CARRIZO OIL & GAS INC - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION SECTION 302 - CARRIZO OIL & GAS INC	ex3113q18.htm
EX-32.2 - EXHIBIT 32.2 CFO CERTIFICATION SECTION 906 - CARRIZO OIL & GAS INC	ex3223q18.htm
EX-32.1 - EXHIBIT 32.1 CEO CERTIFICATION SECTION 906 - CARRIZO OIL & GAS INC	ex3213q18.htm
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION SECTION 302 - CARRIZO OIL & GAS INC	ex3123q18.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 September 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 November 2, 2018 was 91,625,532.

TABLE OF CONTENTS



		PAGE
Part I. Financial Information
Item 1.	Consolidated Financial Statements (Unaudited)	2
	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	2
	Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017	3
	Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2018	4
	Consolidated Statements of Cash Flows for the nine months ended September 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	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	48
Part II. Other Information
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
Signatures		51

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)



	September 30, 2018			December 31, 2017
Assets
Current assets
Cash and cash equivalents		$2,415			$9,540
Accounts receivable, net	128,780			107,441
Derivative assets	10,258			—
Other current assets	9,636			5,897
Total current assets	151,089			122,878
Property and equipment
Oil and gas properties, full cost method
Proved properties, net	2,124,767			1,965,347
Unproved properties, not being amortized	579,275			660,287
Other property and equipment, net	10,885			10,176
Total property and equipment, net	2,714,927			2,635,810
Deposit for pending acquisition of oil and gas properties	21,500			—
Other assets	23,482			19,616
Total Assets		$2,910,998			$2,778,304

Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$147,670			$74,558
Revenues and royalties payable	52,975			52,154
Accrued capital expenditures	117,556			119,452
Accrued interest	23,748			28,362
Derivative liabilities	162,895			57,121
Other current liabilities	50,918			41,175
Total current liabilities	555,762			372,822
Long-term debt	1,327,689			1,629,209
Asset retirement obligations	17,071			23,497
Derivative liabilities	102,103			112,332
Deferred income taxes	4,699			3,635
Other liabilities	8,703			51,650
Total liabilities	2,016,027			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 September 30, 2018 and 250,000 issued and outstanding as of December 31, 2017	173,629			214,262
Shareholders’ equity
Common stock, $0.01 par value, 180,000,000 shares authorized; 91,619,733 issued and outstanding as of September 30, 2018 and 81,454,621 issued and outstanding as of December 31, 2017	916			815
Additional paid-in capital	2,132,253			1,926,056
Accumulated deficit	(1,411,827		)	(1,555,974		)
Total shareholders’ equity	721,342			370,897
Total Liabilities and Shareholders’ Equity		$2,910,998			$2,778,304

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 amounts)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues
Crude oil		$254,525			$152,101			$679,242			$422,999
Natural gas liquids	33,798			12,467			71,969			27,678
Natural gas	15,052			16,711			41,417			48,440
Total revenues	303,375			181,279			792,628			499,117

Costs and Expenses
Lease operating	41,022			34,874			115,446			100,767
Production taxes	14,516			7,741			37,578			21,092
Ad valorem taxes	2,588			1,736			8,201			5,776
Depreciation, depletion and amortization	80,108			67,564			217,005			181,018
General and administrative, net	12,811			16,029			58,368			49,328
(Gain) loss on derivatives, net	55,388			24,377			152,698			(27,004		)
Interest expense, net	15,406			20,673			46,522			62,350
Loss on extinguishment of debt	—			—			8,676			—
Other (income) expense, net	(690		)	462			2,305			1,640
Total costs and expenses	221,149			173,456			646,799			394,967

Income Before Income Taxes	82,226			7,823			145,829			104,150
Income tax expense	(880		)	—			(1,682		)	—
Net Income		$81,346			$7,823			$144,147			$104,150
Dividends on preferred stock	(4,457		)	(2,249		)	(13,794		)	(2,249		)
Accretion on preferred stock	(771		)	—			(2,264		)	—
Loss on redemption of preferred stock	—			—			(7,133		)	—
Net Income Attributable to Common Shareholders		$76,118			$5,574			$120,956			$101,901

Net Income Attributable to Common Shareholders Per Common Share
Basic		$0.88			$0.07			$1.45			$1.44
Diluted		$0.85			$0.07			$1.42			$1.43

Weighted Average Common Shares Outstanding
Basic	86,727			81,053			83,461			70,728
Diluted	89,039			81,138			85,221			71,147

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	—	—		15,701			—			15,701
Issuance of common stock upon grants of restricted stock awards and vestings of restricted stock units and performance shares, net of forfeitures	665,112	6		(75		)	—			(69		)
Sale of common stock, net of offering costs	9,500,000	95		213,762			—			213,857
Dividends on preferred stock	—	—		(13,794		)	—			(13,794		)
Accretion on preferred stock	—	—		(2,264		)	—			(2,264		)
Loss on redemption of preferred stock	—	—		(7,133		)	—			(7,133		)
Net income	—	—		—			144,147			144,147
Balance as of September 30, 2018	91,619,733		$916		$2,132,253			($1,411,827	)		$721,342

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)



