Carrizo Oil touts fall in leverage ratio, targets 2-to-2.5 times range

By Paul Deckelman

New York, Dec. 11 - Carrizo Oil & Gas, Inc. has substantially improved its balance sheet over the past two years to the point where its leverage ratio is below that of most of its sector peers, its president and chief executive officer declared on Wednesday.

"We've worked hard on the balance sheet," Sylvester P. "Chip" Johnson IV told participants at the Capital One Securities 8th Annual Energy Conference taking place in New Orleans. He opined, "I think that [balance sheet considerations] was one of the things holding us back the last couple of years."

Johnson told conference attendees that the company has brought its leverage ratio of net debt as a multiple of trailing 12-month adjusted EBITDA "down under 2 [times], which is better than most of our peers. And we can keep it there. We don't have anything that forces us to spend capital if there's some sort of reason that we have to slow down."

According to slides prepared by the company for use with Johnson's conference presentation, the Denver-based independent oil and natural gas exploration and production company's leverage was at the 4.1 times mark at the end of the first quarter of 2011, and after a slight dip later that year, it had moved back up to 4.2 times by the 2012 first quarter, its peak level.

After that, though, the company was able to cut the debt measure down to 2.9 times by the end of 2012, to 2.6 times at the end of this year's first quarter, 2.5 times by the second quarter and 2.4 times by the end of the third quarter.

Asset sales play role

Johnson said the company did this "by growing EBITDA, cutting capex, doing a better job of living within our means and also selling off some non-strategic assets," chiefly properties where the company expected to be able to drill for dry gas. (Dry gas is natural gas that does not contain natural gas liquids - chemical compounds such as ethane and butane that can be separated from the gas and then refined into saleable products such as ethylene, which is used to make plastics. Low market prices for purely natural gas over the past few years, as opposed to stronger prices for the natural gas liquids, have made such dry-gas assets less desirable.)

Carrizo announced in September that it had agreed to sell its remaining assets in the Barnett Shale formation in northeast Texas, all of its interest in the Camp Hill Field in eastern Texas and certain undeveloped acreage in the Marcellus Shale formation in Pennsylvania for total consideration of about $268 million, including aggregate cash proceeds of around $250.4 million. The company said that it planned to use the net proceeds from these sale transactions to repay borrowings under its revolving credit facility as well as to fund a portion of the remainder of its 2013 capital expenditures program, largely in the Eagle Ford Shale formation in southern Texas.

The company also augmented its finances via an equity offering it did last month. It sold a total of 5.18 million shares of its common stock - the main offering of 4.5 million plus an underwriters' over-allotment of 675,000 shares - for $44 per share, or gross proceeds of about $227 million. It plans to use the proceeds on capital spending, including the acquisition of acreage in the Utica Shale formation in Ohio and development of reserves there, to fund accelerated development of its reserves in the Eagle Ford Shale and for other general corporate purposes.

While the actual leverage ratio at the end of the third quarter stood at 2.4 times, the company extrapolates a third-quarter debt-to-EBITDA leverage ratio as low as 1.8 times pro forma for the completion of the equity offering, the asset sales and the Utica acquisition, according to the slides used with the presentation.

Johnson said that the ratio of under 2 times "puts us in about the top quartile in our peer group, and our goal is to run between 2 and 2.5 [debt times EBITDA]."

Bonds dominate debt structure

As of the end of the third quarter on Sept. 30, the company had total debt outstanding of $991.4 million, most of it in the form of two series of junk bonds: $600 million of outstanding 8 5/8% senior notes due 2018 and $300 million of outstanding 7½% senior notes due 2020. It also had $4.43 million of 4.375% convertible senior notes 2028 and $87 million outstanding at that time on its secured revolving credit facility, but it repaid the revolver borrowings subsequent to the quarter's end, using some of the proceeds from its Barnett Shale asset sale, and thus had no outstanding borrowings on the facility as of Nov. 1.

In October, Carrizo and its lenders - a consortium of 12 banks led by administrative agent Wells Fargo Bank, NA - agreed to amend the facility, extending its maturity to July 2, 2018 from Jan. 27, 2016 and increasing the lenders' commitments to $1 billion from $750 million.

The company had borrowing-base availability at that time of $530 million, although this was reduced to $470 million, the current level, upon the closing of the sale of the Barnett Shale properties.

Borrowings bear interest at a rate of 250 basis points over Libor. The company is required under one of its covenants to keep net debt levels below 4 times its trailing 12-month adjusted EBITDA.

The two bond issues meantime have no liquidity or performance-based covenants, the company said.

The company had cash and cash equivalents as of Sept. 30 of $5.7 million.

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