-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SPZm8FEYek1QA7v8kImpwOysPnxeGVr94kKzoXQuEW/tdKr5dXv72zlTPvZrMrDy QnluRseYpR/Rw/bt2+ooXQ== 0000950129-98-001393.txt : 19980401 0000950129-98-001393.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950129-98-001393 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRIZO OIL & GAS INC CENTRAL INDEX KEY: 0001040593 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760415919 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-29187-87 FILM NUMBER: 98583847 BUSINESS ADDRESS: STREET 1: 14811 ST MARYS LANE STREET 2: STE 148 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 2814961352 MAIL ADDRESS: STREET 1: CARRIZO OIL & GAS INC STREET 2: 14811 ST MARYS LANE STE 148 CITY: HOUSTON STATE: TX ZIP: 77079 10-K 1 CARRIZO OIL & GAS, INC. - DATED 12/31/97 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION NO. 0-22915 CARRIZO OIL & GAS, INC. (Exact name of registrant as specified in its charter) TEXAS 76-0415919 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14811 ST. MARY'S LANE, SUITE 148 HOUSTON, TEXAS 77079 (Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 496-1352 Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At March 25, 1998, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $26.9 million based on the closing price of such stock on such date of $6.75. At March 25, 1998, the number of shares outstanding of registrant's Common Stock was 10,375,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the Registrant's 1998 Annual Meeting of Shareholders to be held on May 20, 1998 are incorporated by reference in Part III of this Form 10-K. Such definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to December 31, 1997. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I...................................................... 1 Item 1. and Item 2. Business and Properties............... 1 Item 3. Legal Proceedings................................. 23 Item 4. Submission of Matters to a Vote of Security Holders................................................ 23 Executive Officers of the Registrant...................... 23 PART II..................................................... 24 Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.................................... 24 Item 6. Selected Financial Data........................... 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 28 Item 8. Financial Statements and Supplementary Data....... 34 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............... 34 PART III.................................................... 35 Item 10. Directors and Executive Officers of the Registrant............................................. 35 Item 11. Executive Compensation........................... 35 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 35 Item 13. Certain Relationships and Related Party Transactions........................................... 35 PART IV..................................................... 35 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 35
3 PART I ITEM 1. AND ITEM 2. BUSINESS AND PROPERTIES GENERAL Carrizo Oil & Gas, Inc. ("Carrizo" or the "Company") is an independent oil and gas company engaged in the exploration, development, exploitation and production of natural gas and crude oil. The Company's operations are currently focused onshore in proven oil and gas producing trends along the Gulf Coast, primarily in Texas and Louisiana in the Frio, Wilcox and Vicksburg trends. The Company believes that the availability of economic onshore 3-D seismic surveys has fundamentally changed the risk profile of oil and gas exploration in these regions. Recognizing this change, the Company has aggressively sought to control significant prospective acreage blocks for targeted, proprietary, 3-D seismic surveys. As of December 31, 1997, the Company had assembled approximately 419,953 gross acres under lease or option. The Company typically seeks to acquire seismic permits from landowners that include options to lease the acreage prior to conducting proprietary surveys. In other circumstances, including when the Company participates in 3-D group shoots, the Company typically seeks to obtain leases or farm-ins rather than lease options. Approximately 60% of the Company's current acreage position is covered by 3-D seismic data that the Company has acquired, or is in the process of acquiring, in its first 18 seismic surveys. The Company expects to acquire or cause to be acquired additional 3-D seismic data during the remainder of 1998 that will cover approximately 80% of its remaining current acreage position. From the data generated by its first seven proprietary seismic surveys, covering 200 square miles (128,000 acres), 94 drillsites were identified. The Company's capital budget for 1998 of approximately $43.3 million includes amounts for the acquisition of additional 3-D seismic data and for the drilling of approximately 150 gross wells (71.8 net) in 1998 with an anticipated 48% average working interest. In addition, the Company anticipates that as its existing 3-D seismic data is further evaluated, and 3-D seismic data is acquired over the balance of its acreage, additional prospects will be generated for drilling beyond 1998. The Company's primary drilling targets have been shallow (from 4,000 to 7,000 feet), normally pressured reservoirs that generally involve moderate cost (typically $200,000 to $500,000 per completed well) and risk. Many of these drilling prospects also have secondary, deeper, over-pressured targets which have greater economic potential but generally involve higher cost (typically $1 million to $2 million per completed well) and risk. The Company often seeks to sell a portion of these deeper prospects to reduce its exploration risk and financial exposure while still allowing the Company to retain significant upside potential. The Company operates the majority of its projects through the exploratory phase but may relinquish operator status to qualified partners in the production phase to control costs and focus resources on the higher-value exploratory phase. As of December 31, 1997, the Company operated 69 producing oil and gas wells, which accounted for 43% of the wells in which the Company had an interest. The Company has experienced rapid increases in reserves, production and EBITDA since its inception in 1993 due to the growth of its 3-D based drilling and development activities. From January 1, 1996 to December 31, 1997, the Company participated in the drilling of 90 gross wells (34.6 net) with a commercial well success rate of approximately 69%. This drilling success contributed to the Company's total proved reserves as of December 31, 1997 of approximately 43.2 Bcfe, with a PV-10 Value of $26.1 million. From inception through December 31, 1997, the Company's average finding and development cost was approximately $.95 per Mcfe. The Company's production has increased 79% from 1,916 MMcfe for the year ended December 31, 1996 to 3,424 MMcfe for the year ended December 31, 1997. EBITDA has also increased significantly from $2,296,000 for the year ended December 31, 1996 to $4,787,000 for the year ended December 31, 1997. Certain terms used herein relating to the oil and natural gas industry are defined in "Glossary of Certain Industry Terms" below. 1 4 EXPLORATION APPROACH The Company generally seeks to rapidly accumulate large amounts of 3-D seismic data along prolific, producing trends of the onshore Gulf Coast after obtaining options to lease areas covered by the data. The Company then uses this data to identify or evaluate prospects before drilling the prospects that fit its risk/ reward criteria. The Company typically seeks to explore in locations within its core areas of expertise that it believes have (i) numerous accumulations of normally pressured reserves at shallow depths and in geologic traps that are difficult to define without the interpretation of 3-D seismic data and (ii) the potential for large accumulations of deeper, over-pressured reserves. As a result of the increased availability of economic onshore 3-D seismic surveys and the improvement and increased affordability of data interpretation technologies, the Company has relied almost exclusively on the interpretation of 3-D seismic data in its exploration strategy. The Company generally does not invest any substantial portion of the costs for an exploration well without first interpreting 3-D seismic data. The principal advantage of 3-D seismic data over traditional 2-D seismic analysis is that it affords the geoscientist the ability to interpret a three dimensional cube of data representing a specific project area as compared to interpreting between widely separated two dimensional vertical profiles. As a consequence, the geoscientist is able to more fully and accurately evaluate prospective areas, improving the probability of drilling commercially successful wells in both exploratory and development drilling. The use of 3-D seismic allows the geoscientist to identify and use areas of irregular sand geometry to augment or replace structural interpretation in the identification of potential hydrocarbon accumulations. Additionally, detailed analysis and correlation of the 3-D seismic response to lithology and contained fluids assist geoscientists in identifying and prioritizing drilling targets. Because 3-D analysis is completed over an entire target area cube, shallow, intermediate and deep objectives can be