CARRIZO OIL & GAS INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 CFO CERTIFICATION SECTION 906 - CARRIZO OIL & GAS INC	ex3222q18.htm
EX-32.1 - EXHIBIT 32.1 CEO CERTIFICATION SECTION 906 - CARRIZO OIL & GAS INC	ex3212q18.htm
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION SECTION 302 - CARRIZO OIL & GAS INC	ex3122q18.htm
EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION SECTION 302 - CARRIZO OIL & GAS INC	ex3112q18.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________

FORM 10-Q

_________________________________________________



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018



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 þ NO ¨

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted 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 such files). YES þ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):



Large accelerated filer	þ	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of August 1, 2018 was 82,114,492.

TABLE OF CONTENTS



		PAGE
Part I. Financial Information
Item 1.	Consolidated Financial Statements (Unaudited)	2
	Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	2
	Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017	3
	Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2018	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
Part II. Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	47
Signatures		48

Part I. Financial Information

Item 1. Consolidated Financial Statements (Unaudited)

CARRIZO OIL & GAS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



	June 30, 2018			December 31, 2017
Assets
Current assets
Cash and cash equivalents		$2,099			$9,540
Accounts receivable, net	111,100			107,441
Derivative assets	10,928			—
Other current assets	8,378			5,897
Total current assets	132,505			122,878
Property and equipment
Oil and gas properties, full cost method
Proved properties, net	1,959,951			1,965,347
Unproved properties, not being amortized	597,892			660,287
Other property and equipment, net	10,582			10,176
Total property and equipment, net	2,568,425			2,635,810
Other assets	20,909			19,616
Total Assets		$2,721,839			$2,778,304

Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$113,651			$74,558
Revenues and royalties payable	53,280			52,154
Accrued capital expenditures	117,934			119,452
Accrued interest	21,126			28,362
Derivative liabilities	145,520			57,121
Other current liabilities	52,020			41,175
Total current liabilities	503,531			372,822
Long-term debt	1,502,307			1,629,209
Asset retirement obligations	16,305			23,497
Derivative liabilities	87,933			112,332
Deferred income taxes	4,164			3,635
Other liabilities	8,273			51,650
Total liabilities	2,122,513			2,193,145
Commitments and contingencies
Preferred stock
Preferred stock, $0.01 par value, 10,000,000 shares authorized; 200,000 issued and outstanding as of June 30, 2018 and 250,000 issued and outstanding as of December 31, 2017	172,858			214,262
Shareholders’ equity
Common stock, $0.01 par value, 180,000,000 shares authorized; 82,107,544 issued and outstanding as of June 30, 2018 and 81,454,621 issued and outstanding as of December 31, 2017	821			815
Additional paid-in capital	1,918,820			1,926,056
Accumulated deficit	(1,493,173		)	(1,555,974		)
Total shareholders’ equity	426,468			370,897
Total Liabilities and Shareholders’ Equity		$2,721,839			$2,778,304

The accompanying notes are an integral part of these consolidated financial statements.

-2-

CARRIZO OIL & GAS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenues
Crude oil		$229,798			$142,806			$424,717			$270,898
Natural gas liquids	21,269			7,786			38,171			15,211
Natural gas	12,906			15,891			26,365			31,729
Total revenues	263,973			166,483			489,253			317,838

Costs and Expenses
Lease operating	35,151			36,048			74,424			65,893
Production taxes	12,487			7,143			23,062			13,351
Ad valorem taxes	3,640			1,073			5,613			4,040
Depreciation, depletion and amortization	72,430			59,072			136,897			113,454
General and administrative, net	18,265			11,596			45,557			33,299
(Gain) loss on derivatives, net	67,714			(26,065		)	97,310			(51,381		)
Interest expense, net	15,599			21,106			31,116			41,677
Loss on extinguishment of debt	—			—			8,676			—
Other expense, net	2,895			204			2,995			1,178
Total costs and expenses	228,181			110,177			425,650			221,511

Income Before Income Taxes	35,792			56,306			63,603			96,327
Income tax expense	(483		)	—			(802		)	—
Net Income		$35,309			$56,306			$62,801			$96,327
Dividends on preferred stock	(4,474		)	—			(9,337		)	—
Accretion on preferred stock	(740		)	—			(1,493		)	—
Loss on redemption of preferred stock	—			—			(7,133		)	—
Net Income Attributable to Common Shareholders		$30,095			$56,306			$44,838			$96,327

Net Income Attributable to Common Shareholders Per Common Share
Basic		$0.37			$0.86			$0.55			$1.47
Diluted		$0.36			$0.85			$0.54			$1.46

Weighted Average Common Shares Outstanding
Basic	82,058			65,767			81,802			65,479
Diluted	83,853			65,908			83,240			65,866

The accompanying notes are an integral part of these consolidated financial statements.

-3-

CARRIZO OIL & GAS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)



	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Total Shareholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Deficit			Total Shareholders’ Equity
Balance as of December 31, 2017	81,454,621		$815		$1,926,056			($1,555,974	)		$370,897
Stock-based compensation expense	—	—		10,757			—			10,757
Issuance of common stock upon grants of restricted stock awards and vestings of restricted stock units and performance shares	652,923	6		(30		)	—			(24		)
Dividends on preferred stock	—	—		(9,337		)	—			(9,337		)
Accretion on preferred stock	—	—		(1,493		)	—			(1,493		)
Loss on redemption of preferred stock	—	—		(7,133		)	—			(7,133		)
Net income	—	—		—			62,801			62,801
Balance as of June 30, 2018	82,107,544		$821		$1,918,820			($1,493,173	)		$426,468

The accompanying notes are an integral part of these consolidated financial statements.

-4-

CARRIZO OIL & GAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2018			2017
Cash Flows From Operating Activities
Net income		$62,801			$96,327
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization	136,897			113,454
(Gain) loss on derivatives, net	97,310			(51,381		)
Cash (paid) received for derivative settlements, net	(38,448		)	1,258
Loss on extinguishment of debt	8,676			—
Stock-based compensation expense, net	10,724			3,596
Deferred income taxes	529			—
Non-cash interest expense, net	1,262			2,074
Other, net	3,975			2,767
Changes in components of working capital and other assets and liabilities-
Accounts receivable	2,437			(8,094		)
Accounts payable	3,878			14,486
Accrued liabilities	(12,883		)	5,650
Other assets and liabilities, net	(1,286		)	(982		)
Net cash provided by operating activities	275,872			179,155
Cash Flows From Investing Activities
Capital expenditures	(430,639		)	(290,625		)
Acquisitions of oil and gas properties	—			(16,533		)
Deposit for acquisition of oil and gas properties	—			(75,000		)
Proceeds from divestitures of oil and gas properties, net	345,789			18,201
Other, net	(1,096		)	(2,479		)
Net cash used in investing activities	(85,946		)	(366,436		)
Cash Flows From Financing Activities
Redemptions of senior notes	(330,435		)	—
Redemption of preferred stock	(50,030		)	—
Borrowings under credit agreement	1,126,856			919,097
Repayments of borrowings under credit agreement	(933,156		)	(723,797		)
Payments of debt issuance costs	(627		)	(4,368		)
Payment of commitment fee for issuance of preferred stock	—			(5,000		)
Payments of dividends on preferred stock	(9,337		)	—
Other, net	(638		)	(617		)
Net cash provided by (used in) financing activities	(197,367		)	185,315
Net Decrease in Cash and Cash Equivalents	(7,441		)	(1,966		)
Cash and Cash Equivalents, Beginning of Period	9,540			4,194
Cash and Cash Equivalents, End of Period		$2,099			$2,228

The accompanying notes are an integral part of these consolidated financial statements.

