Carrizo Pounces On Delaware Basin Acreage For $648 Million

Carrizo Oil & Gas Inc. (NASDAQ: CRZO) agreed June 28 to purchase 16,488 net Delaware Basin acres in Reeves and Ward counties, Texas, from ExL Petroleum Management LLC in a deal the company described as “transformational.”

Houston’s Carrizo agreed to pay ExL, a Quantum Energy Partners backed company, $648 million for the position with additional contingency payments of up to $125 million. Under certain conditions, the acquisition could potentially cost up to $773 million. Carrizo said ExL's position will cost about $22,300 per acre.

The deal includes average production of about 8,000 barrels of oil equivalent per day—comprising 48% oil—on acreage the company described as “highly contiguous.” ExL operates about 95% of the acreage and holds average working interests of 70%.

Production is from 11 gross producing horizontal wells. Another seven wells are in the process of drilling, completion or flowback, Carrizo said.

ExL is running four rigs on the properties to manage near-term leasehold obligations, Carrizo said in a June 28 news release. Beyond 2017, the company said two rigs can likely manage leasehold obligations though for now it intends to run three rigs after the deal closes.

The acreage contains “multiple stacked pay zones across the Bone Spring and Wolfcamp formations, with four of six target Wolfcamp formations … successfully tested with horizontal wells,” Carrizo said.

The deal calls for Carrizo to pay an annual $50 million contingency payment for each year between 2018 and 2021 that West Texas Intermediate (WTI) prices average more than $50 per barrel.

To finance the transaction, Carrizo said June 28 that it will commence an underwritten public offering of 15.6 million shares of its common stock. The company also said it will sell additional Appalachia assets and other noncore assets in its portfolio for proceeds of at least $300 million.

In addition, Carrizo agreed to issue $250 million of newly-created redeemable preferred stock to funds managed by GSO Capital Partners LP.

S.P. "Chip" Johnson IV, Carrizo's president and CEO, said that over the past couple of years the company evaluated numerous deals in the Delaware Basin and ExL’s properties “rank amongst the best we have evaluated, meeting all of our acquisition criteria.”

“The assets are located in the core of the Delaware Basin, offering the potential for decades of high-return drilling locations across multiple horizontal zones. Additionally, the properties have a significant amount of well control, not just across the acreage, but also within the various target zones, dramatically reducing the future operational risk,” he said.

Based on geochemical data and operator activity on and around the ExL assets, Carrizo expects to see upside development potential in the Avalon, 1st Bone Spring, 2nd Bone Spring, 3rd Bone Spring, Wolfcamp X/Y, Wolfcamp C and Wolfcamp D zones.

Johnson said the deal establishes the company’s two core positions, with a deep inventory of future drilling locations in the Eagle Ford Shale and Delaware.

“Our plan going forward is to focus our efforts on these two regions and, as a result, we have elected to begin a monetization process for our noncore assets and expect to use the proceeds from these dispositions for debt reduction,” he said.

Carrizo said it expects the ExL acquisition to close in mid-August. Citigroup served as financial adviser to Carrizo for this acquisition, while Baker Botts LLP was its legal adviser. RBC Capital Markets acted as exclusive financial adviser to ExL.

Goldman Sachs & Co. LLC and Wells Fargo Securities LLC are serving as joint book-running managers on Carrizo’s stock offering.

Darren Barbee can be reached at dbarbee@hartenergy.com.