-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PhQayGnb4eBGncySpB7K8n9fmOzQYy5Pj5RIwIgQkXV9h+ixDCW0SOpkgcDzBU/6 qocJvyFjytLnVQ4u9gM18w== 0000950129-98-003481.txt : 19980817 0000950129-98-003481.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950129-98-003481 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRIZO OIL & GAS INC CENTRAL INDEX KEY: 0001040593 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760415919 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-29187-87 FILM NUMBER: 98688336 BUSINESS ADDRESS: STREET 1: 14811 ST MARYS LANE STREET 2: STE 148 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 2814961352 MAIL ADDRESS: STREET 1: CARRIZO OIL & GAS INC STREET 2: 14811 ST MARYS LANE STE 148 CITY: HOUSTON STATE: TX ZIP: 77079 10-Q 1 CARRIZO OIL & GAS, INC. - 6/30/98 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 1998 [ ] 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 registrant became subject to the reporting requirements of Section 13 of the Securities Act of 1933 on August 5, 1997. The number of shares outstanding of the registrant's common stock, par value $0.01 per share, as of August 10, 1998, the latest practicable date, was 10,375,000. 2 CARRIZO OIL & GAS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Condensed Balance Sheets - As of June 30, 1998 and December 31, 1997 2 Condensed Statements of Operations - For the three-month and six-month periods ended June 30, 1998 and 1997 3 Condensed Statements of Cash Flows - For the six-month periods ended June 30, 1998 and 1997 4 Notes to Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Items 1-6. 13 SIGNATURES 15
3 CARRIZO OIL & GAS, INC. CONDENSED BALANCE SHEETS
December 31, June 30, 1997 1998 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,674,837 $ 1,922,105 Accounts receivable 3,635,504 3,516,416 Advances to operators 1,817,990 3,278,844 Other current assets 108,633 116,613 ------------ ------------ Total current assets 8,236,964 8,833,978 PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and gas properties) 45,082,833 62,428,200 OTHER ASSETS 338,638 305,622 ------------ ------------ $ 53,658,435 $ 71,567,800 ============ ============ LIABILITIES AND EQUITY CURRENT LIABILITIES: Accounts payable, trade $ 10,433,479 $ 7,222,067 Dividends payable -- 689,006 Other current liabilities 79,328 78,568 ------------ ------------ Total current liabilities 10,512,807 7,989,641 LONG-TERM DEBT 7,950,000 -- DEFERRED INCOME TAXES 2,300,267 2,342,676 MANDATORILY REDEEMABLE PREFERRED STOCK (10,000,000 shares authorized with none and 300,000 issued and outstanding at December 31, 1997 and June 30, 1998, respectively)(Note 3) -- 29,233,362 SHAREHOLDERS' EQUITY: Warrants (Note 3) -- 300,000 Common Stock (40,000,000 shares authorized with 10,375,000 issued and outstanding at December 31, 1997 and June 30, 1998) 103,750 103,750 Additional paid-in capital 32,845,727 32,845,727 Retained earnings (deficit) 365,690 (967,486) Deferred compensation (419,806) (279,870) ------------ ------------ 32,895,361 32,002,121 ------------ ------------ $ 53,658,435 $ 71,567,800 ============ ============
The accompanying notes are an integral part of these financial statements. -2- 4 CARRIZO OIL & GAS, INC. UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the Three For the Six Months Ended Months Ended June 30, June 30, -------------------------- -------------------------- 1997 1998 1997 1998 ----------- ----------- ----------- ----------- OIL AND NATURAL GAS REVENUES $ 2,311,854 $ 1,848,765 $ 4,165,024 $ 4,187,647 COSTS AND EXPENSES: Oil and natural gas operating expenses 638,329 653,364 1,195,793 1,282,809 Depreciation, depletion and amortization 605,549 860,862 988,024 1,620,367 General and administrative 407,146 558,280 604,761 1,392,633 ----------- ----------- ----------- ----------- Total costs and expenses 1,651,024 2,072,506 2,788,578 4,295,809 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) 660,830 (223,741) 1,376,446 (108,162) OTHER INCOME AND EXPENSES: Interest income -- 80,033 -- 273,537 Interest expense (323,213) -- (469,660) (57,731) Interest expense, related parties (43,352) -- (85,403) -- Capitalized interest 276,282 -- 464,780 54,646 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 570,547 (143,708) 1,286,163 162,290 TAX EXPENSE (BENEFIT) 1,934,572 (36,934) 1,934,572 83,529 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $(1,364,025) $ (106,774) $ (648,409) $ 78,761 =========== =========== =========== =========== LESS: DIVIDENDS AND ACCRETION ON PREFERRED SHARES -- (741,444) -- (1,411,938) ----------- ----------- ----------- ----------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $(1,364,025) $ (848,218) $ (648,409) $(1,333,177) =========== =========== =========== =========== BASIC EARNINGS (LOSS) PER COMMON SHARE (Note 2) $ (.18) $ (.08) $ (.09) $ (.13) =========== =========== =========== =========== DILUTED EARNINGS (LOSS) PER COMMON SHARE (Note 2) $ (.18) $ (.08) $ (.08) $ (.13) =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. -3- 5 CARRIZO OIL & GAS, INC. UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, ---------------------------- 1997 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (648,409) $ 78,761 Adjustment to reconcile net income (loss) to net cash provided by operating activities- Depreciation, depletion and amortization 988,024 1,620,367 Deferred income taxes 1,934,572 42,409 Changes in assets and liabilities- Accounts receivable (4,309,241) 119,088 Other current assets (1,741,473) (7,980) Other assets -- (34,386) Accounts payable, trade 169,502 (5,145,559) Interest payable to related parties and other current liabilities 155,356 (760) ------------ ------------ Net cash (used in) operating activities (3,451,669) (3,328,060) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, accrual basis (11,884,645) (18,758,396) Adjustment to cash basis 6,711,520 1,934,147 Advance to operators -- (1,460,854) ------------ ------------ Net cash used in investing activities (5,173,125) (18,285,103) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of preferred stock -- 28,810,431 Proceeds from long-term debt 9,734,454 -- Debt repayments (500,000) (7,950,000) Proceeds from related-party notes payable 130,545 -- Distributions (90,000) -- ------------ ------------ Net cash provided by financing activities 9,274,999 20,860,431 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 650,205 (752,732) CASH AND CASH EQUIVALENTS, beginning of period 1,492,603 2,674,837 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 2,142,808 $ 1,922,105 ============ ============ SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest (net of amounts capitalized) $ 28,669 $ 3,085 ============ ============
The accompanying notes are an integral part of these financial statements. -4- 6 CARRIZO OIL & GAS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. NATURE OF OPERATIONS, COMBINATION AND OFFERING: 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, 1997, 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, 1997. 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. -5- 7 2. EARNINGS PER COMMON SHARE: Supplemental earnings per share information is provided below:
For the Three Months Ended June 30 ---------------------------------------------------------------------------- Income (Loss) Shares Per-Share Amount 1997 1998 1997 1998 1997 1998 ----------- ----------- --------- ---------- ------- ------- Net Income (loss) $(1,364,025) $ (106,774) Less: Dividends and accretion on preferred stock (741,444) ----------- Basic Earnings per Share Net Income (loss) available to common shareholders $(1,364,025) (848,218) 7,500,000 10,375,000 $ (0.18) $ (0.08) ======= ======= Stock Options -- -- 222,120 87,445 ----------- ----------- ----------- ----------- Diluted Earnings per Share Net Income (loss) available to common shareholders plus assumed conversions $(1,364,025) $ (848,218) 7,722,120 10,462,445 $ (0.18) $ (0.08) =========== =========== =========== =========== ======= =======
For the Six Months Ended June 30 ---------------------------------------------------------------------------- Income (Loss) Shares Per-Share Amount 1997 1998 1997 1998 1997 1998 ----------- ----------- --------- ---------- ------- ------- Net Income (loss) $ (648,409) $ 78,761 Less: Dividends and accretion on preferred stock -- (1,411,938) ----------- ----------- Basic Earnings per Share Net Income (loss) available to common shareholders (648,409) (1,333,177) 7,500,000 10,375,000 $ (0.09) $ (0.13) ======= ======= Stock Options -- -- 222,120 105,810 ----------- ----------- ----------- ----------- Diluted Earnings per Share Net Income (loss) available to common shareholders plus assumed conversions $ (648,409) $(1,333,177) 7,722,120 10,480,810 $ (0.08) $ (0.13) =========== =========== =========== =========== ======= =======
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. During the six months ended June 30, 1998, the Company had outstanding 250,000 stock options and warrants to purchase 1,000,000 shares of common stock, which were antidillutive and were not included in the calculation as the exercise price exceeded the market value. In 1997, the Company adopted SFAS No. 128, "Earnings per Share," effective December 31, 1997. This accounting change had no effect on previously reported earnings per share (EPS) data. 3. SALES OF PREFERRED STOCK AND WARRANTS: 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. A portion of the proceeds were used to repay indebtedness of $7.95 million. -6- 8 The remaining proceeds are being used primarily for oil and natural gas exploration and development activities in Texas and Louisiana. 