Carrizo Oil & Gas Strikes a PE Deal for Marcellas Shale Play

• The Company: Carrizo Oil & Gas, a Houston-based energy company.
• The Filing: FORM 8-K filed with the SEC on November 4, 2008.
• The Finding: As lower natural gas prices and tight credit cause some natural gas companies to cut back on drilling activity in the costly Appalachian Basin, Carrizo Oil & Gas announced a joint venture with Avista Capital Partners to pursue growth opportunities in the Marcellus Shale. Terms of the deal, however, initially favor the private equity firm.

The Upshot: Under the terms of the agreement, Carrizo and Avista will each contribute up to $150 million in cash and properties to acquire and develop acreage in the Marcellus Shale play. As Carrizo has a weak balance sheet, with long-term debt approaching 94 percent of shareholder equity at September 30, Avista has agreed to fund 100 percent of the joint venture’s projected expenditures over the next eight to 12 months, up to $71.5 million. Buried in the regulatory filing, net cash flow from hydrocarbon production from the dedicated properties is skewed to favor Avista until it has recovered its investment.

Carrizo has historically concentrated its drilling activity on proven onshore oil and natural gas provinces, particularly in the in the Barnett Shale area in North Texas and along the onshore Texas and Louisiana Gulf Coast regions. Ergo, utilizing partners’ capital in the initial exploratory phase in order to prove up geological concepts provides the opportunity to leverage its working interest at a lower risk basis.

The Question: Carrizo still has proven Barnett Shale production waiting on completion and connection to pipelines. With realized natural gas prices falling, is now the time to be investing scarce capital back east?