Carrizo Oil & Gas makes bolt-on Eagle Ford acquisition

Carrizo Oil & Gas Inc. (Nasdaq:CRZO) has agreed to acquire Eagle Ford Shale properties from an affiliate of Sanchez Energy Corp. for $181 million in cash, subject to customary closing adjustments.

The bolt-on acquisition adds approximately 15,000 net acres located primarily in the core volatile oil window of the Eagle Ford Shale in LaSalle, Frio, and McMullen counties, TX. Estimated net production from the assets during September was approximately 3,100 Boe/d (61% oil) from 112 gross (93 net) wells. Net proved reserves, based on Carrizo’s internal estimates, reached 14.5 MMBoe (71% oil, 56% developed). The acreage is 100% operated with no additional drilling requirements.

Following the closing of the transaction, Carrizo will hold over 100,000 net acres in the Eagle Ford Shale, concentrated in LaSalle, McMullen, and Atascosa counties. Based on the company's current development spacing assumptions, which include only a single layer within the Lower Eagle Ford Shale, the acquisition increases Carrizo's drilling inventory in the play to approximately 1,100 net locations.

The transaction has an effective date of June 1, 2016, and is currently expected to close by mid-December, 2016. Carrizo plans to fund the acquisition with approximately $225 million (before underwriters' discounts and commissions and estimated offering expenses) from a newly-announced equity offering of six million shares (not including an overallotment of 900,000 million shares).

The deal is positive, said Jefferies analysts in a note Tuesday.

Permian for Eagle Ford?
“Assuming $30k per flowing, CRZO paid $5.9k per acre of $1.1 MM per location. In our view the market is struggling to value Eagle Ford properties as many are in decline. However, CRZO has an opportunity as being one of the few companies willing to consolidate. We believe CRZO is open to acquiring more acreage in the Eagle Ford.”

Additionally, Jefferies noted, the transactions are accretive to metrics. “At strip pricing, we saw 2017 EV/EBITDA of 8.7x before today’s announcements. Assuming deal price of $37.50/share, we see CRZO trading at pro-forma 8.2x. Similarly, 2017 net-debt-to-EBITDA was also lowered to 2.7x from 3.2x (at Strip). We are maintaining our price target of $48.”

Stifel analysts see the bolt-on acquisition as in line with Carrizo’s strategy, echoing Jefferies’ view that additional Eagle Ford acquisitions are possible. Stifel says Carrizo’s Permian Delaware Basin acreage could provide the catalyst.

“Unable to build scale in the Delaware Basin at attractive prices, we believe CRZO's 22,000 net acre Reeves/Culberson acreage position is a divestiture candidate. Recent Delaware sales suggest CRZO could fetch $500 million, which is $310 million or $5/share above the value we are currently attributing in our risked NAV,” the analysts noted. Proceeds “could be used to accelerate its highly profitable Eagle Ford program and/or be used to fund future Eagle Ford bolt-on acquisitions.”

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