<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 000-22915.
CARRIZO OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0415919
----- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14811 ST. MARY'S LANE, SUITE 148, HOUSTON, TEXAS 77079
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(281) 496-1352
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes . No X*.
-- --
* The registrant became subject to the reporting requirements of Section 13 of
the Securities Act of 1933 on August 5, 1997.
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of September 18, 1997, the latest practicable date, was
10,375,000.
<PAGE> 2
CARRIZO OIL & GAS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Condensed Combined Balance Sheets
- As of June 30, 1997 and December 31, 1996 2
Condensed Combined Statements of Operations
- For the three-month and six-month periods ended June 30, 1997 and 1996 3
Condensed Combined Statements of Cash Flows
- For the six-month periods ended June 30, 1997 and 1996 4
Notes to Condensed Combined Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
PART II. OTHER INFORMATION
Items 1-6. 14
SIGNATURES 18
</TABLE>
<PAGE> 3
CARRIZO OIL & GAS, INC., AND AFFILIATED ENTITIES
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
---------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,492,603 $ 2,142,808
Accounts receivable 1,815,906 6,125,147
Other current assets 15,472 1,756,945
------------- ------------
Total current assets 3,323,981 10,024,900
PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and
gas properties) 15,205,587 26,355,469
OTHER ASSETS 339,789 226,464
------------- ------------
$ 18,869,357 $ 36,606,833
============= ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 4,326,299 $ 11,207,321
Other current liabilities 22,976 74,598
------------- ------------
Total current liabilities 4,349,275 11,281,919
NOTES PAYABLE TO RELATED PARTIES 2,773,935 2,904,480
LONG-TERM DEBT 6,910,000 16,144,454
DEFERRED INCOME TAXES - 1,934,572
OTHER LONG-TERM LIABILITIES 240,197 343,931
EQUITY:
Capital 4,261,000 4,870,678
Retained earnings (deficit) 334,950 (313,459)
Deferred compensation - (559,742)
------------- ------------
4,595,950 3,997,477
------------- ------------
$ 18,869,357 $ 36,606,833
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 4
CARRIZO OIL & GAS, INC., AND AFFILIATED ENTITIES
UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30 June 30
-------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OIL AND NATURAL GAS REVENUES $ 1,428,139 $ 2,311,854 $ 2,218,646 $ 4,165,024
COSTS AND EXPENSES:
Oil and natural gas operating expenses 646,105 638,329 1,063,832 1,195,793
Depreciation, depletion and amortization 294,651 605,549 436,325 988,024
General and administrative 116,040 407,146 160,233 604,761
----------- ----------- ----------- -----------
Total costs and expenses 1,056,796 1,651,024 1,660,390 2,788,578
----------- ----------- ----------- -----------
OPERATING INCOME 371,343 660,830 558,256 1,376,446
OTHER INCOME AND EXPENSES:
Interest expense (58,273) (323,213) (134,753) (469,660)
Interest expense, related parties (35,221) (43,352) (65,527) (85,403)
Capitalized interest 64,390 276,282 129,071 464,780
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 342,239 570,547 487,047 1,286,163
INCOME TAXES (Note 3) - 1,934,572 - 1,934,572
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 342,239 $(1,364,025) $ 487,047 $ (648,409)
=========== =========== =========== ===========
PRO FORMA PRIMARY AND FULLY DILUTED EARNINGS PER
SHARE (Note 2) $(.18) $(.08)
===== =====
PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (Note 2)
7,722,120 7,722,120
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 5
CARRIZO OIL & GAS, INC., AND AFFILIATED ENTITIES
UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30
----------------------------
1996 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 487,047 $ (648,409)
Adjustment to reconcile net income (loss) to
net cash provided by operating activities-
Depreciation, depletion and
amortization 436,325 988,024
Deferred income taxes - 1,934,572
Changes in assets and liabilities-
Accounts receivable (1,014,586) (4,309,241)
Other current assets (257) (1,741,473)
Accounts payable, trade 865,196 169,502
Interest payable to related parties 45,216 103,734
Other current liabilities - 51,622
----------- -----------
Net cash provided by
operating activities 818,941 (3,451,669)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, accrual basis (2,878,720) (11,884,645)
Adjustment to cash basis - 6,711,520
----------- -----------
Net cash used in
investing activities (2,878,720) (5,173,125)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,716,316 9,734,454
Debt repayments - (500,000)
Proceeds from related-party notes payable 416,242 130,545
Contributions 450,000 -
Distributions (45,000) (90,000)
----------- -----------
Net cash provided by
financing activities 2,537,558 9,274,999
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS
477,779 650,205
CASH AND CASH EQUIVALENTS, beginning of period
69,536 1,492,603
----------- -----------
CASH AND CASH EQUIVALENTS, end of period
$ 547,315 $ 2,142,808
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amounts
capitalized) $ - $ 28,669
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 6
CARRIZO OIL & GAS, INC., AND AFFILIATED ENTITIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND
PRINCIPLES OF COMBINATION:
The condensed combined financial statements included herein have been prepared
by Carrizo Oil & Gas, Inc. (Carrizo, or together with its affiliates and
predecessors, the Company), and are unaudited, except for the balance sheet at
December 31, 1996, which has been prepared from the audited financial
statements at that date. The financial statements reflect necessary
adjustments, all of which were of a recurring nature, and are in the opinion of
management necessary for a fair presentation. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). The
Company believes that the disclosures presented are adequate to allow the
information presented not to be misleading. The condensed combined financial
statements included herein should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Registration
Statement on Form S-1 (No. 333-29187).
