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Oil, gas driller Carrizo gets thumbs up for going 'all Texas, all the time'

Carrizo Oil & Gas Inc.'s decision to sell its assets in Colorado's DJ Basin for $140 million centers the Houston-based exploration and production company's focus entirely in its home state, something analysts said is not necessarily a bad thing.

Carrizo announced Nov. 27 that it reached an agreement to sell its holdings in the DJ to an unnamed buyer and could receive as much as $15 million more in contingent payments. "The sale of the DJ Basin assets is another step towards achieving our leverage reduction goals and positioning Carrizo to be able to deliver strong, high-return production growth within cash flow," company President Chip Johnson IV said.

The move leaves Carrizo operating in the Eagle Ford Shale of South Texas and the Permian Basin to the west, or as Capital One Securities put it, "All Texas, All the time." Carrizo's move helps cover overhead for 2018 and helps cut debt, Capital One said.

"The combination of cash in the door and a more focused Texas-centric portfolio leaves Carrizo in a better place moving forward," Capital One analysts said Nov. 27. "The company is now anchored by just two key assets in the Eagle Ford and the Delaware. The deal also drops our [2018 estimated] net debt to EBITDA multiple to 3.0x from 3.2x. Finally, the $140MM in proceeds covers our estimated $136MM of outspend next year before the company turns cash flow positive in 2019."

Stifel Nicolaus & Co. Inc. also approved of the move, reiterating a buy rating and saying Carrizo's focus on the Permian, including the Delaware Basin, and Eagle Ford makes it a stronger company. "We view this morning's release positively. Assuming future contingency payments are made, [Carrizo] will have achieved its $300MM 2017 divestiture target," the firm said. "With two core assets and a much improved balance sheet, the company is well positioned to narrow [its] valuation gap to our mid-cap peer group next year."

Tudor Pickering Holt & Co. gave a mostly positive review, but with caveats. The energy investment bank said it would have to see more from one of Carrizo's remaining holdings before going further. "[The DJ Basin] deal completes the company's non-core disposal program, leaving the Delaware and Eagle Ford, with proceeds likely directed towards further improving the balance sheet. Positive to see, but we remain sidelined pending longer-dated execution in the newly-acquired Delaware position," the group said.