	Nine Months Ended September 30,
	2018			2017
Cash Flows From Operating Activities
Net income		$144,147			$104,150
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization	217,005			181,018
(Gain) loss on derivatives, net	152,698			(27,004		)
Cash received (paid) for derivative settlements, net	(64,710		)	7,714
Loss on extinguishment of debt	8,676			—
Stock-based compensation expense, net	13,786			8,462
Deferred income taxes	1,063			—
Non-cash interest expense, net	1,878			2,961
Other, net	4,100			4,249
Changes in components of working capital and other assets and liabilities-
Accounts receivable	(12,763		)	(25,885		)
Accounts payable	10,863			14,748
Accrued liabilities	(9,336		)	11,970
Other assets and liabilities, net	(2,115		)	(1,786		)
Net cash provided by operating activities	465,292			280,597
Cash Flows From Investing Activities
Capital expenditures	(662,459		)	(433,561		)
Acquisitions of oil and gas properties	—			(692,006		)
Deposit (paid for pending acquisition) received for pending divestiture of oil and gas properties	(21,500		)	6,200
Proceeds from divestitures of oil and gas properties	377,693			18,212
Other, net	(2,687		)	(3,804		)
Net cash used in investing activities	(308,953		)	(1,104,959		)
Cash Flows From Financing Activities
Issuance of senior notes	—			250,000
Redemptions of senior notes and other long-term debt	(330,435		)	—
Redemption of preferred stock	(50,030		)	—
Borrowings under credit agreement	2,415,208			1,311,875
Repayments of borrowings under credit agreement	(2,396,671		)	(1,183,275		)
Payments of debt issuance costs and credit facility amendment fees	(627		)	(8,964		)
Sale of common stock, net of offering costs	213,857			222,378
Sale of preferred stock, net of issuance costs	—			236,404
Payments of dividends on preferred stock	(13,794		)	(2,249		)
Other, net	(972		)	(909		)
Net cash provided by (used in) financing activities	(163,464		)	825,260
Net Increase (Decrease) in Cash and Cash Equivalents	(7,125		)	898
Cash and Cash Equivalents, Beginning of Period	9,540			4,194
Cash and Cash Equivalents, End of Period		$2,415			$5,092

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”).

2. Summary of Significant Accounting Policies

Recently Adopted Accounting Standards

Revenue From Contracts with Customers. 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 nine months ended September 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 summarize the impact of adoption for the three and nine months ended September 30, 2018:



	Three Months Ended September 30, 2018
	Under ASC 606		Under ASC 605		Increase		% Increase
	(In thousands)
Revenues
Crude oil		$254,525		$254,382		$143	0.1	%
Natural gas liquids	33,798		32,018		1,780		5.6	%
Natural gas	15,052		14,280		772		5.4	%
Total revenues	303,375		300,680		2,695		0.9	%

Costs and Expenses
Lease operating	41,022		38,327		2,695		7.0	%

Income Before Income Taxes		$82,226		$82,226		$—	—	%



	Nine Months Ended September 30, 2018
	Under ASC 606		Under ASC 605		Increase		% Increase
	(In thousands)
Revenues
Crude oil		$679,242		$678,834		$408	0.1	%
Natural gas liquids	71,969		68,253		3,716		5.4	%
Natural gas	41,417		39,439		1,978		5.0	%
Total revenues	792,628		786,526		6,102		0.8	%

Costs and Expenses
Lease operating	115,446		109,344		6,102		5.6	%

Income Before Income Taxes		$145,829		$145,829		$—	—	%

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.

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 acquisitions 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 (“ROU”) 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.

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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 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.

Revenue Recognition

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 its 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 September 30, 2018 and December 31, 2017, receivables from contracts with customers were $100.2 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 purchasers of the NGLs and residue gas are the customers. Revenue is recognized on a gross basis, with gathering, processing and transportation fees recognized as lease operating expense in the consolidated statements of income as the Company maintains control throughout processing.

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.

-8-

Net Income Attributable to Common Shareholders Per Common Share

The following table summarizes the calculation of net income attributable to common shareholders per common share:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(In thousands, except per share amounts)
Net Income		$81,346			$7,823			$144,147			$104,150
Dividends on preferred stock	(4,457		)	(2,249		)	(13,794		)	(2,249		)
Accretion on preferred stock	(771		)	—			(2,264		)	—
Loss on redemption of preferred stock	—			—			(7,133		)	—
Net Income Attributable to Common Shareholders		$76,118			$5,574			$120,956			$101,901

Basic weighted average common shares outstanding	86,727			81,053			83,461			70,728
Dilutive effect of restricted stock and performance shares	1,272			85			967			253
Dilutive effect of common stock warrants	1,040			—			793			166
Diluted weighted average common shares outstanding	89,039			81,138			85,221			71,147

Net Income Attributable to Common Shareholders Per Common Share
Basic		$0.88			$0.07			$1.45			$1.44
Diluted		$0.85			$0.07			$1.42			$1.43

The computation of diluted net income attributable to common shareholders per common share excluded restricted stock, performance shares and common stock warrants that were anti-dilutive. The following table presents the weighted average anti-dilutive securities for the periods presented:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017
	(In thousands)
Anti-dilutive restricted stock and performance shares	—	730	5	120
Anti-dilutive common stock warrants	—	152	—	—
Total weighted average anti-dilutive securities	—	882	5	120

3. Acquisitions and Divestitures of Oil and Gas Properties

2018 Acquisitions and Divestitures

Devon Acquisition. On August 13, 2018, the Company entered into a purchase and sale agreement with Devon Energy Production Company, L.P. (“Devon”), a subsidiary of Devon Energy Corporation, to acquire oil and gas properties in the Delaware Basin in Reeves and Ward counties, Texas (the “Devon Properties”) for an agreed upon price of $215.0 million, with an effective date of April 1, 2018, subject to customary purchase price adjustments (the “Devon Acquisition”). The Company paid $21.5 million as a deposit on August 13, 2018 and $183.4 million upon initial closing on October 17, 2018, which included purchase price adjustments primarily related to the net cash flows from the effective date to the closing date, for an estimated aggregate purchase price of $204.9 million. The final purchase price remains subject to post-closing adjustments.