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. Payments for the three and six months ended June 30, 1998 were made by the issuance of an additional 6,225 and 6,866.72 shares of Preferred Stock, respectively. As of July 15, 1998, there were 313,091.72 shares of Preferred Stock outstanding. The Warrants, which had a fair value at issuance of $.30 per share, will be accreted through the term of the Preferred Stock. 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 certain events. 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 per share. The Warrants (i) enable the holders to purchase 1,000,000 share of Common Stock at a price of $11.50 per share (payable in cash, by "cashless exercise" and certain other methods), subject to adjustments, (ii) expire after a seven-year term, and (iii) are exercisable after one year. 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, "Reporting Comprehensive Income" (Statement No. 130") and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information ("Statement No. 131"). In February 1998, the FASB issued Statement No. 132 "Employers' Disclosure About Pension and Other Post-retirement Benefits" ("Statement No. 132") that revised disclosure requirements for pension and other post-retirement benefits. Statement No. 132 does not impact Carrizo's disclosure or reporting. During the first quarter of 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accounts issued two Statements of Position ("SOP"), SOP 98-5 "Reporting on the Costs of Start-up Activities and SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Statement No. 130 established standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This standard does not currently alter the Company's reporting or disclosure. Statement No. 131 established standards for the way public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to share holders. It also established standards for related disclosure about products and services, geographic areas and major customers. Statement No. 131 will not currently impact the Company's disclosure or reporting. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 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. Statement No. 133 is effective for fiscal years beginning after June 15, 1999. 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, 1997 and, at the company's election, before January 1, 1998. 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. SOP 98-1 establishes guidance on the accounting for the costs of computer software developed or obtained for internal use. The Company's current accounting policies adhere to the provisions of the SOP. SOP 98-5 provides guidance on the accounting for start up costs and organization costs, and must be adopted for fiscal years beginning after December 15, 1998. At adoption, the Company will be required to record the cumulative effect of a change in accounting principle to write off any unamortized start up or organization costs remaining on the balance sheet. The Company plans to adopt the SOP in the first quarter of 1999. -7- 9 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, 1997 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 70 wells in 1997 and 29 wells through the six months ended June 30, 1998. The Company had initially budgeted to drill a total of 150 gross wells in 1998. As a result of unexpected delays in settling certain land issues and poor weather, the Company drilled 29 wells in the six months ended June 30, 1998 which is fewer than number contemplated in the initial budget. As a result of lower commodity prices, the Company has reduced the number of wells it budgets to drill in 1998, but anticipates drilling at least as many wells in the second half of 1998 as in the first half of the year. 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 financial statements are prepared on the basis of a combination of Carrizo and the entities that were a party to the Combination Transactions. Carrizo and the entities combined with it in the Combination Transactions were not required to pay federal income taxes due to their status as partnerships or Subchapter S corporations, which are not subject to federal income taxation. Instead, taxes for such periods were paid by the shareholders and partners of such entities. On May 16, 1997, Carrizo terminated its status as an S corporation and thereafter became subject to federal income taxes. In accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," the Company established a deferred tax liability in the second quarter of 1997 which resulted in a noncash charge to income of approximately $1.6 million. The Company has primarily grown through the internal development of properties within its exploration project areas, although the Company acquired properties with existing production in the Camp Hill Project in late 1993, the Encinitas Project in early 1995 and the La Rosa Project in 1996. The Company made these acquisitions through the use of limited partnerships with Carrizo or Carrizo Production, Inc. as the general partner. However, as operations have expanded, the Company has increasingly funded its activities through bank borrowings and cash flow from operations in order to retain a greater portion of the interests it develops. 