-5-

CARRIZO OIL & GAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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 crude oil, NGLs, and natural gas from resource plays located in the United States. The Company’s current operations are principally focused in proven, producing oil and gas plays in the Eagle Ford Shale in South Texas and the Permian Basin in West Texas.

Consolidated Financial Statements

The accompanying unaudited interim consolidated financial statements include the accounts of the Company after elimination of intercompany transactions and balances and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and therefore do not include all disclosures required for financial statements prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, these financial statements include all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly, in all material respects, the Company’s interim financial position, results of operations and cash flows. However, the results of operations for the periods presented are not necessarily indicative of the results of operations that may be expected for the full year. These financial statements and related notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Annual Report”). Except as disclosed herein, there have been no material changes to the information disclosed in the notes in the 2017 Annual Report. 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.

2. Summary of Significant Accounting Policies

Revenue Recognition

Impact of ASC 606 Adoption. Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606) (“ASC 606”) using the modified retrospective method and has applied the standard to all existing contracts. ASC 606 supersedes previous revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”) and includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration in exchange for those goods or services. As a result of adopting ASC 606, the Company did not have a cumulative-effect adjustment in retained earnings. The comparative information for the three and six months ended June 30, 2017 has not been recast and continues to be reported under the accounting standards in effect for that period. Additionally, adoption of ASC 606 did not impact net income attributable to common shareholders and the Company does not expect that it will do so in future periods.

-6-

The tables below summarizes the impact of adoption for the three and six months ended June 30, 2018:



	Three Months Ended June 30, 2018
	Under ASC 606		Under ASC 605		Increase		% Increase
	(In thousands)
Revenues
Crude oil		$229,798		$229,658		$140	0.1	%
Natural gas liquids	21,269		20,139		1,130		5.6	%
Natural gas	12,906		12,272		634		5.2	%
Total revenues	263,973		262,069		1,904		0.7	%

Costs and Expenses
Lease operating	35,151		33,247		1,904		5.7	%

Income Before Income Taxes		$35,792		$35,792		$—	—	%



	Six Months Ended June 30, 2018
	Under ASC 606		Under ASC 605		Increase		% Increase
	(In thousands)
Revenues
Crude oil		$424,717		$424,452		$265	0.1	%
Natural gas liquids	38,171		36,235		1,936		5.3	%
Natural gas	26,365		25,159		1,206		4.8	%
Total revenues	489,253		485,846		3,407		0.7	%

Costs and Expenses
Lease operating	74,424		71,017		3,407		4.8	%

Income Before Income Taxes		$63,603		$63,603		$—	—	%

Changes to crude oil, NGL, and natural gas revenues and lease operating expense are due to the conclusion that the Company controls the product throughout processing before transferring to the customer for certain natural gas processing arrangements. Therefore, any transportation, gathering, and processing fees incurred prior to transfer of control are included in lease operating expense.

The Company’s revenues are comprised solely of revenues from customers and include the sale of crude oil, NGLs, and natural gas. The Company believes that the disaggregation of revenue into these three major product types appropriately depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors based on our single geographic location. Crude oil, NGL, and natural gas revenues are recognized at a point in time when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, control has transferred and collectability of the revenue is probable. The transaction price used to recognize revenue is a function of the contract billing terms. Revenue is invoiced by calendar month based on volumes at contractually based rates with payment typically required within 30 days of the end of the production month. At the end of each month when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in “Accounts receivable, net” in the consolidated balance sheets. As of June 30, 2018 and December 31, 2017, receivables from contracts with customers were $87.1 million and $85.6 million, respectively. Taxes assessed by governmental authorities on crude oil, NGL, and natural gas sales are presented separately from such revenues in the consolidated statements of income.

Crude oil sales. Crude oil production is primarily sold at the wellhead at an agreed upon index price, net of pricing differentials. Revenue is recognized when control transfers to the purchaser at the wellhead, net of transportation costs incurred by the purchaser.

Natural gas and NGL sales. Natural gas is delivered to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds for the resulting sales of NGLs and residue gas. The Company evaluates whether it is the principal or agent in the transaction and has concluded it is the principal and the ultimate third party is the customer. Revenue is recognized on a gross basis, with gathering, processing and transportation fees presented in “Lease operating expense” in the consolidated statements of income as the Company maintains control throughout processing.

-7-

Transaction Price Allocated to Remaining Performance Obligations. The Company applied the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Each unit of product typically represents a separate performance obligation, therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

Recently Adopted Accounting Pronouncements

Business Combinations. In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or divestitures) of assets or businesses. Effective January 1, 2018, the Company adopted ASU 2017-01 using the prospective method and will apply the clarified definition of a business to future acquisition and divestitures.

Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance addresses eight specific cash flow issues for which current GAAP is either unclear or does not include specific guidance. Effective January 1, 2018, the Company adopted ASU 2016-15 using the retrospective approach as prescribed by ASU 2016-15. There were no changes to the statement of cash flows as a result of adoption.

Recently Issued Accounting Pronouncements

Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which significantly changes accounting for leases by requiring that lessees recognize a right-of-use asset and a related lease liability representing the obligation to make lease payments, for virtually all lease transactions. ASU 2016-02 does not apply to leases of mineral rights to explore for or use crude oil and natural gas. Additional disclosures about an entity’s lease transactions will also be required. ASU 2016-02 defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration.” ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. ASU 2016-02 requires companies to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach.

The Company is in the process of reviewing and determining the contracts to which ASU 2016-02 applies with the assistance of a third party consultant. These include contracts such as non-cancelable leases, drilling rig contracts, pipeline gathering, transportation and gas processing agreements, and contracts for the use of vehicles and well equipment. The Company continues to review current accounting policies, controls, processes, and disclosures that will change as a result of adopting the new standard. Based upon its initial assessment, the Company expects the adoption of ASU 2016-02 will result in: (i) an increase in assets and liabilities due to the required recognition of right-of-use (“ROU”) assets and corresponding lease liabilities, (ii) increases in depreciation, depletion and amortization and interest expense, (iii) decreases in lease operating and general and administrative expense and (iv) additional disclosures, however, the full impact to the Company’s consolidated financial statements and related disclosures is still being evaluated. Currently, the Company plans to make certain elections allowing the Company not to reassess contracts that commenced prior to adoption, to continue applying its current accounting policy for land easements, and not to recognize ROU assets or lease liabilities for short-term leases. The Company plans to adopt the guidance on the effective date of January 1, 2019. As permitted by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, the Company does not expect to adjust comparative-period financial statements.

Other than as disclosed above or in the Company’s 2017 Form 10-K, there are no other accounting standard updates applicable to the Company that would have a material effect on the Company’s consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of June 30, 2018, and through the filing of this report.

