From lows of $18.43 on January 19, Carrizo Oil & Gas (CRZO, Financial) surged by 65% to $30.76 Thursday morning. Even after the big rally, long-term investors can still consider exposure to the stock.
Strong fundamentals
Carrizo is not significantly leveraged with total debt of $1.3 billion as of December 2015. Considering fiscal year 2015 EBITDA of $455 million, the stock is trading at leverage of 2.75, which is not a concern for the next 12 to 24 months. The reason for considering the leverage as comfortable is the EBITDA interest coverage, which stands at 6.5 for the year ending December 2015.
From a balance sheet perspective, another important point to note is that Carrizo has senior notes maturing in 2020 and 2023. Further, the company has $685 million in undrawn credit facility that is expiring in July 2018.
There is no near-term debt maturity with the credit facility providing strong liquidity buffer for the next 12 to 24 months. The undrawn credit facility has restrictive covenant of 4.75 for net debt to TTM EBITDA, but Carrizo has ample headroom on that covenant.
Conservative investment profile
Even with decent liquidity buffer, Carrizo has a conservative investment plan for the next 12 months with capital expenditure outlay of $295 million. For fiscal year 2015, Carrizo reported operating cash flow of $385 million and even if the operating cash flow is lower for fiscal year 2016, it is likely to be sufficient to fund the company’s investment plan for the year.
This will ensure that the company’s leverage remains conservative and EBITDA interest coverage also remains comfortable by the end of 2016. The company is well hedged through the first half of 2017 and therefore the cash flow will remain decent even if oil prices are not significantly higher than current levels.
Also, with $685 million in liquidity buffer, Carrizo has flexibility to increase investment in the next 12 to 24 months if oil prices trend meaningfully higher.
Low break-even assets
I mentioned that Carrizo has an investment plan of $295 million for fiscal year 2016. The important point is that $260 million is allocated to the Eagle Ford.
Carrizo’s Eagle Ford assets have weighted average break-even cost of less than $40 per barrel, and this is a key positive even with low prices.
With oil producers globally meeting on April 17 to discuss production freeze, even if oil trends to $50 per barrel in the next two to three months, the company’s EBITDA margin will increase along with operating cash flows.
Carrizo has a large resource potential, and 50% of the company’s undrilled locations are from assets with break-even of below $40 per barrel. The company is attractive from a long-term perspective when oil is meaningfully higher and the company’s low break-even assets are developed.
Conclusion
With these positives in consideration, Carrizo is certainly worth considering for the long term. While the stock has surged by 65% in less than three months, there is still value for long-term investors.
However, a 10% to 15% correction is entirely likely after the big surge, and investors should gradually accumulate the stock instead of making a big plunge at current levels. For short-term traders, it might not be a good idea to consider long positions at current levels.
Disclosure: No positions in the stock.