In August 1997, Carrizo completed its initial public offering (the Offering) of
2,500,000 shares of its common stock at a public offering price of $11.00 per
share. The Offering provided the Company with proceeds of approximately $24.1
million, net of expenses. In September 1997, the underwriters for the Offering
exercised their overallotment option to purchase an additional 375,000 shares
of the Company's common stock at a public offering price of $11.00 per share.
Net proceeds received by the Company were approximately $3.8 million.
The Company was formed in 1993 and is the surviving entity after a series of
combination transactions (the Combination) consummated at the time of the
Offering. The Combination included the following transactions: (a) Carrizo
Production, Inc. (a Texas corporation and an affiliated entity with ownership
substantially the same as Carrizo), was merged into Carrizo and the outstanding
shares of capital stock of Carrizo Production, Inc., were exchanged for an
aggregate of 343,000 shares of common stock of Carrizo; (b) Carrizo acquired
Encinitas Partners Ltd. (a Texas limited partnership of which Carrizo
Production, Inc., served as the general partner) as follows: Carrizo acquired
from the shareholders who serve as directors of Carrizo their limited partner
interests in Encinitas Partners Ltd. for an aggregate consideration of 468,533
shares of common stock and, on the same date, Encinitas Partners Ltd. was
merged into Carrizo and the outstanding limited partner interests in Encinitas
Partners Ltd. were exchanged for an aggregate of 860,699 shares of common
stock; (c) La Rosa Partners Ltd. (a Texas limited partnership of which Carrizo
served as the general partner) was merged into Carrizo and the outstanding
limited partner interests in La Rosa Partners Ltd. were exchanged for an
aggregate of 48,700 shares of common stock; and (d) Carrizo Partners Ltd. (a
Texas limited partnership of which Carrizo served as the general partner) was
merged into Carrizo and the outstanding limited partner interests in Carrizo
Partners Ltd. were exchanged for an aggregate of 569,068 shares of common
stock. The Combination was completed concurrently with the Offering.
The Combination was accounted for as a reorganization in accordance with SEC
Staff Accounting Bulletin (SAB) No. 47 because of the high degree of common
ownership among, and the common control of, the combining entities.
Accordingly, the accompanying combined accounts have been prepared using the
historical costs and results of operations of the affiliated entities. There
were no significant differences in accounting methods or their application
among the combining entities. All intercompany balances have been eliminated.
-5-
<PAGE> 7
2. PRO FORMA EARNINGS PER SHARE:
Pro forma earnings per share is based on the weighted average number of shares
of common stock outstanding during the indicated period. The computation
assumes that the Company was combined during all periods presented and,
accordingly presents all shares issued in connection with the Combination as
outstanding, but does not include any shares associated with the Offering. All
stock options have been treated as outstanding for all periods presented. No
historical earnings per share presentations are required as the public offering
took place subsequent to June 30, 1997.
3. INCOME TAXES:
Historical income taxes for the three and six months ended June 30, 1997,
reflect a one-time charge of $1,623,268 for the termination of the Company's
pass-through tax status. The following reflects pro forma income taxes, net
income and earnings per share for the three- and six-month periods ended June
30, 1996 and 1997, using the incremental statutory federal income tax rate
which would have been provided had the Company been a taxpaying entity for all
periods presented.
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30 June 30
-------------------------- ---------------------------
1996 1997 1996 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Income before income taxes $ 342,239 $ 570,547 $ 487,047 $ 1,286,163
Pro forma income taxes (123,206) (205,397) (175,337) (463,019)
---------- ----------- ---------- -----------
Pro forma net income $ 219,033 $ 365,150 $ 311,710 $ 823,144
========== =========== ========== ===========
Pro forma primary and fully diluted
earnings per share $.03 $.05 $.04 $.11
==== ==== ==== ====
</TABLE>
4. RECENT EVENTS:
Stock Incentive Plan
In June 1997, the Company adopted the Incentive Plan of Carrizo Oil & Gas,
Inc., and reserved for issuance pursuant to such plan 1,000,000 shares of
common stock. Upon completion of the Offering, the Company granted 220,000
options to employees under the plan and granted 30,000 options to nonemployee
directors, all of such options with an exercise price equal to the fair market
value on the date of the grant (the $11.00 public offering price in the
Offering).