analyzed. Additionally, the more precise structural definition allowed by 3-D seismic data combined with integration of available well and production data assists in the positioning of new development wells. The Company has sought to obtain large volumes of 3-D seismic data either by participating in large seismic data acquisition programs either alone or pursuant to joint venture arrangements with other energy companies, or through "group shoots" in which the Company shares the costs and results of seismic surveys. By participating in joint ventures and group shoots, the Company is able to share the up-front costs of seismic data acquisition and interpretation, thereby enabling it to participate in a larger number of projects and diversify exploration costs and risks. Substantially all of the Company's operations are conducted through joint operations with industry participants. As of December 31, 1997, the Company was actively involved in 40 project areas. The Company intends to further increase the number and size of seismic data acquisition projects in which it participates to accelerate its exploration activities. The Company's primary strategy for acreage acquisition is to obtain leasing options covering large geographic areas in connection with 3-D seismic surveys. Prior to conducting proprietary surveys, the Company typically seeks to acquire seismic permits that include options to lease the acreage, thereby ensuring the price and availability of leases on drilling prospects that may result upon completing a successful seismic data acquisition program over a project area. The Company generally attempts to obtain these options covering at least 80% of the project area for these proprietary surveys. The size of these surveys has ranged from 10 to 70 square miles. When the Company participates in 3-D group shoots, it generally seeks prospective leases as quickly as possible following interpretation of the survey. In connection with some group shoots in which the Company believes that competition for acreage may be especially strong, the Company may seek to obtain lease options or leases in prospective areas prior to the receipt or interpretation of 3-D seismic data. The Company maintains a flexible and diversified approach to project identification by focusing on the estimated financial results of a project area rather than limiting its focus to any one method or source for obtaining leads for new project areas. The Company's current project areas resulted from leads developed by its project generation network that includes small, independent "prospect generators", the Company's joint venture partners and the Company's internal staff. The Company believes that it has been able to increase the number of potential projects and reduce its costs through the use of these outside sources of project generation. Similarly, in identifying specific drillsites from within a project area, the Company has relied upon 2 5 outside contract geoscientists and joint venture partners who have worked with the Company's own geoscientists. As of December 31, 1997, over 20 geoscientists from this network were devoting some or all of their time to identifying project areas or evaluating drillsites in which the Company expects to have an interest. Similarly, the Company also utilizes outside independent landmen with expertise in a particular project area. This outsourcing strategy has enabled the Company to control costs without maintaining a large internal land and exploration department. OPERATING APPROACH The Company's management team has extensive experience in the development and management of projects along the Texas and Louisiana Gulf Coast. The Company believes that the experience of its management in the development of 3-D projects in its core operating areas is a competitive advantage for the Company. The Company's technical and operating employees have an average of 15 years of industry experience, in many cases with major and large independent oil companies, including Shell Oil Company, Vastar Resources, Inc., Pennzoil Company and Tenneco Inc. The Company generally seeks to obtain lease operator status and control over field operations, and in particular seeks to control decisions regarding 3-D survey design parameters and drilling and completion methods. In some cases, the Company may thereafter relinquish its operator status in order to concentrate its resources on exploration activities, especially if the Company has had successful prior experience with an industry partner acting as operator. As of December 31, 1997, the Company operated 69 producing oil and natural gas wells, which ranged in depth from 450 feet to greater than 6,100 feet. The Company emphasizes preplanning in project development to lower capital and operational costs and to efficiently integrate potential well locations into the existing and planned infrastructure, including gathering systems and other surface facilities. In constructing surface facilities, the Company seeks to use reliable, high quality, used equipment in place of new equipment to achieve cost savings. The Company also seeks to minimize cycle time from drilling to hook-up of wells, thereby accelerating cash flow and improving ultimate project economics. The Company seeks to use advanced production techniques to exploit and expand its reserve base. Following the discovery of proved reserves, the Company typically continues to evaluate its producing properties through the use of 3-D seismic data to locate undrained fault blocks and identify new drilling prospects and performs further reserve analysis and geological field studies using computer aided exploration techniques. The Company seeks to integrate its 3-D seismic data with reservoir characterization and management systems through the use of geophysical workstations which are compatible with industry standard reservoir simulation programs. SIGNIFICANT PROJECT AREAS The Company is currently evaluating approximately 40 exploration project areas. As of December 31, 1997, the Company had an existing 3-D seismic database of 930 square miles and was acquiring an additional 240 square miles of data (totaling 1,170 square miles of 3-D seismic data). To date, all project areas for which seismic data has been interpreted have yielded multiple prospects and drillsites. The Company is continuing to receive and interpret data covering these project areas and believes that each project area has the potential for additional prospects and drillsites. 3 6 1998 EXPLORATION PROGRAM
SQ. MILES OF 3-D GROSS SEISMIC DATA AT ACREAGE DECEMBER 31, 1997 LEASED OR ----------------------- UNDER BUDGETED 1998 AVERAGE OPTION AT EXISTING FOR BUDGETED AVERAGE NET DEC. 31, OR BEING ACQUISITION GROSS WORKING REVENUE PROJECT AREAS 1997 ACQUIRED 1998 WELLS(1) INTEREST(2) INTEREST(2) ------------- --------- -------- ----------- -------- ----------- ----------- TEXAS Starr/Hidalgo........... 9,186 340(3) -- 6 50.0% 37.5% Encinitas/Kelsey........ 9,300 32 -- 3 27.5% 23.0% Buckeye................. 34,303 62 -- 14 50.0% 39.0% La Rosa................. 8,249 22 -- 6 31.5% 23.6% Mexican Sweetheart...... 30,795 40 -- 4 25.0% 18.8% McFaddin Ranch.......... 5,374 15 -- 4 37.5% 28.1% Cologne................. 18,200 40 -- 23 25.0% 18.8% South Cabeza Creek...... 7,128 -- 78 4 52.5% 39.4% Western 325............. -- 320(3) -- 2 50.0% 37.5% Lance................... 18,536 30 -- 1 25.0% 19.3% Highway 59.............. 4,995 -- 20 4 20.0% 15.0% Geronimo................ 29,358 107 -- 4 15.0% 11.3% RPP Welder.............. 31,182 60 -- 9 15.0% 11.3% Midway.................. 1,235 -- 15 2 100.0% 75.0% Lost Bridge............. 5,065 16 -- 6 50.0% 37.5% Drake 202............... 3,877 20 -- 8 100.0% 80.0% Metro................... 11,349 20 -- 4 25.0% 18.7% North Heyser............ 8,100 13 -- 3 47.0% 34.7% Victoria................ 21,288 -- 60 5 57.0% 42.75% Matagorda............... 16,093 -- 51 6 87.5% 64.75% Driscoll Ranch.......... 23,135 -- 80 7 50.0% 37.0% Other (16 Areas)........ 110,042 33 268 17 66.0% 48.8% LOUISIANA North Chalkley.......... 1,130 -- -- 0 18.0% 13.5% Atchafalaya............. 3,611 -- -- 1 55.4% 41.5% Live Oak................ 350 -- -- 1 15.0% 10.8% Other (5 Areas)......... 8,072 -- 14 6 28.7% 21.7% ------- ----- --- --- Total........... 419,953 1,170 586 150 ======= ===== === ===
