Carrizo Oil & Gas Activist Investor Pushing Merger, Sale

Carrizo Oil & Gas Inc. appears to be taking in stride an activist investor’s demands that, which including exploring a merger or sale.

In a regulatory filing, Lion Point Master LP disclosed a 5.1% stake in the company and said it acquired Carrizo’s shares because they are undervalued and represent an “attractive investment opportunity.”

Lion Point contends that shareholder value would be enhanced, were Carrizo to pursue a potential merger or broader sales to other operators.

Carrizo, based in Houston, operates in the Eagle Ford Shale in South Texas and Permian Basin in West Texas. As of March 1, the company had more than 76,500 net acres in the Eagle Ford and roughly 46,000 net acres in the Permian’s Delaware sub-basin.

A merger, according to Lion Point, would:

• Build the size and scale of its Permian Basin operations;
• Increase cashflow through overhead reductions and operations cost reductions;
• Reduce Carrizo’s leverage profile, improving it valuation while reducing risk; and
• Improve focus on core assets and exploring potential divestitures following a merger.

Lion Point’s chief investment officer Didric Cederholm, who is a founding partner, was behind a similar push at another Permian Basin producer, Resolute Energy Corp. Cimarex Energy Co. purchased Resolute on March 1 in a deal valued at $1.6 billion.

Carrizo said May 6 the company would not comment on specific discussions with shareholders. In a press release, the company said it welcomes engagement with shareholders and “seriously considers all suggestions that may enhance shareholder value.”

During the company’s earnings call on May 8, Chip Johnson, Carrizo’s co-founder and president and CEO, said he supposed “anybody who has an activist [investor] needs to get some advisers that are used to dealing with activists.”

“We have to engage the activists because they are shareholders, and they often have good ideas,” he said. “That’s all we can say about that.”

Activist investors have sprung up in the oil and gas space in the past 18 months. Most recently, activist investor Carl Icahn took a position in Occidental Petroleum Corp., which has been negotiating its successful bid to acquire Anadarko Petroleum Corp. in a $38 billion deal.

This year, activists such as Fir Tree Partners forced management changes at Halcón Resources Corp. and calling for the company to sell. On May 7, activist Kimmeridge Energy Management Co., which owns 5.1% of PDC Energy Inc., compelled the company to accept the nomination of three new board members.

RELATED: Halcón Resources CEO Floyd Wilson To Step Down

Carrizo has targeted cash flow neutrality by third-quarter 2019, with free cash flow beyond that targeted to debt reduction, Capital One Securities analysts said on May 8.

For the first quarter, Carrizo reported earnings on May 7 of 47 cents, which beat Street consensus of 39 cents, according to analysts with Tudor, Pickering, Holt & Co.

Adjusted net income was $43.6 million, an increase from $39.5 million a year ago. The company also beat its oil production guidance in the first quarter by 3%. Carrizo said efficiency gains and cost saving have contributed to a 35% year-over-year reduction in capex.

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