<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, 1999
[ ] 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 X. No
--- ---
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of August 11, 1999, the latest practicable date, was
10,375,000.
<PAGE> 2
CARRIZO OIL & GAS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Condensed Balance Sheets
- As of June 30, 1999 and December 31, 1998 2
Condensed Statements of Operations
- For the three-month and six-month periods ended
June 30, 1998 and 1999 3
Condensed Statements of Cash Flows
- For the six-month periods ended June 30, 1998 and
1999 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Items 1-6. 18
SIGNATURES 20
</TABLE>
<PAGE> 3
CARRIZO OIL & GAS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,187,656 $ 213,477
Accounts receivable, net of allowance for doubtful accounts of zero and 4,227,365 3,088,224
$480,000 at December 31, 1998 and June 30, 1999, respectively
Advances to operators 1,192,079 1,060,884
Other current assets 117,614 114,113
------------ ------------
Total current assets 6,724,714 4,476,698
PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and gas
properties) 57,878,191 61,583,761
OTHER ASSETS 385,127 233,922
------------ ------------
$ 64,988,032 $ 66,294,381
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 10,003,376 $ 5,860,042
Dividends payable 720,360 753,141
Other current liabilities 275,116 125,625
Current maturities of long-term debt 930,000 10,525,982
------------ ------------
Total current liabilities 11,928,852 17,264,790
LONG-TERM DEBT (Note 4) 11,126,000 7,799,952
DEFERRED INCOME TAXES -- --
MANDATORILY REDEEMABLE PREFERRED STOCK (10,000,000 shares
authorized with 320,110.53 and 334,623.71 issued and outstanding at December
31, 1998 and June 30, 1999, respectively) (Note 5) 30,730,695 32,293,494
SHAREHOLDERS' EQUITY:
Warrants (Note 5) 300,000 300,000
Common Stock (40,000,000 shares authorized with 10,375,000 issued and
Outstanding at December 31, 1998 and June 30, 1999, respectively) 103,750 103,750
Additional paid-in capital 32,845,727 32,845,727
Retained earnings (deficit) (21,907,082) (24,313,332)
Deferred compensation (139,910) --
------------ ------------
11,202,485 8,936,145
------------ ------------
$ 64,988,032 $ 66,294,381
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-2-
<PAGE> 4
CARRIZO OIL & GAS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OIL AND NATURAL GAS REVENUES $ 1,848,765 $ 1,925,265 $ 4,187,647 $ 3,767,580
COSTS AND EXPENSES:
Oil and natural gas operating expenses 653,364 636,840 1,282,809 1,380,545
Depreciation, depletion and amortization 860,862 985,053 1,620,367 1,928,244
General and administrative 558,280 480,474 1,392,633 1,187,999
----------- ----------- ----------- -----------
Total costs and expenses 2,072,506 2,102,367 4,295,809 4,496,788
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (223,741) (177,102) (108,162) (729,208)
OTHER INCOME AND EXPENSES:
Interest income 80,033 6,879 273,537 13,364
Interest expense -- (343,397) (57,731) (603,779)
Capitalized interest -- 340,306 54,646 600,688
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (143,708) (173,314) 162,290 (718,935)
INCOME TAXES (36,934) 7,002 83,529 14,004
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (106,774) (180,316) 78,761 (732,939)
CUMULATIVE EFFECT OF CHANGE IN METHOD OF
REPORTING COSTS OF START-UP ACTIVITIES (Note 6) -- -- -- 77,731
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (106,774) $ (180,316) $ 78,761 $ (810,670)
=========== =========== =========== ===========
LESS: DIVIDENDS AND ACCRETION ON
PREFERRED SHARES (741,444) (806,736) (1,411,938) (1,595,579)
----------- ----------- ----------- -----------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (848,218) $ (987,052) $(1,333,177) $(2,406,249)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (Note 3) $ (.08) $ (.10) $ (.13) $ (.22)
BASIC AND DILUTED LOSS PER COMMON SHARE OF CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (Notes 3 and 6) -- -- -- (.01)
----------- ----------- ----------- -----------
BASIC AND DILUTED LOSS PER COMMON SHARE (Note 3) $ (.08) $ (.10) $ (.13) $ (.23)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-3-
<PAGE> 5
CARRIZO OIL & GAS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 78,761 $ (810,671)
Adjustment to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation, depletion and amortization 1,620,367 1,928,244
Deferred income taxes 42,409 --
Cumulative effect of change in accounting principle -- 77,732
Changes in assets and liabilities-
Accounts receivable 119,088 1,139,141
Other assets (42,366) (89,416)
Accounts payable, trade (5,145,559) 2,277,632
Other current liabilities (760) (149,4,1)
------------ ------------
Net cash provided by (used) in
operating activities (3,328,060) 4,373,171
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, accrual basis (18,758,396) (5,327,514)
Adjustment to cash basis 1,934,147 (251,031)
Advance to operators (1,460,854) 131,195
------------ ------------
Net cash used in
investing activities (18,285,103) (5,447,350)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock 28,810,431 --
Proceeds from long-term debt -- 100,000
Debt repayments (7,950,000) --
------------ ------------
Net cash provided by
financing activities 20,860,431 100,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (752,732) (974,179)
CASH AND CASH EQUIVALENTS, beginning of period 2,674,837 1,187,656
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,922,105 $ 213,477
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amounts capitalized) $ 3,085 $ 3,091
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE> 6
CARRIZO OIL & GAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND PRINCIPLES OF COMBINATION:
The condensed financial statements included herein have been prepared by Carrizo
Oil & Gas, Inc. (the Company), and are unaudited, except for the balance sheet
at December 31, 1998, 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 financial statements included
herein should be read in conjunction with the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
The Company was formed in 1993 and is the surviving entity after a series of
combination transactions (the Combination). 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.
Simultaneous with the Combination, the Company completed its initial public
offering (the Offering) of 2,875,000 shares of its common stock at a public
offering price of $11.00 per share. The Offering provided the Company with
proceeds of approximately $28.1 million, net of expenses.
The Combination was accounted for as a reorganization of entities as prescribed
by Securities and Exchange Commission (SEC) Staff Accounting Bulletin 47 because
of the high degree of common ownership among, and the common control of, the
combining entities. Accordingly, the accompanying financial statements 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. Certain reclassifications have been made to prior period amounts to
conform to the current period's financial statement presentation.
2. GOING CONCERN:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Due principally to depressed oil and
gas prices, the Company's operating cash flows have decreased significantly in
1998 and through the second quarter of 1999. The Company projects that, after
considering advances and borrowing base adjustments obtained through the second
quarter of 1999, and without further increases in borrowing base capacity under
its existing revolving credit facility, debt repayments totaling approximately
$10,705,982 will be required in the 12 months ended June 30, 2000. The Company
raised $2 million in additional financing under its existing credit facility in
March 1999; however, proceeds were utilized to fund the Company's ongoing
drilling program and for working capital. The Company must find additional oil
and gas reserves in order to significantly increase the financing available
through its existing revolving credit facility.
-5-
<PAGE> 7
The Company projects that its cash sources will exceed its planned needs for
cash in 1999. Such cash sources include additional borrowings subject to
borrowing availability, cash flows from currently producing properties along
with those nearing completion or pending pipeline hookup and projected net cash
flows from wells to be drilled. Cash needs in 1999 include debt requirements,
working capital, drilling expenditures, lease bonus payments, geological and
geophysical costs on its active exploration projects and cash general and
administrative costs. The Company also has specific plans which involve, among
other things, cost reductions, hedging activities to lock in higher prices and
the drilling of high probability exploration and development prospects that it
believes will generate the necessary borrowing capacity and cash flow to fund
its 1999 obligations. There are no assurances, however, that the Company will be
able to generate cash flows sufficient to pay all of its 1999 obligations as
they become due because of the sensitivity of such cash flow projections to
factors such as oil and natural gas sales price volatility, production levels,
operating cost fluctuations, and other variables inherent in the oil and gas
industry. The current uncertainties surrounding the sufficiency of its future
cash flows and the lack of firm commitments for additional capital raise
substantial doubt about the ability of the Company to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
During the second quarter of 1999, the Company entered into an Exploration
Agreement with Palace Exploration Company, an Oklahoma oil & gas company, to
drill and, if successful, develop a minimum of 27 of Carrizo's exploration
prospects during the nine months ended March 31, 2000. In exchange for earning
50 percent of Carrizo's working interest in each of the prospects, Palace has
agreed to pay approximately 71 percent of the drilling costs for such wells.
Palace also has the right to participate in certain additional 1999 wells on
substantially the same terms, as Carrizo identifies such prospects. The
agreement provides that Carrizo will retain control of well operations. Palace
has certain termination rights in the event of continued adverse drilling
results. The joint exploration program includes wells ranging in expected depths
from 5,800 feet to over 14,000 feet. Most of the prospects were internally
generated with approximately 90 percent located in South Texas and approximately
10 percent located in South Louisiana. It is anticipated that the total drilling
cost of the minimum 27 gross well program will exceed $10 million.
As of June 30, 1999 and December 31, 1998, respectively, the Company had
$39,121,247 and $37,060,418 of investment in unevaluated properties. In order to
fully realize this investment through the exploration and development of these
properties, additional capital resources above the amount currently available
from the borrowing base, net cash flow from operations and the Exploration
Agreement will be necessary to fund such capital expenditures. The Company is
continuing to seek additional financing from a variety of sources, including new
common or preferred equity investors and additional debt financing. No assurance
can be given that additional financing will be available by these or other means
on terms acceptable to the Company. Without a continued increase in commodity
prices, successful drilling or raising additional capital, the Company
anticipates that it will be required to limit or defer its planned oil and gas
exploration and development program, which could adversely affect the
recoverability and ultimate value of the Company's oil and gas properties. The
Company has the ability to control the pace of drilling in projects where it has
a 100 percent working interest. In other projects where the Company only has a
partial ownership, the Company generally has the right, but not the obligation,
to participate for its percentage interest in drilling wells and can decline to
participate if it does not have sufficient capital resources at the time such
drilling operations commence. The Company may also transfer its right to
participate in drilling wells in exchange for cash, a reversionary interest, or
some combination thereof or may seek to sell or transfer all or a portion of its
interest in undeveloped properties.
-6-
<PAGE> 8
3. EARNINGS PER COMMON SHARE:
Supplemental earning per share information is provided below:
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
---------------------------------------------------------------------------------------
Income (Loss) Shares Per-Share Amount
1998 1999 1998 1999 1998 1999
--------------------------- -------------------------- ------------------------
<S> <C> <C> <C> <C>
Net Loss $ (106,774) $ (180,316)
Less: Dividends and accretion
on preferred stock (741,444) (806,736)
------------ ------------
Basic Earnings per Share
Net Loss available to
common shareholders (848,218) (987,052) 10,375,000 10,375,000 $ (0.08) $ (0.10)
=========== ==========
Stock Options -- -- 87,445 --
------------ ------------ ---------- ----------
Diluted Earnings per Share Net
Loss available to common
shareholders plus assumed
conversions $ (848,218) $ (987,052) 10,462,445 10,375,000 $ (0.08) $ (0.10)
============ ============ ========== ========== =========== ==========
</TABLE>
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<PAGE> 9
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-----------------------------------------------------------------------------------
Income (Loss) Shares Per-Share Amount
1998 1999 1998 1999 1998 1999
------------------------- ----------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (loss) before
cumulative effect of change in
accounting principle $ 78,761 $ (732,939)
Less: Dividends and accretion
on preferred stock (1,411,938) (1,595,579)
----------- -----------
Basic Earnings per Share before
cumulative change in
accounting principle
Net Loss available to
common shareholders (1,333,177) (2,328,518) 10,375,000 10,375,000 $ (0.13) $ (0.22)
============ ==============
Stock Options -- -- 105,810 --
----------- ----------- ---------- ----------
Diluted Earnings per Share before
cumulative effect of change in
accounting principle
Net Loss available to common
shareholders plus assumed
conversions $(1,333,177) $(2,328,518) 10,480,810 10,375,000 $ (0.13) $ (0.22)
=========== =========== ========== ========== ============ ==============
Cumulative effect of change in
accounting principle $ -- $ (77,731)
Basic Earnings per Share of
cumulative effect of change in
accounting principle
Net Loss available to common
shareholders $ -- $ (77,731) 10,375,000 10,375,000 $ -- $ (0.01)
============ ==============
Stock Options -- -- 105,810 --
----------- ----------- ---------- ----------
Diluted Earnings per Share before
cumulative effect of change in
accounting principle
Net Loss available to common
shareholders plus assumed
conversions $ -- $ (77,731) 10,480,810 10,375,000 $ -- $ (0.01)
=========== =========== ========== ========== ============ ==============
Net Income (loss) $ 78,761 $ (810,670)
Less: Dividends and accretion
on preferred stock (1,411,938) (1,595,579)
----------- -----------
Basic Earnings per Share
Net Loss available to common
shareholders (1,333,177) (2,406,249) 10,375,000 10,375,000
$ (0.13) $ (0.23)
============ ==============
Stock Options -- -- 105,810 --
----------- ----------- ---------- ----------
Diluted Earnings per Share Net
Loss available to common
shareholders plus assumed
conversions $(1,333,177) $(2,406,249) 10,480,810 10,375,000 $ (0.13) $ (0.23)
=========== =========== ========== ========== ============ ==============
</TABLE>
Net income (loss) per common share has been computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the periods. The Company had outstanding 250,000 and 443,500 stock
options and 1,000,000 warrants, during the three months and six months ended
June 30, 1998 and 1999, respectively, which were antidilutive and were not
included in the calculation because the exercise price of these instruments
exceeded the underlying market value of the options and warrants.
4. FINANCING ARRANGEMENTS:
In connection with the Offering, the Company entered into an amended revolving
credit agreement with Compass Bank (the "Company Credit Facility"), to provide
for a maximum loan amount of $25 million, subject to borrowing base
limitations. The maximum loan amount was amended to $10 million in April, 1999.
Under the Company Credit Facility, the principal outstanding is due and payable
upon maturity in June 2000 with interest due monthly. The Company Credit
Facility was subsequently amended in September 1998 to provide for a term loan
under the facility
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<PAGE> 10
(the "Term Loan") in addition to the revolving credit facility limited by the
Company's borrowing base. The Term Loan was initially due and payable upon
maturity in September 1999. 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. As of June 30, 1999 and
December 31, 1998, respectively, the borrowing base was $6,273,287 and
$6,076,000 and borrowings outstanding were $5,451,000 and $5,056,000.
Proceeds from the Borrowing Base portions of this credit facility have been
used to provide funding for exploration and development activity. Substantially
all of Carrizo's oil and natural gas property and equipment is pledged as
collateral under this facility. At June 30, 1999 and December 31, 1998
borrowings under this facility totaled $5,451,000 and $5,056,000, respectively,
with an additional $523,287 and $1,020,000, respectively, available for future
borrowings. Borrowings outstanding under the Term Loan portion of the facility
were $9,000,000 and $7,000,000 at June 30, 1999 and December 31, 1998,
respectively. The facility was also available for letters of credit, two and
one of which have been issued for $299,000 and $224,000 at June 30, 1999 and
December 31, 1998, respectively. The term loan is guaranteed by certain members
of the Board of Directors.
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. In March 1999, the
Company Credit Facility was amended to decrease the required specified tangible
net worth covenant.
In March 1999, the Company borrowed an additional $2 million on the term loan
portion of the Company Credit Facility increasing the total outstanding
borrowing under the Term Loan to $9 million. Certain members of the Board of
Directors have guaranteed the Term Loan. The maturity date of the Term Loan was
amended to provide for twelve monthly installments of $750,000 beginning January
1, 2000. The Company also received a deferral of principal payments due under
the borrowing base facility until July 1, 1999. At such time, the available
borrowing base portion of the loan will be reviewed and is expected to begin to
reduce ratably at $325,000 per month with any difference between the available
borrowing base and amounts outstanding being currently due. Should the Company
be able to add sufficient value to its borrowing base through drilling
activities, the required principal payments would be reduced. Certain members of
the Board of Directors have provided approximately $4 million in collateral
primarily in the form of marketable securities to secure the borrowing base
facility.