- --------------- (1) Consists of (i) identified drill sites included in the Company's 1998 capital budget that are fully evaluated, leased and have been or are scheduled to be drilled in 1998 and (ii) wells included in the Company's 1998 capital budgets, but as to which 3-D seismic data has either not been obtained or fully evaluated, or for which the Company has not yet acquired leases or option rights. A portion of the number of wells indicated is based upon statistical results of drilling activities in 3-D project areas that the Company believes are geologically similar. (2) Anticipated interests based upon ownership or contractual rights as of December 31, 1997. (3) Represents non-proprietary "group shoots" in which the Company is a participant. Set forth below are descriptions of the Company's key project areas where it is actively exploring for potential oil and natural gas prospects and in some cases currently has production. The 3-D surveys the Company is using to analyze its project areas range from regional, non-proprietary "group shoots" to single field proprietary surveys. The Company has, in many cases, participated in these project areas with industry partners to share the up-front costs associated with obtaining option arrangements with landowners, seismic 4 7 data acquisition and related data interpretation, to mitigate its exploration risk and to increase the number of projects in which it is able to participate. Although the Company is currently pursuing prospects within the project areas described below, and has budgeted to drill the number of wells set forth in the preceding table, there can be no assurance that these prospects will be drilled at all or within the expected time frame. In particular, budgeted wells that are based upon statistical results of drilling activities in other project areas are subject to greater uncertainties than wells for which drillsites have been identified. The final determination with respect to the drilling of any identified drillsites or budgeted wells will be dependent on a number of factors, including (i) the results of exploration efforts and the acquisition, review and analysis of the seismic data, (ii) the availability of sufficient capital resources by the Company and the other participants for the drilling of the prospects, (iii) the approval of the prospects by other participants after additional data has been compiled, (iv) the economic and industry conditions at the time of drilling, including prevailing and anticipated prices for oil and natural gas and the availability of drilling rigs and crews, (v) the financial resources and results of the Company and (vi) the availability of leases on reasonable terms and permitting for the prospect. There can be no assurance that these projects can be successfully developed or that the identified drillsites or budgeted wells discussed will, if drilled, encounter reservoirs of commercially productive oil or natural gas. The success of the Company will be materially dependent upon the success of its exploratory drilling program. Exploratory drilling involves numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be encountered. The cost of drilling, completing and operating wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, adverse weather conditions, compliance with governmental requirements and shortages or delays in the availability of drilling rigs and the delivery of equipment. Although the Company believes that its use of 3-D seismic data and other advanced technologies should increase the probability of success of its exploratory wells and should reduce average finding costs through elimination of prospects that might otherwise be drilled solely on the basis of 2-D seismic data, exploratory drilling remains a speculative activity. Even when fully utilized and properly interpreted, 3-D seismic data and other advanced technologies only assist geoscientists in identifying subsurface structures and do not enable the interpreter to know whether hydrocarbons are in fact present in such structures. In addition, the use of 3-D seismic data and other advanced technologies requires greater predrilling expenditures than traditional drilling strategies and the Company could incur losses as a result of such expenditures. The Company's future drilling activities may not be successful, and if unsuccessful, such failure will have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the Company's overall drilling success rate or its drilling success rate for activity within a particular project area will not decline. The Company may choose not to acquire option and lease rights prior to acquiring seismic data and, in many cases, the Company may identify a prospect or drilling location before seeking option or lease rights in the prospect or location. Although the Company has identified or budgeted for numerous drilling prospects, there can be no assurance that such prospects will ever be leased or drilled (or drilled within the scheduled or budgeted time frame) or that oil or natural gas will be produced from any such prospects or any other prospects. In addition, prospects may initially be identified through a number of methods, some of which do not include interpretation of 3-D or other seismic data. Wells that are currently included in the Company's capital budget may be based upon statistical results of drilling activities in other 3-D project areas that the Company believes are geologically similar, rather than on analysis of seismic or other data. Actual drilling and results are likely to vary from such statistical results and such variance may be material. Similarly, the Company's drilling schedule may vary from its capital budget because of future uncertainties, including those described above. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The reserve data set forth below is based upon the reserve report (the "Ryder Scott Report") dated February 26, 1998 prepared by Ryder Scott Company, independent petroleum engineers ("Ryder Scott"), and the reserve report (the "Fairchild Report" and collectively with the Ryder Scott Report, the "Reserve Reports") dated February 25, 1998 prepared by Fairchild, Ancell & Wells, Inc., independent petroleum 5 8 engineers ("Fairchild"). There are numerous uncertainties in estimating quantities of proved reserves, including many factors beyond the control of the Company. See "-- Oil and Natural Gas Reserves." TEXAS Starr/Hidalgo Project Area: Frio and Vicksburg Formations The Starr/Hidalgo Project Area is located in Starr and Hidalgo Counties, Texas in the Frio and Vicksburg formations. The Company and a partner licensed approximately 340 square miles of non-proprietary 3-D seismic data that was delivered during August 1995 and June 1996. More than 70 prospects have been identified in the shallow Frio trend and the deeper, structurally complex Vicksburg trend, as well as two large prospects in the relatively unexplored Eocene trend. As of December 31, 1997, the Company and its partner had leases covering 9,186 acres in this project area and currently control 25 of these prospects (11 Frio, 13 Vicksburg and one Eocene). The Company sold a portion of its interest in six of the deeper and riskier Vicksburg and Eocene prospects to industry partners. During the six months ended June 30, 1997, the Company's share of production from wells in this production area was approximately 36 Bbls/d of oil and 3.4 MMcf/d of natural gas. Primarily as a result of the curtailment of production by the wells in the Wheeler area by the Texas Railroad Commission, during the quarter ended December 31, 1997, the Company's share of production from wells in this project area was approximately 12 Bbls/d of oil and 0.8 MMcf/d natural gas. As of December 31, 1997, the Company and its partners had drilled a total of 23 wells in this project area, resulting in 15 producing wells. The estimated proved reserves net to the Company for this project area was 130 MBbls of oil and 1.6 BCF of natural gas at December 31, 1997. The Company and its partners have identified 6 locations that have been or are budgeted to be drilled during 1998. The Company believes that continuing interpretation and seismic processing of the Starr/Hidalgo Project Area 3-D seismic data will result in additional prospects and drilling locations. Encinitas/Kelsey Project Area: Frio and Vicksburg Formations The Encinitas/Kelsey Project Area is located in Brooks County, Texas in the Frio and Vicksburg formations. The Company acquired an interest in leases covering 9,300 acres in this area in December 1994 to re-develop the property. Upon acquisition of its interests in this project area, the Company undertook a comprehensive petrophysical study and acquired a 32 square mile 3-D seismic survey. This effort has resulted in the identification of numerous Frio and Vicksburg prospects. During the quarter ended December 31, 1997, the Company's share of production from wells in this project area was approximately 33 Bbls/d of oil, 86 Bbls/d of natural gas liquids and 2.5 MMcf/d of natural gas. As of December 31, 1997, the Company and its partners had drilled a total of 12 wells in this project area, resulting in 10 producing wells. The estimated proved reserves net to the Company for this project area was 27.8 MBbls of oil, 192.3 MBbls of natural gas liquids and 3.6 BCF of natural gas at December 31, 1997. The Company and its partners have identified three locations that are budgeted to be drilled in 1998. Buckeye Project Area: Wilcox, Hockley, Pettus and Yegua Formations The Buckeye Project Area is located in Live Oak County, Texas. As of December 31, 1997, the Company and its partner held 13,492 acres under lease and 20,811 acres under option and have acquired an approximately 62 square mile 3-D seismic survey. The exploration objectives for the Buckeye Project Area are the shallow zones of the Hockley, Pettus and Yegua formations and the deep zones of the expanded Upper Wilcox formation. The data for this project area was received from processing in 1997 and initial interpretation has generated 38 shallow prospects. During the quarter ended December 31, 1997, the Company's share of production from wells in this project area was approximately 125 Bbls/d of oil and 1.7 MMcf/d of natural gas. As of December 31, 1997, the Company and its partners have drilled 24 wells in this project area, resulting in 17 producing wells. The estimated proved reserves net to the Company for this project area was 118.3 MBbls of oil and 1.4 BCF of natural gas at December 31, 1997. The remaining prospects are planned to be drilled in 1998. 