-8-

Net Income Attributable to Common Shareholders Per Common Share

Supplemental net income attributable to common shareholders per common share information is provided below:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(In thousands, except per share amounts)
Net Income Attributable to Common Shareholders		$30,095		$56,306		$44,838		$96,327
Basic weighted average common shares outstanding	82,058		65,767		81,802		65,479
Effect of dilutive instruments	1,795		141		1,438		387
Diluted weighted average common shares outstanding	83,853		65,908		83,240		65,866
Net Income Attributable to Common Shareholders Per Common Share
Basic		$0.37		$0.86		$0.55		$1.47
Diluted		$0.36		$0.85		$0.54		$1.46

The table below presents the a reconciliation of the basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and six months ended June 30, 2018 and 2017:



	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
	(In thousands)
Basic weighted average common shares outstanding	82,058	65,767	81,802	65,479
Dilutive unvested restricted stock awards and units	833	141	640	387
Dilutive unvested performance shares	134	—	158	—
Dilutive exercisable common stock warrants	828	—	640	—
Diluted weighted average common shares outstanding	83,853	65,908	83,240	65,866

The table below presents a summary of the common shares outstanding that were excluded from the computation of diluted net income attributable to common shareholders per common share for the three and six months ended June 30, 2018 and 2017, as their inclusion would be anti-dilutive:



	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
	(In thousands)
Anti-dilutive unvested restricted stock awards and units	16	101	17	16
Anti-dilutive unvested performance shares	—	108	2	62
Anti-dilutive exercisable common stock warrants	—	—	—	—
Total anti-dilutive	16	209	19	78

3. Acquisitions and Divestitures of Oil and Gas Properties

Acquisitions

ExL Acquisition. On August 10, 2017, the Company closed on the acquisition of oil and gas properties located in the Delaware Basin in Reeves and Ward Counties, Texas (the “ExL Properties”) from ExL Petroleum Management, LLC and ExL Petroleum Operating Inc. (together “ExL”) for aggregate cash consideration of $679.8 million (the “ExL Acquisition”). See “Note 10. Derivative Instruments” for information regarding the contingent consideration arrangement associated with the ExL Acquisition.

-9-

The consolidated statements of income for the three and six months ended June 30, 2018 include total revenues and net income attributable to common shareholders from the ExL Acquisition, representing activity of the acquired properties as shown in the table below:



	Three Months Ended		Six Months Ended
	June 30, 2018
	(In thousands)
Total revenues		$52,771		$96,239

Net income attributable to common shareholders		$42,048		$76,851

Divestitures

Eagle Ford. On January 31, 2018, the Company sold a portion of its assets in the Eagle Ford Shale to EP Energy E&P Company, L.P. The Company received aggregate net proceeds of $245.7 million, which represents an agreed upon price of $245.0 million plus purchase price adjustments, which were primarily related to the net cash flows from the effective date to the closing date.

Niobrara. On January 19, 2018, the Company sold substantially all of its assets in the Niobrara Formation. Estimated aggregate net proceeds are $134.7 million, subject to post-closing adjustments. See “Note 10. Derivative Instruments” for information regarding the contingent consideration arrangement associated with this divestiture.

The aggregate net proceeds for each of the divestitures above were recognized as a reduction of proved oil and gas properties.

Marcellus. Effective August 2008, the Company’s wholly-owned subsidiary, Carrizo (Marcellus) LLC, entered into a joint venture with ACP II Marcellus LLC (“ACP II”), an affiliate of Avista Capital Partners, LP, a private equity fund (Avista Capital Partners, LP, together with its affiliates, “Avista”). As of June 30, 2018, the Avista Marcellus joint venture holds no material assets or obligations, has no interest in any wells or leases, and intends to divest all remaining immaterial assets. There have been no revenues, expenses, or operating cash flows in the Avista Marcellus joint venture during the years ended December 31, 2015, 2016 and 2017 or during the six months ended June 30, 2018. Concurrently with the sale of the remaining immaterial assets, the Avista Marcellus joint venture and associated joint venture agreements will terminate.

Steven A. Webster, Chairman of the Company’s Board of Directors, serves as Co-Managing Partner and President of Avista Capital Holdings, LP. ACP II’s Board of Managers has the sole authority for determining whether, when and to what extent any cash distributions will be declared and paid to members of ACP II. Mr. Webster is not a member of ACP II’s Board of Managers. The terms of the Avista Marcellus joint venture were approved by a special committee of the Company’s independent directors.

4. Property and Equipment, Net

As of June 30, 2018 and December 31, 2017, total property and equipment, net consisted of the following:



	June 30, 2018			December 31, 2017
	(In thousands)
Oil and gas properties, full cost method
Proved properties		$5,744,434			$5,615,153
Accumulated depreciation, depletion and amortization and impairments	(3,784,483		)	(3,649,806		)
Proved properties, net	1,959,951			1,965,347
Unproved properties, not being amortized
Unevaluated leasehold and seismic costs	539,836			612,589
Capitalized interest	58,056			47,698
Total unproved properties, not being amortized	597,892			660,287
Other property and equipment	27,223			25,625
Accumulated depreciation	(16,641		)	(15,449		)
Other property and equipment, net	10,582			10,176
Total property and equipment, net		$2,568,425			$2,635,810

Average depreciation, depletion and amortization (“DD&A”) per Boe of proved properties was $13.74 and $12.43 for the three months ended June 30, 2018 and 2017, respectively, and $13.73 and $12.55 for the six months ended June 30, 2018 and 2017, respectively.

The Company capitalized internal costs of employee compensation and benefits, including stock-based compensation, directly associated with acquisition, exploration and development activities totaling $6.1 million and $1.9 million for the three months

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ended June 30, 2018 and 2017, respectively, and $12.7 million and $7.3 million for the six months ended June 30, 2018 and 2017, respectively.

Unproved properties, not being amortized, include unevaluated leasehold and seismic costs associated with specific unevaluated properties and related capitalized interest. The Company capitalized interest costs associated with its unproved properties totaling $8.7 million and $4.0 million for the three months ended June 30, 2018 and 2017, respectively, and $19.1 million and $7.8 million for the six months ended June 30, 2018 and 2017, respectively.

5. Income Taxes

The Company’s estimated annual effective income tax rates are used to allocate expected annual income tax expense or benefit to interim periods. The rates are the ratio of estimated annual income tax expense or benefit to estimated annual income or loss 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 or loss before income taxes by taxing jurisdiction to determine the income tax expense or benefit allocated to the interim period. The Company updates its estimated annual effective income tax rates on a quarterly basis considering the geographic mix of the estimated annual income or loss attributable to the tax jurisdictions in which the Company operates.

The Company’s income tax expense differs from the income tax expense computed by applying the U.S. federal statutory corporate income tax rate of 21% for the three and six months ended June 30, 2018 and 35% for the three and six months ended June 30, 2017, to income before income taxes as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(In thousands)
Income before income taxes		$35,792			$56,306			$63,603			$96,327
Income tax expense at the statutory rate	(7,517		)	(19,707		)	(13,357		)	(33,714		)
State income tax expense, net of U.S. federal income taxes	(487		)	(1,017		)	(806		)	(1,727		)
Tax shortfalls from stock-based compensation expense	(16		)	(164		)	(2,542		)	(2,756		)
Decrease in deferred tax assets valuation allowance	8,048			20,948			16,449			38,317
Other	(511		)	(60		)	(546		)	(120		)
Income tax expense		($483	)		$—			($802	)		$—

Significant changes in the Company’s operations, including the ExL Acquisition in the Delaware Basin in the third quarter of 2017 and divestitures of substantially all of the Company’s assets in the Utica and Marcellus in the fourth quarter of 2017 and the Niobrara in the first quarter of 2018, resulted in changes to the Company’s state apportionment for estimated state deferred tax liabilities. As a result of these changes, the Company recorded current and deferred state income tax expense of $0.5 million and $0.8 million for the three and six months ended June 30, 2018, respectively.