5. MANDATORILY REDEEMABLE PREFERRED STOCK:
In January 1998, the Company consummated the sale of 300,000 shares of
Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to
affiliates of Enron Corp. The net proceeds received by the Company from this
transaction were approximately $28.8 million and were used primarily for oil
and natural gas exploration and development activities in Texas and Louisiana
and to repay related indebtedness. The Preferred Stock provides for annual
cumulative dividends of $9.00 per share, payable quarterly in cash or, at the
option of the Company until January 15, 2002, in additional shares of Preferred
Stock. The Company expects to continue payment in kind dividends due in 1999.
Dividend payments for the six months ended June 30, 1999 were made by the
issuance of an additional 14,838.54 shares of Preferred Stock. As of July 15,
1999 there were 342,125.23 shares of Preferred Stock outstanding.
The Preferred Stock is required to be redeemed by the Company (i) on January 8,
2005, or (ii) after a request for redemption from the holders of at least
30,000 shares of the Preferred Stock (or, if fewer than such number of shares
of Preferred Stock are outstanding, all of the outstanding shares of Preferred
Stock) and the occurrence of the following events: (a) the Company has failed
at any point in time to declare and pay any two dividends in the amount then
due and payable on or before the date the second of such dividends is due and
such dividends remain unpaid at such time, (b) the Company breaches certain
other covenants concerning the payment of dividends or other distributions on
or redemption or acquisition of shares of its capital stock ranking at parity
with or junior to the
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<PAGE> 11
Preferred Stock, (c) for two consecutive fiscal quarterly periods the quarterly
Cash Flow (as defined below) of the Company is less than the amount of the
dividends accrued in respect to the Preferred Stock, (d) the Company fails to
pay certain amounts due on indebtedness for borrowed money or there has
otherwise been an acceleration of such indebtedness for borrowed money, (e)
there is a violation of the Shareholders' Agreement that is not waived or (f)
the Company sells, leases, exchanges or otherwise disposes of all or
substantially all of its property and assets which transaction does not provide
for the redemption of the Series A Preferred Stock. "Cash Flow" means net
income prior to preferred dividends and accretion (i) plus (to the extent
included in net income prior to preferred dividends and accretion)
depreciation, depletion and amortization and other non-cash charges and losses
on the sale of property (ii) minus non-cash income items and required principal
payments on indebtedness for borrowed money with a maturity from the original
date of incurrence of such indebtedness of six months or greater (excluding
voluntary prepayments and refinancing, but including prepayments (other than in
connection with refinancing) which would otherwise be due under such
indebtedness within a 60-day period following the date of such prepayment). The
Preferred Stock also may be redeemed at the option of the Company at any time
in whole or in part. All redemptions are at a price per share, together with
dividends accumulated and unpaid to the date of redemption, decreasing over
time from an initial rate of $104.50 per share to $100.00 per share. If the
Company fails to meet its redemption obligations, the holders of the Preferred
Stock will generally have the right, voting separately as a class, to elect
additional directors, which in most cases will constitute a majority of the
board.
The Preferred Stockholder has advised the Company that they disagree with the
calculation of Cash Flow (as defined above) for the first quarter of 1999
because they believe that capitalized interest and capitalized geological,
geophysical and land costs are "non-cash income" items and as such should be
deducted from cash flow for purposes of the Test. The Company believes that
these items are neither "non-cash" nor "income" and therefore has advised the
Preferred Stockholder that the Company strongly disagrees with the Preferred
Stockholders' position regarding the treatment of these items. Based upon the
Company's calculation of Cash Flow, which is consistent with prior quarters, for
the three months ended June 30, 1999 the Cash Flow was greater than the amount
of the dividends accrued with respect to the Preferred Stock for such period,
and the Company has advised the Preferred Stockholder that based upon its
calculations the Company believes that it has met the Cash Flow test for the
quarter. The Company has also prepared the Cash Flow test for the quarter ended
June 30, 1999 on a basis the Company believes is consistent with the Preferred
Stockholders' advice to the Company. Based upon this calculation, the Company
believes that it has also met the Cash Flow test for the quarter on this
alternative basis. The Company, however, has not been advised by the Preferred
Stockholder as to whether or not the Preferred Stockholder concurs with such
calculation. There can be no assurance as to whether the Company's Cash Flow for
future periods will exceed the amount of the dividends to be accrued with
respect to the Preferred Stock.
6. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
On January 1, 1999 the Company adopted the American Institute of Certified
Public Accountants Statement of Position 98-5, which provides guidance on the
accounting for start up costs that required the recording of the cumulative
effect of a change in accounting principle to write off unamortized
organization costs of $77,731.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging activities - Deferral of the Effective Date of SFAS No.
133" is effective for fiscal years beginning after June 15, 2000. A Company may
also implement the Statement as of the beginning of any fiscal quarter after
issuance. Statement No. 133 cannot be applied retroactively. Statement No. 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1998 and, at the company's election,
before January 1, 1999. The Company routinely enters into financial instrument
contracts to hedge price risks associated with the sale of crude oil and
natural gas. Statement No. 133 amends, modifies and supercedes significantly
all of the authoritative literature governing the accounting for and disclosure
of derivative financial instruments and hedging activities. As a result,
adoption of Statement No. 133 will impact the accounting for and disclosure of
the Company's operations. The Company is assessing the impact Statement No. 133
will have on its financial accounting and disclosures and intends to adopt the
provisions of such statement in accordance with the requirements provided by
the statement.
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<PAGE> 12
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 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 financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and the unaudited condensed financial statements
included elsewhere herein. Unless otherwise indicated by the context,
references herein to "Carrizo" or "Company" mean Carrizo Oil & Gas, Inc., a
Texas corporation that is the registrant.
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 53 wells in 1998 and
eight wells through the six months ended June 30, 1999. The Company originally
budgeted to drill a total of 18 to 44 gross wells (4.6 to 17.5 net) in 1999.
The Company currently has budgeted to drill 29 gross wells (7.7 net) for the
last six months of 1999. 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 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. In addition, in November 1998, the
Company acquired assets in Wharton County, Texas in the Jones Branch project
area for $3,000,000.
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 the success of the Company's exploration program
and the 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 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 entered in hedging transactions covering 420 Mmcf and 1,080
Mmcf at an average price (Houston Ship Channel) of $1.98 and $2.07 resulting in
a loss of $85,000 and a gain of $32,000 for the three and six months ended June
30, 1999, respectively. The Company also entered in hedging transactions
covering 18,000 Bbls at an average price of $15.45 resulting in a loss of
$56,000 for the three and six months ended June 30, 1999. Further, the Company
entered in hedging transactions covering 364 and 544 Mmcf at an average price
(Houston Ship Channel) of $2.15 and $2.42 resulting in a loss of $11,000 and a
gain of $129,000 for the three and six months ended June 30, 1998,
respectively. The Company had outstanding hedge positions as of June 30, 1999
and 1998, respectively, covering 720 Mmcf for July-December 1999 and 124 Mmcf
for July 1998 at an average price of $1.93 and $2.15 (Houston Ship Channel).
The Company also had outstanding hedge positions as of June 30, 1999 covering
36,000
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<PAGE> 13
Bbls for July-December 1999 at an average price of $15.45. The fair market
value of the hedge positions as June 30, 1999 is approximately $(669,000).
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. A ceiling test write-down was not required for the three
months and six months ended June 30, 1999 and 1998. Once incurred, a write-down
of oil and gas properties is not reversible at a later date.
RECENT EXPLORATION AGREEMENT
During the second quarter of 1999, the Company entered into an Exploration
Agreement with Palace Exploration Company, an Oklahoma oil & gas company, to
drill and, if successful, develop a minimum of 27 of Carrizo's exploration
prospects during the nine months ended March 31, 2000. In exchange for earning
50 percent of Carrizo's working interest in each of the prospects, Palace has
agreed to pay approximately 71 percent of the drilling costs for such wells.
Palace also has the right to participate in certain additional 1999 wells on
substantially the same terms, as Carrizo identifies such prospects. The
agreement provides that Carrizo will retain well operations. Palace has certain
termination rights in the event of continued adverse drilling results. The
joint exploration program includes wells ranging in expected depths from 5,800
feet to over 14,000 feet. Most of the prospects were internally generated with
approximately 90 percent located in South Texas and approximately 10 percent
located south Louisiana. It is anticipated that the total drilling cost of the
minimum 27 gross well program will exceed $10 million.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999,
Compared to the Three Months Ended June 30, 1998
Oil and natural gas revenues for the three months ended June 30, 1999 increased
4 percent to $1,925,000 from $1,849,000 for the same period in 1998. Production
volumes for natural gas during the three months ended June 30, 1999 increased
12 percent to 697,268 from 623,998 for the same period in 1998. Average gas
prices decreased 13 percent to $1.97 per Mcf in the second quarter of 1999 from
$2.28 per Mcf in the same period in 1998. Production volumes for oil in the
second quarter of 1999 increased 16 percent to 42,562 Bbls from 36,639 Bbls for
the same period in 1998. Average oil prices increased 16 percent to $12.92 per
barrel in the second quarter of 1999 from $11.71 per barrel in the same period
in 1998. The increase in oil production was due primarily to the Jones Branch
acquisition during the fourth quarter of 1998. Natural gas production increased
primarily as a result of the Jones Branch acquisition and the completion of the
Musselman Ranches #2 offset by the natural decline of existing wells. Oil and
natural gas revenues include the impact of hedging activities as discussed
above under "General Overview."
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, 1998 and 1999:
<TABLE>
<CAPTION>
1999 Period
Compared to 1998 Period
June 30 ------------------------------
--------------------------- Increase % Increase
1998 1999 (Decrease) (Decrease)
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (Bbls) 36,639 42,562 5,923 16%
Natural gas (Mcf) 623,998 697,268 73,270 12%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 11.71 $ 12.92 $ 1.21 10%
Natural gas (per Mcf) 2.28 1.97 (.31) (13)%
Operating revenues-
Oil and condensate $ 428,998 $ 550,047 $ 121,049 28%
Natural gas 1,419,767 1,375,218 (44,549) (3)%
---------- ---------- ----------
Total $1,848,765 $1,925,265 $ 76,500 4%
========== ========== ==========
</TABLE>
- ---------------------
(1) Includes impact of hedging activities.
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<PAGE> 14
Oil and natural gas operating expenses for the three months ended June 30, 1999
decreased 3 percent to $637,000 from $653,000 for the same period in 1998
primarily due to a reduction in costs on older producing fields offset by the
addition of new production. Operating expenses per equivalent unit decreased to
$.67 per Mcfe in the second quarter of 1999 from $.77 per Mcfe in the same
period in 1998 as a result of the increase in production of natural gas and
cost control measures implemented in certain oil producing fields.
Depreciation, depletion and amortization (DD&A) expense for the three months
ended June 30, 1999 increased 14 percent to $985,000 from $861,000 for the same
period in 1998. This increase was due to increased amortization of deferred
loan costs, increased production and additional seismic and drilling costs
offset by the lower asset base resulting from the ceiling test write-down in
the fourth quarter of 1998. General and administrative expense for the three
months ended June 30, 1999 decreased 14 percent to $480,000 from $558,000 for
the same period in 1998 primarily as a result of cost control measures
implemented in the first quarter of 1999.
Interest income for the three months ended June 30, 1999 decreased to $7,000
from $80,000 in the second quarter of 1999 as a result of declining cash
balances. Net interest expense for the three months ended June 30, 1999,
increased to $3,000 from zero from in the same period in 1998. Capitalized
interest increased to $340,000 in the second quarter of 1999 from zero in the
second quarter of 1998 reflecting higher debt levels in the 1999 quarter.
Loss before income taxes for the three months ended June 30, 1999 decreased to
a loss of $173,000 from a loss of $144,000 in the same period in 1998. Net loss
for the three months ended June 30, 1999 decreased to a loss of $180,000 from a
loss of $107,000 for the same period in 1998 primarily as a result of the
factors described above.
Six Months Ended June 30, 1999,
Compared to the Six Months Ended June 30, 1998
Oil and natural gas revenues for the six months ended June 30, 1999 decreased
10 percent to $3,768,000 from $4,188,000 for the same period in 1998.
Production volumes for natural gas during the six months ended June 30, 1999
increased 5 percent to 1,400,962 Mcf from 1,331,169 Mcf for the same period in
1998. Average gas prices decreased 21 percent to $1.94 per Mcf in the first
half of 1999 from $2.47 per Mcf in the same period in 1998. Production volumes
for oil in the first half of 1999 increased 29 percent to 90,321 Bbls from
69,814 Bbls for the same period in 1998. Average oil prices decreased 10
percent to $11.55 per barrel in the first half of 1999 from $12.89 per barrel
in the same period in 1998. The increase in oil production was due primarily to
the Jones Branch Acquisition during the fourth quarter of 1998. Natural gas
production increased primarily as a result of Jones Branch acquisition and the
completion of the Musselman Ranches #2 offset by the natural decline of
existing wells. Oil and natural gas revenues include the impact of hedging
activities as discussed above under "General Overview."
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, 1998 and 1999:
<TABLE>
<CAPTION>
1999 Period
Compared to 1998 Period
June 30 ------------------------------
------------------------- Increase % Increase
1998 1999 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (Bbls) 69,814 90,321 20,507 29%
Natural gas (Mcf) 1,331,169 1,400,962 69,793 5%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 12.89 $ 11.55 $ (1.34) (10)%
Natural gas (per Mcf) 2.47 1.94 (.53) (21)%
Operating revenues-
Oil and condensate $ 899,687 $1,043,484 $ 143,797 16%
Natural gas 3,287,960 2,724,096 (563,864) (17)%
---------- ---------- ----------
Total $4,187,647 $3,767,580 $ (420,067) (10)%
========== ========== ==========
</TABLE>
- -------------------
(2) Includes impact of hedging activities.
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<PAGE> 15
Oil and natural gas operating expenses for the six months ended June 30, 1999
increased 8 percent to $1,381,000 from $1,283,000 for the same period in 1998
primarily due to the addition of new wells offset by a reduction in costs on
older producing fields. Operating expenses per equivalent unit decreased to
$.71 per Mcfe in the first half of 1999 from $.73 per Mcfe in the same period
in 1998 as a result of increased production of natural gas and the
implementation of cost control measures in certain oil producing fields during
the first quarter of 1999.
Depreciation, depletion and amortization (DD&A) expense for the six months
ended June 30, 1999 increased 19 percent to $1,928,000 from $1,620,000 for the
same period in 1998. This increase was due to additional seismic and drilling
costs. General and administrative expense for the six months ended June 30,
1999 decreased 15 percent to $1,188,000 from $1,393,000 for the same period in
1998 primarily as a result of cost control measures implemented in the first
quarter of 1999.
Interest income for the six months ended June 30, 1999 decreased to $13,000
from $274,000 in the first half of 1998. Net interest expense for the six
months ended June 30, 1999 and 1998 was unchanged. Capitalized interest
decreased to $601,000 in the first half of 1999 from $55,000 in the first half
of 1998 reflecting higher debt levels in 1999.
Income (loss) before income taxes for the six months ended June 30, 1999
decreased to a loss of $719,000 from income of $162,000 for the same period in
1998. Net income (loss) for the six months ended June 30, 1999 decreased to a
loss of $811,000 from income of $79,000 for the same period in 1998 primarily
as a result of the factors described above and the charge of $78,000 for the
cumulative effect of change in method of reporting costs of start-up
activities.