-6-
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected certain aspects of the Company's financial position
and results of operations during the periods included in the accompanying
unaudited condensed combined financial statements. This discussion should
be read in conjunction with the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the annual
combined financial statements included in the Company's Registration Statement
on Form S-1, as amended (Registration No. 333-29187) (the "Registration
Statement"), relating to the Company's initial public offering (the "Offering")
and the accompanying unaudited condensed combined financial statements.
Unless otherwise indicated by the context, references herein to "Carrizo" mean
Carrizo Oil & Gas, Inc., a Texas corporation that is the registrant, and
references herein to the "Company" mean Carrizo and its corporate and
partnership affiliates and predecessors.
GENERAL OVERVIEW
The Company began operations in September 1993 and initially focused on the
acquisition of producing properties. As a result of the increasing
availability of economic onshore 3 D seismic surveys, the Company began to
obtain 3 D seismic data and options to lease substantial acreage in 1995 and
began to drill its 3 D based prospects in 1996. The Company drilled 20 wells
in 1996 and 30 wells through the six months ended June 30, 1997 and is
continuing to accelerate its exploration pace. The Company has budgeted to
drill a total of 67 gross wells (26.9 net) in 1997 and 147 gross wells (67.5
net) in 1998. As a result of the acceleration of its Drilling Program, the
Company now expects to drill 6 gross wells (1.8 net) in addition to those wells
previously budgeted for the fourth quarter of 1997. Accordingly, depreciation,
depletion and amortization, oil and gas operating expenses, and production are
expected to increase. The Company has typically retained the majority of its
interests in shallow, normally pressured prospects and sold a portion of its
interests in deeper, overpressured prospects.
The Company uses the full-cost method of accounting for its oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including any general and administrative costs that are directly
attributable to the Company's acquisition, exploration and development
activities, are capitalized in a "full-cost pool" as incurred. The Company
records depletion of its full-cost pool using the unit-of-production method.
To the extent that such capitalized costs in the full-cost pool (net of
depreciation, depletion and amortization and related deferred taxes) exceed the
present value (using a 10 percent discount rate) of estimated future net
after-tax cash flows from proved oil and gas reserves, such excess costs are
charged to operations. The Company has not been required to make any such
write-downs. Once incurred, a write-down of oil and gas properties is not
reversible at a later date.
The Company has primarily grown through the internal development of properties
within its exploration project areas, although the Company acquired properties
with existing production in the Camp Hill Project in late 1993, the Encinitas
Project in early 1995 and the La Rosa Project in 1996. The Company made these
acquisitions through the use of limited partnerships with Carrizo or Carrizo
Production, Inc., as the general partner. However, as operations have
expanded, the Company has increasingly funded its activities through bank
borrowings and cash flow from operations in order to retain a greater portion
of the interests it develops.
-7-
<PAGE> 9
Prior to the Offering, Carrizo conducted its oil and natural gas operations
directly, with industry partners and through the following affiliated entities:
Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd.,
Carrizo Partners Ltd. and Placedo Partners Ltd. Concurrently with the closing
of the Offering, the following transactions (the "Combination Transactions")
were closed: (i) Carrizo Production, Inc. merged into Carrizo; (ii) Carrizo
acquired Encinitas Partners Ltd. in two steps: (a) Carrizo acquired the limited
partner interests in Encinitas Partners Ltd. held by certain of the Company's
directors and (b) Encinitas Partners Ltd. merged into Carrizo; (iii) La Rosa
Partners Ltd. merged into Carrizo; and (iv) Carrizo Partners Ltd. merged into
Carrizo. As a result of the merger of Carrizo and Carrizo Partners Ltd.,
Carrizo became the owner of all of the partnership interests in Placedo
Partners Ltd.
The combined financial statements are prepared on the basis of a combination of
Carrizo and the entities that were a party to the Combination Transactions.
Carrizo and the entities combined with it in the Combination Transactions were
not required to pay federal income taxes due to their status as partnerships or
Subchapter S Corporations, which are not subject to federal income taxation.
Instead, taxes for such periods were paid by the shareholders and partners of
such entities. On May 16, 1997, Carrizo terminated its status as an S
corporation and thereafter became subject to federal income taxes. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," the Company established a deferred tax liability
in the second quarter of 1997 which resulted in a noncash charge to income of
approximately $1.6 million.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997,
Compared to the Three Months Ended June 30, 1996
Oil and natural gas revenues for the three months ended June 30, 1997,
increased 62 percent to $2,312,000 from $1,428,000 for the same period in 1996.
Production volumes for natural gas during the three months ended June 30, 1997,
increased 195 percent to 835,910 MMcf from 283,585 MMcf for the same period in
1996. Average gas prices decreased 20 percent to $2.16 per Mcf in the second
quarter of 1997 from $2.69 per Mcf in the same period in 1996. Production
volumes for oil in the second quarter of 1997 decreased to 27,168 MBbls from
27,656 MBbls for the same period in 1996 due to the natural decline of oil
producing properties and the Company's focus on adding lower cost gas
production. Average oil prices decreased 23 percent to $18.57 per barrel in
the second quarter of 1997 from $24.02 per barrel in the same period in 1996.