Tax Cuts and Jobs Act

On December 22, 2017, the U.S. Congress enacted the Tax Cuts and Jobs Act (the “Act”) which made significant changes to U.S. federal income tax law, including lowering the U.S. federal statutory corporate income tax rate to 21% from 35% beginning January 1, 2018. Due to the uncertainty regarding the application of ASC 740 in the period of enactment of the Act, the SEC issued Staff Accounting Bulletin 118 which allowed the Company to provide a provisional estimate of the impacts of the Act in earnings for the year ended December 31, 2017 and also provided a one-year measurement period in which the Company would record additional impacts from the enactment of the Act as they are identified. As of June 30, 2018, the Company has not made any changes to the provisional estimate recorded in earnings for the year ended December 31, 2017. While the Company has made a reasonable estimate of the effects on its existing deferred tax balances, it has not completed its accounting for the tax effects of the enactment of the Act and will continue to monitor provisions with discrete rate impacts, such as the limitation on executive compensation for subsequent events and additional guidance provided within the one year measurement period.

Deferred Tax Assets Valuation Allowance

Primarily as a result of the impairments of proved oil and gas properties recognized beginning in the third quarter of 2015 and continuing through the third quarter of 2016, the Company had a cumulative historical three year pre-tax loss and a net deferred tax asset position at June 30, 2018. The Company then assessed the realizability of its deferred tax assets and, beginning in the third quarter of 2015 and continuing through the second quarter of 2018, the Company concluded that it was more likely than not the deferred tax assets will not be realized and that a valuation allowance was required to reduce the net deferred tax assets to zero. As of June 30, 2018 and December 31, 2017, the valuation allowance was $316.5 million and $333.0 million, respectively. See

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the table above for changes in the valuation allowance for the three and six months ended June 30, 2018 and 2017, which primarily related to activity during each respective period and, for the three and six months ended June 30, 2017, the effect of adopting ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

6. Long-Term Debt

Long-term debt consisted of the following as of June 30, 2018 and December 31, 2017:



	June 30, 2018			December 31, 2017
	(In thousands)
Senior Secured Revolving Credit Facility due 2022		$485,000			$291,300
7.50% Senior Notes due 2020	130,000			450,000
Unamortized premium for 7.50% Senior Notes	139			579
Unamortized debt issuance costs for 7.50% Senior Notes	(1,095		)	(4,492		)
6.25% Senior Notes due 2023	650,000			650,000
Unamortized debt issuance costs for 6.25% Senior Notes	(7,554		)	(8,208		)
8.25% Senior Notes due 2025	250,000			250,000
Unamortized debt issuance costs for 8.25% Senior Notes	(4,183		)	(4,395		)
Other long-term debt due 2028	—			4,425
Long-term debt		$1,502,307			$1,629,209

Senior Secured Revolving Credit Facility

The Company has a senior secured revolving credit facility with a syndicate of banks that, as of June 30, 2018, had a borrowing base of $1.0 billion, with an elected commitment amount of $900.0 million, and borrowings outstanding of $485.0 million at a weighted average interest rate of 3.74%. The credit agreement governing the revolving credit facility provides for interest-only payments until May 4, 2022 (subject to a springing maturity date of June 15, 2020 if the 7.50% Senior Notes due 2020 (the “7.50% Senior Notes”) have not been redeemed or refinanced on or prior to such time), when the credit agreement matures and any outstanding borrowings are due. The borrowing base under the credit agreement is subject to regular redeterminations in the spring and fall of each year, as well as special redeterminations described in the credit agreement, which in each case may reduce the amount of the borrowing base. 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. The capitalized terms which are not defined in this description of the revolving credit facility, shall have the meaning given to such terms in the credit agreement.

On January 31, 2018, as a result of the divestiture in the Eagle Ford Shale discussed above, the Company’s borrowing base under the senior secured revolving credit facility was reduced from $900.0 million to $830.0 million, however, the elected commitment amount remained unchanged at $800.0 million.

On May 4, 2018, the Company entered into the twelfth amendment to its credit agreement governing the revolving credit facility to, among other things, (i) establish the borrowing base at $1.0 billion, with an elected commitment amount of $900.0 million, until the next redetermination thereof, (ii) reduce the applicable margin for Eurodollar loans from 2.0%-3.0% to 1.5%-2.5%, depending on level of facility usage, (iii) amend the covenant limiting payment of dividends and distributions on equity to increase the Company’s ability to make dividends and distributions on its equity interests and (iv) amend certain other provisions, in each case as set forth therein.

The obligations of the Company under the credit agreement are guaranteed by the Company’s material domestic subsidiaries and are secured by liens on substantially all of the Company’s assets, including a mortgage lien on oil and gas properties having at least 90% of the total value of the oil and gas properties included in the Company’s reserve report used in its most recent redetermination.

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Borrowings outstanding under the credit agreement bear interest at the Company’s option at either (i) a base rate for a base rate loan plus the margin set forth in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50% and the adjusted LIBO rate plus 1.00%, or (ii) an adjusted LIBO rate for a Eurodollar loan plus the margin set forth in the table below. The Company also incurs commitment fees at rates as set forth in the table below on the unused portion of lender commitments, which are included in “Interest expense, net” in the consolidated statements of income.



Ratio of Outstanding Borrowings to Lender Commitments	Applicable Margin for Base Rate Loans	Applicable Margin for Eurodollar Loans	Commitment Fee
Less than 25%	0.50%	1.50%	0.375%
Greater than or equal to 25% but less than 50%	0.75%	1.75%	0.375%
Greater than or equal to 50% but less than 75%	1.00%	2.00%	0.500%
Greater than or equal to 75% but less than 90%	1.25%	2.25%	0.500%
Greater than or equal to 90%	1.50%	2.50%	0.500%

The Company is subject to certain covenants under the terms of the credit agreement, 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. As defined in the credit agreement, Total Debt excludes debt premiums and debt issuance costs and is net of cash and cash equivalents, EBITDA will be calculated based on the last four fiscal quarters after giving pro forma effect to EBITDA for material acquisitions and divestitures of oil and gas properties, and the Current Ratio includes an add back of the unused portion of lender commitments. As of June 30, 2018, the ratio of Total Debt to EBITDA was 2.53 to 1.00 and the Current Ratio was 1.49 to 1.00. Because the financial covenants are determined as of the last day of each quarter, the ratios can fluctuate significantly period to period as the level of borrowings outstanding under the credit agreement are impacted by the timing of cash flows from operations, capital expenditures, acquisitions and divestitures of oil and gas properties and securities offerings.

The credit agreement also places restrictions on the Company and certain of its subsidiaries with respect to additional indebtedness, liens, dividends and other payments to shareholders, repurchases or redemptions of the Company’s common stock, redemptions of senior notes, investments, acquisitions and divestitures of oil and gas properties, mergers, transactions with affiliates, hedging transactions and other matters.

The credit agreement is subject to customary events of default, including in connection with a change in control. If an event of default occurs and is continuing, the lenders may elect to accelerate amounts due under the credit agreement (except in the case of a bankruptcy event of default, in which case such amounts will automatically become due and payable).