LIQUIDITY AND CAPITAL RESOURCES
Note 2 to the Financial Statements notes that the financial statements have
been prepared assuming the Company will continue as a going concern but also
notes the uncertainties about the Company's future ability to pay its
obligations when they become due and the lack of firm commitments for
additional capital raised substantial doubt about the ability of the Company to
continue as a going concern. As stated in that note, the financial statements
do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern. See Note 2 in the Notes to the Company's Financial Statements.
The Company has made and will be required to make oil and gas capital
expenditures substantially in excess of its net cash flow from operations in
order to complete the exploration and development of its existing properties.
The Company will require additional sources of financing to fund drilling
expenditures on properties currently owned by the Company and to fund leasehold
costs and geological and geophysical cost on its active exploration projects.
Management of the Company continues to seek financing for its capital program
from a variety of sources. The Company is seeking common or preferred equity
investors. The Company is also seeking additional debt financing. No assurance
can be given that the Company will be able to obtain additional financing by
these or other means on terms that would be acceptable to the Company. The
Company's inability to obtain additional financing would have a material
adverse effect on the Company. Without raising additional capital, the Company
anticipates that it will be required to limit or defer its planned oil and gas
exploration and development program, which could adversely affect the
recoverability and ultimate value of the Company's oil and gas properties. The
Company may also be required to pursue other financial alternatives, which
could include sales of assets or a sale or merger of the Company.
The Company's primary sources of liquidity have included proceeds from the
Offering and from the sale of shares of Preferred Stock and the Warrants, funds
generated by operations, equity capital contributions and borrowings, primarily
under revolving credit facilities.
Cash flows provided by (used in) operations (after changes in working capital)
were $(3,328,060) and $4,373,171 for the six months ended June 30, 1998 and
1999, respectively. The decrease in cash flows used in operations in 1999 as
compared to 1998 was due primarily to increases in trade accounts payable in
1998.
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<PAGE> 16
The Company originally budgeted capital expenditures in 1999 of approximately
$2.2 million to $9.5 million of which $500,000 was expected to be used to fund
3-D seismic surveys and land acquisitions and $1.7 million to $ 9.0 million of
which was expected to be used for drilling activities in the Company's project
areas. The Company originally budgeted to drill approximately 18 to 44 gross
wells (4.6 to 17.8 net) in 1999. The Company has budgeted capital expenditures
for the last six months of 1999 of $4.1 million of which $500,00 is expected to
be used to fund 3-D seismic surveys and land acquisitions and $3.6 million of
which is expected to be used for drilling activities in the Company's project
areas. The Company has budgeted to drill approximately 29 gross wells (7.7 net)
in the last six months of 1999. The actual number of wells drilled and capital
expended is dependent upon available financing and cash flow. This decrease in
planned drilling activity resulted primarily from the lack of availability of
capital resources.
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 $5.8 million for the six months ended June 30, 1999. The
Company's drilling efforts resulted in the successful completion of 31 gross
wells (10.3 net) during the year ended December 31, 1998 and six gross wells
(1.0 net) during the six months ended June 30, 1999.
FINANCING ARRANGEMENTS
In connection with the Offering, the Company entered into an amended revolving
credit agreement with Compass Bank (the "Company Credit Facility"), to provide
for a maximum loan amount of $25 million, subject to borrowing base
limitations. The maximum borrowing base loan amount was amended to $10 million
in April, 1999. Under the Company Credit Facility, the principal outstanding is
due and payable upon maturity in June 2000 with interest due monthly. The
Company Credit Facility was amended in September 1998 to provide for a term
loan under the facility (the "Term Loan") in addition to the revolving credit
facility limited by the Company's borrowing base. The Term Loan was initially
due and payable upon maturity in September 1999. 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. As of June 30, 1999 and
December 31, 1998, respectively, the borrowing base was $6,273,287 and
$6,076,000 and borrowings outstanding were $5,451,000 and $5,056,000.
Proceeds from the Borrowing Base portions of this credit facility have been
used to provide funding for exploration and development activity. Substantially
all of Carrizo's oil and natural gas property and equipment is pledged as
collateral under this facility. At June 30, 1999 and December 31, 1998
borrowings under this facility totaled $5,451,000 and $5,056,000, respectively,
with and an additional $523,287 and $1,020,000, respectively, available for
future borrowings. Borrowings outstanding under the Term Loan portion of the
facility were $9,000,000 and $7,000,000 at June 30, 1999 and December 31, 1998,
respectively. The facility was also available for letters of credit, two and
one of which have been issued for $299,000 and $224,000 at June 30, 1999 and
December 31, 1998, respectively. The term loan is guaranteed by certain members
of the Board of Directors.
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. In March 1999, the
Company Credit Facility was amended to decrease the required specified tangible
net worth covenant.
In March 1999, the Company borrowed an additional $2 million on the term loan
portion of the Company Credit Facility increasing the total outstanding
borrowing under the Term Loan to $9 million. Certain members of the Board of
Directors have guaranteed the Term Loan. The maturity date of the Term Loan was
amended to provide for twelve monthly installments of $750,000 beginning
January 1, 2000. The Company also received a deferral of principal payments due
under the borrowing base facility until July 1, 1999. At such time, the
available borrowing base portion of the loan will be reviewed and is expected
to begin to reduce ratably at $325,000 per month with any
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<PAGE> 17
difference between the available borrowing base and amounts outstanding being
currently due. Should the Company be able to add sufficient value to its
borrowing base through drilling activities, the required principal payments
would be reduced. Certain members of the Board of Directors have provided
approximately $4 million in collateral primarily in the form of marketable
securities to secure the borrowing base facility.
In January 1998, the Company consummated the sale of 300,000 shares of
Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to
affiliates of Enron Corp. The net proceeds received by the Company from this
transaction were approximately $28.8 million and were used primarily for oil
and natural gas exploration and development activities in Texas and Louisiana
and to repay related indebtedness. The Preferred Stock provides for annual
cumulative dividends of $9.00 per share, payable quarterly in cash or, at the
option of the Company until January 15, 2002, in additional shares of Preferred
Stock. The Company expects to continue payment in kind dividends due in 1999.
Dividend payments for the six months ended June 30, 1999 were made by the
issuance of an additional 14,838.54 shares of Preferred Stock. As of July 15,
1999 there were 342,125.23 shares of Preferred Stock outstanding.
The Preferred Stock is required to be redeemed by the Company (i) on January 8,
2005, or (ii) after a request for redemption from the holders of at least
30,000 shares of the Preferred Stock (or, if fewer than such number of shares
of Preferred Stock are outstanding, all of the outstanding shares of Preferred
Stock) and the occurrence of the following events: (a) the Company has failed
at any point in time to declare and pay any two dividends in the amount then
due and payable on or before the date the second of such dividends is due and
such dividends remain unpaid at such time, (b) the Company breaches certain
other covenants concerning the payment of dividends or other distributions on
or redemption or acquisition of shares of its capital stock ranking at parity
with or junior to the Preferred Stock, (c) for two consecutive fiscal quarterly
periods the quarterly Cash Flow (as defined below) of the Company is less than
the amount of the dividends accrued in respect to the Preferred Stock, (d) the
Company fails to pay certain amounts due on indebtedness for borrowed money or
there has otherwise been an acceleration of such indebtedness for borrowed
money, (e) there is a violation of the Shareholders' Agreement that is not
waived or (f) the Company sells, leases, exchanges or otherwise disposes of all
or substantially all of its property and assets which transaction does not
provide for the redemption of the Series A Preferred Stock. "Cash Flow" means
net income prior to preferred dividends and accretion (i) plus (to the extent
included in net income prior to preferred dividends and accretion)
depreciation, depletion and amortization and other non-cash charges and losses
on the sale of property (ii) minus non-cash income items and required principal
payments on indebtedness for borrowed money with a maturity from the original
date of incurrence of such indebtedness of six months or greater (excluding
voluntary prepayments and refinancing, but including prepayments (other than in
connection with refinancing) which would otherwise be due under such
indebtedness within a 60-day period following the date of such prepayment). The
Preferred Stock also may be redeemed at the option of the Company at any time
in whole or in part. All redemptions are at a price per share, together with
dividends accumulated and unpaid to the date of redemption, decreasing over
time from an initial rate of $104.50 per share to $100.00 per share. If the
Company fails to meet its redemption obligations, the holders of the Preferred
Stock will generally have the right, voting separately as a class, to elect
additional directors, which in most cases will constitute a majority of the
board.
The Preferred Stockholder has advised the Company that they disagree with the
calculation of Cash Flow (as defined above) for the first quarter of 1999
because they believe that capitalized interest and capitalized geological,
geophysical and land costs are "non-cash income" items and as such should be
deducted from cash flow for purposes of the Test. The Company believes that
these items are neither "non-cash" nor "income" and therefore has advised the
Preferred Stockholder that the Company strongly disagrees with the Preferred
Stockholders' position regarding the treatment of these items. Based upon the
Company's calculation of Cash Flow, which is consistent with prior quarters, for
the three months ended June 30, 1999 the Cash Flow was greater than the amount
of the dividends accrued with respect to the Preferred Stock for such period,
and the Company has advised the Preferred Stockholder that based upon its
calculations the Company believes that it has met the Cash Flow test for the
quarter. The Company has also prepared the Cash Flow test for the quarter ended
June 30, 1999 on a basis the Company believes is consistent with the Preferred
Stockholders' advice to the Company. Based upon this calculation, the Company
believes that it has also met the Cash Flow test for the quarter on this
alternative basis. The Company, however, has not been advised by the Preferred
Stockholder as to whether or not the Preferred Stockholder concurs with such
calculation. There can be no assurance as to whether the Company's Cash Flow for
future periods will exceed the amount of the dividends to be accrued with
respect to the Preferred Stock.
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.
YEAR 2000
The "Year 2000 Issue" is a general term used to refer to certain business
implications of the arrival of the new millennium. In simple terms, on January
1, 2000, all computerized systems that use the two-digit convention to identify
the applicable year, including both information technology systems and
non-information technology systems that use embedded technology, could fail
completely or create erroneous data as a result of the system failing to
recognize the two digit internal date "00" as representing the year 2000.
-16-
<PAGE> 18
The Company has completed its initial assessment of Year 2000 compliance of its
internal information technology systems, which consist primarily of financial
and accounting systems and geological evaluation systems, and does not believe
that these systems have any material issues with respect to Year 2000
compliance. The Company's internal information technology systems are all new
and widely utilized. Its vendors have advised the Company that all of these
systems are either Year 2000 compliant or can be easily upgraded to be Year
2000 compliant. The Company anticipates that its Year 2000 remediation efforts
for information technology systems, consisting primarily of software upgrades,
will continue through 1999, and anticipates incurring less than $10,000 in
connection with these efforts.
The Company has not identified any non-information technology systems that use
embedded technology on which it relies and which it believes is likely to have
a Year 2000 problem; however such assessment is expected to continue through
1999.
Like every other business enterprise, the Company is at risk from Year 2000
failures on the part of its major business counterparts, including suppliers
and service providers, as well as potential failures in public and private
infrastructure services, including electricity, water, gas, transportation and
communications.
Through communications with industry partners and others, the Company is also
evaluating the risk presented by potential Year 2000 non-compliance of third
parties. Because such risks vary substantially, companies are being contacted
based on the estimated magnitude of the risk posed to the Company by their
potential Year 2000 non-compliance. The Company anticipates that these efforts
will continue through 1999 and will not result in significant costs to the
Company.
The Company believes that its most likely worst-case scenario Year 2000 failure
would be a shutdown of the pipeline systems into which it markets its natural
gas production. Should this occur, the Company would be forced to curtail its
production as there is no alternate way to market its production. Revenues
would be negatively impacted for the period of the curtailment. While the
pipeline operators do not anticipate such an event, there can be no assurance
that it will not occur. The Company is not insured for any resulting lost
revenues.
The Company's assessment of its Year 2000 issues involves many assumptions.
There can be no assurance that the Company's assumptions will prove accurate,
and actual results could differ significantly from the assumptions. In
conducting its Year 2000 compliance efforts, the Company has relied primarily
on vendor representations with respect to its internal computerized systems and
representations from third parties with which the Company has business
relationships and has not independently verified these representations. There
can be no assurance that these representations will prove to be accurate. A
Year 2000 failure could result in a business disruption that adversely affects
the Company's business, financial condition or results of operations. The
Company is unlikely to be insured for Year 2000 losses should they occur.
Although it is not currently aware of any likely business disruption, the
Company is developing contingency plans, such as alternate methods of measuring
its natural gas sales volumes, to address Year 2000 failures and expects this
work to continue through 1999.
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<PAGE> 19
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of business. The Company is not currently a
party to any litigation that it believes could have a material adverse
effect on the financial position of the Company.
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
(A) Annual Meeting of Shareholders on May 25, 1999.
(B) Set forth below are the results of the voting with respect to each
matter acted upon at the meeting (proxy totals in thousands):
<TABLE>
<CAPTION>
Broker
For Against Withheld Abstain Non votes
--- ------ -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Election of Directors 9,088,126 9,271
S. P. Johnson IV 9,088,126 9,271
Frank A. Wojtek 9,088,126 9,271
Steven A. Webster 9,088,126 9,271
Douglas A. P. Hamilton 9,088,126 9,271
Paul B. Loyd, Jr. 9,088,126 9,271
Approval of the Appointment
of Arthur Andersen L.L.P. as
Independent Public
Accountants 9,086,597 10,800
</TABLE>
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, effects of
litigation, expected production or reserves, increases in reserves, acreage
working capital requirements, hedging activities, the ability of expected
sources of liquidity to implement its business strategy, matters relating to
the Palace Agreement, including cost of wells and any effect of that agreement,
the effects of the Year 2000 issue 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
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<PAGE> 20
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 Company's Annual Report on Form 10-K
and 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
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
+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 Annual Report on Form 10-K for the year ended
December 31, 1997.
+3.2 -- Statement of Resolution Establishing Series of Shares Designated 9% Series A Preferred Stock
(Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
+3.3 -- 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 -- Sixth Amendment to First Amended, Restated and Combined Loan Agreement by and between Carrizo Oil
& Gas, Inc. and Compass Bank dated April 23, 1999. Incorporated by reference to Exhibit 4.4 to
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
4.5 -- Amended and Restated Limited Guaranty, Paul B. Loyd, Jr. dated March 22, 1999.
10.1 -- Exploration Agreement dated June 22, 1999 between the Company and Palace Exploration Company.
27.1 -- Financial Data Schedule.
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
None
</TABLE>
-19-
<PAGE> 21
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: August 16, 1999 By: /s/ S. P. Johnson, IV
--------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 1999 By: /s/ Frank A. Wojtek
--------------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 Exploration Agreement
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EXPLORATION AGREEMENT
THIS EXPLORATION AGREEMENT (the "Agreement") entered into this 21st
day of June, 1999, however effective as of the 4th day of May, 1999, by and
between CARRIZO OIL AND GAS, INC., a Texas corporation, of Houston, Texas
(herein "Carrizo") and PALACE EXPLORATION COMPANY, an Oklahoma corporation, of
Cedarhurst, New York (herein "Palace").
RECITALS:
A. Carrizo has developed and leased and is in the process of
developing and leasing numerous oil and gas prospects located within the
on-shore portion of South Texas and the South Louisiana Gulf Coast as outlined
on the Exploratory Area identified on the attached as Schedule 1. These oil and
gas leasehold prospects were and are being developed by Carrizo through
"in-house" geological subsurface mapping, proprietary 2-D and 3-D seismic
acquisition projects, 3-D spec shoot acquisition participation and
participation in third party (via retainer arrangements) geological/geophysical
efforts.
