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In Natural Gas Market, Advantage Goes to 'Fire Sale' Buyer

Carrizo's deal won't answer any of the conspiratorial questions, but it does show the market giving a lot more short-term credit to the company able to buy up these dry gas assets at a reasonable price than to the seller trying to transition away from the natural gas story to the hunt for liquids.

The assets sold by Carrizo produce 35 million cubic feet of natural gas production per day, which when divided into the $190 million price tag, suggests a price paid of roughly $5,400 per flowing cubic feet per day.

Stephens analyst Will Green said the estimated price is significantly lower than what had been the norm in recent years, a range of $7,500 to $12,500 per flowing cubic feet per day. Peer companies have traded based on a $7,700 assumed value. Yet all of that was based on a world of $4 natural gas, a world that seems like a distant memory now.

The Carrizo deal is one of the first divestitures of dry gas assets since the historic slide in natural gas pricing began this year. While the bump to Atlas shares comes as a direct result of the impact the additional assets -- all of which will be hedged -- will have on EBITDA [earnings before interest, taxes, depreciation and amortization] and cash flow, Carrizo still has its work cut out for it in proving to the market that it's also a winner in this deal.

Green thinks Carrizo is a winner, though, or ultimately will be, and the market is missing the point of the deal for the seller.

  • Carrizo's dry gas production in the Barnett is less important to its cash flow profile than the market assumes.
  • Stephens estimates that the gas assets being sold represent 3% to 5% of cash flow.

  • The company is transitioning to the search for liquids and production in the Eagle Ford shale -- one of the hottest shale plays of all.
  • Carrizo is trying to de-complicate its story, while also generating the cash to de-lever its balance sheet, and moving away from natural gas by selling the assets accomplishes this goal.
  • "Investors should view what matters most and what matters most is oil growth," Green argues. "From 2003 until now they made a lot of money on the Barnett natural gas but it's become a low return asset and selling a quarter of production that is only representing 3% to 5% of current cash flow doesn't change the meaningful part of cash flow."

    The analyst sees Carrizo as a unique seller, as opposed to kick-starting a natural gas market fire sale.

    "They are not giving it away. They may as well monetize the Barnett though, since investors aren't giving them any credit for it," Green said, adding that the sale came in toward the high-end of a range previously provided by Carrizo when it first told the market to anticipate a deal between $150 million and $200 million.

    Yet if the market is missing the point in one of the first sales of natural gas assets by an independent E&P that is calling it a day with "yesterday's cash flow model," only time will tell.

    --Written by Eric Rosenbaum from New York.

    >To contact the writer of this article, click here: Eric Rosenbaum.

    >To follow the writer on Twitter, go to Eric Rosenbaum.

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