100.50% of par, plus accrued interest from September 15, 2014. The use of net proceeds of $299.8 million is described above under “The Eagle Ford Shale Transaction.” The new 7.50% Senior Notes have substantially identical terms, other than with respect to transfer restrictions and registration rights, as our original 7.50% Senior Notes due 2020 that were issued on September 10, 2012 (the “Original 7.50% Senior Notes”), although the new 7.50% Senior Notes were issued as a separate series of securities.
The 7.50% Senior Notes bear interest at a rate of 7.50% per annum and will mature on September 15, 2020. We may redeem all or a portion of the 7.50% Senior Notes at any time on or after September 15, 2016 at varying redemption prices. Before September 15, 2016, we may, at our option, redeem all or a portion of the notes at 100% of the principal amount plus a make-whole premium. In addition, prior to September 15, 2015, we may, at our option, redeem up to 35% of the aggregate principal amount of the 7.50% Senior Notes with the proceeds of certain equity offerings at a specified redemption price. Holders of the 7.50% Senior Notes may require us to repurchase some or all of their 7.50% Senior Notes for cash in the event of certain fundamental changes, at 101% of the amount plus accrued and unpaid interest.
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Results of Operations
Three Months Ended September 30, 2014, Compared to the Three Months Ended September 30, 2013
The following table summarizes total production volumes, daily production volumes, average realized prices and revenues for the three months ended September 30, 2014 and 2013:
Three Months Ended September 30, | 2014 Period Compared to 2013 Period | ||||||||||||||
2014 | 2013 | Increase (Decrease) | % Increase (Decrease) | ||||||||||||
Total production volumes - | |||||||||||||||
Crude oil (MBbls) |