Jefferies: Carrizo Oil & Gas Niobrara JV in line with expectations, Gulf Coast deal ‘underwhelming’

Carrizo Oil & Gas Inc.(NYSE: CRZO) has entered into a Niobrara joint venture with two Delhi, India-based energy companies and has completed the sale of virtually all of its Gulf Coast assets.

The deal builds on the Houston-based company's previously announced plan to monetize certain dry gas assets in an effort to focus on its liquids-rich resources. In March, the company agreed to sell a portion of its Barnett Shale properties to an Atlas Resource Partners subsidiary for $190 million.

Niobrara JV
In the Niobrara, the Houston-based oil and gas exploration and production company has entered into a JV agreement with subsidiaries of OIL India Ltd. and Indian Oil Corp. Ltd.

OIL and Indian Oil Corp. have together acquired an undivided 30% non-operated interest in substantially all of Carrizo's assets and operations prospective for Niobrara Formation oil development located primarily in Weld and Adams Counties, Colorado for approximately $82.5 million. Included in the transaction is the sale of approximately 18,100 net mineral acres and approximately 555 boe/day (75% oil) of production from 24 gross currently producing Carrizo operated wells.

The $82.5 million sale price for 30% of Niobrara implies value of $275 million for gross value, in line with the $280 million estimated by Jefferies & Co. Inc. analysts last week. “Actual gross oil production of 1,400 bbls/d higher than our 1,200 bbls/d estimate. If we value oil production at $100k per flowing bbl, would imply a value of $135mm for the 61,500 gross acres, or $2,200/acre. As expected, proceeds were 50% cash / 50% carry,” said the analysts in a note to investors Thursday morning.

Carrizo is receiving $41.25 million in cash and an additional $41.25 million in the form of a drilling carry that will be applied to fund a portion of Carrizo's share of future Niobrara development costs—an appropriate use of capital as it will bridge the 2012 funding gap, while the carry will enable a second rig to be added to the Niobrara in 2013, noted Jefferies.

Carrizo's President and CEO, S.P. "Chip" Johnson, IV, commented, " We estimate that the acceleration in development activity net to Carrizo from the additional rig will offset our future lower working interest and will result in an increase in Niobrara oil production net to our shareholder's interests over the course of 2013 compared to our pre-JV internal estimates."

Gulf Coast sale
At the same time, the exploration and production company said that it has completed the divestiture of substantially all of its legacy producing properties along the onshore Gulf of Mexico located primarily in Texas and Louisiana for approximately $19.5 million cash consideration. Net production from the sold properties is approximately 120 bbls/day of oil/condensate and 5,000 mcf/day of high BTU gas.

Jefferies analysts see the deal value as low for legacy assets, but the cash will also help to “incrementally bridge 2012 funding gap.”

The Jefferies’ estimated valuation of $3,400 per flowing mcfe is “underwhelming,” and may be a reflection of the assets’ “gassy nature (87% gas), expected declines, and lack of upside” of the assets.

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