Under one of the Company’s existing joint operating agreements covering acreage in the vicinity of the Devon Properties, the other party to the joint operating agreement has a right to purchase a 20% interest in certain of the acres within the Devon Properties acquired by the Company at a price based on the Company’s cost to acquire the Devon Properties. This right is exercisable for a 30-day period after the Company delivers a specified notice following the closing of the Devon Acquisition and, if not exercised, will expire in the fourth quarter of 2018. To the extent that the other party exercises its right to make such purchase, the Company’s interests in the Devon Properties will be reduced and the proceeds received will be recognized as a reduction of proved oil and gas properties.

The Company funded the Devon Acquisition with net proceeds from the common stock offering completed on August 17, 2018, which, pending the closing of the Devon Acquisition, were used to temporarily repay a portion of the borrowings outstanding under the revolving credit facility. See “Note 9. Shareholders’ Equity and Stock-Based Compensation” for details regarding the common stock offering.

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The Devon Acquisition will be accounted for as a business combination. The Company has not completed its initial allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated acquisition date fair values. The Company will disclose the allocation of the purchase price as well as other related disclosures in its Annual Report on Form 10-K for the year ended December 31, 2018.

Delaware Basin Divestiture. On July 11, 2018, the Company closed on the divestiture of certain non-operated assets in the Delaware Basin for an agreed upon price of $30.0 million, with an effective date of May 1, 2018, subject to customary purchase price adjustments. The Company received $31.4 million upon closing on July 11, 2018 and paid $0.5 million upon post-closing on October 22, 2018, for aggregate net proceeds of $30.9 million.

Eagle Ford Divestiture. On December 11, 2017, the Company entered into a purchase and sale agreement with EP Energy E&P Company, L.P. to sell a portion of its assets in the Eagle Ford Shale for an agreed upon price of $245.0 million, with an effective date of October 1, 2017, subject to adjustment and customary terms and conditions. The Company received $24.5 million as a deposit on December 11, 2017, $211.7 million upon closing on January 31, 2018, $10.0 million for leases that were not conveyed at closing on February 16, 2018, and paid $0.5 million upon post-closing on July 19, 2018, for aggregate net proceeds of $245.7 million.

Niobrara Divestiture. On November 20, 2017, the Company entered into a purchase and sale agreement to sell substantially all of its assets in the Niobrara Formation for an agreed upon price of $140.0 million, with an effective date of October 1, 2017, subject to customary purchase price adjustments. The Company received $14.0 million as a deposit on November 20, 2017, $122.6 million upon closing on January 19, 2018, and paid $1.0 million upon post-closing on August 14, 2018, for aggregate net proceeds of $135.6 million. As part of this divestiture, the Company agreed to a contingent consideration arrangement (the “Contingent Niobrara Consideration”), which was determined to be an embedded derivative. As a result, the asset is recorded at fair value in the consolidated balance sheets with all gains and losses as a result of changes in the fair value between periods recognized in the consolidated statements of income in the period in which the changes occur. See “Note 10. Derivative Instruments” and “Note 11. Fair Value Measurements” for further details.

The aggregate net proceeds for each of the 2018 divestitures discussed above were recognized as a reduction of proved oil and gas properties with no gain or loss recognized.

2017 Acquisitions and Divestitures

ExL Acquisition. On June 28, 2017, the Company entered into a purchase and sale agreement with ExL Petroleum Management, LLC and ExL Petroleum Operating Inc. to acquire oil and gas properties located in the Delaware Basin in Reeves and Ward counties, Texas for an agreed upon price of $648.0 million, with an effective date of May 1, 2017, subject to customary purchase price adjustments (the “ExL Acquisition”). The Company paid $75.0 million as a deposit on June 28, 2017, $601.0 million upon closing on August 10, 2017, and $3.8 million upon post-closing on December 8, 2017 for aggregate cash consideration of $679.8 million, which included purchase price adjustments primarily related to the net cash flows from the effective date to the closing date. As part of the ExL Acquisition, the Company agreed to a contingent consideration arrangement (the “Contingent ExL Consideration”), which was determined to be an embedded derivative. As a result, the liability is recorded at fair value in the consolidated balance sheets with all gains and losses as a result of changes in the fair value between periods recognized in the consolidated statements of income in the period in which the changes occur. See “Note 10. Derivative Instruments” and “Note 11. Fair Value Measurements” for further details.