The increase in natural gas production was due primarily to production from new
wells drilled and completed in the second half of 1996 and early 1997.
Although, production has continued to increase in the third quarter of 1997
over the prior year's period, the Company does not expect any increase for the
quarter to be as dramatic as the increase in the second quarter of 1997 due to
the temporary curtailment of gas production from the Wheeler wells in the
Starr/Hildago Project Area. The Texas Railroad Commission has ordered a
temporary curtailment of the gas production from these wells as a result of the
discovery of an oil zone downdip to the gas reservoir, which the Company
believes should significantly increase the total reserves in such wells, but
will delay current gas production until the oil can be produced. There can be
no assurance as to the duration or effect of this curtailment.
-8-
<PAGE> 10
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
three months ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
1997 Period
Compared to 1996 Period
June 30 -----------------------
-------------------------- Increase % Increase
1996 1997 (Decrease) (Decrease)
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (MBbls) 27,656 27,168 (488) (2)%
Natural gas (MMcf) 283,585 835,910 552,325 195 %
Average sales prices-
Oil and condensate (per Bbl) $ 24.02 $ 18.57 $ (5.45) (23)%
Natural gas (per Mcf) 2.69 2.16 (.53) (20)%
Operating revenues-
Oil and condensate $ 664,238 $ 504,624 $ (159,614) (24)%
Natural gas 763,901 1,807,230 1,043,329 137 %
----------- ----------- -----------
Total $ 1,428,139 $ 2,311,854 $ 883,715 62 %
=========== =========== ===========
</TABLE>
Oil and natural gas operating expenses for the three months ended June 30,
1997, decreased 1 percent to $638,000 from $646,000 for the same period in
1996. Oil and natural gas operating expenses decreased primarily due to a
reduction in costs on older producing fields and the addition of new production
from low-cost gas wells. Operating expenses per equivalent unit decreased to
$.64 per Mcfe in the second quarter of 1997 from $1.44 per Mcfe in the same
period in 1996 as a result of increased production of natural gas which had
lower per unit operating costs.
Depreciation, depletion and amortization (DD&A) expense for the three months
ended June 30, 1997, increased 106 percent to $606,000 from $295,000 for the
same period in 1996. This increase was due to increased production, partially
offset by an 8 percent decrease in the 1997 depletion rate to $.61 per Mcfe
from $.66 per Mcfe in the three months ended June 30, 1996, as a result of
increased reserves added through drilling activities. General and
administrative expense for the three months ended June 30, 1997, increased 251
percent to $407,000 from $116,000 for the same period in 1996 as a result of
increases in the number of employees and related benefits, increased office
space, ramp-up expenses and charges relating to the Offering.
Net interest expense for the three months ended June 30, 1997, increased 210
percent to $90,000 from $29,000 in the same period in 1996. Increases in
interest expense were due to increased debt levels in late 1996 and the first
half of 1997. Capitalized interest increased to $276,000 in the second quarter
of 1997 from $64,000 in the second quarter of 1996 as a result of increased
levels of exploration activity and higher levels of unevaluated property.
Income before income taxes for the three months ended June 30, 1997, increased
67 percent to $571,000 from $342,000 in the same period in 1996. Net income for
the three months ended June 30, 1997, decreased to a loss of $1,364,000 from
pro forma income of $219,000 for the same period in 1996 primarily as a result
of a one-time noncash charge of $1,623,000 reflecting the termination of the
Company's pass-through tax status.
-9-
<PAGE> 11
Six Months Ended June 30, 1997, Compared
To the Six Months Ended June 30, 1996
Oil and natural gas revenues for the six months ended June 30, 1997, increased
88 percent to $4,165,000 from $2,219,000 for the same period in 1996.
Production volumes for natural gas during the six months ended June 30, 1997,
increased 198 percent to 1,428,183 MMcf from 479,480 MMcf for the same period
in 1996. Average gas prices decreased 7 percent to $2.24 per Mcf in the first
half of 1997 from $2.40 per Mcf in the same period in 1996. Production volumes
for oil in the first half of 1997 decreased to 48,550 MBbls from 48,929 MBbls
for the same period in 1996 due to the natural decline in oil producing
properties. Average oil prices decreased 9 percent to $19.87 per barrel during
the six months ended June 30, 1997, from $21.86 per barrel in the same period
in 1996. The increase in natural gas production was due primarily to
production from new wells drilled and completed in the second half of 1996 and
early 1997.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the six
months ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
1997 Period
Compared to 1996 Period
June 30 -------------------------
-------------------------- Increase % Increase
1996 1997 (Decrease) (Decrease)
--------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (MBbls) 48,929 48,550 (379) (1)%
Natural gas (MMcf) 479,480 1,428,183 948,703 198 %
Average sales prices(1)
Oil and condensate (per Bbl) $ 21.86 $ 19.87 $ (1.99) (9)%
Natural gas (per Mcf) 2.40 2.24 (.16) (7)%
Operating revenues-
Oil and condensate $ 1,069,426 $ 964,599 $ (104,827) (10)%
Natural gas 1,149,220 3,200,425 2,051,205 178 %
----------- ----------- ------------
Total $ 2,218,646 $ 4,165,024 $ 1,946,378 88 %
=========== =========== ============
</TABLE>
- ---------------------------------------
(1) Including impact of hedging.