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 -8- 10 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 364 and 544 Mmcf for the three and six months ended June 30, 1998 at an average price (Houston Ship Channel) of 2.15 and 2.42 resulting in net income (loss) of $(11,000) and $129,000, respectively. The Company had outstanding hedge positions as of June 30, 1998 covering 124 Mmcf for July 1998 at an average price of $2.15 (Houston Ship Channel). The Company uses the full-cost method of accounting for its oil and gas properties. Under this method, all acquisition, exploration and development costs, including any general and administrative costs that are directly attributable to the Company's acquisition, exploration and development activities, are capitalized in a "full-cost pool" as incurred. The Company records depletion of its full-cost pool using the unit-of-production method. To the extent that such capitalized costs in the full-cost pool (net of depreciation, depletion and amortization and related deferred taxes) exceed the present value (using a 10 percent discount rate) of estimated future net after-tax cash flows from proved oil and gas reserves, such excess costs are charged to operations. The Company has not been required to make any such write-downs. Once incurred, a write-down of oil and gas properties is not reversible at a later date. The ceiling test for many full cost companies, including Carrizo, could be negatively impacted by prolonged unfavorable oil and gas prices, potentially resulting in the Company recording a non-cash charge to earnings related to its oil and gas properties during 1998. RESULTS OF OPERATIONS Three Months Ended June 30, 1998, Compared to the Three Months Ended June 30, 1997 Oil and natural gas revenues for the three months ended June 30, 1998 decreased 20 percent to $1,849,000 from $2,312,000 for the same period in 1997. Production volumes for natural gas during the three months ended June 30, 1998 decreased 25 percent to 623,998 Mcf from 835,910 Mcf for the same period in 1997. Average gas prices increased 6 percent to $2.28 per Mcf in the second quarter of 1998 from $2.16 per Mcf in the same period in 1997. Production volumes for oil in the first quarter of 1998 increased 35 percent to 36,639 Bbls from 27,168 Bbls for the same period in 1997. Average oil prices decreased 37 percent to $11.71 per barrel in the second quarter of 1998 from $18.57 per barrel in the same period in 1997. The decrease in natural gas production was due primarily to the curtailment of the production from the Company's Wheeler wells and the declines in production from the Company's Encinitas wells combined with the delay in commencement of production from several wells drilled during the first quarter of 1998. The increase in oil production was due primarily to the production from new wells drilled and completed during 1997 and 1998. 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, 1997 and 1998:
1998 Period Compared to 1997 Period June 30 ------------------------- ----------------------- Increase % Increase 1997 1998 (Decrease) (Decrease) ---------- ---------- ---------- ---------- Production volumes- Oil and condensate (Bbls) 27,168 36,639 9,471 35% Natural gas (Mcf) 835,910 623,998 (211,912) (25%) Average sales prices-(1) Oil and condensate (per Bbl) $ 18.57 $ 11.71 $ (6.86) (37%) Natural gas (per Mcf) 2.16 2.28 .12 6% Operating revenues- Oil and condensate $ 504,624 $ 428,998 $ (75,626) (15%) Natural gas 1,807,230 1,419,767 (387,463) (21%) ---------- ---------- ---------- Total $2,311,854 $1,848,765 $ (463,089) (20%) ========== ========== ==========
- ------------ (1) Includes impact of hedging activities. Oil and natural gas operating expenses for the three months ended June 30, 1998 increased 2 percent to $653,000 from $638,000 for the same period in 1997. Operating expenses per equivalent unit increased to $.77 per Mcfe in the second quarter of 1998 from $.64 per Mcfe in the same period in 1997 as a result of decreased production of natural gas which had lower per unit operating costs. Depreciation, depletion and amortization (DD&A) expense for the three months ended June 30, 1998 increased 42 percent to $861,000 from $606,000 for the same period in 1997. This increase was due to additional seismic and drilling costs. -9- 11 General and administrative expense for the three months ended June 30, 1998 increased 37 percent