Redemptions of 7.50% Senior Notes

During the first quarter of 2018, the Company redeemed $320.0 million of the outstanding aggregate principal amount of its 7.50% Senior Notes at a price equal to 101.875% of par. Upon the redemptions, the Company paid $336.9 million, which included redemption premiums of $6.0 million as well as accrued and unpaid interest of $10.9 million from the last interest payment date up to, but not including, the redemption date. As a result of the redemptions, the Company recorded a loss on extinguishment of debt of $8.7 million, which included the redemption premiums of $6.0 million paid to redeem the notes and non-cash charges of $2.7 million attributable to the write-off of unamortized premium and debt issuance costs.

Redemption of Other Long-Term Debt

On May 3, 2018, the Company redeemed the remaining $4.4 million outstanding principal amount of its 4.375% Convertible Senior Notes due 2028 at a price equal to 100% of par. Upon redemption, the Company paid $4.5 million, which included accrued and unpaid interest of $0.1 million from the last interest payment date up to, but not including, the redemption date.

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.

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8. Preferred Stock and Warrants

On August 10, 2017, the Company closed on the issuance and sale in a private placement of (i) $250.0 million initial liquidation preference (250,000 shares) of 8.875% redeemable preferred stock, par value $0.01 per share (the “Preferred Stock”) and (ii) warrants for 2,750,000 shares of the Company’s common stock, with a term of ten years and an exercise price of $16.08 per share, exercisable only on a net share settlement basis (the “Warrants”), for a cash purchase price equal to $970.00 per share of Preferred Stock, to certain funds managed or sub-advised by GSO Capital Partners LP and its affiliates (the “GSO Funds”).

The Preferred Stock has a liquidation preference of $1,000.00 per share and bears an annual cumulative dividend rate of 8.875%, payable on March 15, June 15, September 15 and December 15 of any given year. The Company may elect to pay all or a portion of the Preferred Stock dividends in shares of its common stock in decreasing percentages as follows with respect to any preferred stock dividend declared by the Company’s Board of Directors and paid in respect of a quarter ending:



Period	Percentage
September 15, 2018	100	%
On or after December 15, 2018 and on or prior to September 15, 2019	75	%
On or after December 15, 2019 and on or prior to September 15, 2020	50	%

If the Company fails to satisfy the Preferred Stock dividend on the applicable dividend payment date, then the unpaid dividend will be added to the liquidation preference until paid.

The Preferred Stock outstanding is not mandatorily redeemable, but can be redeemed at the Company’s option and, in certain circumstances, at the option of the holders of the Preferred Stock. On or prior to August 10, 2018, the Company had the right to redeem up to 50,000 shares of Preferred Stock, in cash, at $1,000.00 per share, plus accrued and unpaid dividends in an amount not to exceed the sum of the cash proceeds of divestitures of oil and gas properties and related assets, the sale or issuance of the Company’s common stock and the sale of any of the Company’s wholly owned subsidiaries. In the first quarter of 2018, the Company redeemed 50,000 shares of Preferred Stock, representing 20% of the issued and outstanding Preferred Stock. Upon redemption, the Company paid $50.5 million, which consisted of $1,000.00 per share of Preferred Stock redeemed, plus accrued and unpaid dividends, with a portion of the proceeds from the divestitures of oil and gas properties. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” for information regarding divestitures.

In addition, at any time on or prior to August 10, 2020, the Company may redeem all or part of the Preferred Stock in cash at a redemption premium of 104.4375%, plus accrued and unpaid dividends and the present value on the redemption date of all quarterly dividends that would be payable from the redemption date through August 10, 2020. After August 10, 2020, the Company may redeem all or part of the Preferred Stock in cash at redemption premiums, as presented in the table below, plus accrued but unpaid dividends.



Period	Percentage
After August 10, 2020 but on or prior to August 10, 2021	104.4375	%
After August 10, 2021 but on or prior to August 10, 2022	102.21875	%
After August 10, 2022	100	%

The holders of the Preferred Stock have the option to cause the Company to redeem the Preferred Stock under the following conditions:


•	Upon the Company’s failure to pay a quarterly dividend within three months of the applicable payment date;


•	On or after August 10, 2024, if the Preferred Shares remain outstanding; or


•	Upon the occurrence of certain changes of control.

For the first two conditions described above, the Company has the option to settle any such redemption in cash or shares of its common stock and the holders of the Preferred Stock may elect to revoke or reduce the redemption if the Company elects to settle in shares of common stock.

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The Preferred Stock are non-voting shares except as required by the Company’s articles of incorporation or bylaws. However, so long as the GSO Funds beneficially own more than 50% of the Preferred Stock, the consent of the holders of the Preferred Stock will be required prior to issuing stock senior to or on parity with the Preferred Stock, incurring indebtedness subject to a leverage ratio, agreeing to certain restrictions on dividends on, or redemption of, the Preferred Stock and declaring or paying dividends on the Company’s common stock in excess of $15.0 million per year subject to a leverage ratio. Additionally, if the Company does not redeem the Preferred Stock before August 10, 2024, in connection with a change of control or failure to pay a quarterly dividend within three months of the applicable payment date, the holders of the Preferred Stock are entitled to additional rights including:


•	Increasing the dividend rate to 12.0% per annum until August 10, 2024 and thereafter to the greater of 12.0% per annum and the one-month LIBOR plus 10.0%;


•	Electing up to two directors to the Company’s Board of Directors; and


•	Requiring approval by the holders of the Preferred Stock to incur indebtedness subject to a leverage ratio, declaring or paying dividends on the Company’s common stock in excess of $15.0 million per year or issuing equity of the Company’s subsidiaries to third parties.

The Preferred Stock is presented as temporary equity in the consolidated balance sheets with the issuance date fair value accreted to the redemption value using the effective interest method.

The table below summarizes changes in the carrying amount of Preferred Stock for the six months ended June 30, 2018:



	June 30, 2018
	(In thousands)
Preferred Stock, beginning of period		$214,262
Redemption of preferred stock	(42,897		)
Accretion on Preferred Stock	1,493
Preferred Stock, end of period		$172,858

Preferred Stock Dividends, Accretion, and Loss on Redemption

Dividends, accretion, and loss on redemption of preferred stock are presented in the consolidated statements of income as a reduction of net income to compute net income attributable to common shareholders.

For the three months ended June 30, 2018, the Company declared and paid $4.5 million of cash dividends to the holders of record of the Preferred Stock on June 15, 2018. For the six months ended June 30, 2018, the Company declared and paid $9.3 million of cash dividends to the holders of the Preferred Stock on June 15, 2018 and March 15, 2018.

For the three and six months ended June 30, 2018, the Company recorded accretion on Preferred Stock of $0.7 million and $1.5 million, respectively.

As a result of the redemption described above, the Company recorded a loss on redemption of preferred stock of $7.1 million, which included $0.1 million of direct costs incurred as a result of the redemption and a non-cash charge of $7.0 million attributable to the difference between $50.0 million, which was the consideration transferred to the holders of the Preferred Stock excluding accrued and unpaid dividends, and $42.9 million, which was 20% of the carrying value of the Preferred Stock on the date of redemption.