Oil and natural gas operating expenses for the six months ended June 30, 1997,
increased 12 percent to $1,196,000 from $1,064,000 for the same period in 1996.
Oil and natural gas operating expenses increased primarily due to increased
production as described above, which was partially offset by a decrease in
operating expenses per equivalent unit to $.70 per Mcfe during the six months
ended June 30, 1997, from $1.38 per Mcfe in the same period in 1996. The per
unit cost decreased primarily as a result of increased production of natural
gas which had lower per unit operating costs than oil.
DD&A expense for the six months ended June 30, 1997, increased 126 percent to
$988,000 from $436,000 for the same period in 1996. This increase was due to
increased production from successful drilling.
General and administrative expense for the six months ended June 30, 1997,
increased 277 percent to $605,000 from $160,000 for the same period in 1996, as
a result of increases in the number of employees and related benefits,
increased office space, and ramp-up expenses and charges related to the
Offering.
-10-
<PAGE> 12
Net interest expense for the six months ended June 30, 1997, increased 26
percent to $90,000 from $72,000 in the same period in 1996. Increases in
interest expense were due to increased debt levels in late 1996 and early 1997.
Capitalized interest increased to $465,000 in the first and second quarters of
1997 from $129,000 in the same period of 1996 as a result of increased levels
of exploration activity and higher levels of unevaluated property.
Income before income taxes for the six months ended June 30, 1997, increased
164 percent to $1,286,000 from $487,000 in the same period in 1996. Net income
for the six months ended June 30, 1997, decreased to a loss of $648,000 from
pro forma income of $312,000 for the same period in 1996 primarily as a result
of a one-time noncash charge of $1,623,000 reflecting the termination of the
Company's pass-through tax status.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have included funds generated by
operations, equity capital contributions and borrowings, primarily under
revolving credit facilities. A portion of the proceeds from the Offering was
used to repay the amounts outstanding under the Company's revolving credit
facilities and notes from certain of the Company's directors and officers.
Cash flows (used in) provided by operations (after changes in working capital)
were $819,000 and $(3,452,000) for the six months ended June 30, 1996 and 1997,
respectively. The decrease in cash flows provided by operations in 1997 as
compared to 1996 was due primarily to increased accounts receivable relating to
joint interest billings.
The Company has budgeted capital expenditures in 1997 of approximately $21.9
million, $12.6 million of which is expected to be used to fund 3 D seismic
surveys and land acquisitions and $9.3 million of which is expected to be used
for drilling activities in the Company's project areas. The Company has
budgeted capital expenditures in 1998 of approximately $43.8 million. The
Company budgeted to drill approximately 67 gross wells (26.9 net) in 1997 and
has budgeted for approximately 147 gross wells (67.5 net) in 1998. The Company
plans to accelerate its drilling program, and as such, now expects to drill 6
gross wells (1.8 net) in addition to those wells previously budgeted for the
fourth quarter of 1997. Actual amounts of capital expenditures and number of
wells drilled may differ significantly from such estimates. In addition to its
existing leased acreage, as of July 31, 1997, the Company had acquired various
3 D seismic options that would allow it to lease up to approximately 253,000
gross undeveloped acres (95,242 net) if determined by 3 D seismic data to be
prospective for drilling.
The Company has continued to reinvest a substantial portion of its cash flows
into increasing its 3 D prospect portfolio, improving its 3 D seismic
interpretation technology and funding its drilling program. Oil and gas
capital expenditures were $7.5 million and $11.9 million for the three and six
months ended June 30, 1997, respectively. The Company's drilling efforts
resulted in the successful completion of 16 gross wells (6.0 net) in 1996 and
25 gross wells (9.9 net) during the six months ended June 30, 1997.
The Company's revenues, profitability, future growth and ability to borrow
funds or obtain additional capital, and the carrying value of its properties
are substantially dependent on prevailing prices of oil and natural gas. It is
impossible to predict future oil and natural gas price movements with
certainty. Declines in prices received for oil and natural gas may have an
adverse effect on the Company's financial condition, liquidity, ability to
finance capital expenditures, and results of operations. Lower prices may also
impact the amount of reserves that can be produced economically by the Company.
Due to the instability of oil and natural gas prices, in 1995 the Company began
utilizing, from time to time, certain hedging instruments (e.g., NYMEX futures
contracts) for a portion of its oil and gas production to achieve a more
predictable cash flow, as well as to reduce the exposure to price fluctuations.
