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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 area in Texas and Louisiana, primarily
in the Miocene, Wilcox, Frio and Vicksburg trends, and, since mid-2003,
in the Barnett Shale area in North Texas. Our other interests include
properties in East Texas, and a coalbed methane investment in the
Rocky Mountains. 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, 2004 on an annualized basis was 14%. From our
inception through December 31, 2004, we participated in the drilling
of 373 wells (119.7 net) with a success rate of approximately 70%
in our onshore Gulf Coast area and 100% in the Barnett Shale area
in North Texas. Exploratory wells accounted for 86% of the total
wells we drilled. Our total proved reserves as of December 31, 2004
were an estimated 109.3 Bcfe with a PV-10 Value of $208.6 million.
During 2004, we added a record 47.3 Bcfe to proved reserves and
produced a record 8.3 Bcfe. We have traditionally 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 9,200 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 area by approximately 84% to over 7,500
square miles, in large part by taking advantage of very favorable
pricing available for nonproprietary data from libraries of seismic
companies. Since 2003, we have also grown our 3-D seismic holdings
in the Barnett Shale area to over 123 square miles.
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, Ocean Energy, ARCO, Conoco, Burlington Resources, Vastar,
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
in the Gulf Coast area. As of December 31, 2004, we had 159,496
gross acres in Texas and Louisiana under lease or lease option (all
references to acres under lease in this Form 10-K also include lease
option acres unless otherwise indicated), including 109,129 net
acres in our onshore Gulf Coast area, predominantly all covered
by 3-D seismic data, and 44,835 gross acres in our Barnett Shale
area. On this leased acreage, we have identified: (1) over 155 potential
exploratory drilling locations in our onshore Gulf Coast area, including
over 78 additional extension opportunities, depending on the success
of our initial drilling activities on those locations and (2) over
200 potential exploratory and development horizontal drilling locations
in the Barnett Shale area. The vast majority of our 3-D seismic
data covers productive geological trends in our onshore Gulf Coast
area, where we have made 223 completions as a result of our utilization
and evaluation of this data.
In our onshore Gulf Coast area, 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 used a portion of the $23.3 million of
net proceeds from our February 2004 public offering to increase
our percentage of and exposure to these wells.
In mid-2003, we became active in the Barnett
Shale area in North Texas (primarily in the Tarrant, Parker, Denton,
Johnson, Hill and Erath counties). Improvements in fracture techniques
in recent years have dramatically changed the economics of producing
reserves in the Barnett Shale, which is now considered one of the
most active natural gas plays in North America. The reserve profile
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