9. Stock-Based Compensation

Equity-Based Incentive Awards Plans

The Company grants equity-based incentive awards under the 2017 Incentive Plan of Carrizo Oil & Gas, Inc. (the “2017 Incentive Plan”) and the Carrizo Oil & Gas, Inc. Cash-Settled Stock Appreciation Rights Plan (“Cash SAR Plan”). The 2017 Incentive Plan replaced the Incentive Plan of Carrizo Oil & Gas, Inc., as amended and restated effective May 15, 2014 (the “Prior Incentive Plan”) and, from the effective date of the 2017 Incentive Plan, no further awards may be granted under the Prior Incentive Plan. However, awards previously granted under the Prior Incentive Plan will remain outstanding in accordance with their terms. Under the 2017 Incentive Plan, the Company can grant restricted stock awards and units, stock appreciation rights that can be settled in shares of common stock or cash at the option of the Company, performance shares, stock options, and cash awards to employees, independent contractors, and non-employee directors. Under the Cash SAR Plan, the Company can grant stock appreciation rights that may only be settled in cash (“Cash SARs”) to employees and independent contractors.

The 2017 Incentive Plan provides that up to 2,675,000 shares of the Company’s common stock, plus the shares remaining available for awards under the Prior Incentive Plan at the effective date of the 2017 Incentive Plan, may be issued (the “Maximum Share Limit”). Each restricted stock award, restricted stock unit, or performance share granted under the 2017 Incentive Plan counts as

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1.35 shares against the Maximum Share Limit. Each stock option and stock appreciation right to be settled in shares of common stock (“Stock SAR”) granted under the 2017 Incentive Plan counts as 1.00 share against the Maximum Share Limit. Each stock appreciation right to be settled in shares of common stock or cash (“Incentive SAR”) granted under the 2017 Incentive Plan counts as 1.00 share against the Maximum Share Limit up to the date the Company, if it so chooses, affirmatively elects to settle the stock appreciation right in cash. Each stock appreciation right to be settled in cash (“Incentive Cash SAR”) granted under the 2017 Incentive Plan or Cash SAR does not count against the Maximum Share Limit. As of June 30, 2018, there were 326,774 common shares remaining available for grant under the 2017 Incentive Plan.

Restricted Stock Awards and Units

As of June 30, 2018, unrecognized compensation costs related to unvested restricted stock awards and units was $30.5 million and will be recognized over a weighted average period of 2.2 years.

The table below summarizes restricted stock award and unit activity for the six months ended June 30, 2018:



	Restricted Stock Awards and Units		Weighted Average Grant Date Fair Value
Unvested restricted stock awards and units, beginning of period	1,482,655			$28.07
Granted	1,348,415			$14.68
Vested	(608,904	)		$31.43
Forfeited	(10,993	)		$19.17
Unvested restricted stock awards and units, end of period	2,211,173			$19.02

During the six months ended June 30, 2018, the Company granted 1,348,415 restricted stock awards and units primarily consisting of 1,343,412 restricted stock units to employees and independent contractors as part of its annual grant of long-term equity incentive awards during the first quarter of 2018. These restricted stock units had a grant date fair value of $19.7 million and will vest ratably over a three-year period.

Stock Appreciation Rights (“SARs”)

As of June 30, 2018, all outstanding SARs are either Cash SARs or Incentive Cash SARs and will be settled in cash. The liability for SARs as of June 30, 2018 was $8.7 million, all of which was classified as “Other current liabilities,” in the consolidated balance sheets. As of December 31, 2017, the liability for SARs was $4.4 million, all of which was classified as “Other liabilities” in the consolidated balance sheets. Unrecognized compensation costs related to unvested SARs was $11.3 million as of June 30, 2018, and will be recognized over a weighted average period of 2.6 years.

The table below summarizes the activity for SARs for the six months ended June 30, 2018:



	SARs	Weighted Average Exercise Prices		Weighted Average Remaining Life (In years)	Aggregate Intrinsic Value (In millions)		Aggregate Intrinsic Value of Exercises (In millions)
Outstanding, beginning of period	714,238		$27.12
Granted	616,686		$14.67
Exercised	—		$—					$—
Forfeited	—		$—
Expired	—		$—
Outstanding, end of period	1,330,924		$21.35	4.8		$9.1
Vested, end of period	543,018		$27.18
Vested and exercisable, end of period	543,018		$27.18	3.04		$0.5

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During the six months ended June 30, 2018, the Company granted 616,686 Incentive Cash SARs to certain employees and independent contractors, all of which occurred in the first quarter of 2018 as part of the Company’s annual grant of long-term equity incentive awards. These Incentive Cash SARs will vest ratably over a three-year period and expire approximately seven years from the grant date.

The grant date fair value of the Incentive Cash SARs, calculated using the Black-Scholes-Merton option pricing model, was $4.9 million. The following table summarizes the assumptions used to calculate the grant date fair value of the Incentive Cash SARs granted during the six months ended June 30, 2018:



	Grant Date Fair Value Assumptions
Expected term (in years)	6.0
Expected volatility	54.3	%
Risk-free interest rate	2.8	%
Dividend yield	—	%

Performance Shares

As of June 30, 2018, unrecognized compensation costs related to unvested performance shares was $2.9 million and will be recognized over a weighted average period of 2.2 years.

The table below summarizes performance share activity for the six months ended June 30, 2018:



	Target Performance Shares ⁽¹⁾		Weighted Average Grant Date Fair Value
Unvested performance shares, beginning of period	144,955			$47.14
Granted	93,771			$19.09
Vested at end of performance period	(49,458	)		$65.51
Did not vest at end of performance period	(7,059	)		$65.51
Forfeited	—			$—
Unvested performance shares, end of period	182,209			$27.01


(1)	The number of performance shares that vest may vary from the number of target performance shares granted depending on the Company’s final TSR ranking for the approximate three-year performance period.

During the six months ended June 30, 2018, the Company granted 93,771 target performance shares to certain employees and independent contractors, all of which occurred in the first quarter of 2018 as part of the Company’s annual grant of long-term equity incentive awards. Each performance share represents the right to receive one share of common stock, however, the number of performance shares that will vest ranges from zero to 200% of the target performance shares granted based on the total shareholder return (“TSR”) of the Company’s common stock relative to the TSR achieved by a specified industry peer group over an approximate three-year performance period, the last day of which is also the vesting date.

Also during the six months ended June 30, 2018, the Company vested 49,458 performance shares that were granted in 2015. As a result of the Company’s final TSR ranking during the performance period, a multiplier of 88% was applied to the 56,517 target performance shares that were granted in 2015, resulting in 7,059 performance shares that did not vest.

The grant date fair value of the performance shares, calculated using a Monte Carlo simulation, was $1.8 million. The following table summarizes the assumptions used to calculate the grant date fair value of the performance shares granted during the six months ended June 30, 2018:



	Grant Date Fair Value Assumptions
Number of simulations	500,000
Expected term (in years)	3.0
Expected volatility	61.5	%
Risk-free interest rate	2.4	%
Dividend yield	—	%

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Stock-Based Compensation Expense, Net

Stock-based compensation expense associated with restricted stock awards and units, SARs and performance shares is reflected as “General and administrative expense, net” in the consolidated statements of income.