The Company's hedging arrangements apply to only a portion of its production,
provide only partial price protection against declines in oil and natural gas
prices and limit potential gains from future increases in prices. Such hedging
arrangements may expose the Company to risk of financial loss in certain
circumstances, including instances where production is less than expected, the
Company's customers fail to purchase contracted quantities of oil or natural
gas, or a sudden
-11-
<PAGE> 13
unexpected event materially impacts oil or natural gas prices. The Company
accounts for all these transactions as hedging activities and, accordingly,
gains and losses from hedging activities are included in oil and gas revenues
during the period the hedged transactions occur. Historically, gains and
losses from hedging activities have not been material. The Company expects
that the amount of hedges that it has in place will vary from time to time.
The Company had no outstanding hedge positions as of December 31, 1996 or June
30, 1997.
The Company has experienced and expects to continue to experience substantial
working capital requirements primarily due to the Company's active exploration
and development programs and, to a much lesser extent, its technology
enhancement programs. While the Company believes that the net proceeds from
the Offering, cash flow from operations and borrowings under the Company Credit
Facility (defined below) should allow the Company to implement its present
business strategy during 1997 and 1998, additional financing may be required in
the future to fund the Company's growth, development and exploration program
and continued technological enhancement. In the event such capital resources
are not available to the Company, its exploration and other activities may be
curtailed.
FINANCING ARRANGEMENTS
At the close of the Offering, the Company entered into an amended revolving
credit agreement with Compass Bank, (the "Company Credit Facility"), which
provides for a maximum loan amount of $25 million, subject to borrowing base
limitations. Prior to the Offering, the Company utilized various credit
facilities as well as borrowings from certain directors and officers of the
Company. Except for the Company Credit Facility, all of these facilities and
borrowings were terminated with the close of the Offering. Under the Company
Credit Facility, the principal outstanding is due and payable upon maturity in
June 1999 with interest due monthly. The interest rate for borrowings is
calculated at a floating rate based on the Compass index rate or LIBOR plus 2
percent. The Company's obligations are secured by certain of its oil and gas
properties and cash or cash equivalents included in the borrowing base.
Under the Company Credit Facility, Compass, in its sole discretion, will make
semiannual borrowing base determinations based upon the proved oil and natural
gas properties of the Company. Compass may redetermine the borrowing base and
the monthly borrowing base reduction at any time and from time to time. The
Company may also request borrowing base redeterminations in addition to its
required semiannual reviews at the Company's cost.
The Company is subject to certain covenants under the terms of the Company
Credit Facility, including, but not limited to, (a) maintenance of specified
tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net
income plus depreciation and other noncash charges, less noncash income) to
quarterly debt service (payments made for principal in connection with the
credit facility plus payments made for principal other than in connection with
such credit facility) of no less than 1.25 to 1.00. The Company Credit
Facility also places restrictions on, among other things, (a) incurring
additional indebtedness, loans and liens, (b) changing the nature of business
or business structure, (c) selling assets and (d) paying dividends.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by changing oil
and gas prices. If the price of oil and gas increases (decreases), there could
be a corresponding increase (decrease) in the operating cost that the Company
is required to bear for operations, as well as an increase (decrease) in
revenues. Inflation has had a minimal effect on the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
regarding accounting for the impairment of long-lived assets. The Company
adopted SFAS No. 121 effective January 1, 1996. However, its
-12-
<PAGE> 14
provisions are not applicable to the Company's oil and gas properties as they
are accounted for under the full-cost method of accounting.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
which is a new standard of accounting for stock-based compensation that
establishes a fair value method of accounting for awards granted after December
31, 1995, under stock compensation plans. SFAS No. 123 encourages, but does
not require, companies to adopt the fair value method of accounting in place of
the existing method of accounting for stock-based compensation, whereupon
compensation costs are recognized only in situations where stock compensation
plans award intrinsic value to recipients at the date of grant. The Company has
elected not to adopt the fair value accounting of SFAS No. 123 and will account
for any plans under Accounting Principles Board (APB) Opinion No. 25, under
which no compensation costs have been recognized.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
regarding earnings per share. SFAS No. 128 cannot be adopted until December
15, 1997; however, pro forma disclosures are allowed to minimize the impact of
year-end adoption. As a result of the noncomplex nature of the Company's
capital structure and treatment of all stock options as outstanding for all
periods pursuant to Staff Accounting Bulletin No. 83, SFAS No. 128 would have
no current impact on the pro forma calculation of earnings per share.
-13-
<PAGE> 15
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities and Use of Proceeds
Sales of Unregistered Securities.
The Company sold 2,290,000 shares of Common Stock in the Combination
Transactions. Such transactions were exempt from the registration requirements
of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof as
transactions not involving any public offering.
Use of Proceeds.
The Company's Registration Statement on Form S-1 (Registration No.
333-29187), as amended, with respect to the initial public offering of shares
of Company's Common Stock, par value $0.01 per share (the "Common Stock"), was
declared effective by the Securities and Exchange Commission on August 5, 1997.
The offering commenced on August 6, 1997, and has since terminated, resulting
in (i) the sale by the Company of 2,500,000 shares of Common Stock on August
11, 1997 and (ii) the sale by the Company of 375,000 shares of Common Stock
pursuant to the exercise of the underwriters' over-allotment option on
September 8, 1997. The shares sold constitute all of the shares of Common
Stock covered by the Registration Statement. The managing underwriters for the
Offering were Schroder & Co. Inc. and Jefferies & Company, Inc.