The ExL Acquisition was accounted for as a business combination, therefore, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated acquisition date fair values based on then currently available information. A combination of a discounted cash flow model and market data was used by a third-party valuation specialist in determining the fair value of the oil and gas properties. Significant inputs into the calculation included forward oil and gas price curves, estimated volumes of oil and gas reserves, expectations for timing and amount of future development and operating costs, future plugging and abandonment costs and a risk adjusted discount rate. The fair value of the Contingent ExL Consideration was determined by a third-party valuation specialist using a Monte Carlo simulation. Significant inputs into the calculation included forward oil and gas price curves, volatility factors, and a risk adjusted discount rate. See “Note 11. Fair Value Measurements” for further details.

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The following table presents the final allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date.



	Purchase Price Allocation
	(In thousands)
Assets
Other current assets		$106
Oil and gas properties
Proved properties	294,754
Unproved properties	443,194
Total oil and gas properties		$737,948
Total assets acquired		$738,054

Liabilities
Revenues and royalties payable		$5,785
Asset retirement obligations	153
Contingent ExL Consideration	52,300
Total liabilities assumed		$58,238
Net Assets Acquired		$679,816

The results of operations for the ExL Acquisition have been included in the Company’s consolidated statements of income since the August 10, 2017 closing date, including total revenues and net income attributable to common shareholders for the three and nine months ended September 30, 2018 and 2017 as shown in the table below:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(In thousands)
Total revenues		$71,525		$14,016		$167,764		$14,016

Net Income Attributable to Common Shareholders		$57,466		$11,393		$134,317		$11,393

Pro Forma Operating Results (Unaudited). The following unaudited pro forma financial information presents a summary of the Company’s consolidated results of operations for the three and nine months ended September 30, 2017, assuming the ExL Acquisition had been completed as of January 1, 2016, including adjustments to reflect the fair values assigned to the assets acquired and liabilities assumed. The pro forma financial information does not purport to represent what the actual results of operations would have been had the transactions been completed as of the date assumed, nor is this information necessarily indicative of future consolidated results of operations. The Company believes the assumptions used provide a reasonable basis for reflecting the significant pro forma effects directly attributable to the ExL Acquisition.



	Three Months Ended September 30, 2017		Nine Months Ended September 30, 2017
	(In thousands, except per share amounts)
Total revenues		$189,499		$534,607
Net Income Attributable to Common Shareholders		$14,654		$115,053

Net Income Attributable to Common Shareholders Per Common Share
Basic		$0.18		$1.63
Diluted		$0.18		$1.62

Marcellus Divestiture. On October 5, 2017, the Company entered into a purchase and sale agreement with BKV Chelsea, LLC, a subsidiary of Kalnin Ventures LLC, to sell substantially all of its assets in the Marcellus Shale for an agreed upon price of $84.0 million. The Company received $6.3 million into escrow as a deposit on October 5, 2017 and $67.6 million upon closing on November 21, 2017, for aggregate net proceeds of $73.9 million. As part of this divestiture, the Company agreed to a contingent consideration arrangement (the “Contingent Marcellus Consideration”), which was determined to be an embedded derivative. As a result, the asset is recorded at fair value in the consolidated balance sheets with all gains and losses as a result of changes in the

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fair value between periods recognized in the consolidated statements of income in the period in which the changes occur. See “Note 10. Derivative Instruments” and “Note 11. Fair Value Measurements” for further details.

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”). 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 nine months ended September 30, 2018. The Avista Marcellus joint venture agreements terminated during the third quarter of 2018 in connection with the sale of the remaining immaterial assets.

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.

Utica Divestiture. On August 31, 2017, the Company entered into a purchase and sale agreement to sell substantially all of its assets in the Utica Shale for an agreed upon price of $62.0 million. The Company received $6.2 million as a deposit on August 31, 2017, $54.4 million upon closing on November 15, 2017, and $2.5 million upon post-closing on December 28, 2017, for aggregate net proceeds of $63.1 million. As part of this divestiture, the Company agreed to a contingent consideration arrangement (the “Contingent Utica Consideration”), which was determined to be an embedded derivative. As a result, the asset is recorded at fair value in the consolidated balance sheets with all gains and losses as a result of changes in the fair value between periods recognized in the consolidated statements of income in the period in which the changes occur. See “Note 10. Derivative Instruments” and “Note 11. Fair Value Measurements” for further details.

Delaware Basin Divestiture. During the first quarter of 2017, the Company sold a small undeveloped acreage position in the Delaware Basin for aggregate net proceeds of $15.3 million.

The aggregate net proceeds for each of the 2017 divestitures discussed above were recognized as a reduction of proved oil and gas properties with no gain or loss recognized.

2016 Acquisitions and Divestitures

Sanchez Acquisition. On October 24, 2016, the Company entered into a purchase and sale agreement with Sanchez Energy Corporation and SN Cotulla Assets, LLC, a subsidiary of Sanchez Energy Corporation to acquire oil and gas properties located in the Eagle Ford Shale for an agreed upon price of $181.0 million, with an effective date of June 1, 2016, subject to customary purchase price adjustments. The Company paid $10.0 million as a deposit on October 24, 2016, $143.5 million upon initial closing on December 14, 2016, and $7.0 million and $9.8 million on January 9, 2017 and April 13, 2017, respectively, for leases that were not conveyed to the Company at the time of initial closing, for aggregate cash consideration of $170.3 million, which included purchase price adjustments primarily related to the net cash flows from the effect date to the closing date.

The Company did not have any material divestitures in 2016.

