Kimmeridge pushes the firm to focus on Permian
Activist investors continue to shake up E&P companies, with one group now taking aim at Carrizo Oil & Gas (ticker: CRZO).
Private equity firm Kimmeridge Energy disclosed an 8.1% stake in Carrizo today, roughly 6.6 million shares. According to the filing, Kimmeridge is pushing Carrizo to remedy several challenges. Kimmeridge believes Carrizo has a high debt level and criticizes the company’s distributed, multi-basin operations approach.
According to EnerCom Analytics, Carrizo currently has a debt/market cap of 131% and a net debt to TTM EBITDA of 3.8x. While these levels are certainly above average for large and mid-cap E&P companies, they are very comparable to most of Carrizo’s peers. The median small-cap independent has a debt/market cap of 106% and a net debt to EBITDA of 4.0x, meaning Carrizo is right in the middle of the pack in debt terms.
The multi-basin criticism is certainly valid, as the company has historically been highly spread out. Last year Carrizo was active in the Eagle Ford, Delaware, Niobrara, Marcellus and Utica. Few companies of Carrizo’s scale attempt to operate in this many basins, as a tight focus can reduce overhead and costs while concentrating returns.
However, Carrizo has already made significant progress on both fronts. The company has recently sold all its Marcellus, Utica and DJ Basin assets and some of its Eagle Ford properties for a combined $531 million, and used much of these proceeds to pay down debt.
Kimmeridge believes these efforts have been insufficient, as Carrizo has not seen a significant response in its stock price. Instead, according to the filing, Kimmeridge believes Carrizo should either
- Completely divest its Eagle Ford position to pay down debt and become a Permian pure-play
- Merge with another operator with Permian overlap to increase scale. Following such a merger, the Eagle Ford position could either be divested or run as a smaller portion of the overall company
- Exit part of the Eagle Ford position and use the proceeds to repurchase stock
If none of these actions are performed in the next year, Kimmeridge will push for Carrizo to sell.
Eagle Ford is currently primary Carrizo foucs
Most of these options involve selling Carrizo’s Eagle Ford assets, which would be a major shift for the company. The Eagle Ford has long been Carrizo’s primary basin, providing a majority of production. Pro forma for all the previously announced divestitures, the Eagle Ford accounts for almost 70% of the company’s production, and will receive about half of all 2018 CapEx. The company owns over 80,000 acres in the basin, compared to 42,000 in the Delaware.
The markets have responded positively to this development, with Carrizo showing gains of 13% in intraday trading.
Other active oil and gas investors
This is not the only action from activist investors in oil and gas today, as Carl Icahn continued his feud with Sandridge Energy (ticker: SD). Icahn plans to nominate a full slat to the board of Sandridge that would seek strategic alternatives for the company. Icahn took an interest in SandRidge after the company announced it would acquire Bonanza Creek Energy. Icahn successfully fought against the transaction, and SandRidge’s CEO soon departed.