B. Carrizo is seeking a working interest participant to share the risk
of developing certain of the prospects and Palace seeks to acquire working
interest positions in such prospects.
C. This Agreement represents the understanding, agreement and contract
of the parties regarding Palace's acquisition of working interest positions in
certain of the aforesaid prospects and the parties' participation in the
development thereof.
D. Carrizo acknowledges that (i) Palace's business involves raising
funds for investment in drilling activities, (ii) a material consideration for
Palace entering into this Agreement is Palace's need to expend funds it has
raised for the drilling operations contemplated herein, and (iii) that the
consideration provided by Palace's agreements and obligations set forth herein
are adequate and sufficient consideration or the rights and remedies provided
to Palace hereunder.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and promises herein set forth, Carrizo and Palace hereby agree as
follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings unless the context otherwise requires:
Section 1.1 "AFE" means an authority for expenditure.
Section 1.2 "Affiliate" shall mean, with respect to any person (which
shall include any individual, partnership, company, joint venture, corporation,
limited liability company, trust, trustee,
1
<PAGE> 2
receiver, or other entity or any unincorporated association or organization),
any person directly or indirectly controlling, controlled by or under common
control with such person. As used in this definition, "control" (in the context
of the terms "controlling," and "controlled by," and "under common control
with") includes, but is not limited to, the possession directly or indirectly
of the authority to direct or cause the direction of the management, policies
or operational activities of a person, whether through ownership of voting
securities or other right to vote, by contract or otherwise. Notwithstanding
anything to the contrary, the term "affiliate" shall not apply affiliates of
Enron Corporation as it may pertain to Carrizo.
Section 1.3 "Casing Point" shall mean that point at which the
authorized objective has been reached, all logs and cores have been run or
taken and other pre-completion testing (i.e, testing prior to setting pipe) has
been performed and a decision has been made by the Parties whether or not to
make a completion attempt, or join in a completion attempt made by other
working interest owners in the well.
Section 1.4 "Current Exhibit "B" Prospect" means any Prospect which is
an Exhibit "B" Prospect as of the effective date of this Agreement.
Section 1.5 "Exhibit "A" Prospects" shall mean those Prospects
specifically outlined and identified on Exhibit "A" hereto which is hereby made
a part hereof and which is comprised of the Tigre Lagoon Prospect and the Ursa
Minor Prospect.
Section 1.6 "Exhibit "B" Prospects" shall mean those Prospects
specifically outlined and identified on Exhibit "B" hereto and made a part
hereof together with any other Prospects which, by the terms of this Agreement,
are added to Exhibit "B" and are stated to become Exhibit "B" Prospects.
Section 1.7 "Exploratory Area" means that geographic area within the
area outlined on the Plat attached as Schedule "I" hereto.
Section 1.8 "Farmout" means any contract right whereby an oil and gas
lease or leases or an interest therein or any leasehold, operating rights or
other rights authorizing the owner thereof to explore for and produce oil, gas
and related hydrocarbons and other minerals may be earned by the drilling of
one or more wells.
Section 1.9 "Force Majeure" means the inability of a party to perform
or comply with an obligation under this Agreement by reason of acts of God,
strikes, lockout or other industrial disturbance, acts of the public enemy,
wars, blockage, insurrections, riots, epidemics, landslides, lightening,
earthquakes, fires, explosions or other casualty, hurricanes, storms, floods,
arrests and restraint of Government (whether federal, state, local, civil or
military), civil disturbances, inability or delay in obtaining necessary
easements, rights of way, leases or servitudes, and any other cause or causes,
whether of the kind herein enumerated or otherwise, not reasonably within the
control of the Party claiming Force Majeure and which, by the exercise of due
diligence, such party is unable wholly or in part to prevent or overcome;
provided "Force Majeure" does not mean and shall not include causes which by
the exercise of reasonable diligence the Party claiming suspension could
2
<PAGE> 3
overcome or could have prevented. Further, "Force Majeure" shall not include
lack of finances or unavailability of funds.
Section 1.10 "Initial Test Well" shall mean the first well (and only
the first well) drilled on a Subject Prospect pursuant to this Agreement.
Section 1.11 "Lease" means an oil and gas lease, oil, gas and mineral
lease, compulsory pooled interest, pooled interest, leasehold estates, partial
and other interests therein and subleases thereof, operating rights and other
rights authorizing the owner thereof to explore for and produce oil, gas and
related hydrocarbons and other minerals. This term also includes top leases and
other interests which are to vest upon the expiration of a currently effective
interest. Except as expressly provided herein to the contrary or where the
context otherwise requires, "Lease" shall also include Lease Contract Rights.
The fact that use of the term "Lease" or "Leases" may on occasion be expressly
stated herein to include "Lease Contract Rights" is for emphasis and is not to
imply that the term "Lease" or "Leases" used alone do not include Lease
Contract Rights unless the context requires otherwise.
Section 1.12 "Lease Acquisition Costs" shall mean all direct costs
incurred in acquiring Leases (excluding Well Costs) including by way of
illustration, but not limited to, cash bonus consideration (including bonuses
paid for interests acquired by compulsory pooling), brokers' fees and expenses,
recording fees, title examination expense, legal expenses, and title curative
costs incurred in connection with acquisition of a Lease.
Section 1.13 "Lease Contract Rights" means Farmouts, Lease option
contracts and all other contractual rights to acquire oil and gas leases, oil,
gas and mineral leases, compulsory pooled interests, pooled interests,
leasehold estates, partial and other interests therein and subleases thereof,
operating rights and other rights authorizing the owner thereof to explore for
and produce oil, gas and related hydrocarbons and other minerals, whether or
not such interests have been earned by performance.
Section 1.14 "Party" means either of Palace or Carrizo, and the
"Parties" means both of Palace and Carrizo, and when the context requires,
"Party" and "Parties" includes the successors and assigns of such persons.
Section 1.15 "Promoted Well Costs" means that share of Well Costs
incurred by Palace in drilling an Initial Test Well to Casing Point which are
in excess of Well Costs directly attributable and chargeable to the working
interest of Palace before the addition of any promotion or carry, all as
determined by section 3.4 and section 3.6. Under section 3.6, Promoted Well
Costs are determined by such directly attributable and chargeable Well Costs
times the difference between the Applicable Drilling Cost Percentage and 100%.
For example, if Palace's Participating Interest is 50%, Promoted Well Costs are
an additional 42.8571429% of Well Costs chargeable to the working interest of
Palace in drilling the Initial Test Well to Casing Point.
Section 1.16 "Prospect" means an area identified by Carrizo which is a
contiguous geographic area which in the opinion of Carrizo encompasses a
geologic structure, stratigraphic trap
3
<PAGE> 4
or other geologic feature which makes its treatment reasonable as a single
Prospect for oil and gas purposes. "Prospect" includes the Subject Prospects
unless the context requires otherwise.
Section 1.17 "Seismic Acquisition Area" means the lands lying within
any of those areas outlined on the Plats attached as Schedule "II" hereto.
Section 1.18 "Subject Prospects" means those Prospects in which Palace
is to acquire an interest under this Agreement.
Section 1.19 "Subsequent Well Operation" shall mean any Well Operation
on a Subject Prospect other than the drilling of an Initial Test Well and
further means any Well Operation conducted in an Initial Test Well after the
initial drilling of such Well to Casing Point, and Subsequent Well Operations
include a completion attempt at Casing Point on an Initial Test Well.
Section 1.20 "Technical Data" means geological, geophysical, seismic,
production test, engineering, technical and other scientific data and/or
information and all studies, maps, evaluations and/or reports derived
therefrom.
Section 1.21 "Third-Party Agreements" means letter agreements, joint
operating agreements, exploration agreements, geological and geophysical
consulting agreements, or farm-in or farmout agreements, or any other
agreements with third parties which may require Carrizo to assign interests in
Leases to a third party or which may govern the ownership, use or enjoyment of
Leases. Schedule "IV" hereto, to the best of Carrizo's knowledge, contains a
list of the applicable Third-Party Agreements in effect on the date hereof.
Carrizo shall make available such agreements at the offices of Carrizo during
normal business hours.
Section 1.22 "Well Costs" shall mean all costs incurred for the
drilling, deepening, sidetracking, plugging back, testing, completing and
equipping of a well for the taking of production (including installation of all
necessary surface equipment actually located on-lease and usually considered to
be on-lease equipment such as heater-treaters, on-lease tankage, separation,
and the like, and including on-lease amine treaters and on-lease dehydration
and compression), and for the plugging and for the abandonment of the same in
the event a well is completed as a dry hole (whether or not a completion
attempt is made). This term includes (i) all costs incurred in operations in
preparation for drilling; (ii) all costs incurred for the settlement of damage
claims and the costs of restoring the well site in accordance with applicable
governmental and/or Lease requirements; (iii) all costs chargeable under the
applicable accounting procedure in connection with any of the aforementioned
operations or activities; (iv) title examination expense and title curative
costs incurred for drilling of a well, (v) insurance and permit costs and (vi)
such other costs as would be incurred by a reasonable and prudent operator in
connection with the performance of such operations. In no event shall Well
Costs include any costs incurred in marketing or making the oil and gas
marketable or incident to marketing oil and gas (excepting only those on-lease
facilities expressly mentioned previously in this definition) or for any
central facilities for the same applicable to multiple wells even if on-lease.
4
<PAGE> 5
Section 1.23 "Well Operations" shall mean any operation for the
drilling, testing, logging, deepening, plugging back, side-tracking, reworking,
repairing, workover, completion, recompleting, equipping, redrilling or
plugging and abandonment of a well.
Section 1.24 "Terms Defined Elsewhere." The following terms are
defined elsewhere in this Agreement:
"Applicable Drilling Cost Percentage" - Section 3.6.2
"Area of Mutual Interest (AMI)" - Section 11.1
"Declined Prospect" - Section 4.2
"Maximum Amount" - Section 5.3
"Notified Party" - Subsection 11.1.1, 11.1.2, and 11.1.3
"Operating Agreement" - Section 10.1
"Participating Percentage" - Section 3.6
"Proportionate Acquisition Interest" - Subsection 11.1.4
"Prospect Proposal Package" - Section 6.2
"Prospect Review Package" - Section 4.1
"Subsequently Acquired Leases" - Section 5.1
"Termination Conditions" - Section 4.3
ARTICLE II
THE EXHIBIT "A" PROSPECTS
Section 2.1 Upon payment by Palace to Carrizo of Palace's share of
estimated Well Costs (including Promoted Well Costs) to Casing Point, Carrizo
shall assign to Palace an undivided fifty percent (50%) of Carrizo's currently
owned Lease and Subsequently Acquired Lease position in each of the Exhibit "A"
Prospects, as such Lease position is determined after giving affect to
assignments owed to third parties under Third Party Agreements but otherwise
prior to any subsequent assignments, commitments or transfers to other persons.
Section 2.2 Exhibit "A-1" hereto and made a part hereof sets forth for
each of the Exhibit "A" Prospects (i) the approximate number of gross acres now
under lease; (ii) the approximate number of net mineral acres now under lease;
(iii) the average net revenue interests currently under lease; (iv) the lowest
and highest net revenue interest comprising the Leases; and (v) a schedule of
farmout and other similar agreements by which Leases will be acquired.
Section 2.3 Exhibit "A" hereto identifies the Exhibit "A" Prospects,
the Objective Depth for each Prospect's Initial Test Well and an Inside
Commencement Date and an Outside Commencement Date for each such Well. Carrizo
agrees to drill or cause to be drilled each of the Initial Test Wells for each
of said Prospects to a depth sufficient to test the Objective Depth. Carrizo
further agrees to commence drilling operations for the Initial Test Well for
the Ursa Minor Prospect no sooner than May 10, 1999 and for the Initial Test
Well for the Tigre Lagoon Prospect no sooner than August 1, 1999.
5
<PAGE> 6
Section 2.4 As and for Palace's share of Well Costs incurred in
drilling each of the Initial Test Wells to Casing Point for the Exhibit "A"
Prospects and in plugging and abandoning each such Well if no completion
attempt is made or if Palace elects not to join in a completion attempt, Palace
shall pay to Carrizo a turnkey price of the following amounts:
Tigre Lagoon: $ 532,000.00
Ursa Minor: $ 515,000.00
For the turnkey price, Carrizo agrees to drill or cause to be drilled
each of said Initial Test Wells to Casing Point and, if no completion attempt
is made to plug and abandon such Well in accordance with lease requirements and
the requirements of regulatory authority, regardless of whether the actual cost
otherwise attributable to the interest of Palace is more or less than the
aforesaid amount; provided, however, Carrizo shall be under no obligation to
continue drilling the Initial Test Well, sidetrack the Initial Test Well, or
drill a substitute well thereof, if Carrizo is unable to reach the objective
depth because Carrizo encounters impenetrable substances or drilling
conditions, whether natural or mechanical, which in the opinion of a reasonably
prudent operator, under the same or similar circumstances, would render further
drilling operations impossible or impracticable. If Carrizo should abandon
drilling prior to Casing Point in accordance with the foregoing, no portion of
the turnkey price shall be due and any portion thereof previously paid will be
refunded to Palace.
Section 2.5 All costs incurred subsequent to Casing Point with respect
to each of the Initial Test Wells for the Exhibit "A" Prospects, including
costs of completion and equipping and/or plugging and abandonment if a
completion attempt is made, shall be borne by Palace in accordance with
Palace's working interest in each of said Wells.
Section 2.6 Palace acknowledges that it has previously completed its
technical and land review of the Exhibit "A" Prospects.
ARTICLE III
THE EXHIBIT "B" PROSPECTS
Section 3.1 Upon payment by Palace to Carrizo of Palace's share of
estimated Well Costs (including Promoted Well Costs) to Casing Point, Carrizo
shall assign to Palace an undivided fifty percent (50%) of Carrizo's currently
owned Lease and Subsequently Acquired Lease position in each of the Exhibit "B"
Prospects, as such Lease position is determined after giving effect to
assignments owed to third parties under Third Party Agreements but otherwise
prior to any subsequent assignments, commitments or transfers to other persons;
provided the interest of Palace is further subject to reduction under Section
3.6. If an Exhibit "B" Prospect covers only a part of a Lease, Carrizo shall be
obligated to assign to Palace only that part of the Lease that is within the
Exhibit "B" Prospect.
Section 3.2 Exhibit "B-1" hereto and made a part hereof sets forth for
each of the Exhibit "B" Prospects (i) the approximate number of gross acres now
under lease; (ii) the approximate number of net mineral acres now under lease;
(iii) the average net revenue interests currently under
6
<PAGE> 7
lease; (iv) the lowest and highest net revenue interest comprising the Leases;
(v) a schedule of farmout and other similar agreements by which Leases will be
acquired; and (vi) open acreage intended to be leased.
Section 3.3 Exhibit "B" hereto identifies the Initial Test Well for
each of the Exhibit "B" Prospects and the Objective Depth for each Prospect's
Initial Test Well. Subject to excuse because of Force Majeure, Carrizo shall
drill or cause to be drilled each of the Initial Test Wells for each of said
Subject Prospects to a depth sufficient to test the Objective Depth. Subject to
Palace's election to participate therein, Carrizo agrees to commence drilling
operations on each Initial Test Well for the Exhibit "B" Prospects in
accordance with the schedule set forth in Exhibit "B"; provided, if Carrizo's
ability to commence such operations is restricted by Third-Party Agreements,
Carrizo will use reasonable efforts, utilizing the rights and options available
to it under the applicable Third-Party Agreement, to cause such Wells to be
commenced in accordance with such schedule.
