Carrizo Oil & Gas – A Smart Small-Cap Energy Buy?

Carrizo Oil & Gas – A Smart Small-Cap Energy Buy?

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As oil hovers at high price levels, consumers and investors alike are looking for more domestic companies that can help the US relieve some of its dependency on foreign oil. Carrizo Oil & Gas (CRZO), a Houston-based energy company, has recently popped up once again on investors’ radars as a sensible investment in the small cap segment for its impressive recent performance.

Oil Trends & Recent Turmoil

Despite WTI Crude prices falling from $97 per barrel to around $93 per barrel over the past month, the more internationally-used Brent Crude benchmark has been on the rise for most of the past six months. Consumers remain discontented with prices at the pump and spectators find themselves worried over the current turmoil engulfing several of the OPEC nations; Iran continues to absorb sanctions from the international community, Venezuela faces a potential political crises with the declining health of Hugo Chavez, Nigeria grapples with religious extremism and Iraq deals with its regular instability. If a combination of political crises in these countries precipitates production shortages, oil prices could jump even higher. In recent years, politicians and investors have both advocated for America to focus more on domestic production for more stability and economic dependence.

Carrizo Oil & Gas

Carrizo Oil & Gas (NASDAQ:CRZO) may definitely qualify as a dark horse in the domestic oil industry. A relatively small company with a market capitalization of almost $950mm, Carrizo recently shifted its business model from focusing on natural gas to oil and has done so quite smoothly. The firm specializes in horizontal drilling in various locations across the United States, such as the Eagle Ford Shale in Texas, and continues to explore new reserves. Over the past year, the firm’s proven reserves have increased by 58% and production has increased nearly three-fold. Carrizo’s revenues have grown by 93% over the past year.

Share Performance & Investor Concerns

Carrizo’s share price has been on the rise this year-to-date, and an extremely impressive fourth quarter earnings report (54 cents per share vs. analyst estimates of 34 per share) on Tuesday has improved investor sentiment. Not all has been rosy for Carrizo in the past year, however. Investors have been quite concerned with the firm’s high leverage in relation to the industry and unsustainable capital expenditures, which exerted downward pressure on the stock over the past year. Looking forward, however, Carrizo seems to be on the right track. Capital expenditures have declined for three straight quarters and with a profit margin of almost $70/barrel, the firm can bring its free cash flow in the positive and realize its potential.

Carrizo’s CEO, Chip Johnson, believes his firm has a true value of $1.4B relative to the market value of $950mm. Johnson expects the majority of the firm’s explorations will yield proven reserves and boost the firms value. The average analyst price target for the firm is around $26-27, so be sure to keep a lookout for Carrizo in coming weeks.

By Kapitall Contributor Sherif Ahmad


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