The Company recognized the following stock-based compensation expense, net for the three and six months ended June 30, 2018 and 2017:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(In thousands)
Restricted stock awards and units		$4,720			$5,024			$9,804			$10,873
SARs	5,788			(3,783		)	4,373			(7,469		)
Performance shares	406			574			963			1,280
	10,914			1,815			15,140			4,684
Less: amounts capitalized to oil and gas properties	(3,708		)	(233		)	(4,416		)	(1,088		)
Total stock-based compensation expense, net		$7,206			$1,582			$10,724			$3,596

10. Derivative Instruments

Commodity Derivative Instruments

The Company uses commodity derivative instruments to reduce its exposure to commodity price volatility for a portion of its forecasted production and thereby achieve a more predictable level of cash flows to support the Company’s capital expenditure program and fixed costs.

The Company does not enter into derivative instruments for speculative or trading purposes. The Company’s commodity derivative instruments consist of price swaps, three-way collars, basis swaps, and purchased and sold call options, which are described below.

Price Swaps: The Company receives a fixed price and pays an index price to the counterparty over specified periods for contracted volumes.

Three-Way Collars: A three-way collar is a combination of options including a purchased put option (fixed floor price), a sold call option (fixed ceiling price) and a sold put option (fixed sub-floor price). These contracts offer a higher fixed ceiling price relative to a costless collar but limit the Company’s protection from decreases in commodity prices below the fixed floor price. At settlement, if the published index price is between the fixed floor price and the fixed sub-floor price or is above the fixed ceiling price, the Company receives the fixed floor price or pays the index price, respectively. If the index price is below the fixed sub-floor price, the Company receives the index price plus the difference between the fixed floor price and the fixed sub-floor price. If the index price is between the fixed floor price and fixed ceiling price, no payments are due from either party. The Company has incurred premiums on certain of these contracts in order to obtain a higher floor price and/or ceiling price.

Basis Swaps: Basis swaps fix the price differential between a published index price and the applicable local index price under which our production is sold. For the Company’s Permian oil production, the basis swaps fix the price differential between the Midland WTI price and the Cushing WTI price and for the Company’s Eagle Ford oil production, the basis swaps fix the price differential between the LLS price and the Cushing WTI price.

Sold Call Options: These contracts give the counterparty the right, but not the obligation, to buy contracted volumes from the Company over specified periods and prices in the future. At settlement, if the index price exceeds the fixed price of the call option, the Company pays the counterparty the excess. If the index price settles below the fixed price of the call option, no payment is due from either party. These contracts require the counterparty to pay premiums to the Company that represent the fair value of the call option as of the date of sale. All of the Company’s natural gas sold call options were executed contemporaneously with certain crude oil price swaps to increase the fixed price on those crude oil price swaps. Those certain crude oil price swaps settled prior to 2018.

Purchased Call Options: These contracts give the Company the right, but not the obligation, to buy contracted volumes from the counterparty over specified periods and prices in the future. At settlement, if the index price exceeds the fixed price of the call option, the counterparty pays the Company the excess. If the index price settles below the fixed price of the call option, no payment is due from either party. These contracts require the Company to pay premiums to the counterparty that represent the fair value of the call option as of the date of purchase. All of the Company’s purchased crude oil call options were executed contemporaneously with sold crude oil call options to increase the fixed price on a portion of the existing sold crude oil call options and therefore are presented on a net basis as “Net Sold Call Options” in the table below.

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Premiums: In order to increase the fixed price on a portion of the Company’s existing sold call options, the Company incurred premiums on its purchased call options. Additionally, in order to obtain a higher floor price and/or ceiling price, the Company incurred premiums on certain of its three-way collars. Payment of these premiums are deferred until the applicable contracts settle on a monthly basis throughout the term of the contract or, in some cases, during the final 12 months of the contract and are referred to as deferred premium obligations.

The following table sets forth a summary of the Company’s outstanding crude oil derivative positions as of June 30, 2018 at weighted average contract prices:



Period	Type of Contract	Index	Volumes (Bbls/d)	Fixed Price ($/Bbl)			Sub-Floor Price ($/Bbl)		Floor Price ($/Bbl)		Ceiling Price ($/Bbl)
2018
Q3-Q4	Price Swaps	NYMEX WTI	6,000		$49.55			$—		$—		$—
Q3-Q4	Three-Way Collars	NYMEX WTI	24,000	—			39.38		49.06		60.14
Q3-Q4	Basis Swaps	LLS-Cushing WTI ⁽¹⁾	18,000	5.11			—		—		—
Q3-Q4	Basis Swaps	Midland WTI-Cushing WTI ⁽²⁾	6,000	(0.10		)	—		—		—
Q3-Q4	Net Sold Call Options	NYMEX WTI	3,388	—			—		—		71.33
2019
Q1-Q4	Three-Way Collars	NYMEX WTI	15,000	—			41.00		49.72		62.48
Q1-Q2	Basis Swaps	Midland WTI-Cushing WTI ⁽²⁾	3,000	(3.83		)	—		—		—
Q3	Basis Swaps	Midland WTI-Cushing WTI ⁽²⁾	3,500	(4.18		)	—		—		—
Q4	Basis Swaps	Midland WTI-Cushing WTI ⁽²⁾	6,000	(3.71		)	—		—		—
Q1-Q4	Net Sold Call Options	NYMEX WTI	3,875	—			—		—		73.66
2020
Q1-Q4	Net Sold Call Options	NYMEX WTI	4,575	—			—		—		75.98


(1)	The index price paid under these basis swaps is LLS and the index price received is Cushing WTI plus the fixed price differential.


(2)	The index price paid under these basis swaps is Midland WTI and the index price received is Cushing WTI less the fixed price differential.

The following table sets forth a summary of the Company’s outstanding NGL derivative positions as of June 30, 2018 at weighted average contract prices:



Period	Type of Contract	Index	Volumes (Bbls/d)	Fixed Price ($/Bbl)
2018
Q3-Q4	Price Swaps	Ethane - OPIS Mont Belvieu Non-TET	2,200		$12.01
Q3-Q4	Price Swaps	Propane - OPIS Mont Belvieu Non-TET	1,500	34.23
Q3-Q4	Price Swaps	Butane - OPIS Mont Belvieu Non-TET	200	38.85
Q3-Q4	Price Swaps	Isobutane - OPIS Mont Belvieu Non-TET	600	38.98
Q3-Q4	Price Swaps	Natural Gasoline - OPIS Mont Belvieu Non-TET	600	55.23

The following table sets forth a summary of the Company’s outstanding natural gas derivative positions as of June 30, 2018 at weighted average contract prices:



Period	Type of Contract	Index	Volumes (MMBtu/d)	Fixed Price ($/MMBtu)		Ceiling Price ($/MMBtu)
2018
Q3-Q4	Price Swaps	NYMEX HH	25,000		$3.01		$—
Q3-Q4	Sold Call Options	NYMEX HH	33,000	—		3.25
2019
Q1-Q4	Sold Call Options	NYMEX HH	33,000	—		3.25
2020
Q1-Q4	Sold Call Options	NYMEX HH	33,000	—		3.50

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The Company typically has numerous hedge positions that span several time periods and often result in both commodity derivative asset and liability positions held with that counterparty. The Company nets its commodity derivative instrument fair values executed with the same counterparty, along with deferred premium obligations, to a single asset or liability 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.