Section 3.4 As and for Palace's share of Well Costs incurred in
drilling each of the Initial Test Wells to Casing Point for the Exhibit "B"
Prospects, Palace shall pay to Carrizo the Applicable Drilling Cost Percentage
(as hereinafter defined) of (i) all Well Costs chargeable to the working
interest of Palace incurred in drilling each of the Initial Test Wells to
Casing Point for the Exhibit "B" Prospects and (ii) all costs to plug and
abandon the Initial Test Well, if the Initial Test Well results in a dry hole
and no attempt is made to complete such Well. All other costs incurred
subsequent to Casing Point for each of the Initial Test Wells, including costs
of completion and equipping and/or plugging and abandonment if a completion
attempt is made in which Palace has participated, shall be borne by Palace in
accordance with Palace's working interest in each of such Wells.
Section 3.5 Palace recognizes and accepts the fact that Carrizo's
current working interest position in the Exhibit "B" Prospects is subject to
change by virtue of various Third Party Agreements in existence on the date
hereof and other Third Party Agreements which may be entered into by Carrizo
prior to Carrizo's submission of a Prospect Review Package under Section 4.1.
Accordingly, the working interest in currently owned Leases to which Palace is
entitled in the Exhibit "B" Prospects shall be subject to proportionate
reduction by reason of assignments made to third parties under such Third Party
Agreements. Carrizo shall use reasonable efforts to maintain its current Lease
position in the Exhibit "B" Prospects. However, Carrizo's obligation to expend
funds to maintain said position, shall be limited to an aggregate expenditure
of $150,000.00 on all Exhibit "B" Prospects.
Section 3.6 Palace shall be entitled to an undivided percentage
(herein, the "Participating Percentage") of Carrizo's currently owned Leases
and Subsequently Acquired Leases in each of the Exhibit "B" Prospects, as such
Lease ownership is determined after giving affect assignments owed to third
parties under Third Party Agreements but otherwise prior to any subsequent
assignments, commitments or transfers to other persons. The Participating
Percentage shall be fifty percent (50%) unless reduced by other provisions
herein but shall in no event be less than twenty-five percent (25%).
3.6.1 Subject to Palace's preferential right to purchase under Section
3.7 below, Carrizo may sell, farmout or otherwise transfer to a third
party both a portion of Carrizo's working
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<PAGE> 8
interest together with a portion of the working interest to which
Palace would otherwise be entitled but for such transfer if and only
if (i) Carrizo is not in material breach of this Agreement, and (ii)
all of the following apply to the Prospect to which the transfer
pertains:
(a) Carrizo has not yet submitted a Prospect Review Package for
such Prospect under Section 4.1; and
(b) Carrizo owns or controls working interests in the Prospect
which equal or exceed seventy percent (70%) of the gross
working interest in such Prospect based upon the total cost
bearing share of gross working interest in the Initial Test
Well; and
(c) Before transferring any interests which reduce the
Participating Percentage of Palace, Carrizo shall first
transfer interests out of Carrizo's retained 50% interest;
provided, Carrizo shall not reduce its retained working
interest below 15% (which 15% shall be in addition to
Carrizo's carried working interest); and
(d) Once Carrizo has reduced its retained working interest in the
Leases to 15% of Carrizo's initial retained working interest
(which 15% shall be in addition to Carrizo's carried working
interest), any additional transfers may be made from the
original interest of Palace; and
(e) In no event may the Participating Percentage of Palace be
reduced below twenty-five percent (25%).
Palace, at its sole discretion, may waive (but only in writing) any or
all of the conditions set forth in Section 3.6.1 (i) and (ii) on a
case-by-case basis, but no waiver in any one instance shall be deemed
a continuing or permanent waiver of such condition(s) in any other
case in instance. For the purposes of this Section 3.6.1, Carrizo
shall not be deemed to be "in material breach" of this Agreement for
the purposes of Section 3.6.1 if, within 10 days after receipt of
written notice from Palace of the occurrence of any breach of or
default under this Agreement, Carrizo has cured such breach or default
(or, if such breach or default is incapable of being fully cured
within such period, Carrizo has initiated, in good faith, its best
efforts to effect such cure, and such cure is fully effected within
thirty (30) days after the occurrence of such breach or default).
Notwithstanding the preceding sentence, Carrizo shall immediately be
"in material breach" for purposes of Section 3.6.1 (x) if at any time
during the term of this Agreement, Carrizo has failed to pay sums when
due to Palace or when due to a third party for Palace's benefit, and
such sums exceed $10,000 in any one instance or exceed $50,000 in the
aggregate at any given time (if and only if Palace is current on all
amounts due Carrizo), (y) if Carrizo fails to assign to Palace legal
title to Prospect(s) to which Palace is entitled under this Agreement
within seventy-two (72) hours of the time such assignment(s) is(are)
due, or (z) if Carrizo fails to account for sums paid to Carrizo by
Palace strictly in accordance with the terms of this Agreement.
3.6.2 The Applicable Drilling Cost Percentage which governs the Well
Costs which Palace is to pay under Section 3.4 shall vary in
accordance with Palaces' Participating Percentage
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<PAGE> 9
and is to be determined by the following formula. If Palace's
Participating Percentage is fifty percent (50%), the applicable Carry
Percentage shall be thirty percent (30%) and the Applicable Drilling
Cost Percentage shall be 142.8571429%. If Carrizo reduces Palace's
Participating Percentage to less than 50%, the Carry Percentage shall
be reduced by 0.6% for every 1.0% reduction in Participating
Percentage. The Applicable Drilling Cost Percentage is determined by
the fraction the numerator of which is 100% and the denominator of
which is 100% less the Carry Percentage. The following illustrates the
reduction in Carry Percentage and Applicable Drilling Cost Percentage:
<TABLE>
<CAPTION>
Palace's Participating Applicable Drilling Cost
Percentage Carry Percentage Percentage
<S> <C> <C>
50% (maximum interest) 30% 142.8571429%
45% 27% 136.9863014%
40% 24% 131.5789474%
35% 21% 126.5822785%
30% 18% 121.9512195%
25% (minimum interest) 15% 117.6470588%
</TABLE>
Section 3.7 If Carrizo desires to dispose of any of the working
interests of Carrizo and/or Palace as permitted by Section 3.6 above, Carrizo
will not do so without first offering to Palace the preferential right and
option to acquire such interests on the same terms and conditions Carrizo is
willing to dispose of the same to a third party not an Affiliate of Carrizo. At
such time as Carrizo has received from a third party not an Affiliate of
Carrizo a bona fide offer to acquire any of the working interest holdings which
Carrizo is permitted to dispose of in a Subject Prospect, Carrizo will not
accept such offer without first giving written notice to Palace accompanied by
a full and complete copy of such offer containing all of the terms and
conditions pertaining to such disposition. Thereupon, Palace shall have the
right, but not the obligation, to acquire such interest on the same terms and
conditions offered by giving written notice to Carrizo within the earlier of
(i) ten (10) days after receipt of such written offer or (ii) twenty-four (24)
hours before the expiration of any bona fide, unsolicited time-limit required
to accept such offer. The failure by Palace to respond within the required time
shall be deemed an election not to acquire the interest offered. If Palace
exercises its preferential right, then the Parties shall promptly enter into
such documents as may be required in order to consummate the disposition in
accordance with the terms of the bona fide offer. If does not exercise it
preferential purchase right, Carrizo shall not dispose of the interest on terms
more favorable to the acquiring party or dispose of the interest to a party
other than the party specified in the notice to Palace of bona fide offer
without first offering the interest to Palace under this section.
Section 3.8 If any non-consent interests become available to Carrizo
in connection with the drilling of an Initial Test Well for an Exhibit "B"
Prospect, Carrizo shall give written notice to Palace of such availability,
which notice shall include specific information as to the interest involved and
all of the terms applicable to such non-consent interest, including a copy of
the applicable operating agreement or other document governing such non-consent
interest. Palace shall have a period of ten (10) days from receipt of such
notice to give written notice to Carrizo that it elects to acquire a portion of
such non-consent interest, and a failure to respond within said ten-day period
shall be deemed an election not to so acquire. If Palace shall make an election
to acquire a portion of such non-consent interest, Palace shall specify the
portion of the non-consent interest it wishes
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<PAGE> 10
to acquire, which, without Carrizo's consent, shall not exceed fifty percent
(50%) of the non-consent interest available to Carrizo. If Palace elects to
acquire any portion of such non-consent interest, then Palace shall pay to
Carrizo 117.6470588% of all Well Costs chargeable to the portion of the
non-consent working interest acquired by Palace (i) incurred in drilling the
Initial Test Well to Casing Point and (ii) incurred in plugging and abandoning
the Well it is plugged and abandoned without a completion attempt. Costs
incurred subsequent to Casing Point if a completion attempt is made in which
Palace participates shall be borne by Palace in accordance with the portion of
the non-consent interest acquired. Carrizo shall be under no obligation to take
any non-consent interest offered by a third party which Palace elects not to
acquire. In addition, if Palace elects not to take its share of a non-consent
interest available to Carrizo which is applicable to drilling the Well to
Casing Point, Carrizo shall be under no obligation to drill the Initial Test
Well to which the non-consent election pertains.
Section 3.9 Palace agrees to pay Carrizo sixty thousand dollars
($60,000) in consideration for delaying the drilling of the following Prospects
in order to cover delay rentals to become due:
<TABLE>
<CAPTION>
PROSPECT EARLIEST SPUD DATE COSTS
-------- ------------------ -----
<S> <C> <C>
Olmos January, 2000 18,775.00
Mex Sweetheart February, 2000 7,500.00
Col-Wx December 15, 1999 13,125.00
Buckeye Pimlico February, 2000 11,000.00
Mata Snake November, 1999 4,800.00
Mata Viper January, 2000 4,800.00
</TABLE>
Palace agrees to pay such consideration as follows: forty thousand dollars
($40,000) upon the execution of this Agreement; and twenty thousand dollars
($20,000) on July 1, 1999. If a third party not an Affiliate of Carrizo forces
the Initial Test Well for any of the above Prospects to be commenced on a date
earlier than above set out, or a date prior to December 31, 1999, whichever is
the earliest, then fifty percent (50%) of the costs applicable to such Prospect
as set out above shall be credited to and used as an offset against Palace's
Promoted Well Costs for such Initial Test Well in the event Palace participates
in such Prospect. Carrizo agrees to make all reasonable efforts to adhere to a
spud date above specified for such well.
Section 3.10 Notwithstanding the provisions of Article III herein, if
Carrizo has made a good faith effort to assemble an equity position on the SF
COOK MT #1, WST-STR, SF YEGUA D30, HIGGINS 1 and/or WST-DVL Prospect(s) set
forth on Exhibit "B" via Lease, Lease Contract Rights and/or Farmout
acquisition and, in the sole opinion of Carrizo, the equity position is
insufficient to justify the drilling of the initial test well on said
Prospect(s), then, in that event, upon Carrizo's decision not to drill said
Prospect, Carrizo shall tender formal written notice to Palace. Palace shall
have the option, on a Prospect by Prospect basis, to (i) affirm Carrizo's
decision, or (ii) take over, assume and receive assignments of Carrizo's equity
position in such Prospect by paying either Carrizo's actual share of costs in
said Prospect or meeting the terms Carrizo obtains from a bona fide third party
offer. Palace shall exercise its option in writing to Carrizo within fifteen
(15) days from receipt of Carrizo's notice. Upon receipt by Carrizo of Palace's
election, the subject Prospect(s) shall be removed from Exhibit "B" and shall
no longer be subject to this agreement.
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<PAGE> 11
Palace's failure to respond within the fifteen (15) day period, shall be deemed
an election to affirm Carrizo's decision.
ARTICLE IV
EXHIBIT "B" PROSPECT ELECTIONS
Section 4.1 No Exhibit "B" Prospect shall be drilled until Carrizo has
accumulated and fully analyzed all technical data to justify, in Carrizo's sole
opinion, the drilling of such Prospect and has acquired such Leases as are
necessary in Carrizo's sole opinion for the drilling of such Well. Prior to
drilling the Initial Test Well for an Exhibit "B" Prospect, Carrizo shall give
written notice to Palace. Such notice shall be accompanied by a "Prospect
Review Package" which shall contain Carrizo's technical review and all data
upon which the same is based, a summary of Carrizo's Lease holdings, including
gross and net acres, net revenue interests and other material terms of the
Leases, the material terms of Farmouts and other applicable Third Party
Agreements, the objective depth for the Initial Test Well and the estimated
Well Costs and spud date for such Well. Palace shall have ten (10) days from
receipt of such notice and Prospect Review Package to give written notice to
Carrizo whether it will participate or whether it declines to participate in
such Prospect and a failure to respond to said notice within said period shall
be deemed an election not to participate. In the event Palace elects to
participate, Palace shall pay its share of the cost of drilling the Initial
Test Well on such Prospect in accordance with Article III. Further, if Palace
elects to participate, Carrizo shall not permit or cause any material change in
gross and net acres, net revenue interests and other material terms of the
Leases or in the material terms of Lease Contract Rights and other applicable
Third Party Agreements from those reflected in the Prospect Review Package
without Palace's consent. In no event shall Palace be obligated to pay Well
Costs for an Initial Test Well until Carrizo has first complied with this
Section.
Section 4.2 If Palace elects or is deemed to have elected not to
participate in any Exhibit "B" Prospect in accordance with Section 4.1 above,
such Prospect shall become thereupon a "Declined Prospect" and the same shall
be removed from Exhibit "B" and shall no longer be considered an Exhibit "B"
Prospect and shall no longer be subject to the terms and provisions of this
Agreement.
Section 4.3 If the cumulative number of Exhibit "B" Prospects in which
Palace elects or is deemed to have elected not to participate should aggregate
three (3), then Carrizo may, by written notice given to Palace within twenty
(20) days following Palace's third election or deemed election not to
participate in an Exhibit "B" Prospect, elect to terminate this Agreement as to
all Exhibit "B" Prospects for which the Initial Test Well has not been spudded.
This termination shall be conditional and shall not take effect unless Carrizo
has drilled or is in the process of drilling with a rig capable of drilling to
total depth the Initial Test Well for each of the three Declined Prospects on
or before the later of (i) ninety (90) days from Palace's third election or
deemed election not to participate in an Exhibit "B" Prospect or (ii) the date
specified in the Prospect Review Package provided under Section 4.1 as the date
for commencement of drilling operations for the Initial Test Well for each of
said three Prospects; provided, the time within which such drilling operations
must be commenced for termination to be effective may be extended by reason of
Force Majeure, or under any applicable provision of any operating agreement or
exploration agreement pertaining to such Well or Wells.
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<PAGE> 12
(The foregoing conditions which are required for termination are herein
referred to as "Termination Conditions"). If the Termination Conditions do not
occur, the notice of termination by Carrizo shall be of no effect, and this
Agreement shall continue in full force and effect. If the Termination
Conditions occur, then this Agreement shall terminate, as of the time the
Termination Conditions occur, as to all Exhibit "B" Prospects excluding those
Exhibit "B" Prospects in which Palace has previously elected to participate and
on which the Initial Test Well has been spudded. If Carrizo fails to give
written notice of termination within the required twenty (20) day period, this
Agreement shall continue in full force and effect and Carrizo shall have no
further right to terminate this Agreement as a result of Palace's election not
to participate in an Exhibit "B" Prospect.
