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.
During 2005 the Company acquired acreage in shale plays in West Texas/New Mexico,
Mississippi/Alabama, Kentucky and Arkansas. 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. 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 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. The Company believes the following
critical accounting policies affect its more significant judgments and estimates
used in the preparation of its consolidated financial statements: | 
