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 along the onshore Gulf
Coast of Texas and Louisiana, primarily the Frio, Wilcox and Vicksburg
trends and in the Barnett Shale trend in North Texas. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statement are presented
in accordance with U.S. generally accepted accounting principles
. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All intercompany accounts
and transactions have been eliminated in consolidation.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
The Company's investment in Pinnacle
Gas Resources, Inc. ("Pinnacle") is recorded using the equity method
of accounting. Under this method, the investment is recorded at
cost initially, and the investment is adjusted for the Company's
equity in the subsidiary's profit or loss. The investment is further
adjusted for additional contributions to and distributions from
the subsidiary.
The Company would also record any loss in fair
value of the investment other than a temporary decline.
RECLASSIFICATIONS
Certain reclassifications have been made to
prior periods' financial statements to conform to the current presentation.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of financial statements in
conformity with U. S. 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.
SIGNIFICANT ESTIMATES
Significant estimates include volumes of oil
and natural gas reserves used in calculating depletion of proved
oil and natural gas properties, future net revenues and abandonment
obligations, impairment of undeveloped properties, future income
taxes and related assets/liabilities, bad debts, derivatives, contingencies
and litigation. Oil and natural gas reserve estimates, which are
the basis for unit-of-production depletion and the ceiling test,
have numerous inherent uncertainties. The accuracy of any reserve
estimate is a function of the quality of available data and of engineering
and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may
justify revision of such estimate. Accordingly, reserve estimates
are often different from the quantities of oil and natural gas that
are ultimately recovered. In addition, reserve estimates are vulnerable
to changes in wellhead prices of crude oil and natural gas. Such
prices have been volatile in the past and can be expected to be
volatile in the future.
The significant estimates are based on current
assumptions that may be materially effected by changes to future
economic conditions such as the market prices received for sales
of volumes of oil and natural gas, interest rates, the market value
of the Company's common stock and corresponding volatility and the
Company's ability to generate future taxable income. Future changes
to these assumptions may affect these significant estimates materially
in the near term.
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