Over the past three years or so, the oil and gas exploration and production (E&P) segment has lost about 11% of its market value. Since reaching a high over $69 in June of 2014, shares of Carrizo Oil & Gas Inc. (NASDAQ: CRZO) were down about 78%, closing Wednesday night below $15 a share.
Shares have bounced about 10% higher Thursday morning following news that affiliates of activist energy investment firm Kimmeridge Energy Management have built a stake of 8.1% in Carrizo and are pushing the independent E&P firm to sharpen its focus on the company’s holdings in the Permian Basin.
Kimmeridge acknowledges that Carrizo recently has taken steps to “enhance or maximize shareholder value” by selling no-core assets in the Eagle Ford, Utica, Marcellus and Niobrara shale plays and using the proceeds to pay down debt. Kimmeridge thinks Carrizo should do more, however.
In a filing with the U.S. Securities and Exchange Commission (SEC) Thursday morning, Kimmeridge said it believes Carrizo “should take one or more” of these steps to address its “low valuation”:
- Completely divest its Eagle Ford position to pay down debt and become a Permian pure-play with an industry-leading balance sheet.
- Merge with another operator with Permian overlap to increase scale. Following such a merger, the Eagle Ford position could either be divested or run as a smaller portion of the overall company.
- Exit part of the Eagle Ford position and use the proceeds to repurchase a significant portion of [Carrizo’s common stock].
The Wall Street Journal cites Kimmeridge founder and managing partner Ben Dell:
There should be a wave of consolidation. The biggest obstacle to that happening is management teams focusing on their own job preservation instead of what’s best for shareholders.
This is not a particularly penetrating insight. The Permian is by far the most popular play among activists, private equity firms and hedge funds that bought up significant pieces of independent E&P companies when the bottom fell out of the crude market in 2016 and 2017. Now these investors want to cash in.
There’s a catch to everyone piling into the Permian Basin, however. John Zanner at RBN Energy puts it succinctly:
Permian production is increasing at a breakneck pace as new players are entering the scene. Private equity-backed exploration and production companies (E&Ps) are no longer just acquiring and flipping acreage, as they are being forced to prove their assets are profitable and can generate a return on investment. The combination of large drilling plans from the majors and new production from these smaller operators — with no new pipeline takeaway capacity in sight — has sent Permian crude pricing into a tailspin.
Zanner noted that Permian crude is priced at a $4 a barrel discount to West Texas Intermediate (WTI) and that’s entirely due to the lack of pipeline capacity. Producers have been forced to transport crude by truck to the nearest pipeline injection point that will accept it.
Kimmeridge rightly sees Permian acreage as more valuable than Eagle Ford acreage. But lack of takeaway capacity is likely to get worse before it gets better as E&P companies produce more oil with no place to go.
Carrizo shares traded up about 9% Thursday morning, at $16.82 in a 52-week range of $11.10 to $29.10. The consensus 12-month price target on the stock is $26.22.
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