Section 4.4 In addition to the right of termination provided in
Section 4.3, each time Palace elects not to participate in an Exhibit "B"
Prospect, Carrizo shall also have the option to remove from Exhibit "B" the
declined Prospect and one additional Exhibit "B" Prospect of Carrizo's choice
in which Palace has not elected to participate under the procedure outlined in
Section 4.1 and upon which the Initial Test Well has not been spudded. Carrizo
shall exercise this option of removal by written notice to Palace no later than
twenty (20) days from receipt of Palace's written notice declining
participation in an Exhibit "B" Prospect, which notice of removal shall
identify the specific Prospect to be removed. The choice of the Exhibit "B"
Prospect to be removed shall be in the sole discretion of Carrizo but it may
not include any Exhibit "B" Prospect in which Palace has elected to participate
and for which the Initial Test Well has been spudded. Upon removal, said
Prospect shall no longer be subject to the terms and provisions of this
Agreement; provided such right of removal shall not become effective unless and
until Carrizo commences actual drilling operations for the Initial Test Well on
the Declined Prospect on or before the later of (i) ninety (90) days after
Palace's written notice of non-participation or (ii) the date specified
previously specified by Carrizo as the date for commencement of drilling
operations for the Initial Test Well for such Prospect; provided, the time
within which such drilling operations must be commenced for removal to be
effective may be extended by reason of Force Majeure, or under any applicable
provision of any operating agreement or exploration agreement pertaining to
such Well.
Section 4.5 When Carrizo submits to Palace its notice of completion of
technical review for an Exhibit "B" Prospect accompanied by technical
information under Section 4.1, Carrizo shall also notify Palace of the working
interest with which it will participate for its own account in the drilling of
the Initial Test Well on such Prospect. If the participating interest of
Carrizo is less than fifteen percent (15%) of the working interest owned and/or
controlled by Carrizo as of the date of the execution of this Agreement and if
Palace shall elect not to participate in such Prospect, such Prospect shall not
be included in the cumulative number of three Declined Prospects necessary for
Carrizo to have the option to terminate the Agreement as provided in Section
4.3, and further such election not to participate shall not entitle Carrizo to
remove a Prospect from the Exhibit "B" Prospects under Section 4.4 above. If
Palace elects or is deemed to have elected not to participate in such Exhibit
"B" Prospect, then such Prospect shall be removed from Exhibit "B" and shall no
longer be an Exhibit "B" Prospect; provided, however, that such removal shall
not be effective and shall not occur unless Carrizo has actually commenced
operations for the drilling of the Initial Test Well for such Prospect in good
faith with a rig capable of drilling to total depth on or before the later of
(i) ninety (90) days from the election or deemed election of Palace not to
participate in such Prospect or (ii) ninety (90) days following the estimated
spud date for the Initial Test Well as set out on Exhibit "B".
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<PAGE> 13
Section 4.6 Subject to the terms of this Agreement, Palace is
obligated to fund its share of costs as set forth in this Agreement for all but
three (3) of the Initial Test Wells associated with the Prospects that are on
Exhibit "B" or added to Exhibit "B", but for such purposes Palace's election
not to participate in any Exhibit "B" Prospects by reason of an election under
Section 4.5 shall not be counted. If Palace elects to not participate in more
than three (3) Exhibit "B" Prospects (not counting elections not to participate
under Section 4.5), Carrizo shall have the right to immediately terminate this
Agreement in accordance with Section 4.3 above, among its other rights.
Section 4.7 Palace has a one time option to terminate this agreement
immediately following an occurrence where seven (7) dry holes have been drilled
consecutively on Prospects subject to this Agreement, as long as Carrizo and
Palace both had a cost bearing share in all seven (7) dry holes. Palace shall
be required to tender written notification of Agreement termination to Carrizo
within twenty days of the determination of the dry hole status of the seventh
(7th) consecutive dry hole or before the next well is spud, whichever is
sooner. However, in no event shall Palace's written notification be required
earlier than forty-eight (48) from the date of said determination. In the event
Palace fails to tender written notification of termination within the time
allowed, the Agreement will continue in full force and effect.
Section 4.8 Palace acknowledges that it has previously completed its
technical and land review of the Highway 59 Wilcox #1 Prospect and the Cedar
Point Prospect and will participate in such Prospects.
ARTICLE V
SUBSEQUENT LEASE ACQUISITION COSTS
Section 5.1 It is contemplated that Carrizo will acquire additional
Leases (including Lease Contract Rights) within the Exhibit "A" Prospects and
the Exhibit "B" Prospects subsequent to the execution of this Agreement and
prior to the spudding of the Initial Test Well for any such Prospect (such
additional Leases acquired during said period, herein "Subsequently Acquired
Leases"). Subject to the provisions of this Article V, Palace shall be entitled
to an undivided percentage of Carrizo's interest in all Subsequently Acquired
Leases within such Prospect, which percentage shall be 50% for Exhibit "A"
Prospects and shall be 50% for Exhibit "B" Prospects unless Palace's
Participating Percentage has been reduced in an Exhibit "B" Prospect under
Section 3.6 in which event the percentage shall be the same as Palace's
Participating Percentage.
Section 5.2 In the event Carrizo acquires any Subsequently Acquired
Lease, Carrizo shall promptly give Palace written notice thereof, which notice
shall be accompanied by a description of the interest acquired, stating the
Lease Acquisition Costs, proof of such Costs, a copy of the Lease and all title
documents and title information pertaining to the interest acquired.
Section 5.3 For Prospect on Exhibits "A" and "B" on the date of this
document Palace shall pay a share (based upon the applicable percentage under
section 5.1 above) of all Lease Acquisition Costs incurred by Carrizo for
Subsequently Acquired Leases, up to a maximum amount of One Hundred Fifty
Thousand Dollars ($150,000) in the aggregate cost to Palace for all
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<PAGE> 14
Subsequently Acquired Leases (the "Maximum Amount"). Further, if and when
Subsequently Acquired Leases are acquired which result in the Maximum Amount
being exceeded, Palace shall have the right and election, but not the
obligation, to pay a share (based upon the applicable percentage under section
5.1 above) of Lease Acquisition Costs in excess of the Maximum Amount for
Subsequently Acquired Leases, which election shall be made within ten (10) days
after receipt of the Lease acquisition notice provided in Section 5.2. If
Palace elects to pay any Lease Acquisition Cost in excess of the Maximum
Amount, then the excess amounts so paid thereof shall be credited and offset
against the amount of the Promoted Well Costs which Palace is subsequently
obligated to pay with respect to the drilling of Initial Test Wells under
Article III. Further, Palace shall in its sole discretion designate the Initial
Test Well or Wells against which the excess Lease Acquisition Costs are to be
credited and the amounts to be so credited for the Wells selected.
Section 5.4 If, under the provisions of Section 4.1 hereof or Section
4.5 hereof, Palace elects not to participate in an Exhibit "B" Prospect for
which Palace has paid Lease Acquisition Costs for Subsequently Acquired Leases
under Section 5.3 and such Prospect is thereafter actually drilled, then
immediately upon commencement of drilling operations for the Initial Test Well
for such Prospect, Carrizo shall reimburse Palace for all Lease Acquisition
Costs incurred by Palace with respect to such Prospect.
ARTICLE VI
RIGHTS TO ADDITIONAL PROSPECTS
Section 6.1 If as a result of the efforts described in Recital A above
Carrizo develops any Prospects within the Exploratory Area not currently listed
on Exhibits "A" and "B" which Carrizo intends to commence drilling in calendar
year 1999 and in which Carrizo owns more than a twelve percent (12%) of 8/8ths
working interest, it will immediately upon identification notify Palace of the
existence of any such Prospect and offer Palace the opportunity to review any
and all pertinent technical data in accordance with the process outlined
hereinbelow. Carrizo shall simultaneously submit an appropriate AFE covering
the anticipated costs on the newly developed Prospect's Initial Test Well and
the anticipated spud date. Palace shall have ten (10) days from receipt of said
data to complete its technical review and provide Carrizo written notice as to
its election to participate or not participate in the newly submitted Prospect.
If Palace elects to participate in any Prospect submitted under this Section,
such Prospect shall be added to Exhibit "B" and become an Exhibit "B" Prospect,
in which event all other provisions of Article III shall apply thereto. Carrizo
and Palace agree that the provisions of this Section shall not apply to any
replacement well or substitute well Carrizo drills directly relating to any
Carrizo well existing and producing as of the date of this Agreement. Further,
if Palace elects not to participate in a Prospect submitted under this Section
6.1 and on or before December 31, 1999, it becomes necessary to drill a
replacement well for the Initial Test Well, Carrizo shall not be obligated to
resubmit such Prospect to Palace under the provisions of this Section.
Section 6.2 If during the term of this Agreement Carrizo acquires or
develops any Leases pertaining to a Prospect within or partially within any
Seismic Acquisition Area which is not an Exhibit "A" or and Exhibit "B"
Prospect, Carrizo has the option, but not the obligation to offer such Prospect
to Palace for Palace's participation. Such presentation of estimated facts and
costs shall
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<PAGE> 15
be made by submitting a Prospect Proposal Package which shall contain a land
plat of the Prospect outlining the lands to be included therein, a written
analysis summarizing the geological and geophysical characteristics of the
Prospect, a copy of the technical data supporting the Prospect, a statement of
the Leases proposed to be acquired, the approximate Lease Acquisition Costs,
the expected gross and net acres, net revenue interest and other material terms
of the Leases, the material terms by which the Leases are to be acquired, the
objective depth for the Initial Test Well and the estimated Well Costs and spud
date for such Well. Palace shall have ten (10) days from the date Carrizo
offers the Prospect to Palace in which to elect in writing whether it will
participate in or not participate in such Prospect and a failure to make a
written election within said period shall be deemed an election not to
participate.
6.2.1 If Palace elects not to participate, then Palace shall have
no rights with respect to said Prospect and the same shall
not be subject to this Agreement.
6.2.2 If Palace elects to participate in the Prospect, such
Prospect shall be added to Exhibit "B" and shall become an
additional Exhibit "B" Prospect and subject to all of the
terms and provisions of Article III herein. Further, Palace
shall be obligated to pay, as incurred, a percentage share of
the Lease Acquisition Costs incurred by Carrizo for such
Prospect prior to the spudding of the Initial Test Well
thereon. The applicable percentage shall be 50% unless
Palace's Participating Percentage has been reduced under
section 3.6 in which event the percentage shall be the same
as Palace's Participating Percentage. However, all such Lease
Acquisition Costs incurred by Palace for such Prospect shall
be credited and offset against the Promoted Well Costs which
Palace is thereafter obligated to pay under Article III in
drilling Initial Test Wells on such additional Prospect. If
the Lease Acquisition Costs incurred by Palace exceed
Palace's Promoted Well Costs for such Initial Test Well, such
excess shall then be credited and offset against Promoted
Well Costs which Palace is thereafter obligated to pay on the
next subsequent Initial Test Well drilled on an Exhibit "B"
Prospect and so on until such excess incurred by Palace has
been credited and offset.
Section 6.3 If during the term of this Agreement, Carrizo develops a
Prospect or an exploration project that is outside any Seismic Acquisition Area
but is contiguous to a Seismic Acquisition Area containing an Exhibit "A" or
"B" Prospect in which Palace participates or is obligated to participate under
the terms of this Agreement and if Carrizo intends to offer to third parties a
participation in such Prospect, Carrizo shall notify Palace of the availability
of such Prospect, which notice shall be accompanied by all of the materials
required for a Prospect Proposal Package under Section 6.2 above, the terms
upon which such Prospect or project is being offered to outside parties and
drafts of participation documents or an outline thereof. Palace shall have ten
(10) days from the receipt of all such materials to make a written election to
participate in such Prospect for the total interest to be being offered on the
terms and conditions to be offered to outside parties, and if Palace fails to
make an election within said period, the same shall be deemed an election not
to participate. However, Carrizo shall not thereafter offer said Prospect or
project or enter into an agreement with any person for participation in such
Prospect or project on terms and conditions more favorable to the participant
those offered to Palace without first re-offering such Prospect or project to
Palace under the terms of this Section. In the event Palace elects to
participate in such Prospect
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<PAGE> 16
or project, the parties shall promptly execute such documents as may be
required to document such participation.
Section 6.4 Notwithstanding anything in this Agreement to the
contrary, Carrizo shall be under no obligation to add Prospects to Exhibit "B"
which were identified by Carrizo prior to May 4, 1999, in which Carrizo prior
to May 4, 1999 (i) was actively negotiating with a third party; or (ii) had
identified the Prospect as containing proven undeveloped reserves by a third
party reserve report. The Prospects excluded by this Section are identified on
Exhibit "C" hereto.
Section 6.5 For each Prospect in which Palace elects to participate
under this Article VI, Carrizo shall assign a percentage of all Leases then
owned and Leases subsequently acquired by Carrizo in such Prospect, which
assignment shall be made within ten (10) days following such election to
participate for Leases then owned and within ten (10) after acquisition for
Subsequently Acquired Leases. For elections made under section 6.1 and 6.2, the
applicable percentage shall be 50% unless Palace's Participating Percentage has
been reduced under section 3.6 in which event the percentage shall be the same
as Palace's Participating Percentage. For elections under section 6.3, the
percentage shall be governed by the terms of the offer accepted.
ARTICLE VII
ASSIGNMENT FROM CARRIZO
Section 7.1 All assignments from Carrizo to Palace attributable to
Exhibit "A" Prospects shall be provided to Palace upon Carrizo's receipt of
payment Carrizo from Palace of Palace's share of Turnkey Well Costs. All
assignments from Carrizo to Palace attributable to Exhibit "B" Prospects shall
be provided to Palace upon Carrizo's receipt of payment from Palace of Palace's
share of estimated Well Costs (including Promoted Well Costs) to Casing Point.
All assignments from Carrizo to Palace attributable to Subsequently Acquired
Leases shall be provided to Palace upon Carrizo's receipt of payment from Palace
of Palace's share of the applicable costs.
Section 7.2 All assignments of Leases from Carrizo, except Lease
Contract Rights not evidenced by record title, shall be in recordable form and
shall be good and sufficient to convey record title to the interest assigned.
Carrizo shall make subsequent record title assignments to Palace in those
Leases earned by Carrizo in which Palace has elected to participate in the
acquisition of such Lease Contract Rights; provided, in the event Carrizo is
prohibited by third party agreement(s) from making assignment(s) of record
title earned by Palace, to the extent Carrizo is legally able to do so, Carrizo
shall assign contractual rights or sublease, to Palace, the interest(s) to
which Palace is entitled. All assignments shall be subject to all burdens
affecting same whether or not of record, which existing lease burdens shall be
borne proportionately by the Parties; however, said assignments shall be free
of any burdens or interests created by Carrizo subsequent to the effective date
of this Agreement, except burdens and interests contained in agreements by
which such interests were acquired. Assignments by Carrizo shall warrant title
against subsequently created lease burdens but otherwise shall be without
warranty of title, express or implied.
Section 7.3 Palace's right to acquire interests from Carrizo under
this Agreement applies only to working interests and shall not apply to any
overriding royalty interests, net profits interests,
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<PAGE> 17
or any carried working interests, reversionary working interests or other
rights which are not currently cost-bearing to Carrizo.
Section 7.4 If a Prospect covers only a part of a Lease, Carrizo shall
be obligated to assign Palace only that part of the Lease that lies within the
boundaries of the Prospect.
ARTICLE VIII
DATA AND ACCESS TO DATA
Section 8.1 Subject to limitations contained in Third Party
Agreements, Carrizo agrees to allow Palace full and complete access to all
Technical Data and to all AFE, gas marketing and pipeline access, legal and
land information and data and all files, documents and instruments containing
the same relating to all Prospects subject to this Agreement. Said access shall
be reasonable and shall be made available to Palace in Carrizo's offices during
normal business hours. Carrizo agrees to make all reasonable efforts to
facilitate Palace's timely review of said data and information. If any of
Technical Data sought to be reviewed by Palace is restricted by Third Party
Agreement, Carrizo shall notify Palace thereof and shall furnish Palace with a
copy of the applicable Third Party Agreement. If after review of such Agreement
Palace reviews the Technical Data governed by said Agreement, Palace shall be
bound by the terms and conditions of such Agreement and shall pay any required
access or user fees.