The aggregate price to the public for the shares sold in the Offering
was $31,625,000. The expenses incurred by the Company with respect to the
Offering were as follows:
<TABLE>
<S> <C>
Underwriter Discounts and Commissions . . . . . . . . . . . $ 2,213,750
Other Expenses . . . . . . . . . . . . . . . . . . . . . . 1,500,000
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,713,750
============
</TABLE>
The amount of other expenses set forth above is a reasonable estimate of such
amount. None of such payments were direct or indirect payments to directors or
officers of the Company or their associates, to persons owning ten percent or
more of any class of equity securities of the Company or to affiliates of the
Company.
The net proceeds to the Company from the Offering were $ 27.9 million.
As of September 19, 1997, the Company has used such net proceeds as follows:
(i) to repay $ 16.5 million of indebtedness outstanding under the Company's
revolving credit facilities, (ii) to repay $ 3.2 million of promissory notes
outstanding to certain of the Company's directors and officers, (iii) to
provide $ 5.7 million in working capital and (iv) to make $ 2.5 million in
temporary investments. Except as set forth in clause (ii), none of such
payments were direct or indirect payments to directors or officers of the
Company or their associates, to persons owning ten percent or more of any class
of equity securities of the Company or to affiliates of the Company.
Item 3 - Defaults Upon Senior Securities
None
-14-
<PAGE> 16
Item 4 - Submission of Matters to a Vote of Security Holders
On June 4, 1997, prior to the closing of the Offering, the
Company held its 1997 Annual Meeting of Shareholders at which the shareholders
of the Company, among other things, (i) approved the Company's amended and
restated articles of incorporation, (ii) approved the appointment of Steven A.
Webster, S.P. Johnson IV, Frank A. Wojtek, Douglas A.P. Hamilton and Paul B.
Loyd, Jr. as directors, (iii) approved the Combination Transactions, (iv)
approved the Company's incentive plan and (v) approved indemnification
agreements between the Company and each of its directors. On July 28, 1997,
the shareholders of the Company approved the Company's amended and restated
bylaws, as amended. The Company's first Annual Meeting of Shareholders as a
public company will be held during 1998.
Item 5 - Other Information
FORWARD LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, those relating to the Company's schedule, targets, estimates or
results of future drilling, budgeted wells, increases in wells, budgeted and
other future capital expenditures, use of offering proceeds, expected
production or reserves, increases in reserves, working capital requirements,
hedging activities, the ability of expected sources of liquidity to implement
its business strategy, and any other statements regarding future operations,
financial results, business plans and cash needs and other statements that are
not historical facts are forward looking statements. When used in this
document, the words "anticipate," "estimate," "expect," "may," "project,"
"believe" and similar expression are intended to be among the statements that
identify forward looking statements. Such statements involve risks and
uncertainties, including, but not limited to, those relating to the Company's
dependence on its exploratory drilling activities, the volatility of oil and
natural gas prices, the need to replace reserves depleted by production,
operating risks of oil and natural gas operations, the Company's dependence on
its key personnel, factors that affect the Company's ability to manage its
growth and achieve its business strategy, risks relating to, limited operating
history, technological changes, significant capital requirements of the
Company, the potential impact of government regulations, litigation,
competition, the uncertainty of reserve information and future net revenue
estimates, property acquisition risks and other factors detailed in the
Registration Statement and the Company's other filings with the Securities and
Exchange Commission. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
Exhibit
Number Description
+2.1 - Combination Agreement by and among the Company, Carrizo
Production, Inc., Encinitas Partners Ltd., La Rosa Partners
Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A.
Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A.
Wojtek dated as of June 6, 1997 (Incorporated herein by reference
to Exhibit 2.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-29187)).
+3.1 - Amended and Restated Articles of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
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<PAGE> 17
+3.2 - Amended and Restated Bylaws of the Company, as amended by
Amendment No. 1 (incorporated herein by reference to Exhibit
3.2 to the Company's Registration Statement on Form 8-A
(Registration No. 000-22915).
+4.1 - First Amendment to Loan Agreement by and between the Company
and Compass Bank dated April 4, 1997 (Incorporated herein by
reference to Exhibit 4.5 to the Company's Registration Statement
on Form S-1 (Registration No. 333-29187)).
+4.2 - Second Amendment to Loan Agreement by and between the Company
and Compass Bank dated May 15, 1997 (Incorporated herein by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+4.3 - Third Amendment to Loan Agreement by and between the Company
and Compass Bank dated June 26, 1997 (Incorporated herein by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+4.4 - Fourth Amendment to Loan Agreement by and between the Company
and Compass Bank dated June 27, 1997 (Incorporated herein by
reference to Exhibit 4.8 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+10.1 - Incentive Plan of the Company (Incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+10.2 - Employment Agreement between the Company and S.P. Johnson IV
(Incorporated herein by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.3 - Employment Agreement between the Company and Frank A. Wojtek
(Incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.4 - Employment Agreement between the Company and Kendall A. Trahan
(Incorporated herein by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-29187)).