6 9 La Rosa Project Area: Frio Formation The La Rosa Project Area is located in Refugio County, Texas over a producing field leasehold of 3,689 acres. The area covers Frio barrier/strandplain sands productive down to 8,200 feet. Data is currently being integrated from a 3-D seismic survey over 22 square miles that was conducted by the Company during the first quarter of 1997. As of December 31, 1997, the Company's leases covered 3,689 acres and its seismic options covered 4,560 acres in this project area. During the quarter ended December 31, 1997, the Company's share of production from wells in this project area was approximately 8 Bbls/d of oil and 0.2 MMcf/d natural gas. As of December 31, 1997, the Company and its partners have drilled one well in this project area, resulting in one producing well. The estimated proved reserves net to the Company for this project area was 10.2 MBbls of oil and 0.2 BCF of natural gas at December 31, 1997. Additional drilling opportunities within and peripheral to the producing field exist and are being evaluated for 1998 drilling. Mexican Sweetheart Project Area: Frio Formation The Mexican Sweetheart Project Area is located in southwestern Jackson County, Texas in the Frio producing trend. Secondary objectives for this project area include the shallow Miocene trend, the downdip Yegua and Wilcox trends. The area is directly south of successful 3-D seismic projects conducted by the Company's partners in this project and covers historical field discoveries. The Company has planned and directed a 40 square mile 3-D seismic survey covering the project area. The Company will seek to use the 3-D seismic data to identify shallow objectives, delineate reservoir compartments for drilling of bypassed reserves and identify flank prospects and deeper, higher risk prospects in the Yegua and Upper Wilcox trends, which the Company would seek to explore with an industry partner. As of December 31, 1997, the Company's leases covered 848 acres and its seismic options covered 29,947 acres in this project area. Interpretation of the 3-D has led to four initial prospects budgeted to be drilled in 1998. McFaddin Ranch Project Area: Miocene and Frio Formations The McFaddin Ranch Project Area is located in Victoria County, Texas in the Miocene and Frio formations. Data is currently being interpreted from a 15 square mile 3-D seismic survey conducted in the first quarter of 1997. The Company has identified and budgeted to drill four initial prospects in this project area during 1998. As of December 31, 1997, the Company's leases in this project area covered 5,374 acres. Cologne Project Area: Frio Formation The Cologne Project Area is located in Goliad and Victoria Counties, Texas in the Frio formation. A secondary objective for this project area is Wilcox formations. The area covers several historical field discoveries. A 40 square mile 3-D seismic survey has been shot over the project area, has been interpreted and yielded drillsites to evaluate prospectively from the Frio through the Wilcox formations. As of December 31, 1997, the Company's multiple seismic options covered 18,200 acres in this project area. Drilling on the 23 identified prospects is expected to begin in April, 1998. South Cabeza Creek Project Area: Frio Formation to Lower Wilcox Sands The South Cabeza Creek Project Area is located in Goliad County, Texas in an area having significant production in the shallow Frio and lower Wilcox trends. The Company is currently in the process of acquiring seismic options and leases for participation in a 78 square mile non-exclusive 3-D seismic shoot in the project area that is currently scheduled to seek to begin in the second quarter of 1998. The Company intends to use the 3-D seismic data to identify potential Frio, Vicksburg and Yegua opportunities and to verify and optimize a Wilcox prospect. The Company currently has 525 acres under lease and 6,603 acres under seismic option in this project area. Western 325 Project Area: Wilcox and Jackson-Yegua Formations The Western 325 Project Area is located in Webb and Duval Counties, Texas in the Wilcox and Jackson-Yegua formations. The Company and a partner have joined others in underwriting a non-proprietary 3-D 7 10 seismic data shoot covering approximately 320 square miles in the project area. Multiple prospects have been identified from data covering approximately 160 square miles that was delivered in 1997. The remainder of the data is currently expected to be delivered in 1998. The Company has budgeted to drill two wells in this project area during the second quarter of 1998. The Company believes that experience gained in the Starr/Hidalgo Project Area may assist in exploration efforts in the Western 325 Project Area. Lance Project Area: Frio and Vicksburg Formations The Lance Project Area is located in Bee County, Texas in an area of prolific shallow Frio production. The primary exploration objectives in this project area are the Frio/Vicksburg trends, with secondary objectives in the deeper Vicksburg, Jackson and Yegua formations. The Company is currently interpreting data from a 30 square mile 3-D seismic survey completed in the second half of 1996. As of December 31, 1997, the Company and its partners held 500 acres in leases and 18,036 acres in options. During the quarter ended December 31, 1997, the Company's share of production from wells in this project area was approximately 0.03 MMcf/d of natural gas. As of December 31, 1997, the Company and its partners have drilled six wells in this project area, resulting in three producing wells. The estimated proved reserves net to the Company for this project area was 0.09 BCF of natural gas at December 31, 1997. A deeper Yegua well is planned for May 1998. Highway 59 Project Area: Frio, Yegua and Wilcox Formations The Highway 59 Project Area is located in Fort Bend and Wharton Counties, Texas in an area of several historical field discoveries and production in the Frio and Yegua formations and in the highly competitive Wharton County Wilcox trend. A survey design has been completed for a 20 square mile 3-D seismic survey in the project area, and fieldwork is expected to begin during the third quarter of 1998. The Company and two large independent industry partners will seek to use the 3-D seismic data to identify shallow opportunities and to delineate Yegua and Wilcox prospects identified through the interpretation of 2-D seismic data. As of December 31, 1997, the Company's leases in this project area covered 4,995 acres. Geronimo Project Area: Frio Formation The Geronimo Project Area is located in San Patricio County, Texas in an area of predominantly Frio production. Numerous fault systems run through the area, particularly in the basal Frio and Vicksburg formations. A 67 square mile 3-D seismic survey was conducted in 1996, with the initial interpretation of data generating five prospects. A northeast extension of the initial 3-D seismic survey covering an additional 40 square miles was later acquired. As of December 31, 1997, the Company's leases covered 10,278 acres and its seismic options covered 19,080 acres in this project area. During the quarter ended December 31, 1997, the Company's share of production from wells in this project area was approximately 16 Bbls/d of oil and 0.3 MMcf/d of natural gas. As of December 31, 1997, the Company and its partners had drilled three wells in this project area, resulting in two producing wells. The estimated proved reserves net to the Company for this project area was 10.4 MBbls of oil and 0.4 BCF of natural gas at December 31, 1997. Four additional wells are planned for 1998. RPP Welder Project Area: Frio and Vicksburg Formations The RPP Welder Project Area is located in San Patricio and Refugio Counties, Texas in an area of predominantly upper Frio production and is adjacent to the Geronimo, Midway and LaRosa Project Areas. Numerous fault systems run through the area, particularly at the relatively unexplored basal Frio and Vicksburg levels. The primary producing formations in this area have historically been Miocene and upper Frio oil objectives. Field operations for a 60 square mile 3-D seismic survey commenced during the second quarter of 1997. Data was received from processing in March 1998 and interpretation has been initiated. The Company's leases cover 1,127 acres and its options cover 30,055 acres in this project area. 8 11 Midway Project Area: Frio Formation The Midway Project Area is located in San Patricio County, Texas in an area of predominantly Frio production. The area is a southwest extension of the Geronimo Project Area and includes the Company's producing properties from the Midway Field along with contiguous leases and seismic option areas. The Company has designed a 15 square mile 3-D seismic survey in this project area, and field operations are planned to commence in the third quarter of 1998. As of December 31, 1997, the Company's leases covered 1,235 acres in this project area. Lost Bridge Project Area: Frio, Yegua and Wilcox Formations The Lost Bridge Project Area is located in northern Jackson County, Texas in the Frio, Yegua and Wilcox formations. The area covers several historical field discoveries and recent Wilcox production. The Company began work in the third quarter of 1997 on a 16 square mile 3-D seismic survey. The Company will seek to use the 3-D seismic data to delineate a Yegua prospect identified with 2-D seismic data, identify shallow opportunities and image