4. Property and Equipment, Net

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



	September 30, 2018			December 31, 2017
	(In thousands)
Oil and gas properties, full cost method
Proved properties		$5,988,301			$5,615,153
Accumulated depreciation, depletion and amortization and impairments	(3,863,534		)	(3,649,806		)
Proved properties, net	2,124,767			1,965,347
Unproved properties, not being amortized
Unevaluated leasehold and seismic costs	516,537			612,589
Capitalized interest	62,738			47,698
Total unproved properties, not being amortized	579,275			660,287
Other property and equipment	28,134			25,625
Accumulated depreciation	(17,249		)	(15,449		)
Other property and equipment, net	10,885			10,176
Total property and equipment, net		$2,714,927			$2,635,810

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Average depreciation, depletion and amortization (“DD&A”) per Boe of proved properties was $13.29 and $13.04 for the three months ended September 30, 2018 and 2017, respectively, and $13.57 and $12.73 for the nine months ended September 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 $2.9 million and $3.3 million for the three months ended September 30, 2018 and 2017, respectively, and $15.6 million and $10.6 million for the nine months ended September 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 $8.5 million for the three months ended September 30, 2018 and 2017 and $27.6 million and $16.2 million for the nine months ended September 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, excluding significant unusual or infrequent items, the tax effects of statutory rate changes, certain changes in the assessment of the realizability of deferred tax assets, and excess tax benefits or deficiencies related to the vesting of stock-based compensation awards, which are recognized as discrete items in the interim period in which they occur.

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 nine months ended September 30, 2018 and 35% for the three and nine months ended September 30, 2017, to income before income taxes as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(In thousands)
Income before income taxes		$82,226			$7,823			$145,829			$104,150
Income tax expense at the U.S. federal statutory rate	(17,267		)	(2,738		)	(30,624		)	(36,452		)
State income tax expense, net of U.S. federal income tax benefit	(881		)	(247		)	(1,687		)	(1,974		)
Tax deficiencies related to stock-based compensation	(10		)	(273		)	(2,552		)	(3,029		)
Decrease in valuation allowance due to current period activity	17,400			3,253			33,849			41,570
Other	(122		)	5			(668		)	(115		)
Income tax expense		($880	)		$—			($1,682	)		$—

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. In August 2018, the Internal Revenue Service issued Notice 2018-68, Guidance on the Application of Section 162(m) (“Notice 2018-68”), which provides initial guidance on the application of Section 162(m), as amended. Notice 2018-68 provided guidance regarding the group of covered employees subject to Section 162(m)’s deduction limit under the Act and the scope of transition relief available under the Act. The Company is currently evaluating the impact of Notice 2018-68, but as of September 30, 2018, 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 and additional guidance provided within the one year measurement period.

Deferred Tax Asset Valuation Allowance

The deferred tax asset valuation allowance was $299.1 million and $333.0 million as of September 30, 2018 and December 31, 2017, respectively. Decreases in the valuation allowance for the three months and nine months ended September 30, 2018 and 2017 were based primarily on the pre-tax income recorded during those periods.

Throughout 2017 and the first nine months of 2018, the Company maintained a full valuation allowance against its deferred tax assets based on its conclusion, considering all available evidence (both positive and negative), that it was more likely than not that

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the deferred tax assets would not be realized. The Company intends to maintain a full valuation allowance against its deferred tax assets until there is sufficient evidence to support the reversal of such valuation allowance.

6. Long-Term Debt

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



	September 30, 2018			December 31, 2017
	(In thousands)
Senior Secured Revolving Credit Facility due 2022		$309,837			$291,300
7.50% Senior Notes due 2020	130,000			450,000
Unamortized premium for 7.50% Senior Notes	124			579
Unamortized debt issuance costs for 7.50% Senior Notes	(980		)	(4,492		)
6.25% Senior Notes due 2023	650,000			650,000
Unamortized debt issuance costs for 6.25% Senior Notes	(7,219		)	(8,208		)
8.25% Senior Notes due 2025	250,000			250,000
Unamortized debt issuance costs for 8.25% Senior Notes	(4,073		)	(4,395		)
Other long-term debt due 2028	—			4,425
Long-term debt		$1,327,689			$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 September 30, 2018, had a borrowing base of $1.0 billion, with an elected commitment amount of $900.0 million, and borrowings outstanding of $309.8 million at a weighted average interest rate of 3.87%. 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. See “Note 14. Subsequent Events” for details regarding the maturity date of the credit agreement upon redemption of the remaining $130.0 million outstanding aggregate principal amount of its 7.50% Senior Notes. 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 Eagle Ford divestiture, 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. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” for details of the Eagle Ford divestiture.

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 margins for Eurodollar loans from 2.00%-3.00% to 1.50%-2.50% and base rate loans from 1.00%-2.00% to 0.50%-1.50%, each 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.

On October 29, 2018, the Company entered into the thirteenth amendment to its credit agreement governing the revolving credit facility. See “Note 14. Subsequent Events” for further details of the thirteenth amendment.

The obligations of the Company under the credit agreement are guaranteed by the Company’s material 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 September 30, 2018, the ratio of Total Debt to EBITDA was 1.95 to 1.00 and the Current Ratio was 1.84 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 and accrued and unpaid interest of $10.9 million. The redemptions were funded primarily from the net proceeds received from the divestitures in Eagle Ford and Niobrara in the first quarter of 2018. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” for further details of these divestitures. 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 and the write-off of associated unamortized premiums and debt issuance costs of $2.7 million.