Section 8.2 Confidentiality. At all times prior to, but not after, a
period of two years following the date of the termination of this Agreement
Palace shall maintain confidential all Technical Data and all reservoir and
reserve studies, pertaining to oil and gas exploration in the Subject Prospects
learned or developed pursuant to this Agreement or activities conducted
hereunder, and Palace will not, without the consent of Carrizo, reveal the same
to others except its employees, and the employees of its stockholders and
principals. The foregoing restrictions shall not apply, however, to information
which (i) has entered into the public domain without breach of the provisions
of this Section; (ii) was received by Palace from a third person not under an
obligation of confidentiality to Carrizo with respect thereto prior to the time
Palace received the information pursuant to this Agreement; (iii) lawfully may
be obtained as a matter of right by Palace from another source not under an
obligation of confidentiality to Carrizo with respect thereto; (iv) is required
to be disclosed by any law or the rules of any governmental agency; or (v) is
furnished to Affiliates, or for evaluation purposes to bona fide prospective
banks or other institutions for the purpose of obtaining financing, consultants
or to persons who desire to become associated with Palace in drilling a well or
who have acquired or desires to acquire by purchase, Farmout or otherwise, an
interest in any Subject Prospect; provided that the information disclosed shall
be limited to that needed to evaluate the interest involved and further that
any person furnished information pursuant to this clause (v) agrees in writing
to maintain confidential and not to communicate such information to any other
person or to use it for their own benefit in a manner adverse to the interests
of the parties. In any event, however, no such information shall be disclosed
to persons not a party hereto (except as required by law) unless Palace takes
reasonable precautions to insure that the persons to whom the information is
disclosed likewise will maintain such information confidential. When requested
by Carrizo to do so, Palace agrees that it will execute those
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confidentiality agreements required of Carrizo by third parties and shall
indemnify Carrizo for any breach of such third party confidentiality agreements
caused by Palace or its employees.
ARTICLE IX
OPERATIONAL MATTERS
Section 9.1 Operating Agreement. Attached as Exhibit "D" hereto is a
joint operating agreement (herein the "Operating Agreement"). Said Operating
Agreement shall, without further action by the Parties, become automatically
effective as a separate agreement for each Subject Prospect in which Palace
participates as of the date of the spudding of the Initial Test Well for such
Subject Prospect, and termination of this Agreement shall have no effect on the
continuation in force and effect of any such Operating Agreements which
previously became effective. If Carrizo is bound by any operating agreement or
exploration agreement, or if both Parties execute a separate operating
agreement for any particular lands, Leases or operations, then such operating
agreement or exploration agreement shall apply between the Parties with respect
to such lands, Leases or operations in lieu of the attached Operating Agreement
as of the effective date of that agreement and shall constitute the "Operating
Agreement" for all purposes herein as to such lands, Leases and/or operations.
If the Parties are required to enter into any joint operating agreement for
onshore operations with any person not a Party hereto, both Parties shall use
their best efforts to secure an agreement conforming as closely as possible to
the joint operating agreement attached as Exhibit "D" hereto. Except as
otherwise provided in this Agreement, all drilling and producing operations on
each Subject Prospect (including the proposal and/or conduct of all Subsequent
Well Operations) shall be carried out in accordance with and shall be governed
by said Operating Agreement. In the event of any conflict between the
provisions of this Agreement and any Operating Agreement, the provisions of
this Agreement shall control.
Section 9.2 Certain Well Costs Notwithstanding the foregoing, the
drilling of each Initial Test Well and the costs which the parties are to bear
in drilling such Wells to Casing Point shall be as provided in Articles II and
III of this Agreement. Once an Initial Test Well has reached Casing Point, all
further operations respecting such Well, including the completion thereof and
all further Well Costs, shall governed by the Operating Agreement.
Section 9.3 Operator Carrizo shall be named operator under the
Operating Agreement.
Section 9.4 AFE For each Prospect in which Palace elects to
participate, Carrizo will submit an appropriate AFE for the Initial Test Well
for such Prospect covering all of Well Costs anticipated cost to Casing Point
and completion costs. All AFEs shall be prepared based upon bids received by
Carrizo and will be subject to verification at Palace's request. Carrizo shall
have the option of submitting said AFE on any of the three following bases:
a) An industry turnkey drilling contract basis based
upon a disinterested third party bid.
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b) An industry footage and/or day work drilling
contract basis based upon a disinterested third
party bid.
c) A Carrizo turnkey contract which shall be based on
Carrizo's AFE Well Costs plus twenty percent (20%).
Such turnkey contract submittal shall be accompanied
by the AFE on which the turnkey contract is based
and such AFE shall be based upon an industry
disinterested third party bid footage and/or day
work drilling contract. If Carrizo submits an AFE on
a Carrizo turnkey contract basis, Palace shall have
the option to accept same as submitted or to
participate on the related footage and/or day work
contract based AFE.
Section 9.5 Payment of Certain Well Costs
9.5.1 Carrizo shall advise Palace of the anticipated spud
date for Initial Test Wells drilled on the Exhibit "A" Prospects at least ten
(10) days prior thereto. For each such Well, Palace shall prepay five days
prior to the actual commencement of drilling operations the greater of (i)
one-third (1/3) of the turnkey Well Costs to Casing Point or (ii) a pro rata
share of the amount required by the drilling contractor to move a rig on
location and begin drilling. Carrizo shall invoice the balance of the turnkey
Well Costs at such time as same are incurred by Carrizo in the regular course
of business. Palace shall pay such invoices in full no later than fifteen (15)
days from receipt of same.
9.5.2 With respect to Initial Test Wells drilled on Exhibit
"B" Prospects in which Palace is participating, Palace shall make payment of any
and all of Carrizo's appropriate Well Cost prepayment invoices the earlier of
(i) five days prior to the actual commencement of drilling and/or completion
operations for such Wells or (ii) at the same time prepayments are required of
other working interest owners in the Well pursuant to operating or other
agreements with such persons.
9.5.3 Notwithstanding the foregoing, in all events Palace
shall prepay, to the extent it has not otherwise so paid, its share of all Well
Costs to be incurred to Casing Point, based upon applicable AFE's and
determined under this Agreement, for all Initial Test Wells for the Subject
Prospects in which it elects to participate on or before December 31, 1999.
Promptly after the completion of any such Well, adjustments shall be made by
appropriate payments between the Parties so that Palace pays no more and no
less than the amount of Well Costs to Casing Point for which it is obligated
hereunder.
9.5.4 All monies prepaid by Palace will be held in a
separate, special account, jointly owned and in the name of Palace and Carrizo.
No other funds shall be placed in such account. Money may be withdrawn from
said account by Carrizo only for purposes of paying Palace's share of joint
interest billings for Well Costs (including third party operator cash calls or
separate escrow accounts when required for such well costs) actually due and
payable at the time. That portion of joint interest billings reflecting
unaffiliated third party charges shall be accompanied with evidence of the
amount due, and if requested by Palace, shall be paid by separate check drawn
on the jointly owned account payable directly to the vendee. In the event a
Carrizo turnkey contract is involved, Carrizo shall draw excess money from said
account only at such time as the turnkey operations are successfully completed.
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ARTICLE X
AREA OF MUTUAL INTEREST
Section 10.1 General. The Parties hereby establish for each Subject
Prospect an area of mutual interest ("AMI") comprised for each Subject Prospect
of the lands defined by the geologic and/or seismic basis that defines such
Prospect. For the Exhibit "A" Prospects and the Current Exhibit "B" Prospects,
those lands comprising each AMI are set out on Schedule "III" hereto. For each
Prospect which becomes a Subject Prospect subsequent to the date hereof, the
lands comprising the AMI for such Prospect shall be specified by Carrizo when
the Prospect is submitted to Palace for its election to participate. Each such
AMI shall be effective for each Subject Prospect commencing with the date the
Prospect is shown to Palace and shall continue for the lands within each
Subject Prospect until the first to occur of (i) all Leases of the parties
hereto in such Prospect have terminated or expired without renewal or been
abandoned, or (ii) the AMI shall remain in effect as to Palace only on those
Prospects in which Palace elects not to participate, but shall nevertheless
terminate as to Carrizo on the date on which Palace notifies Carrizo of its
election not to participate (iii) December 31, 2009. In any and all events,
these AMI provisions shall terminate on an AMI by AMI basis such time as all
Leases within an AMI have terminated or the Parties have sooner disposed of all
of their Leases within such AMI. The provisions of this Section 10.1 (including
the subsections thereof) shall apply only during the applicable time period as
aforesaid. Notwithstanding anything herein to the contrary, all AMIs between
Carrizo and Palace shall be subject to all Third Party Agreements including any
Third Party AMIs in which Carrizo is required to assign leases acquired by
Carrizo to third parties. As such, Palace's interest in leases acquired by
Carrizo subject to Third Party AMIs shall be proportionately reduced by the
interest ultimately owned by Carrizo after taking into account Carrizo's
obligations to such third parties.
10.1.1 Lease Acquisitions. If either Party shall acquire any
non-producing or producing Lease (and for this Subsection 10.1.1 "Lease" shall
not include a Farmout) covering lands within the AMI, the other Party shall
have the first and prior right to acquire its Proportionate Acquisition
Interest in such Lease at cost, which right shall be exercised within fifteen
(15) days after notification of the acquisition of such a Lease (and failure to
respond within said time shall be deemed an election not to so acquire). A
Party acquiring any such Lease shall promptly notify the other Party ("Notified
Party") in writing of the acquisition thereof describing the interest acquired,
stating the Lease Acquisition Costs thereof, and forwarding copies of all title
information pertaining to the acquired Lease which is available to the
acquiring Party. If the Notified Party elects or is deemed to have elected not
to acquire its Proportionate Acquisition Interests in such Lease, then the
Notified Party shall have no right, title or interest in or claim to such
Lease. If the Notified Party elects to acquire its Proportionate Acquisition
Interest in a Lease, such election shall be deemed an irrevocable obligation to
pay such Party's share of the Lease Acquisition Costs thereof promptly upon
receipt of an assignment from the acquiring Party. If any Lease covers lands
lying both inside and outside the AMI, these provisions shall apply to only
that portion of the Lease lying within the AMI. If Leases are acquired as a
package, these provisions shall apply only to those Leases within, or partially
within, the AMI. Further, the provisions of this Subsection 10.1.1 shall apply
on a Lease by Lease basis to producing and non-producing Leases within (or
partially within) the AMI acquired by as a result of merger, consolidation or
other corporate acquisition. However, in such event the
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Lease Acquisition Costs for each non-producing Lease so acquired shall be the
current fair leasing value of such Lease, and the Lease Acquisition Costs for
each producing Lease so acquired shall be the current fair market value thereof
determined based on the net discounted value of the future production
therefrom.
10.1.2 Farmout Acquisitions-Inside AMI Well. Should either
Party acquire a Farmout by which Leases (whether producing or non-producing)
may be earned by the drilling of a well within the AMI (regardless of whether
such Leases lie wholly within, partially within or wholly outside the AMI), the
other Party shall have the right to acquire its Proportionate Acquisition
Interest in said Farmout, to join in performance of the terms thereof and to
earn its Proportionate Acquisition Interest in all the Leases to be acquired
thereby if such Party elects to do so within thirty (30) days after receipt of
notice that a Party has taken such Farmout (and failure to respond within said
time shall be deemed an election not to so acquire). If either Party shall
acquire a Farmout covered by this subsection (as provided above), the acquiring
Party shall promptly notify the other Party ("Notified Party") of such
acquisition, which notice shall be accompanied by copies of the relevant
agreements, an AFE for the estimated actual cost of performing the operations
necessary to earn the interest under the Farmout if an AFE is then reasonably
available, a schedule of Leases to be earned with legal descriptions, all title
information pertaining to the Leases to be earned under such Farmout which is
available to the acquiring Party and a copy of the executed Farmout. If the
Notified Party elects or is deemed to have elected not to acquire its
Proportionate Acquisition Interest in a Farmout under this Subsection, the
Notified Party shall have no right, title or interest in and to any Lease or
Leases or other rights which may be earned under such Farmout. If the Notified
Party elects to acquire its Proportionate Acquisition Interest in a Farmout
under this subsection, such election shall be deemed to be such electing
Party's unconditional and irrevocable (i) obligation and agreement to pay its
proportionate part of the actual cost and expenses of the operation required to
be performed in order to earn the Leases under the Farmout; (ii) agreement to
pay its proportionate part of any cash sums which are or become due and payable
under the Farmout; and (iii) assumption of its proportionate share of all other
obligations under such Farmout. Sums currently due under clause (ii) shall be
paid to the Party acquiring the Farmout within thirty (30) days after invoice.
Notwithstanding clause (i) above, neither Party shall be required to join in
and pay for the completion of any well once Casing Point has been reached or to
join in and pay for the drilling of any well if under the particular Farmout
the drilling of such well is optional rather than obligatory. If a Farmout is
acquired under which the drilling of any well is optional and any Party elects
not to join in the drilling of such well, then all Leases and rights (including
rights to drill subsequent wells and earn additional Leases) by the drilling of
such well shall be relinquished and all such rights shall be owned by the Party
drilling such well. A Party which has participated in the drilling of a well
under a Farmout but which elects not to participate in a completion attempt
shall be entitled to participate and acquire its interest in Leases earned by
the drilling of such well, but such Party and its interest in the Leases earned
shall be subject to the penalties provided in the applicable Operating
Agreement as a result of the application of Article VII. D. or other comparable
provisions of such Operating Agreement without regard to whether the Farmout is
on a drill-to-earn or produce-to-earn basis.
10.1.3 Farmout Acquisitions-Outside AMI Well. If under a
Farmout the earning well is to be drilled outside the AMI and by the drilling
thereof a Lease or Leases lying partially or wholly inside the AMI may be
earned, the Party acquiring such a Farmout shall promptly give
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written notice thereof to the other Party ("Notified Party"), which notice
shall be accompanied by copies of the relevant agreements, a schedule of Leases
to be earned which lie within or partially within the AMI with legal
descriptions and all title information pertaining to such Leases which is
available to the acquiring Party. The Notified Party shall have fifteen (15)
days from the later of the receipt of such notice and information or receipt of
a copy of the executed definitive agreement for Farmout to elect to acquire its
Proportionate Acquisition Interest in all or any of the Leases thereafter
earned by the acquiring Party which lie wholly within or partially within the
AMI (and in the case of a Lease lying partially within the AMI, the Notified
Party shall have the right to acquire all of said Lease), and a failure to
timely respond shall be an election not to acquire any interest in the Leases
earned. If the Notified Party timely elects to acquire its Proportionate
Acquisition Interest in all or any of such Leases and the acquiring Party
subsequently earns an assignment of all or any of those Leases, the acquiring
Party shall promptly tender to the Notified Party an assignment of those Leases
(and only those Leases) which the Notified Party elected to acquire but limited
to such Leases which the acquiring Party actually earned. Upon tender of such
assignment, the Notified Party shall pay the acquiring Party for the net
interests assigned based on the fair value for a Lease, and the fair value for
any producing Lease acquired shall be the current fair market value thereof
determined based on the net discounted value of the future production
therefrom. In any event, such values shall be determined as of the time the
earning well is completed. In no event shall the Notified Party be obligated
for any of the costs of the earning well. The Notified Party shall have no
right to any interest in any Leases earned which lie wholly outside the AMI.