the deeper Wilcox trend. The Company's strategy is to drill Frio and Yegua prospects and sell a portion of its interest in any Wilcox prospects while retaining a carried interest. The Company is currently interpreting the seismic data over the project area and has 751 acres under lease and 4,314 acres under option to date. Drake 202 Project Area: Frio and Vicksburg Formations The Drake 202 Project Area is located in Bee County, Texas adjacent to the Lance Project Area. Primary exploration objectives for this project area are the Frio and Vicksburg formations, as well as deeper, higher risk prospects in the Yegua formation. In this project area, the Company has seismic options covering 3,877 acres. A 20 square mile 3-D seismic survey is scheduled for April, 1998. Metro Project Area: Frio, Yegua and Wilcox Formations The Metro Project Area is located in Dewitt County, Texas in the active Wilcox producing trend. Target reservoirs include the Frio, Yegua, upper and middle Wilcox ranging in depth from 3,500 feet to 14,500 feet. A 20 square mile 3-D seismic program has been completed and numerous drilling opportunities have been identified. The first well was drilled to a depth of 14,500 feet in the first quarter of 1998 and is currently being completed in the Wilcox formation. The Company has 2,064 acres under lease and 9,285 gross acres under option. North Heyser: Miocene And Frio Formations The North Heyser Project Area is located in Victoria County, Texas. The 3-D seismic shoot area covers significant historical production and targets primarily Basal Frio structural traps and extensions to existing area production. A 13 square mile 3-D seismic program was completed in the fourth quarter of 1997 and is currently being interpreted. As of December 31, 1997 the Company had 8,100 acres under seismic option in this project area. Victoria Project Area: Miocene and Frio Formation The Victoria Project Area is located in Victoria County, Texas and is targeting the Miocene to Basal Frio formations. The area includes several historical field discoveries. A 3-D seismic shoot of approximately 60 square miles has been initiated with expected completion in May of 1998. Interpretation of processed data and identification of potential drillsites is scheduled for the fourth quarter of 1998. As of December 31, 1997, the Company had 5,492 acres under lease and 15,796 under seismic option in this project area. Matagorda Project Area: Frio Formations The Matgorda Project Area is located in Matagorda County, Texas covering numerous Middle Frio structural opportunities in addition to the Lower Frio shelf edge expanded section. The Company has 9 12 committed to a non exclusive 3-D seismic shoot covering 51 square miles that is expected to be initiated in the first quarter of 1998. Interpretation of the 3-D data and initial drilling is expected to begin in the late third quarter of 1998. The Company has acquired 16,093 acres of seismic options in the project area. Driscoll Ranch Project Area: Frio through Yegua Formations The Driscoll Ranch Project Area is located in Jim Wells and Duval Counties, Texas. Industry activity in this area is high with substantial activity to the north and east. Existing 2-D seismic data has generated several leads in the project area and is being used to optimize the 3-D parameters. Target reservoirs include the Frio Formation to the Hockley/Pettus/Yegua intervals between 5,000 feet and 8,000 feet. The anticipated area of a planned seismic shoot is approximately 80 square miles, with acquisition beginning mid 1998. The Company had 23,135 acres under seismic option as of December 31, 1997 in this project area. South Texas Syndicate The South Texas Syndicate Project Area is located in LaSalle and McMullen Counties, Texas. Seismic options covering over 88,000 acres are being negotiated and are expected to be finalized by the first quarter of 1998. Industry activity in the area has been initiated with 3-D seismic projects both east and west along trend. Target reservoirs include the Cook Mountain, Queen City, Wilcox, Edwards and Sligo, ranging in depth from 1,100 feet to 14,500 feet. An initial phase of 3-D coverage covering approximately 40 square miles is planned for 1998. LOUISIANA North Chalkley Project Area: Miogyp Sand The North Chalkley Project Area is located in Calcasieu and Cameron Parishes, Louisiana in an area of production from the Miogyp sand trend. The Company's leases in this project area cover 1,130 acres and control both upthrown and expanded Miogyp closures against the regional Camerina/Miogyp expansion fault. An upthrown 2-D supported opportunity was sold to two large independent oil and natural gas companies for cash and carried working interest in 1997. The well logged gas pay but was not adequately tested due to mechanical problems. The Company now has a 45% working interest in the subject leases and is planning to acquire 3-D seismic data for delineation of drilling future prospects. Atchafalaya Project Area: Cib Op-C Sand The Atchafalaya Project Area is located in Atchafalaya Bay in Louisiana. In 1991, a well was drilled in this fault block resulting in a field discovery at approximately 17,500 feet. The Company and its partners control 3,611 acres in this project area under a farm-in agreement and two state leases. The Company's partners have access to 20 square of 3-D seismic data covering this project area. As of March 31, 1997, the Company's net estimated proved reserves in this project area were 308 MBbls of oil and 5.8 Bcf of natural gas, all of which are undeveloped. The Company subsequently sold down to an approximately 10% carried interest in the first well that has been spudded in March 1998. Live Oak Project Area: Chris II Sand The Live Oak Project Area is located in Vermillion Parish, Louisiana. In 1996, the Company and its partners acquired access to a 20 square mile 3-D seismic survey. The Company promoted its interest in the project area to two independents and will be carried to casing point for a 12% interest in the first well, which should be completed in April 1998. The Company's leases in this project area cover an aggregate of approximately 350 acres. The well is drilling as of March 1998. OTHER PROJECT AREAS In addition to the project areas described above, the Company had over 23 additional project areas in various stages of development as of December 31, 1997. These project areas are located in the onshore Texas 10 13 and Louisiana Gulf Coast region, as well as one project area in the Cotton Valley Lime Reef trend. The Company is in the process of evaluating and acquiring interests with respect to most of these project areas and as of December 31, 1997 had acquired leases and seismic options covering 118,114 acres. 3-D seismic surveys covering an aggregate of approximately 282 square miles in these areas are budgeted for acquisition during 1998. SIGNIFICANT DEVELOPMENT PROJECT -- CAMP HILL The Company owns interests in eight leases totaling approximately 900 acres in the Camp Hill field in Anderson County, Texas. The Company currently operates six of these leases. During the year ended December 31, 1997, the project produced 110 Bbls/d of 19 API gravity oil. The project produces from a depth of 500 feet and utilizes a tertiary steam drive as an enhanced oil recovery process. Although efficient at maximizing oil recovery, the steam drive process is relatively expensive to operate because natural gas or produced crude is burned to create the steam injectant. Lifting costs during the year ended December 31, 1997 averaged $15.54 per barrel ($2.59 per Mcfe). Because profitability increases when natural gas prices drop relative to oil prices, the project is a natural hedge against decreases in natural gas prices relative to oil prices. The crude oil produced, although viscous, commands a higher price (an average premium of $.71 per barrel during the year ended December 31, 1997) than West Texas intermediate crude due to its suitability as a lube oil feedstock. As of December 31, 1997, the Company had 4,697 MBbls of oil of proved reserves in this project, with 902 MBbls of oil currently developed. The Company anticipates that it will drill additional wells and increase steam injection to develop the proved undeveloped reserves in this project, with the timing and amount of expenditures depending on the relative prices of oil and natural gas. The Company has an average working interest of 92.5% in its leases in this field and an average net revenue interest of 74.0%. OIL AND NATURAL GAS RESERVES The following table sets forth estimated net proved oil and natural gas reserves of the Company and the PV-10 Value of such reserves as of December 31, 1997. The reserve data and the present value as of December 31, 1997 were prepared by Ryder Scott Company and Fairchild, Ancell & Wells, Inc., Independent Petroleum Engineers. For further information concerning Ryder Scott's and Fairchild's estimate of the proved reserves of the Company at December 31, 1997, see the Reserve Reports included as exhibits to this Annual Report on Form 10-K. The PV-10 Value was prepared using constant prices as of the calculation date, discounted at 10% per annum on a pretax basis, and is not intended to represent the current market value of the estimated oil and natural gas reserves owned by the Company. For further information concerning the present value of future net revenue from these proved reserves, see Note 10 of Notes to Financial Statements.
