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Institutional Favorite Carrizo Oil & Gas is On the Rise, Could Continue Gains

The independent energy company and Small-Cap Star Carrizo Oil & Gas (CRZO) continued to climb this week, making gains on a strong earnings report in a one-year period that has more than

The independent energy company and Small-Cap Star Carrizo Oil & Gas (CRZO) continued to climb this week, making gains on a strong earnings report in a one-year period that has more than doubled the company’s value.

Earnings Report Upbeat Despite Declining Earnings

Carrizo’s Q4 2013 earnings report was released prior to the opening bell on Tuesday, and prompted a 5.29 percent gain on what appeared to be viewed as positive news. This despite the report of a net loss for Q4 of $22.2 million or $0.52 per diluted share. The adjusted net income was $17 million or $0.39 per diluted share in the black, but that’s still behind Q4 2012’s $21.7 million and $0.54 per diluted share.

However, it was the rate of production that appeared to wow the street, as the company set a record with over 13,000 barrels a day for all of 2013. Production volumes for Q4 were at 24,772 barrels a day, which is actually a decrease of 8 percent year over year until one considers that the company sold its remaining oil and gas properties in the Barnett Shale. Adjusting for that, production is up 31 percent. What’s more, Carrizo estimated a growth in 2014 crude production of 50 percent.

 "This was another outstanding quarter for Carrizo and it caps one of the best years in our history,” said President and CEO S.P. “Chip” Johnson, IV in the company’s press release. “For the quarter, we once again delivered crude oil production growth that exceeded our forecast despite challenging winter weather. This brought our full-year 2013 crude oil production growth to 48%."

"We are well positioned to deliver continued strong production growth,” he continued. “We have a deep inventory of oily drilling locations in the Eagle Ford Shale, Utica Shale, and Niobrara Formation, and the balance sheet to develop them. At year-end, our net-debt-to-adjusted EBITDA ratio was below 2.0x, and we have significant liquidity with an undrawn revolver and more than $150 million of cash on hand."

Technical Signs Positive, Fundamentals Also Have Strength

The continued growth for Carrizo also managed to break out of a major technical pattern, and break through an important resistance level. The stock appeared to be in a level wedge pattern, with a falling resistance level that started after the company closed at $46.80 on October 18, and a rising support level followed in mid-November.

However, Carrizo cleared that resistance level mid-month and has made a positive breakout from the wedge pattern ever since, also breaking through another resistance level that had formed at $46-47 a share. After briefly touching a 52-week high over $50 a share, Carrizo is trading at about $49 a share.

And a look at Carrizo’s fundamentals show a company that has a lot of what investors should be looking for in an independent oil and gas company. Of the five criteria in the Small-Cap Stars methodology, Carrizo shows strong performance in four areas, including a rate of institutional ownership of over 90 percent. The company has clearly impressed the major buyers out there, which is usually a strong sign. Using’s EVA Reports, you can see steady, firm growth in revenue, profits, and income each year from 2009 to 2012.

And a look at the company’s DuPont Report also gives a little more insight. The DuPont System gives a bit more insight into a company’s return on equity (ROE) by breaking the number up into three components, net margin, asset turnover, and the equity multiplier.

There’s clearly cause for concern for any investor owning or considering Carrizo. The company’s ROE remains below industry average, something driven by a considerably higher equity multiplier than the rest of the industry, a sign it’s carrying much more debt than its competitors, and a very low level of asset turnover, a sign it’s not as efficient as it should be at translating its assets into sales.

However, the institutional buyers that are willing to overlook these shortcomings are probably considering a few key things. The first being the company’s strong production levels. While it has a lot of debt, it has also clearly translated that borrowed money into producing wells. And those wells are a big part of the reason why Carrizo sports a considerably stronger net margin than industry average, and a net margin that’s increasing year-over-year.

While any investor would be crazy not to give serious thought to Carrizo’s considerable liabilities, it’s also clear that the company’s using its resources to improve its margins. And while ROE is below industry average, it’s also trending upwards. All told, Carrizo appears to have the potential to consolidate its current gains and potentially drive even higher in 2014. So far in 2013, analysts at Northland Capital reiterated an "outperform" rating and raised their price target from $63 to $68, while MLV & Co has twice reiterated a buy rating and increase its price target from $60 to $67.

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