The Notified Party's election to acquire an interest in Leases earned within or
partially within the AMI shall not obligate the acquiring Party to drill any
well or, except as expressly hereinafter provided, otherwise perform the
Farmout, and such performance shall be within the sole control and discretion
of the acquiring Party. Further, such election by the Notified Party shall not
make the Notified Party a party to the Farmout or require the consent of the
Notified Party to any amendment or modification to the Farmout. However, the
acquiring Party shall promptly notify the Notified Party of any such amendments
or modifications and shall furnish to the Notified Party with executed copies
of any relevant amendments or modifications. If the amendments or modifications
add Leases which lie wholly or partially within the AMI, the Notified Party
shall have a separate election as to each of such added Leases. If the
amendments or modifications add terms pertaining to Leases lying wholly or
partially within the AMI which are more burdensome than those contained in the
original Farmout, the Notified Party shall have ten (10) days after receipt of
an executed copy of the amendments or modifications to revoke any election
previously made. In the event of any such revocation, the acquiring Party shall
promptly refund to the Party revoking the election any consideration paid by
the revoking Party which is applicable to the Leases to which the revocation
applies. If the amendments or modifications add terms pertaining to Leases
lying wholly or partially within the AMI which are more favorable to the
acquiring Party than those contained in the original Farmout and the Notified
Party previously elected not to acquire any of said Leases, the Notified Party
shall have ten (10) days after receipt of an executed copy of the amendments or
modifications to again elect to acquire its Proportionate Acquisition Interest
in all or any of such Leases thereafter earned by the acquiring Party and which
the Notified Party previously elected not to acquire. Notwithstanding the
foregoing, a Notified Party electing to acquire an interest in a Lease under
the provisions of this Subsection 9.1.3 shall be obligated upon and bound by
the terms of the Farmout to the extent (and only to the extent) such Farmout
contains terms remaining applicable to the Leases assigned to the Notified
Party from and after such assignment.
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10.1.4 Proportionate Acquisition Interest. The term
"Proportionate Acquisition Interest" for the purposes of Subsection 10.1.1,
Subsection 10.1.2 and Subsection 10.1.3 above shall mean fifty percent (50%)
for each Party, unless adjusted by sale or farmout in accordance with Section
3.6.1 above.
10.1.5 Affiliate Acquisitions. The provisions of this Section
10.1 (including the subsections thereof) shall apply to Leases and Farmouts
acquired in an AMI not only by the Parties, but also to Leases and Farmouts so
acquired by any Affiliate of a Party.
Section 10.2 Extension and Renewal Leases. The provisions of this
Section shall apply to the acquisition of renewal and extension Leases to the
exclusion of the provisions of Section 10.1. If any Party shall at any time
acquire an extension of an existing Lease or a renewal Lease, the other Party
shall have the first and prior right to acquire its proportionate interest in
such Lease at cost, which right shall be exercised within fifteen (15) days
after notification of the acquisition of such extension or renewal. Any Party
acquiring any such extension or renewal Lease shall promptly notify the other
Party ("Notified Party") in writing of the acquisition thereof describing the
interest acquired and stating the actual cost thereof. If the other Party
elects to acquire its proportionate interest in such extension or renewal, such
election shall be deemed an irrevocable obligation to pay such Party's share of
the actual acquisition costs thereof upon receipt of an assignment from the
acquiring Party. For the purposes hereof a "renewal Lease" shall mean any Lease
taken by a Party before the expiration of a prior Lease in which such Party had
an interest, or taken or contracted for within six (6) months after such
expiration. For purposes of this Section 10.2, the term "proportionate
interest", with respect to a Party, shall mean the identical interest which
upon expiration a Party had in the Lease extended or renewed.
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ARTICLE XI
TERMINATION OPTION UPON MERGER
Section 11.1 If during the term of this Agreement Carrizo is merged
into, or all or substantially all of the assets of Carrizo are acquired by, one
of the following entities, Chesapeake Energy Corporation, Anadarko Petroleum
Corporation, Occidental Petroleum Corporation, Petroleum Development
Corporation and Stephens Production Company, Palace shall have the option to
terminate this Agreement. Carrizo shall promptly notify Palace at such time as
it reaches a firm, bona fide written agreement or letter of intent for such a
merger or acquisition, describing the other party or parties to the
transaction, the conditions which must occur for closing to occur and the
estimated closing date. Palace shall have the right to terminate this Agreement
by giving written notice to Carrizo not later than thirty (30) days after
receipt of such notice of merger or acquisition, but such termination shall not
become effective until (if at all) the actual closing of such merger or
acquisition.
Section 11.2 If during the term of this Agreement either Party is
merged into an unaffiliated entity or if all or substantially all of the assets
of a Party are acquired by an unaffiliated entity, the Party which is the Party
to the merger or acquisition may terminate this Agreement after such merger or
acquisition is actually closed, which right of termination may be exercised by
the Party which is the Party to the merger or acquisition giving written notice
to the Party which is not the Party to the merger or acquisition not later than
(10) days after such closing. If such a Party elects to terminate this
Agreement, the effective date of such termination shall be the later of (i) the
date a Party gives such notice of termination at or after closing, or (ii) the
date six (6) months after the Party to the merger or acquisition gives written
notification to the other Party of the bona fide letter of intent or if there
is no such letter, of a written agreement for such merger or acquisition. If
Palace elects its option under section 11.1, then section 11.2 does not apply.
Section 11.3 Any termination by Palace or Carrizo under this Article
shall not be effective as to the Exhibit "A" Prospects or as to any Prospects
which are Exhibit "B" Prospects at the time notice of the merger or acquisition
is given and on which an Initial Test Well has been spudded or which are to be
drilled prior to the later of (i) the date a Party gives such notice of
termination at or after closing, or (ii) the date six (6) months after the
Party to the merger or acquisition gives written notification to the other
Party of the bona fide letter of intent or if there is no such letter, of a
written agreement for such merger or acquisition.
ARTICLE XII
DEFAULT BY CARRIZO
Section 12.1 If Carrizo is unable or unwilling to perform its
obligations under this Agreement by failure to timely commence and prosecute
the drilling of the Initial Test Wells for any one or more of the Subject
Prospects, Palace shall notify Carrizo in writing of the specific default.
Carrizo shall then have ten (10) days to remedy the default. If Carrizo fails
or refuses to remedy the default, Palace shall have the right, but not the
obligation, to take over and assume Carrizo's working interest in the Subject
Prospect or Prospects to which the default or inability relates. If the default
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or inability relates to more than one Prospect, Palace may exercise its
take-over rights as to any one or more of such Prospects as it may choose.
Section 12.2 Failure to timely commence drilling shall mean that
commencement of an Initial Test Well has not commenced within ninety (90) days
of the commencement date (i) specified on Exhibit "A" for the Exhibit "A"
Prospects, (ii) specified on Exhibit "B" for the Current Exhibit "B" Prospects,
or (iii) specified in the submission of the Prospect to Palace for its election
under the terms hereof for Prospects which hereafter become Exhibit "B"
Prospects. Provided, if such inability to timely commence is by reason of Force
Majeure, lack of rig availability or the necessity of curing title defects,
then the period of non-performance shall be extended until the cause is
removed, but in such event, Carrizo shall exercise all due diligence in order
to remove the cause as quickly as possible.
Section 12.3 As to any Prospect or Prospects for which Palace
exercises its take-over right, Carrizo shall farmout to Palace all of Carrizo's
remaining working interest in the Leases in the Prospect or Prospects on the
following terms:
12.3.1 Palace shall commence drilling of the Initial Test
Well or Wells for the Prospects taken over within
ninety (90) days of Palace's notice to Carrizo of
its takeover election under this Article. Provided,
if failure to timely commence is by reason of Force
Majeure, lack of rig availability or the necessity
of curing title defects, then the commencement
period shall be extended until the cause is removed,
but in such event, Palace shall exercise all due
diligence in order to remove the cause as quickly as
possible. The unexcused failure by Palace to
commence the Well within said period of time shall
result in such Prospect being removed from this
Agreement and it shall no longer be a Subject
Prospect for the purposes hereof and shall be the
sole property of Carrizo.
12.3.2 Such farmout shall be on a drill-to-earn basis. By
the drilling of such well and paying one hundred
percent (100%) of the costs to Casing Point
attributable to the working interests of Carrizo,
Palace shall earn eighty-five percent (85%) of
Carrizo's remaining working interest in such Well
and in such Prospect. Palace's costs, interests, and
promote to Carrizo as to the working interest to
which Palace was originally entitled at the time
Palace elected to Participate in the Prospect are
unchanged by the farmout. Each Party shall bear its
proportionate share of all costs incurred subsequent
to Casing Point. The farmout provided by Carrizo to
Palace shall be on a drill-to-earn basis and shall
only include the working interest owned by Carrizo
that is affected by the default and shall not
include the interest owned by Carrizo in the
Prospects which are not subject to this Agreement as
identified under Section 7.3 above.
Section 12.4 If Carrizo fails to pay Palace any amount to which Palace
may be entitled hereunder, Palace shall have the right to offset the amounts
due against amounts which Palace then or thereafter may owe Carrizo.
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ARTICLE XIII
DEFAULT BY PALACE
Section 13.1 If Palace is unable or unwilling to perform its
obligations under this Agreement by failure to timely pay Carrizo for Palace's
share of the cost to drill the Initial Test Wells to Casing Point for any one
or more of the Subject Prospects or for the payment of Subsequently Acquired
Leases on Prospects in which Palace has elected to participate, Carrizo shall
notify Palace in writing of the specific default. Palace shall then have ten
(10) days to remedy the default. If Palace fails or refuses to remedy the
default, Carrizo shall have the rights to terminate this Agreement and to
demand payment of the amounts due and unpaid.
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ARTICLE XIV
MISCELLANEOUS
Section 14.1 Concerning Lease Contract Rights Except as expressly
otherwise provided in Article X, the assignment to Palace of an interest in
Lease Contract Rights as required by this Agreement shall relate solely to the
transfer of the contractual right to acquire Leases and shall not have the
effect of an assumption by or the imposition on Palace of Carrizo's obligations;
provided, for any Prospect which Palace elects to take-over under Article XII,
Palace shall be required to assume Carrizo's obligations under all or any of the
Lease Contract Rights pertaining to such Prospect in order to facilitate dealing
with other parties to such Agreements or to preserve and protect the rights of
Palace thereunder. Carrizo shall in any event use reasonable efforts to obtain
record title assignments of Leases to which it may be entitled under Lease
Contract Rights at the earliest possible time.
Section 14.2 Term This Agreement shall be effective as of May 4th,
1999, and shall continue until June 30, 2000, unless sooner terminated as herein
provided or by mutual agreement of the Parties. Following such termination, this
Agreement shall, however, remain in force and effect as to the Exhibit "A"
Prospects and the Exhibit "B" Prospects on which the Initial Test Well has been
commenced.
Section 14.3 Exhibits. All Exhibits referred to as attached hereto are
hereby incorporated herein by reference. Any capitalized terms used in any
Exhibit which are defined herein shall have the same meanings in said Exhibits
as they are given herein.
Section 14.4 Taxation. Each Party hereby elects to be excluded from the
application of all of the provisions of Subchapter "K", Chapter 1, Subtitle "A"
of the Internal Revenue Code of 1986, as permitted and authorized by Section 761
of such Code and the Regulations promulgated thereunder. Carrizo is authorized
to execute on behalf of each Party such evidence of this election as may be
required by the Secretary of the Treasury of the United States or the Federal
Internal Revenue Service, including specifically, but not by way of limitation,
all of the returns, statements and the data required by Treasury Regulation
Section l.761. Each Party agrees to execute and furnish such other evidence as
may be necessary to evidence this election.
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Section 14.5 Relationship of the Parties. It is the intent of the
Parties to establish a contractual co-tenancy relationship pursuant to this
Agreement. It is not the intent or purpose of the Parties to create hereunder
any partnership, joint venture or association or the relationship of agency or
employer and employee or any fiduciary relationship, and neither this Agreement
nor any of the operations hereunder shall be construed as creating any such
relationship. The Parties expressly agree that neither Party hereto shall have
the authority to obligate the other Party to any person not a Party to this
Agreement or to cause the other Party to be responsible for the obligations of
any other Party, each Party being separately responsible only for its several
obligations arising hereunder and liable only for its allocated share of the
costs and expenses incurred hereunder.
Section 14.6 No Third Party Beneficiary. Notwithstanding anything to
the contrary herein, each Party's obligations hereunder shall inure only to the
benefit of the Parties hereto and their permitted assigns, it being the express
intention of the Parties that no one shall be deemed a third party beneficiary
of this Agreement.
Section 14.7 Further Assurances. Each of the Parties hereto shall from
time to time and at all times do all such other and further acts and deliver
and execute such other and further instruments and documents as may be
reasonably required in order to fully perform and carry out the terms and
provisions of this Agreement.
Section 14.8 Notices. All notices, requests, demands and other
communications under this Agreement to the Parties shall be in writing and
directed to the applicable Party at the following address or such other address
as a Party may hereafter designate in writing from time to time. All notices
hereunder shall be in writing, dated and signed by the Party giving the same.
Each notice shall be either (i) delivered to the United States Postal Service
with sufficient postage affixed, certified or registered mail, return receipt
requested, (ii) sent and delivered by a nationally recognized overnight
delivery service; or (iii) sent by facsimile or other electronic transmission
with a confirmation copy sent by expedited delivery service. Any notice or
writing exercising an option, right or election shall be effective when sent,
but if such a notice or writing triggers another option, right or election in
the notified or receiving Party, the time period for the notified or receiving
Party to exercise such option, right or election commences upon actual receipt
by the such Party. Except as provided in the preceding sentence, all other
notices shall be effective and deemed given only upon receipt, provided,
facsimile or other electronic transmissions not received between the hours of
8:30 a.m. and 5:00 p.m. local time on a date which is not a Saturday, Sunday,
or federal or state holiday (business day), shall be deemed received at 8:30
a.m. on the next business day.
<TABLE>
<CAPTION>
CARRIZO: PALACE:
------- -------
<S> <C>
Carrizo Oil and Gas, Inc. Palace Exploration Company
14811 St. Mary's Lane, Suite 148 c/o Bistate Oil Management Corp.
Houston, Texas 77079 5 East 59th Street, Fifth Floor
New York, New York 10022
</TABLE>
Section 14.9 Assignment. The assignment by either Party of any of its
rights hereunder shall not have the effect of relieving such Party of any of
its obligations hereunder.
28
<PAGE> 29
Section 14.10 Conflicts. In the event of a conflict between the terms
and provisions of this Agreement and the terms and provisions of any other
exhibit hereto, the terms and provisions of this Agreement shall prevail and
control.
Section 14.11 Governing Law. The laws of the State of Texas shall
apply in all matters concerning this Agreement.
Section 14.12 Entire Agreement. The Parties agree that with respect to
the subject matter hereof, this Agreement together with all exhibits attached
hereto shall constitute the full and complete understanding and agreement of
the Parties and there are no other understandings, obligations, relationships
or agreements, written or oral.
Section 14.13 Inurement. Subject to the restrictions on assignment
contained herein, this Agreement shall be binding upon and inure to the benefit
of the successors and assigns of the Parties and the terms and provisions
hereof shall constitute covenants running with the lands and Leases subject
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date above written.
CARRIZO OIL AND GAS, INC. PALACE EXPLORATION COMPANY
By: By:
------------------------- --------------------------
Name: S. P. Johnson, IV Name Richard D. Siegal
Title: President Title: President
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 213,477
<SECURITIES> 0
<RECEIVABLES> 3,568,224
<ALLOWANCES> 480,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,476,698
<PP&E> 91,119,054
<DEPRECIATION> 29,535,293
<TOTAL-ASSETS> 66,294,381
<CURRENT-LIABILITIES> 17,264,790
<BONDS> 0
32,293,494
0
<COMMON> 103,750
<OTHER-SE> 8,832,395
<TOTAL-LIABILITY-AND-EQUITY> 66,294,381
<SALES> 1,925,265
<TOTAL-REVENUES> 1,925,265
<CGS> 636,840
<TOTAL-COSTS> 1,621,893
<OTHER-EXPENSES> 480,474
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,091
<INCOME-PRETAX> (173,314)
<INCOME-TAX> 7,002
<INCOME-CONTINUING> (180,316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (180,316)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
</TABLE>
