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PART I
ITEM 1. AND ITEM 2. BUSINESS AND PROPERTIES
GENERAL
Carrizo Oil & Gas, Inc. ("Carrizo," the
"Company" or "We") is an independent energy company engaged in the
exploration, development and production of natural gas and oil.
Our current operations are focused in proven, producing natural
gas and oil geologic trends along the onshore Gulf Coast in Texas
and Louisiana, primarily in the Miocene, Wilcox, Frio and Vicksburg
trends. Our other interests include properties in East Texas, a
coalbed methane investment in the Rocky Mountains and, recently,
the Barnett Shale trend in North Texas. Additionally, in 2003 we
obtained licenses to explore in the U.K. North Sea.
We have traditionally grown our production
through our 3-D seismic-driven exploratory drilling program. Our
compound production growth rate for the period December 31, 1999
through December 31, 2003 on an annualized basis was 15%. From our
inception through December 31, 2003, we participated in the drilling
of 295 wells (89.9 net) with a success rate of approximately 68%
in our onshore Gulf Coast core area. Exploratory wells accounted
for 97% of the total wells we drilled. Our total proved reserves
as of December 31, 2003 were an estimated 70.4 Bcfe with a PV-10
Value of $116.0 million. During 2003, we added 15.1 Bcfe to proved
reserves and produced a record 7.5 Bcfe. We have historically financed
the majority of our drilling activity through internal cash flow
generated primarily from oil and natural gas production sales revenue.
As a main component of our business strategy,
we have acquired licenses for over 8,700 square miles of 3-D seismic
data for processing and evaluation. Historically, we either (1)
sought to acquire seismic permits from landowners that included
options to lease the acreage prior to conducting proprietary surveys
or (2) participated in 3-D group shoots in which we typically sought
to obtain leases or farm-ins rather than lease options. Since 2001,
we have been able to increase the size of our 3-D seismic holdings
in our onshore Gulf Coast core area by approximately 75% to over
6,650 square miles, in large part by taking advantage of very favorable
pricing available for nonproprietary data from libraries of seismic
companies.
One of our primary strengths is the experience
of our management and technical staff in the development, processing
and analysis of this 3-D seismic data to generate and drill natural
gas and oil prospects. Our technical and operating employees have
an average of over 20 years of industry experience, in many cases
with major and large independent oil and gas companies, including
Shell Oil, ARCO, Conoco, Vastar Resources, Pennzoil and Tenneco.
Analyzing and reprocessing our 3-D seismic database, our highly
qualified technical staff is continually adding to and refining
our substantial inventory of drilling locations.
We believe that our utilization of large-scale
3-D seismic surveys and related technology allows us to create and
maintain a multiyear inventory of high-quality exploration prospects.
As of December 31, 2003, we had 98,557 gross acres in Texas and
Louisiana under lease or lease option, almost all of which is covered
by 3-D seismic data. On this leased acreage, we have identified
over 120 potential exploratory drilling locations, including over
45 additional extension opportunities, depending on the success
of our initial drilling activities on those locations. The vast
majority of our 3-D seismic data covers productive geological trends
in our onshore Gulf Coast core area, where we have made 192 completions
as a result of our utilization and evaluation of this data.
Most of our drilling targets prior to
2000 were shallow (from 4,000 to 7,000 feet), normally pressured
reservoirs that generally involved moderate cost (typically $0.3
million to $0.4 million per completed well) and risk. Since then,
the depth of many of the wells that we have drilled, as well as
our current drilling prospects, are deeper, over-pressured targets
with greater economic potential but generally higher cost (typically
$1.0 million to $4.0 million per completed well) and risk. We seek
to sell a portion of these deeper prospects to reduce our exploration
risk and financial exposure while retaining significant upside potential.
More recently, we have begun to retain larger percentages of, and
increased our exposure to, higher cost, higher potential wells.
We expect to use a portion of the proceeds from our recently completed
offering to increase our percentage of and exposure to these wells.
We operate the majority of our projects
through the exploratory phase. As of December 31, 2003, we operated
94 producing oil and gas wells, which accounted for 55% of the onshore
Gulf Coast producing wells in which we had an interest.
During 2001, through our wholly-owned
subsidiary, CCBM, Inc. ("CCBM"), we acquired 50% of the working
interests held by Rocky Mountain Gas, Inc. ("RMG") in approximately
107,000 net mineral acres prospective for coalbed methane located
in the Powder River Basin in Wyoming and Montana. Subsequently,
we participated in the acquisition and/or drilling of 77 gross wells
(21 net) before jointly contributing with RMG a majority of our
coalbed methane property interests and operations into a newly,
formed company, Pinnacle Gas Resources, Inc. ("Pinnacle"). In exchange
for the assets contributed, CCBM and RMG each received a 37.5% common
stock ownership in Pinnacle and options to purchase additional common
stock, or on a fully diluted basis, CCBM and RMG
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