See “Note 14. Subsequent Events” for details of the notice of conditional redemption for the remaining $130.0 million outstanding aggregate principal amount of its 7.50% Senior Notes.

Redemption of Other Long-Term Debt

On May 3, 2018, the Company redeemed the remaining $4.4 million outstanding aggregate principal amount of its 4.375% Convertible Senior Notes due 2028 at a price equal to 100% of par. Upon the redemption, the Company paid $4.5 million, which included accrued and unpaid interest of $0.1 million.

Issuance of 8.25% Senior Notes

On July 14, 2017, the Company closed a public offering of $250.0 million aggregate principal amount of 8.25% Senior Notes due 2025 (the “8.25% Senior Notes”). The Company used the proceeds of $245.4 million, net of underwriting discounts and commissions and offering costs, to fund a portion of the ExL Acquisition and for general corporate purposes. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” for further details of the ExL Acquisition.

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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, tax changes, 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. Preferred Stock and Common Stock 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 closing of the private placement occurred on August 10, 2017, contemporaneously with the closing of the ExL Acquisition. The Company used the proceeds of approximately $236.4 million, net of issuance costs, to fund a portion of the ExL Acquisition and for general corporate purposes.

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
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 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 initial liquidation preference using the effective interest method.

The table below presents the reconciliation of changes in the carrying amount of Preferred Stock for the nine months ended September 30, 2018:



	Carrying Amount of Preferred Stock
	(In thousands)
December 31, 2017		$214,262
Redemption of Preferred Stock	(42,897		)
Accretion on Preferred Stock	2,264
September 30, 2018		$173,629

Loss on Redemption of Preferred Stock

During the first quarter of 2018, the Company redeemed 50,000 shares of Preferred Stock, representing 20% of the issued and outstanding Preferred Stock, for $50.5 million, consisting of the $50.0 million redemption price and $0.5 million accrued and unpaid dividends. The Company recognized a $7.1 million loss on the redemption due to the excess of the $50.0 million redemption price over the $42.9 million redemption date carrying value of the Preferred Stock.

9. Shareholders’ Equity and Stock-Based Compensation

Sales of Common Stock

On August 17, 2018, the Company completed a public offering of 9.5 million shares of its common stock at a price per share of $22.55. The Company used the proceeds of $213.9 million, net of offering costs, to fund the Devon Acquisition and for general corporate purposes. Pending the closing of the Devon Acquisition, the Company used the net proceeds to temporarily repay a portion of the borrowings outstanding under the revolving credit facility. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” for further details of the Devon Acquisition.

On July 3, 2017, the Company completed a public offering of 15.6 million shares of its common stock at a price per share of $14.28. The Company used the proceeds of $222.4 million, net of offering costs, to fund a portion of the ExL Acquisition and for general corporate purposes. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” for further details of the ExL Acquisition.

Stock-Based Compensation

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 may grant restricted stock awards and units, stock appreciation rights that can be settled in cash or shares of common stock, performance shares, and stock options to employees, independent contractors, and non-employee directors. Under the Cash SAR Plan, the Company may grant stock appreciation rights that may only be settled in cash to employees and independent contractors.

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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 granted (the “Maximum Share Limit”). Each restricted stock award and unit and performance share granted under the 2017 Incentive Plan counts as 1.35 shares against the Maximum Share Limit. Each stock option and stock appreciation right to be settled in shares of common stock granted under the 2017 Incentive Plan counts as 1.00 share against the Maximum Share Limit. Stock appreciation rights to be settled in cash granted under the 2017 Incentive Plan and stock appreciation rights granted under the Cash SAR Plan (collectively, “Cash SARs”) do not count against the Maximum Share Limit. Restricted stock awards and units, performance shares, and Cash SARs activity during the nine months ended September 30, 2018 is presented below. The Company has not granted stock appreciation rights to be settled in shares of common stock and has no outstanding stock options. As of September 30, 2018, there were 296,654 shares of common stock available for grant under the 2017 Incentive Plan.

Restricted Stock Awards and Units

The table below summarizes restricted stock award and unit activity for the nine months ended September 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	1,391,422			$15.07
Vested	(615,762	)		$31.44
Forfeited	(23,880	)		$18.51
Unvested restricted stock awards and units, end of period	2,234,435			$19.14

During the nine months ended September 30, 2018, the Company granted 1,391,422 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 vest ratably over an approximate three-year period. During the third quarter of 2018, the Company granted 33,536 restricted stock units to its non-employee directors, which had a grant date fair value of $0.9 million and will vest on the earlier of the date of the 2019 Annual Meeting of Shareholders and June 30, 2019.

As of September 30, 2018, unrecognized compensation costs related to unvested restricted stock awards and units were $26.8 million and will be recognized over a weighted average period of 2.0 years.

Cash SARs

The table below summarizes the Cash SAR activity for the nine months ended September 30, 2018:



	Cash 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	4.6		$6.5
Vested, end of period	543,018		$27.18
Vested and exercisable, end of period	—		$27.18	2.8		$—

During the nine months ended September 30, 2018, the Company granted 616,686 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 Cash SARs vest ratably over an approximate three-year period and expire approximately seven years from the grant date.