+10.5 - Employment Agreement between the Company and George Canjar
(Incorporated herein by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.6 - Form of Indemnification Agreement between the Company and
each of its directors and executive officers (Incorporated
herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No. 333-29187)).
+10.7 - Registration Rights Agreement by and among the Company, Paul
B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas
A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997
(Incorporated herein by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.8 - S Corporation Tax Allocation, Payment and Indemnification
Agreement among the Company and Messrs. Loyd, Webster, Johnson,
Hamilton and Wojtek (Incorporated herein by reference to
Exhibit 10.8 to the Company's Registration Statement on Form
S-1 (Registration No. 333-29187)).
-16-
<PAGE> 18
+10.9 - S Corporation Tax Allocation, Payment and Indemnification
Agreement among Carrizo Production, Inc. and Messrs. Loyd,
Webster, Johnson, Hamilton and Wojtek (Incorporated herein by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1 (Registration No. 333-29187)).
27.1 - Financial Data Schedule.
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1997.
-17-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Carrizo Oil & Gas, Inc.
(Registrant)
Date: September 19, 1997 By: /s/S.P. Johnson IV
---------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: September 19, 1997 By: /s/Frank A. Wojtek
---------------------------------------
Chief Financial Officer
(Principal Financial and Accounting
Officer)
-18-
<PAGE> 20
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
+2.1 - Combination Agreement by and among the Company, Carrizo
Production, Inc., Encinitas Partners Ltd., La Rosa Partners
Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A.
Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A.
Wojtek dated as of June 6, 1997 (Incorporated herein by reference
to Exhibit 2.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-29187)).
+3.1 - Amended and Restated Articles of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+3.2 - Amended and Restated Bylaws of the Company, as amended by
Amendment No. 1 (incorporated herein by reference to Exhibit
3.2 to the Company's Registration Statement on Form 8-A
(Registration No. 000-22915).
+4.1 - First Amendment to Loan Agreement by and between the Company
and Compass Bank dated April 4, 1997 (Incorporated herein by
reference to Exhibit 4.5 to the Company's Registration Statement
on Form S-1 (Registration No. 333-29187)).
+4.2 - Second Amendment to Loan Agreement by and between the Company
and Compass Bank dated May 15, 1997 (Incorporated herein by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+4.3 - Third Amendment to Loan Agreement by and between the Company
and Compass Bank dated June 26, 1997 (Incorporated herein by
reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+4.4 - Fourth Amendment to Loan Agreement by and between the Company
and Compass Bank dated June 27, 1997 (Incorporated herein by
reference to Exhibit 4.8 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+10.1 - Incentive Plan of the Company (Incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+10.2 - Employment Agreement between the Company and S.P. Johnson IV
(Incorporated herein by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.3 - Employment Agreement between the Company and Frank A. Wojtek
(Incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.4 - Employment Agreement between the Company and Kendall A.
Trahan (Incorporated herein by reference to Exhibit 10.4 to
the Company's Registration Statement on Form S-1 (Registration
No. 333-29187)).
+10.5 - Employment Agreement between the Company and George Canjar
(Incorporated herein by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.6 - Form of Indemnification Agreement between the Company and
each of its directors and executive officers (Incorporated
herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No. 333-29187)).
<PAGE> 21
+10.7 - Registration Rights Agreement by and among the Company, Paul
B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas
A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997
(Incorporated herein by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.8 - S Corporation Tax Allocation, Payment and Indemnification
Agreement among the Company and Messrs. Loyd, Webster, Johnson,
Hamilton and Wojtek (Incorporated herein by reference to
Exhibit 10.8 to the Company's Registration Statement on Form
S-1 (Registration No. 333-29187)).
+10.9 - S Corporation Tax Allocation, Payment and Indemnification
Agreement among Carrizo Production, Inc. and Messrs. Loyd,
Webster, Johnson, Hamilton and Wojtek (Incorporated herein by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1 (Registration No. 333-29187)).
27.1 - Financial Data Schedule.
+ Incorporated herein by reference as indicated.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,142,808
<SECURITIES> 0
<RECEIVABLES> 6,125,147
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,024,900
<PP&E> 28,830,152
<DEPRECIATION> 2,474,683
<TOTAL-ASSETS> 36,606,833
<CURRENT-LIABILITIES> 11,281,919
<BONDS> 0
0
0
<COMMON> 4,870,678
<OTHER-SE> (873,201)
<TOTAL-LIABILITY-AND-EQUITY> 36,606,833
<SALES> 4,165,024
<TOTAL-REVENUES> 4,165,024
<CGS> 0
<TOTAL-COSTS> 2,183,817
<OTHER-EXPENSES> 604,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,283
<INCOME-PRETAX> 1,283,163
<INCOME-TAX> 1,934,572
<INCOME-CONTINUING> (648,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (648,409)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
