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Yamil Berard
Yamil Berard
Articles (192) 

An Energy Stock Shows Signs of Life

The Houston-based company has boosted production, slashed operating costs and retired $370 million worth of debt

July 11, 2018 | About:

A year ago, gurus like Steven Cohen (Trades, Portfolio), Leon Cooperman (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) bolted out of Carrizo Oil & Gas Inc. (NASDAQ:CRZO). The company was experiencing declining revenues and a rising debt load that was eroding its financial strength.

But now, a more favorable outlook for energy stocks, backed by strong first-quarter earnings, is turning some gurus back into the fold of this Houston-based oil and gas explorer. For three consecutive quarters, gurus like Ken Fisher (Trades, Portfolio) have opened positions, while others, including Louis Moore Bacon (Trades, Portfolio), have expanded their holdings.

Moore, the hedge fund manager, increased his holdings by 340% in the fourth quarter of 2017, amassing an estimated return of 58% on the energy producer. In the first quarter, Moore is sitting on an investment worth roughly $8 million. Shares stood at roughly $19 a share when he launched the position late last year.

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On Wednesday afternoon, the stock stood at $29 a share, down 3%. Other energy stocks, like Exxon Mobil Corp. (NYSE:XOM) and Chevron (NYSE:CVX), saw declines of up to 3% on Wednesday afternoon as the markets shuddered over the unveiling of a new set of tarrifs on China. In mid-afternoon trading, the Dow Jones Industrial Average sunk 200 points.

Year to date, Carrizo has jumped 26%. The median price-sales chart by GuruFocus shows it is currently priced below its historical value.

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A favorable commodity

In recent months, as oil prices have hit record highs, interest in energy stocks has taken a greater hold. On Thursday, the U.S. Energy Information Administration released its latest short-term economic update on energy prices, confirming expectations of unprecedented oil and natural gas production into next year.

The EIA estimates U.S. crude oil and dry natural gas production will easily surpass previous levels, while production of natural gas will hit a record high.

In natural gas, U.S. production will set a record. The EIA expects natural gas production will rise to 84.5 billion cubic feet per day, up by an additional 3.1 billion cubic feet per day.

Meanwhile, crude oil production is expected to average 10.8 million barrels a day in 2018, up from 9.4 million barrels a day in 2017. For next year, the EIA says production will rise to 11.8 million barrels a day. That would set a record. “If realized, both these forecast levels would surpass the previous record of 9.8 million barrels per day set in 1970,” according to the EIA.

At the same time, the EIA is expecting crude oil and petroleum product net imports to drop to levels not seen since 1958. The EIA estimates net imports will fall from an annual average of 3.7 million barrels per day to an average of 2.4 barrels per day this year. Next year, the average is 1.6 million barrels per day.

First-quarter earnings

Carrizo's first-quarter earnings exceeded guidance expectations and analysts’ consensus on key metrics. The company produced a Piotroski F-Score of 7, which signals very healthy business operations.

During the quarter, the company announced it had retired $370 million of its debt through the divestiture of its downdip assets, significant cuts in operating expenses and production levels that exceeded the high end of its guidance range.

Carrizo reported crude oil production of 24,166 barrels of oil per day, representing 67% of total production in the quarter. The company was also able to cut operating expenses far below guidance.

The company operates two asset plays in the Delaware Basin and at the Eagle Ford Shale in south Texas.

For the first quarter, adjusted earnings before interest, taxes, depreciation and amortization was $136 million, with adjusted net income of $39.5 million, or 48 cents per diluted share, exceeding consensus earnings estimates of 34 cents per diluted share.

The company also paid out $4.9 million in cash dividends.

GuruFocus ranks the company a 4 out of 10 in financial strength and a 6 of 10 in profitability and growth. It has a market cap of $2.38 billion.

On Wednesday, it was trading at 38.81 times its price-earnings, which is lower than 52% of its competitors in the oil and gas exploration and production industry. It reported $819 million in revenues for the trailing 12 months. Analysts estimate it will produce revenue of more than $1.3 billion in 2019.

Other gurus who held the stock as of the first quarter of the year included Diamond Hill Capital (Trades, Portfolio) and NWQ Managers (Trades, Portfolio). Third Avenue Management (Trades, Portfolio) closed its position in the first quarter of the year.


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