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The grant date fair value of the 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 Cash SARs granted during the nine months ended September 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	—	%

The liability for Cash SARs as of September 30, 2018 was $7.9 million, all of which was classified as “Other current liabilities,” in the consolidated balance sheets. As of December 31, 2017, the liability for Cash SARs was $4.4 million, all of which was classified as “Other liabilities” in the consolidated balance sheets. Unrecognized compensation costs related to unvested Cash SARs were $8.7 million as of September 30, 2018, and will be recognized over a weighted average period of 2.4 years.

Performance Shares

The table below summarizes performance share activity for the nine months ended September 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 nine months ended September 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 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.

During the first quarter of 2018, 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 the vesting of 49,458 shares and 7,059 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 nine months ended September 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	—	%

As of September 30, 2018, unrecognized compensation costs related to unvested performance shares were $2.5 million and will be recognized over a weighted average period of 2.0 years.

Stock-Based Compensation Expense, Net

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

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(In thousands)
Restricted stock awards and units		$4,487			$5,311			$14,291			$16,184
Cash SARs	(868		)	429			3,505			(7,040		)
Performance shares	411			581			1,374			1,861
	4,030			6,321			19,170			11,005
Less: amounts capitalized to oil and gas properties	(968		)	(1,455		)	(5,384		)	(2,543		)
Total stock-based compensation expense, net		$3,062			$4,866			$13,786			$8,462

10. Derivative Instruments

Commodity Derivative Instruments

The Company uses commodity derivative instruments to mitigate the effects of commodity price volatility for a portion of its forecasted sales of production and achieve a more predictable level of cash flow. Since the Company derives a significant portion of its revenues from sales of crude oil, crude oil price volatility represents the Company’s most significant commodity price risk. While the use of commodity derivative instruments limits or partially reduces the downside risk of adverse commodity price movements, such use also limits the upside from favorable commodity price movements. The Company does not enter into commodity derivative instruments for speculative purposes.

The Company’s commodity derivative instruments, which settle on a monthly basis over the term of the contract for contracted volumes, consist of over-the-counter price swaps, three-way collars, sold call options and basis swaps, each of which is described below.

Price swaps are settled based on differences between a fixed price and the settlement price of a referenced index. If the settlement price of the referenced index is below the fixed price, the Company receives the difference from the counterparty. If the referenced settlement price is above the fixed price, the Company pays the difference to the counterparty.

Three-way collars consist of a purchased put option (floor price), a sold call option (ceiling price) and a sold put option (sub-floor price) and are settled based on differences between the floor or ceiling prices and the settlement price of a referenced index or the difference between the floor price and sub-floor price. If the settlement price of the referenced index is below the sub-floor price, the Company receives the difference between the floor price and sub-floor price from the counterparty. If the settlement price of the referenced index is between the floor price and sub-floor price, the Company receives the difference between the floor price and the settlement price of the referenced index from the counterparty. If the settlement price of the referenced index is between the floor price and ceiling price, no payments are due to or from either party. If the settlement price of the referenced index is above the ceiling price, the Company pays the difference to the counterparty.

Sold call options are settled based on differences between the ceiling price and the settlement price of a referenced index. If the settlement price of the referenced index is above the ceiling price, the Company pays the difference to the counterparty. If the settlement price of the referenced index is below the ceiling price, no payments are due to or from either party. Premiums from the sale of call options have been used to enhance the fixed price of certain contemporaneously executed price swaps. Purchased call options executed contemporaneously with sold call options in order to increase the ceiling price of existing sold call options have been presented on a net basis in the table below.

Basis swaps are settled based on differences between a fixed price differential and the differential between the settlement prices of two referenced indexes. If the differential between the settlement prices of the two referenced indexes is greater than the fixed price differential, the Company receives the difference from the counterparty. If the differential between the settlement prices of the two referenced indexes is less than the fixed price differential, the Company pays the difference to the counterparty.

The referenced index of the Company’s price swaps, three-way collars and sold call options is U.S. New York Mercantile Exchange (“NYMEX”) West Texas Intermediate (“WTI”) for crude oil, NYMEX Henry Hub for natural gas and OPIS Mont Belvieu Non-TET (“OPIS”) for NGL products, as applicable. The prices received by the Company for the sale of its production generally vary from these referenced index prices due to adjustments for delivery location (basis) and other factors. The referenced indexes of the Company’s basis swaps, which are used to mitigate location price risk for a portion of its production, are Argus WTI Cushing (“WTI Cushing”) and the applicable index price of the Company’s crude oil sales contracts is Argus WTI Midland (“WTI Midland”) for its Delaware Basin crude oil production and Argus Light Louisiana Sweet (“LLS”) for its Eagle Ford crude oil production.

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The Company has incurred premiums on certain of its commodity derivative instruments in order to obtain a higher fixed price, higher floor price and/or higher ceiling price. Payment of these premiums are deferred until the applicable contracts settle on a monthly basis over 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.