Counterparties to the Company’s commodity derivative instruments who are also lenders under the Company’s credit agreement (“Lender Counterparty”) allow the Company to satisfy any need for margin obligations associated with commodity derivative instruments where the Company is in a net liability position with the Lender Counterparty with the collateral securing the credit agreement, thus eliminating the need for independent collateral posting. Counterparties to the Company’s commodity derivative instruments who are not lenders under the Company’s credit agreement (“Non-Lender Counterparty”) can require commodity derivative instruments where the Company’s net liability position exceeds the Company’s unsecured credit limit with the Non-Lender Counterparty to be novated to a Lender Counterparty and therefore do not require the posting of cash collateral.

Because each Lender Counterparty has an investment grade credit rating and the Company has obtained a guaranty from each Non-Lender Counterparty’s parent company which has an investment grade credit rating, the Company believes it does not have significant credit risk and accordingly does not currently require its counterparties to post collateral to support the net asset positions of its commodity derivative instruments. Although the Company does not currently anticipate nonperformance from its counterparties, it continually monitors the credit ratings of each Lender Counterparty and each Non-Lender Counterparty’s parent company.

Contingent Consideration Arrangements

In connection with the ExL Acquisition and in each of the divestitures of the Company’s assets in the Niobrara in the first quarter of 2018 and the Marcellus and Utica in the fourth quarter of 2017, the Company agreed to contingent consideration arrangements that could allow the Company to receive or be required to pay certain amounts if commodity prices are above specific thresholds, which are summarized in the table below. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” included in this Quarterly Report on Form 10-Q as well as “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” included in the 2017 Annual Report for details of the ExL Acquisition and each of the divestitures discussed above.



			Contingent Receipt (Payment) - Annual			Contingent Receipt (Payment) - Aggregate Limit
Contingent Consideration Arrangements	Years	Threshold ⁽¹⁾	(In thousands)
Contingent ExL Consideration	2018	$50.00		($50,000	)
	2019	50.00	(50,000		)
	2020	50.00	(50,000		)
	2021	50.00	(50,000		)		($125,000	)

Contingent Niobrara Consideration	2018	$55.00		$5,000
	2019	55.00	5,000
	2020	60.00	5,000			—

Contingent Marcellus Consideration	2018	$3.13		$3,000
	2019	3.18	3,000
	2020	3.30	3,000				$7,500

Contingent Utica Consideration	2018	$50.00		$5,000
	2019	53.00	5,000
	2020	56.00	5,000			—

(1)

The price used to determine whether the specific threshold for each year has been met is the average daily closing spot price of a barrel of West Texas Intermediate crude oil as measured by the U.S. Energy Information Administration for the Contingent ExL Consideration, Contingent Niobrara Consideration, and Contingent Utica Consideration and the average settlement price of a MMBtu of Henry Hub natural gas for the next calendar month, as determined on the last business day preceding each calendar month as measured by the CME Group Inc. for the Contingent Marcellus Consideration.

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Derivative Assets and Liabilities

All commodity derivative instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value. The deferred premium obligations associated with the Company’s commodity derivative instruments are recorded in the period in which they are incurred and are netted with the commodity derivative instrument fair value asset or liability pursuant to the netting arrangements described above. Each of the contingent consideration arrangements discussed above were determined to be embedded derivatives and are recorded in the consolidated balance sheets as either an asset or liability measured at fair value at the acquisition or divestiture date, as well as each subsequent balance sheet date.

The combined derivative instrument fair value assets and liabilities, including deferred premium obligations, recorded in the consolidated balance sheets as of June 30, 2018 and December 31, 2017 are summarized below:



	June 30, 2018
	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Commodity derivative instruments		$32,422			($31,259	)		$1,163
Contingent Niobrara Consideration	4,820			—			4,820
Contingent Marcellus Consideration	130			—			130
Contingent Utica Consideration	4,815			—			4,815
Derivative assets		$42,187			($31,259	)		$10,928
Commodity derivative instruments	13,418			(13,418		)	—
Contingent Niobrara Consideration	5,150			—			5,150
Contingent Marcellus Consideration	1,400			—			1,400
Contingent Utica Consideration	5,730			—			5,730
Other assets		$25,698			($13,418	)		$12,280

Commodity derivative instruments		($118,953	)		$21,813			($97,140	)
Deferred premium obligations	(9,446		)	9,446			—
Contingent ExL Consideration	(48,380		)	—			(48,380		)
Derivative liabilities-current		($176,779	)		$31,259			($145,520	)
Commodity derivative instruments	(40,006		)	5,748			(34,258		)
Deferred premium obligations	(7,670		)	7,670			—
Contingent ExL Consideration	(53,675		)	—			(53,675		)
Derivative liabilities-non current		($101,351	)		$13,418			($87,933	)

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	December 31, 2017
	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Commodity derivative instruments		$4,869			($4,869	)		$—
Derivative assets		$4,869			($4,869	)		$—
Commodity derivative instruments	9,505			(9,505		)	—
Contingent Niobrara Consideration	—			—			—
Contingent Marcellus Consideration	2,205			—			2,205
Contingent Utica Consideration	7,985			—			7,985
Other assets		$19,695			($9,505	)		$10,190

Commodity derivative instruments		($52,671	)		($4,450	)		($57,121	)
Deferred premium obligations	(9,319		)	9,319			—
Derivative liabilities-current		($61,990	)		$4,869			($57,121	)
Commodity derivative instruments	(24,609		)	(2,098		)	(26,707		)
Deferred premium obligations	(11,603		)	11,603			—
Contingent ExL Consideration	(85,625		)	—			(85,625		)
Derivative liabilities-non current		($121,837	)		$9,505			($112,332	)

See “Note 11. Fair Value Measurements” for additional information regarding the fair value of the Company’s derivative instruments.

(Gain) Loss on Derivatives, Net

The Company has elected not to meet the criteria to qualify its commodity derivative instruments for hedge accounting treatment. Therefore, all gains and losses as a result of changes in the fair value of the Company’s commodity derivative instruments, as well as its contingent consideration arrangements, are recognized as “(Gain) loss on derivatives, net” in the consolidated statements of income in the period in which the changes occur. All deferred premium obligations associated with the Company’s commodity derivative instruments are recognized in “(Gain) loss on derivatives, net” in the consolidated statements of income in the period in which the deferred premium obligations are incurred. The effects of commodity derivative instruments, deferred premium obligations and contingent consideration arrangements in the consolidated statements of income for the three and six months ended June 30, 2018 and 2017 are summarized below:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(In thousands)
(Gain) Loss on Derivatives, Net
Crude oil derivatives		$53,437			($29,736	)		$82,948			($48,163	)
NGL derivatives	6,564			—			4,799			—
Natural gas derivatives	153			(3,883		)	(2,892		)	(10,719		)
Deferred premium obligations	—			7,554			—			7,501
Contingent ExL Consideration	10,600			—			16,430			—
Contingent Niobrara Consideration	(1,705		)	—			(2,090		)	—
Contingent Marcellus Consideration	205			—			675			—
Contingent Utica Consideration	(1,540		)	—			(2,560		)	—
(Gain) Loss on Derivatives, Net		$67,714			($26,065	)		$97,310			($51,381	)

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Cash Received (Paid) for Derivative Settlements, Net

Cash flows are impacted to the extent that settlements of commodity derivatives, including deferred premium obligations, and settlements of contingent consideration arrangements result in cash receipts or payments during the period and are presented as “Cash received (paid) for derivative settlements, net” in the consolidated statements of cash fl

CARRIZO OIL & GAS INC - FORM 10-Q - August 7, 2018

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