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We are pleased to report that our company has continued
to make significant progress over the past year. During 2004, Carrizo
achieved record production, record EBITDA and record reserve additions.
In fact, Carrizo was able to increase its proved reserves by 55%
and replace production by 569% while achieving all-in finding and
development costs of $1.75 per mcfe. Certainly, favorable oil and
gas fundamentals have contributed to this success. However, Carrizo’s
long time strategy of creating value through the drillbit, our deep
inventory of exploration prospects and our aggressive move into
the Barnett Shale over the last several years have also proven to
be important factors.
Industry fundamentals remain attractive. Relatively
high oil and natural gas prices contribute to stronger cash flow
for the industry and attractive potential returns on exploration
and development drilling activity. We believe these positive fundamentals
will be sustained since higher oil and gas prices are being driven
by supply trends that we don’t believe are reversible at least in
the near term. At the same time, energy demand has continued to
increase despite higher prices. Especially in the U.S., we are facing
high production decline rates. It is estimated that annual natural
gas production decline rates in the U.S. are approximately 30%.
Canada is experiencing similar decline rates and Mexico remains
a net importer of natural gas. Despite an increased rig count in
the U.S., the industry is having a hard time increasing production
and we are running at or near the capacity of our drilling and service
businesses.
Within the context of these positive industry fundamentals,
we believe Carrizo is particularly well positioned.
Predictable growth is now easier to attain with
our strategy of balanced exploration and development activities
between the lower risk Barnett Shale drilling program and our higher
risk / higher upside onshore Gulf Coast drilling program. Management
continues to believe that significant shareholder value can be created
through its traditional exploration focus. Carrizo continues to
high grade its extensive 3-D seismic database over its original
exploration play in the onshore Gulf Coast market. The Company continues
to achieve high success rates with its drilling program which has
led to steady increases in production and reserves, as well as good
returns on capital employed. But more than this demonstrated steady
growth, Carrizo’s prospect inventory and exploration focus provide
its shareholders with significant option value and upside potential
through exposure to high potential reserve targets. Carrizo is now
positioned to drill several of these high potential impact prospects
every year.
As we have moved into an environment
of higher natural gas prices, in recent years, your management team
has also recognized the value in developing an unconventional gas
resource play. A “gas manufacturing play” would provide Carrizo
with more balance and the ability to mitigate the short reserve
life and volatility inherent in the Company’s Gulf Coast exploration
business. This recognition led to the dedication of a team focused
on the Barnett Shale natural gas play in the Ft. Worth Basin. As
Carrizo has been able to develop a strong knowledge base over the
last several years, it has been able to assemble a high quality
ground floor acreage position in high potential areas within the
Barnett play. We believe the size and quality of our acreage position
relative to the size of our Company offers our shareholders one
of the best pure plays in the Barnett.
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