CARRIZO OIL & GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Carrizo Oil & Gas, Inc. (Carrizo, a Texas
corporation; together with its subsidiary, affiliates and predecessors,
the Company) is an independent energy company formed in 1993 and
is engaged in the exploration, development, exploitation and production
of oil and natural gas. Its operations are focused on Texas and
Louisiana Gulf Coast trends, primarily the Frio, Wilcox and Vicksburg
trends. The Company, through CCBM Inc. (a wholly-owned subsidiary)
("CCBM") acquired interests in certain oil and natural gas leases
in Wyoming and Montana in areas prospective for coalbed methane.
During 2003, the Company obtained offshore licensees to explore
in the U.K. North Sea and acquired interests in the Barnett Shale
trend located in Tarrant and Parker counties in North Texas.
The exploration for oil and natural gas
is a business with a significant amount of inherent risk requiring
large amounts of capital. The Company intends to finance its exploration
and development program through cash from operations, existing credit
facilities or arrangements with other industry participants. If
the sources of capital currently available to the Company not be
sufficient to explore and develop its prospects and meet current
and near-term obligations, the Company may be required to seek additional
sources of financing which may not be available on terms acceptable
to the Company. This lack of additional financing could force the
Company to defer its planned exploration and development drilling
program which could adversely affect the recoverability and ultimate
value of the Company's oil and natural gas properties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statement are
presented in accordance with generally accepted accounting principles
in the United States. The consolidated financial statements include
the accounts of the Company and its subsidiary. All intercompany
accounts and transactions have been eliminated in consolidation.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from these estimates.
The Company believes the following critical
accounting policies affect its more significant judgements and estimates
used in the preparation of its consolidated financial statements:
OIL AND NATURAL GAS PROPERTIES
Investments in oil and natural gas properties
are accounted for using the full-cost method of accounting. All
costs directly associated with the acquisition, exploration and
development of oil and natural gas properties are capitalized. Such
costs include lease acquisitions, seismic surveys, and drilling
and completion equipment. The Company proportionally consolidates
its interests in oil and natural gas properties. The Company capitalized
compensation costs for employees working directly on exploration
activities of $1.0 million, $1.0 million and $1.4 million in 2001,
2002 and 2003, respectively. Maintenance and repairs are expensed
as incurred.
Oil and natural gas properties are amortized
based on the unit-of-production method using estimates of proved
reserve quantities. Investments in unproved properties are not amortized
until proved reserves associated with the projects can be determined
or until they are impaired. Unevaluated properties are evaluated
periodically for impairment on a property-by-property basis. If
the results of an assessment indicate that the properties are impaired,
the amount of impairment is added to the proved oil and natural
gas property costs to be amortized. The amortizable base includes
estimated future development costs and, dismantlement, restoration
and abandonment costs, net of estimated salvage values. The depletion
rate per Mcfe for 2001, 2002 and 2003 was $1.15, $1.41 and $1.55,
respectively.
Dispositions of oil and natural gas properties
are accounted for as adjustments to capitalized costs with no gain
or loss recognized, unless such adjustments would significantly
alter the relationship between capitalized costs and proved reserves.
F-9
|