to $558,000 from $407,000 for the same period in 1997 as a result of increases in the number of employees and related benefits and increased office space. Interest income for the three months ended June 30, 1998 increased to $80,000 from zero in the second quarter of 1997. Net interest expense for the three months ended June 30, 1998, decreased to zero from $90,000 in the same period in 1997. Capitalized interest decreased to zero in the second quarter of 1998 from $276,000 in the second quarter of 1997 as no interest was paid as a result of debt retirement in the first quarter of 1998 using proceeds from the sale of Preferred Stock and Warrants. Income (loss) before income taxes for the three months ended June 30, 1998 decreased 125 percent to a loss of $144,000 from $571,000 in the same period in 1997. Net loss for the three months ended June 30, 1998 decreased to $107,000 from $1,364,000 for the same period in 1997 primarily as a result of decreased income taxes offset by decreased revenue and increased DD&A and general and administrative expense. Six Months Ended June 30, 1998, Compared to the Six Months Ended June 30, 1997 Oil and natural gas revenues for the six months ended June 30, 1998 increased 1 percent to $4,188,000 from $4,165,000 for the same period in 1997. Production volumes for natural gas during the six months ended June 30, 1998 decreased 7 percent to 1,331,169 Mcf from 1,428,183 Mcf for the same period in 1997. Average gas prices increased 10 percent to $2.47 per Mcf in the first half of 1998 from $2.24 per Mcf in the same period in 1997. Production volumes for oil in the first half of 1998 increased 44 percent to 69,814 Bbls from 48,550 Bbls for the same period in 1997. Average oil prices decreased 35 percent to $12.89 per barrel in the first half of 1998 from $19.87 per barrel in the same period in 1997. The increase in oil production was due primarily to production from new wells drilled and completed during 1997 and 1998. 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, 1997 and 1998:
1998 Period Compared to 1997 Period June 30 -------------------------- ---------- ---------- Increase % Increase 1997 1998 (Decrease) (Decrease) ---------- ---------- ---------- ---------- Production volumes- Oil and condensate (Bbls) 48,550 69,814 21,264 44% Natural gas (Mcf) 1,428,183 1,331,169 (97,014) (7%) Average sales prices-(1) Oil and condensate (per Bbl) $ 19.87 $ 12.89 $ (6.98) (35%) Natural gas (per Mcf) 2.24 2.47 .23 10% Operating revenues- Oil and condensate $ 964,599 $ 899,687 $ (64,912) (7%) Natural gas 3,200,425 3,287,960 87,535 3% ---------- ---------- ---------- Total $4,165,024 $4,187,647 $ 22,623 1% ========== ========== ==========
- ------------ (2) Includes impact of hedging activities. Oil and natural gas operating expenses for the six months ended June 30, 1998 increased 7 percent to $1,283,000 from $1,196,000 for the same period in 1997 primarily due to the addition of new wells offset by a reduction in costs on older producing fields. Operating expenses per equivalent unit increased to $.73 per Mcfe in the first half of 1998 from $.70 per Mcfe in the same period in 1997 as a result of declining production of natural gas. Depreciation, depletion and amortization (DD&A) expense for the six months ended June 30, 1998 increased 64 percent to $1,620,000 from $988,000 for the same period in 1997. This increase was due to additional seismic and drilling costs. General and administrative expense for the six months ended June 30, 1998 increased 130 percent to $1,393,000 from $605,000 for the same period in 1997 as a result of increases in the number of employees and related benefits and increased office space. Interest income for the six months ended June 30, 1998 increased to $274,000 from zero in the first half of 1997. Net interest expense for the three months ended June 30, 1998, decreased to $3,000 from $90,000 in the same period in 1997. -10- 12 Capitalized interest decreased to $55,000 in the first half of 1998 from $465,000 in the first half of 1997 as total interest paid decreased as a result of debt retirement using proceeds from the Preferred Stock and Warrants sale. Income before income taxes for the six months ended June 30, 1998 decreased 87 percent to $162,000 from $1,286,000 in the same period in 1997. Net income for the six months ended June 30, 1998 increased to income of $79,000 from a loss of $648,000 for the same period in 1997 primarily as a result of decreased income tax expense offset by increased DD&A and general and administrative expense. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have included proceeds for the Offering and from the sale of shares of Preferred Stock and the Warrants (each as defined below), funds generated by operations, equity capital contributions and borrowings, primarily under revolving credit facilities. Cash flows used in provided by operations (after changes in working capital) were $3,452,000 and $3,328,000 for the six months ended June 30, 1997 and 1998, respectively. The decrease in cash flows provided by operations in 1998 as compared to 1997 was due primarily to decreases in trade accounts payable. 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 $18.7 million for the six months ended June 30, 1998. The Company's drilling efforts resulted in the successful completion of 46 gross wells (17.5 net) during the year ended December 31, 1997 and 19 gross wells (7.1 net) during the six months ended June 30, 1998. As a result of lower commodity prices, the Company has reduced its capital expenditure budget for 1998, but anticipates drilling at least as many wells in the second half of 1998 as in the first half of the year. The Company has experienced and expects to continue to experience substantial working capital requirements primarily due to the Company's active exploration and development programs and, to a much lesser extent, its technology enhancement programs. While the Company believes that the net proceeds from the Offering, net proceeds for the sale of shares of Preferred Stock and the Warrants, cash flow from operations and borrowings under the Company's credit facility should allow the Company to implement its present business strategy, the Company is exploring alternatives for additional financing to ensure the Company's continued growth, and fund its aggressive development and exploration program and continued technological enhancement. In the event such capital resources are not available to the Company, its exploration and other activities may be curtailed. FINANCING ARRANGEMENTS In connection with the Offering, the Company entered into an amended revolving credit agreement with Compass Bank, (the "Company Credit Facility"), which provides for a maximum loan amount of $25 million, subject to borrowing base limitations. Prior to the Offering, the Company utilized various credit facilities as well as borrowings from certain directors and officers of the Company. Except for the Company Credit Facility, all of these facilities and borrowings were terminated with the close of the Offering. Under the Company Credit Facility, the principal outstanding is due and payable upon maturity in June 1999 with interest due monthly. The interest rate for borrowings is calculated at a floating rate based on the Compass index rate or LIBOR plus 2 percent. The Company's obligations are secured by certain of its oil and gas properties and cash or cash equivalents included in the borrowing base. Under the Company Credit Facility, Compass, in its sole discretion, will make semiannual borrowing base determinations based upon the proved oil and natural gas properties of the Company. Compass may redetermine the borrowing base and the monthly borrowing base reduction at any time and from time to time. The Company may also request borrowing base redeterminations in addition to its required semiannual reviews at the Company's cost. At June 30, 1998, the borrowing base amounted to $5,600,000 with no amounts outstanding. 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, -11- 13 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 December 1997, the Company and Compass entered into an amendment to the Company Credit Facility that provided for a term loan of $3 million. Interest for borrowings under the term loan was calculated at a floating rate based on the Company's index rate plus 2 percent. The amount outstanding under the term loan as of December 31, 1997 was $3 million. Amounts outstanding under the term loan were repaid in January 1998. 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. A portion of the proceeds were used to repay indebtedness, as described above. The remaining balance is expected to be used primarily for oil and natural gas exploration and development activities in Texas and Louisiana. The Preferred Stock provides 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. Payments for the three and six months ended June 30, 1998 were made by the issuance of an additional 6,225 and 6,866.72 shares of Preferred Stock, respectively. As of July 15, 1998 there were 313,091.72 shares of Preferred Stock outstanding. The Preferred Stock is required to be redeemed by the Company (i) on January 8, 2005, or (ii) after the occurrence of certain events, including (a) certain failures to declare and pay any two dividends, (b) certain breaches of provisions relating 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 with respect to the Preferred Stock, (d) certain failures to pay or accelerations with respect to indebtedness for borrowed money, (e) certain violations of the shareholders' agreement relating to the Preferred Stock and (f) certain sales or dispositions of substantially all of the Company's assets. "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 refinancings, but including prepayments (other than in connection with refinancings) which would otherwise be due under such indebtedness within a 60-day period following the date of such prepayments). 