As of September 30, 2018, the Company had the following outstanding commodity derivative instruments at weighted average contract volumes and prices:



Commodity	Period	Type of Contract	Index	Volumes (Bbls per day)	Fixed Price ($ per Bbl)		Sub-Floor Price ($ per Bbl)		Floor Price ($ per Bbl)		Ceiling Price ($ per Bbl)		Fixed Price Differential ($ per Bbl)
Crude oil	4Q18	Price Swaps	NYMEX WTI	6,000		$49.55	—		—		—		—
Crude oil	4Q18	Three-Way Collars	NYMEX WTI	24,000	—			$39.38		$49.06		$60.14	—
Crude oil	4Q18	Basis Swaps	LLS-WTI Cushing	18,000	—		—		—		—			$5.11
Crude oil	4Q18	Basis Swaps	WTI Midland-WTI Cushing	6,000	—		—		—		—			($0.10	)
Crude oil	4Q18	Sold Call Options	NYMEX WTI	3,388	—		—		—			$71.33	—

Crude oil	2019	Three-Way Collars	NYMEX WTI	21,000	—			$40.71		$49.80		$67.80	—
Crude oil	2019	Basis Swaps	LLS-WTI Cushing	3,000	—		—		—		—			$4.57
Crude oil	2019	Basis Swaps	WTI Midland-WTI Cushing	7,389	—		—		—		—			($4.82	)
Crude oil	2019	Sold Call Options	NYMEX WTI	3,875	—		—		—			$73.66	—

Crude oil	2020	Basis Swaps	WTI Midland-WTI Cushing	13,000	—		—		—		—			($1.27	)
Crude oil	2020	Sold Call Options	NYMEX WTI	4,575	—		—		—			$75.98	—

Crude oil	2021	Basis Swaps	WTI Midland-WTI Cushing	6,000	—		—		—		—			$0.03



Commodity	Period	Type of Contract	Index	Volumes (Bbls per day)	Fixed Price ($ per Bbl)		Sub-Floor Price ($ per Bbl)	Floor Price ($ per Bbl)	Ceiling Price ($ per Bbl)	Fixed Price Differential ($ per Bbl)
NGLs	4Q18	Price Swaps	OPIS-Ethane	2,200		$12.01	—	—	—	—
NGLs	4Q18	Price Swaps	OPIS-Propane	1,500		$34.23	—	—	—	—
NGLs	4Q18	Price Swaps	OPIS-Butane	200		$38.85	—	—	—	—
NGLs	4Q18	Price Swaps	OPIS-Isobutane	600		$38.98	—	—	—	—
NGLs	4Q18	Price Swaps	OPIS-Natural Gasoline	600		$55.23	—	—	—	—



Commodity	Period	Type of Contract	Index	Volumes (MMBtu per day)	Fixed Price ($ per MMBtu)		Sub-Floor Price ($ per MMBtu)	Floor Price ($ per MMBtu)	Ceiling Price ($ per MMBtu)		Fixed Price Differential ($ per MMBtu)
Natural gas	4Q18	Price Swaps	NYMEX Henry Hub	25,000		$3.01	—	—	—		—
Natural gas	4Q18	Sold Call Options	NYMEX Henry Hub	33,000	—		—	—		$3.25	—

Natural gas	2019	Sold Call Options	NYMEX Henry Hub	33,000	—		—	—		$3.25	—

Natural gas	2020	Sold Call Options	NYMEX Henry Hub	33,000	—		—	—		$3.50	—

The Company typically has numerous commodity derivative instruments outstanding with a counterparty that were executed at various dates, for various contract types, commodities and time periods often resulting in both commodity derivative asset and liability positions with that counterparty. The Company nets its commodity derivative instrument fair values executed with the same counterparty, along with any deferred premium obligations, to a single asset or liability pursuant to International Swap Dealers Association Master Agreements (“ISDAs”), 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

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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 to be novated to a Lender Counterparty if the Company’s net liability position exceeds the Company’s unsecured credit limit with the Non-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. The Company executes its derivative instruments with seventeen counterparties to minimize its credit exposure to any individual counterparty.

Contingent Consideration Arrangements

The purchase and sale agreements of the ExL Acquisition and divestitures of the Company’s assets in the Niobrara, Marcellus and Utica, included contingent consideration arrangements that entitle the Company to receive or require the Company to pay specified amounts if commodity prices exceed specified thresholds, which are summarized in the table below. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” for details of these acquisitions and divestitures.



Contingent Consideration Arrangements	Years	Threshold ⁽¹⁾		Contingent Receipt (Payment) - Annual			Contingent Receipt (Payment) - Aggregate Limit
				(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 specified threshold for each year has been met for the Contingent ExL Consideration, Contingent Niobrara Consideration and Contingent Utica Consideration is the average daily closing spot price per barrel of WTI crude oil as measured by the U.S. Energy Information Administration. The price used to determine whether the specified threshold for each year has been met for the Marcellus Contingent Consideration is the average monthly settlement price per 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.

Derivative Assets and Liabilities

Commodity derivative instruments and contingent consideration arrangements are recorded in the consolidated balance sheets as either an asset or liability measured at fair value. As of September 30, 2018, the Company had $9.8 million classified as current derivative assets and $49.2 million classified as current derivative liabilities, representing the first cash receipts and payments, expected to occur in January 2019, from settlement of contingent consideration assets and liabilities. 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 asset or liability fair values pursuant to the netting provisions of the ISDAs described above.

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The derivative instrument asset and liability fair values recorded in the consolidated balance sheets as of September 30, 2018 and December 31, 2017 are summarized below:



	September 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		$19,408		($18,985	)		$423
Contingent Niobrara Consideration	4,920		—			4,920
Contingent Utica Consideration	4,915		—			4,915
Derivative assets		$29,243		($18,985	)

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

Attached files