PROVED RESERVES ----------------------------------- DEVELOPED UNDEVELOPED TOTAL --------- ----------- ------- (DOLLARS IN THOUSANDS) Oil and condensate (MBbls).......................... 1,146 4,023.5 5,169.5 Natural gas (MMcf).................................. 9,299 2,843 12,142 Total proved reserves (MMcfe)....................... 16,173 26,986 43,159 PV-10 Value(1)...................................... $18,515 $ 7,556 $26,071
- --------------- (1) The PV-10 Value as of December 31, 1997 is pre-tax and was determined by using the December 31, 1997 sales prices, which averaged $16.37 per Bbl of oil, $2.56 per Mcf of natural gas and $10.90 per Bbl of NGL. No estimates of proved reserves comparable to those included herein have been included in reports to any federal agency other than the Commission. In accordance with Commission regulations, the reserve reports used oil and natural gas prices in effect at December 31, 1997. The prices used in calculating the estimated future net revenue attributable to proved reserves do not necessarily reflect market prices for oil and natural gas production subsequent to December 31, 1997. There can be no assurance that all of the proved reserves will be produced and sold within the periods 11 14 indicated, that the assumed prices will actually be realized for such production or that existing contracts will be honored or judicially enforced. There are numerous uncertainties inherent in estimating oil and natural gas reserves and their estimated values, including many factors beyond the control of the producer. The reserve data set forth in this Annual Report on Form 10-K represent only estimates. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers but at different times may vary substantially and such reserve estimates may be subject to downward or upward adjustment based upon such factors. Actual production, revenues and expenditures with respect to the Company's reserves will likely vary from estimates, and such variances may be material. In addition, the 10% discount factor, which is required by the Commission to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and natural gas industry in general. In general, the volume of production from oil and natural gas properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Except to the extent the Company conducts successful exploration and development activities or acquires properties containing proved reserves, or both, the proved reserves of the Company will decline as reserves are produced. The Company's future oil and natural gas production is, therefore, highly dependent upon its level of success in finding or acquiring additional reserves. The business of exploring for, developing or acquiring reserves is capital intensive. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, the Company's ability to make the necessary capital investment to maintain or expand its asset base of oil and natural gas reserves would be impaired. The failure of an operator of the Company's wells to adequately perform operations, or such operator's breach of the applicable agreements, could adversely impact the Company. In addition, there can be no assurance that the Company's future exploration, development and acquisition activities will result in additional proved reserves or that the Company will be able to drill productive wells at acceptable costs. Furthermore, although the Company's revenues could increase if prevailing prices for oil and natural gas increase significantly, the Company's finding and development costs could also increase. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 12 15 VOLUMES, PRICES AND OIL & GAS OPERATING EXPENSE The following table sets forth certain information regarding the production volumes of, average sales prices received for and average production costs associated with the Company's sales of oil and natural gas for the periods indicated.
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ PRODUCTION VOLUMES Oil (MBbls)................................................. 78 107 113 Natural gas (MMcf).......................................... 565 1,273 2,749 Natural gas equivalent (MMcfe).............................. 1,033 1,915 3,424 AVERAGE SALES PRICES Oil (per Bbl)............................................... $19.64 $21.54 $18.66 Natural gas (per Mcf)....................................... 1.60 2.27 2.41 Natural gas equivalent (per Mcfe)........................... 2.36 2.71 2.54 AVERAGE COSTS (PER MCFE) Camp Hill operating expenses................................ $ 2.06 $ 3.15 $ 2.59 Other operating expenses.................................... 1.63 0.94 0.54 Total operating expenses(1)................................. 1.76 1.24 0.68
- --------------- (1) Includes direct lifting costs (labor, repairs and maintenance, materials and supplies), workover costs and the administrative costs of production offices, insurance and property and severance taxes. FINDING AND DEVELOPMENT COSTS From inception through December 31, 1997, the Company has incurred total gross development, exploration and acquisition costs of approximately $47.4 million. Total exploration, development and acquisition activities from inception through December 31, 1997 have resulted in the addition of approximately 49.7 Bcfe, net to the Company's interest, of proved reserves at an average finding and development cost of $.95 per Mcfe. The Company's finding and development costs have historically fluctuated on a year-to-year basis. Finding and development costs, as measured annually, may not be indicative of the Company's ability to economically replace oil and natural gas reserves because the recognition of costs may not necessarily coincide with the addition of proved reserves. DEVELOPMENT, EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES The following table sets forth certain information regarding the gross costs incurred in the purchase of proved and unproved properties and in development and exploration activities.
YEAR ENDED DECEMBER 31 --------------------------- 1995 1996 1997 ------ ------ ------- (IN THOUSANDS) Acquisition costs Unproved prospects........................................ $ 317 $ 51 $ -- Proved properties......................................... 3,588 1,908 14,820 Exploration................................................. 2,364 4,724 14,223 Development................................................. 209 1,956 2,257 ------ ------ ------- Total costs incurred(1)................................ $6,478 $8,639 $31,300 ====== ====== =======
- --------------- (1) Excludes capitalized interest on unproved properties of $117,288, $422,493 and $699,625 for the years ended December 31, 1995, 1996 and 1997, respectively. 13 16 DRILLING ACTIVITY The following table sets forth the drilling activity of the Company for the years ended December 31, 1995, 1996 and 1997. In the table, "gross" refers to the total wells in which the Company has a working interest and "net" refers to gross wells multiplied by the Company's working interest therein. As shown below, the Company's drilling activity from January 1, 1995 to December 31, 1997 has resulted in a commercial success rate of approximately 69%.
YEAR ENDED DECEMBER 31, --------------------------------------------- 1995 1996 1997 ------------ ------------ ------------- GROSS NET GROSS NET GROSS NET ----- --- ----- --- ----- ---- Exploratory Wells Productive.................................... -- -- 16 6.0 39 15.7 Nonproductive................................. -- -- 4 1.1 23 9.4 ----- --- ----- ---- Total................................. -- -- 20 7.1 62 25.1 ===== === ===== ==== Development Wells Productive.................................... -- -- -- -- 7 1.8 Nonproductive................................. -- -- -- -- 1 0.6 ----- ---- Total................................. -- -- -- -- 8 2.4 ===== ====
PRODUCTIVE WELLS The following table sets forth the number of productive oil and natural gas wells in which the Company owned an interest as of December 31, 1997.