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. 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 Company is assessing the impact of the Year 2000 issue on its operations, including the development and implementation of project plans and cost estimates required to make its information systems infrastructure Year 2000 compliant. Based on existing information, the Company believes that anticipated spending necessary to become Year 2000 compliant will not have a material effect on the financial position, cash flows or results of operations of the Company, nor will the Year 2000 issues cause any material adverse effect on the future business operations of the Company. There can be no assurance, however, as to the ultimate effect of the Year 2000 issue on the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. Not required or not applicable. -12- 14 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 Stockholders on May 20, 1998 (C) Set forth below are the results of the voting with respect to each matter acted upon at the meeting (proxy totals in thousands):
Broker For Against Withheld Abstain Non votes --- ------- -------- ------- --------- Election of Directors S.P. Johnson IV 9,075,799 16,000 -- -- -- Frank A. Wojtek 9,075,799 16,000 Steven A. Webster 9,075,799 16,000 Douglas A.P. Hamilton 9,075,799 16,000 Paul B. Loyd, Jr. 9,075,799 16,000 Roberto Marsella 9,075,799 16,000 Approval of the Appointment of Arthur Andersen LLP as Independent Public Accountants 9,081,249 10,550 -- -- --
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, and any other statements regarding future operations, financial results, business plans and cash needs and other statements that are not historical facts are forward looking statements. When used in this document, the words "anticipate," "estimate," "expect," "may," "project," "believe" and similar expression are intended to be among the statements that identify forward looking statements. Such statements involve risks and uncertainties, including, but not limited to, those relating to the Company's dependence on its exploratory drilling activities, the volatility of oil and natural gas prices, the need to replace reserves depleted by production, operating risks of oil and natural gas operations, the Company's dependence on its key personnel, factors that affect the Company's ability to manage its growth and achieve its business strategy, risks relating to, limited operating history, technological changes, significant capital requirements of the Company, the potential impact of government regulations, litigation, competition, the uncertainty of reserve information and future net revenue estimates, property acquisition risks and other factors detailed in the Registration Statement and the Company's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. -13- 15 Item 6 - Exhibits and Reports on Form 8-K Exhibits Exhibit Number Description ------ ----------- +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997 (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +3.1 -- Amended and Restated Articles of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.1 to the Company's 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). 27.1 -- Financial Data Schedule. + Incorporated herein by reference as indicated. Reports on Form 8-K The Company did not file any reports on a Form 8-K during the quarter ended June 30, 1998. -14- 16 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 14, 1998 By: /s/ S. P. Johnson IV ---------------------------------- President and Chief Executive Officer (Principal Executive Officer) Date: August 14, 1998 By: /s/Frank A. Wojtek ---------------------------------- Chief Financial Officer (Principal Financial and Accounting Officer) -15- 17 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------ ----------- +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997 (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +3.1 -- Amended and Restated Articles of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.1 to the Company's 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). 27.1 -- Financial Data Schedule. + Incorporated herein by reference as indicated. EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1,922,105 0 3,516,416 0 0 8,833,978 62,428,200 0 71,567,800 7,989,641 0 29,233,362 0 103,750 31,898,371 71,567,800 4,187,647 4,187,647 0 2,903,176 1,392,633 0 3,085 162,290 83,529 78,761 0 0 0 78,761 (.13) (.13)
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