COMPANY OPERATED OTHER ---------------- ------------- TOTAL GROSS NET GROSS NET GROSS NET -------- ---- ----- ---- ----- ---- Oil........................................ 56 54.4 24 8.7 80 63.1 Natural gas................................ 13 8.2 68 23.7 81 31.9 --- ---- ---- ---- ---- ---- Total.................................... 69 62.6 92 32.4 161 95.0 === ==== ==== ==== ==== ====
ACREAGE DATA The following table sets forth certain information regarding the Company's developed and undeveloped lease acreage as of December 31, 1997. Developed acres refers to acreage within producing units and undeveloped acres refers to acreage that has not been placed in producing units. Leases covering substantially all of the undeveloped acreage in the following table will expire within the next three years. In general, the Company's leases will continue past their primary terms if oil or natural gas in commercial quantities is being produced from a well on such leases.
DEVELOPED ACREAGE UNDEVELOPED ACREAGE TOTAL ------------------- --------------------- ---------------- GROSS NET GROSS NET GROSS NET --------- ------ ----------- ------ ------- ------ Louisiana...................... -- -- 7,310 2,770 7,310 2,770 Texas.......................... 28,245 11,609 83,130 26,582 111,375 38,191 ------ ------ ------ ------ ------- ------ Total................ 28,245 11,609 90,440 29,352 118,685 40,961 ====== ====== ====== ====== ======= ======
The table does not include 301,268 gross acres (127,915 net) that the Company had a right to acquire pursuant to various seismic option agreements at December 31, 1997. Under the terms of its option agreements, the Company typically has the right for a period of one year, subject to extensions, to exercise its option to lease the acreage at predetermined terms. The Company's lease agreements generally terminate if wells have not been drilled on the acreage within a period of three years. 14 17 MARKETING The Company's production is marketed to third parties consistent with industry practices. Typically, oil is sold at the wellhead at field-posted prices plus a bonus and natural gas is sold under contract at a negotiated price based upon factors normally considered in the industry, such as distance from the well to the pipeline, well pressure, estimated reserves, quality of natural gas and prevailing supply/demand conditions. The Company's marketing objective is to receive the highest possible wellhead price for its product. The Company is aided by the presence of multiple outlets near its production in the Texas and Louisiana Gulf Coast. The Company takes an active role in determining the available pipeline alternatives for each property based upon historical pricing, capacity, pressure, market relationships, seasonal variances and long-term viability. There are a variety of factors which affect the market for oil and natural gas, including the extent of domestic production and imports of oil and natural gas, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for oil and natural gas, the marketing of competitive fuels and the effects of state and federal regulations on oil and natural gas production and sales. The Company has not experienced any difficulties in marketing its oil and natural gas. The oil and natural gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual customers. The availability of a ready market for the Company's oil and natural gas production depends on the proximity of reserves to, and the capacity of, oil and natural gas gathering systems, pipelines and trucking or terminal facilities. The Company delivers natural gas through gas gathering systems and gas pipelines that it does not own. Federal and state regulation of natural gas and oil production and transportation, tax and energy policies, changes in supply and demand and general economic conditions all could adversely affect the Company's ability to produce and market its oil and natural gas. The Company from time to time markets its own production where feasible with a combination of market-sensitive pricing and forward-fixed pricing. Forward pricing is utilized to take advantage of anomalies in the futures market and to hedge a portion of the Company's production deliverability at prices exceeding forecast. All of such hedging transactions provide for financial rather than physical settlement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General Overview." Despite the measures taken by the Company to attempt to control price risk, the Company remains subject to price fluctuations for natural gas sold in the spot market due primarily to seasonality of demand and other factors beyond the Company's control. Domestic oil prices generally follow worldwide oil prices, which are subject to price fluctuations resulting from changes in world supply and demand. The Company continues to evaluate the potential for reducing these risks by entering into, and expects to enter into, additional hedge transactions in future years. In addition, the Company may also close out any portion of hedges that may exist from time to time as determined to be appropriate by management. At December 31, 1997, natural gas sold under such swap arrangements was 364,000 MMBtu at an average price of $2.86 per MMBtu relating to first quarter of 1998 production. Total natural gas purchased and sold under such swap arrangements during the years ended December 31, 1995, 1996 and 1997 were 40,000 MMBtu, 60,000 MMBtu and 210,000 MMBtu, respectively. Gains (losses) realized by the Company under such swap arrangements were ($23,466), ($26,887) and $48,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The Company did not engage in hedging prior to 1995. COMPETITION AND TECHNOLOGICAL CHANGES The Company encounters competition from other oil and natural gas companies in all areas of its operations, including the acquisition of exploratory prospects and proven properties. The Company's competitors include major integrated oil and natural gas companies and numerous independent oil and natural gas companies, individuals and drilling and income programs. Many of its competitors are large, well-established companies with substantially larger operating staffs and greater capital resources than those of the Company and which, in many instances, have been engaged in the oil and natural gas business for a much longer time than the Company. Such companies may be able to pay more for exploratory prospects and productive oil and 15 18 natural gas properties and may be able to identify, evaluate, bid for and purchase a greater number of properties and prospects than the Company's financial or human resources permit. In addition, such companies may be able to expend greater resources on the existing and changing technologies that the Company believes are and will be increasingly important to the current and future success of oil and natural gas companies. The Company's ability to explore for oil and natural gas prospects and to acquire additional properties in the future will be dependent upon its ability to conduct its operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. The Company believes that its exploration, drilling and production capabilities and the experience of its management generally enable it to compete effectively. Many of the Company's competitors, however, have financial resources and exploration and development budgets that are substantially greater than those of the Company, which may adversely affect the Company's ability to compete with these companies. The oil and gas industry is characterized by rapid and significant technological advancements and introductions of new products and services utilizing new technologies. As others use or develop new technologies, the Company may be placed at a competitive disadvantage, and competitive pressures may force the Company to implement such new technologies at substantial cost. In addition, other oil and gas companies may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before the Company. There can be no assurance that the Company will be able to respond to such competitive pressures and implement such technologies on a timely basis or at an acceptable cost. One or more of the technologies currently utilized by the Company or implemented in the future may become obsolete. In such case, the Company's business, financial condition and results of operations could be materially adversely affected. If the Company is unable to utilize the most advanced commercially available technology, the Company's business, financial condition and results of operations could be materially and adversely affected. REGULATION The availability of a ready market for oil and gas production depends upon numerous factors beyond the Company's control. These factors include regulation of oil and natural gas production, federal and state regulations governing environmental quality and pollution control, state limits on allowable rates of production by well or proration unit, the amount of oil and natural gas available for sale, the availability of adequate pipeline and other transportation and processing facilities and the marketing of competitive fuels. For example, a productive natural gas well may be "shut-in" because of an oversupply of natural gas or lack of an available natural gas pipeline in the areas in which the Company may conduct operations. State and federal regulations generally are intended to prevent waste of oil and natural gas, protect rights to produce oil and natural gas between owners in a common reservoir, control the amount of oil and natural gas produced by assigning allowable rates of production and control contamination of the environment. Pipelines are subject to the jurisdiction of various federal, state and local agencies. The Company is also subject to changing and extensive tax laws, the effects of which cannot be predicted. The following discussion summarizes the regulation of the United States oil and gas industry. The Company believes that it is in substantial compliance with the various statutes, rules, regulations and governmental orders to which the Company's operations may be subject, although there can be no assurance that this is or will remain the case. Moreover, such statutes, rules, regulations and government orders may be changed or reinterpreted from time to time in response to economic or political conditions, and there can be no assurance that such changes or reinterpretations will not materially adversely affect the Company's results of operations and financial condition. The following discussion is not intended to constitute a complete discussion of the various statutes, rules, regulations and governmental orders to which the Company's operations may be subject. Regulation of Oil and Natural Gas Exploration and Production. The Company's operations are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells and the disposal of fluids used in connection with operations. The Company's operations are also subject to various conservation laws and regulations. These 16 19 include the regulation of the size of drilling and spacing units or proration units and the density of wells that may be drilled in and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely primarily or exclusively on voluntary pooling of lands and leases. In areas where pooling is voluntary, it may be more difficult to form units, and therefore more difficult to develop a project if the operator owns less than 100% of the leasehold. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. The effect of these regulations may limit the amount of oil and natural gas the Company can produce from its wells and may limit the number of wells or the locations at which the Company can drill. The regulatory burden on the oil and gas industry increases the Company's costs of doing business and, consequently, affects its profitability. Inasmuch as such laws and regulations are frequently expanded, amended and reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations. Regulation of Sales and Transportation of Natural Gas. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the regulations promulgated thereunder by the Federal Energy Regulatory Commission (the "FERC"). Maximum selling prices of certain categories of natural gas sold in "first sales," whether sold in interstate or intrastate commerce, were regulated pursuant to the NGPA. The Natural Gas Wellhead Decontrol Act (the "Decontrol Act") removed, as of not later than January 1, 1993, all remaining federal price controls from natural gas sold in "first sales." The FERC's jurisdiction over natural gas transportation was unaffected by the Decontrol Act. Although sales by producers, such as the Company, of natural gas and all sales of crude oil, condensate and natural gas liquids can currently be made at market prices, Congress could reenact price controls in the future. The Company's sales of natural gas are affected by the availability, terms and cost of transportation. The price and terms for access to pipeline transportation are subject to extensive regulation. In recent years, the FERC has undertaken various initiatives to increase competition within the natural gas industry. As a result of initiatives like FERC Order 636, issued in April 1992, the interstate natural gas transportation and marketing system has been substantially restructured to remove various barriers and practices that historically limited non-pipeline natural gas sellers, including producers, from effectively competing with interstate pipelines for sales to local distribution companies and large industrial and commercial customers. The most significant provisions of Order No. 636 require that interstate pipelines provide transportation separate or "unbundled" from their sales service, and require that pipelines provide firm and interruptible transportation service on an open access basis that is equal for all natural gas supplies. In many instances, the result of Order No. 636 and related initiatives have been to substantially reduce or eliminate the interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only storage and transportation services. The FERC has announced several important transportation-related policy statements and proposed rule changes, including a statement of policy and a request for comments concerning alternatives to its traditional cost-of-service ratemaking methodology to establish the rates interstate pipelines may charge for their services. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. In February 1997, the FERC announced a broad inquiry into issues facing the natural gas industry to assist the FERC in establishing regulatory goals and priorities in the post-Order No. 636 environment. Similarly, the Texas Railroad Commission has been reviewing changes to its regulations governing transportation and gathering services provided by intrastate pipelines and gatherers and recently implemented a code of conduct intended to prevent undue discrimination by intrastate pipelines and gatherers in favor of their marketing affiliates. Although the changes being considered by these federal and state regulators would affect the Company only indirectly, they are intended to further enhance competition in natural gas markets. The Company owns certain natural gas pipelines that it believes meet the standards the FERC has used to establish a pipeline's status as a gatherer not subject to FERC jurisdiction under the NGA. State regulation of gathering facilities generally includes various safety, environmental, and in some circumstances, nondiscriminatory take requirements, but does not generally entail rate regulation. Natural gas gathering may receive greater regulatory scrutiny at both state and federal levels in the post-Order No. 636 environment. 17 20 The Company cannot predict what further action the FERC or state regulators will take on these matters; however, the Company does not believe that it will be affected by any action taken materially differently than other natural gas producers with which it competes. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC, state commissions and the courts. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue. Oil Price Controls and Transportation Rates. Sales of crude oil, condensate and gas liquids by the Company are not currently regulated and are made at market prices. The price the Company receives from the sale of these products may be affected by the cost of transporting the products to market. Effective January 1995, the FERC implemented regulations establishing an indexing system under which oil pipelines will be able to change their transportation rates, subject to prescribed ceiling limits. The indexing system generally indexes such rates to inflation, subject to certain conditions and limitations. The Company is not able at this time to predict the effects of these regulations, if any, on the transportation costs associated with oil production from the Company's oil producing operations. Environmental Regulations. The Company's operations are subject to numerous federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands within wilderness, wetlands and other protected areas, require remedial measures to mitigate pollution from former operations, such as pit closure and plugging abandoned wells, and impose substantial liabilities for pollution resulting from production and drilling operations. Public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stricter environmental legislation and regulations applied to the oil and natural gas industry could continue, resulting in increased costs of doing business and consequently affecting profitability. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly waste handling, disposal and cleanup requirements, the business and prospects of the Company could be adversely affected. The Company generates wastes that may be subject to the federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The U.S. Environmental Protection Agency ("EPA") and various state agencies have limited the approved methods of disposal for certain hazardous and nonhazardous wastes. Furthermore, certain wastes generated by the Company's oil and natural gas operations that are currently exempt from treatment as "hazardous wastes" may in the future be designated as "hazardous wastes," and therefore be subject to more rigorous and costly operating and disposal requirements. The Company currently owns or leases numerous properties that for many years have been used for the exploration and production of oil and gas. Although the Company believes that it has used good operating and waste disposal practices, prior owners and operators of these properties may not have used similar practices, and hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by the Company or on or under locations where such wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under the Company's control. These properties and the wastes disposed thereon may be subject to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), RCRA and analogous state laws as well as state laws governing the management of oil and gas wastes. Under such laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination) or to perform remedial plugging operations to prevent future contamination. The Company's operations may be subject to the Clean Air Act ("CAA") and comparable state and local requirements. Amendments to the CAA were adopted in 1990 and contain provisions that may result in the gradual imposition of certain pollution control requirements with respect to air emissions from the 18 21 operations of the Company. The EPA and states have been developing regulations to implement these requirements. The Company may be required to incur certain capital expenditures in the next several years for air pollution control equipment in connection with maintaining or obtaining operating permits and approvals addressing other air emission-related issues. However, the Company does not believe its operations will be materially adversely affected by any such requirements. Federal regulations require certain owners or operators of facilities that store or otherwise handle oil, such as the Company, to prepare and implement spill prevention, control, countermeasure ("SPCC") and response plans relating to the possible discharge of oil into surface waters. The Company has acknowledged the need for SPCC plans at certain of its properties and believes that it will be able to develop and implement these plans in the near future. The Oil Pollution Act of 1990, ("OPA") contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States. The OPA subjects owners of facilities to strict joint and several liability for all containment and cleanup costs and certain other damages arising from a spill, including, but not limited to, the costs of responding to a release of oil to surface waters. The OPA also requires owners and operators of offshore facilities that could be the source of an oil spill into federal or state waters, including wetlands, to post a bond, letter of credit or other form of financial assurance in amounts ranging from $10 million in specified state waters to $35 million in federal outer continental shelf waters to cover costs that could be incurred by governmental authorities in responding to an oil spill. Such financial assurances may be increased by as much as $150 million if a formal risk assessment indicates that the increase is warranted. Noncompliance with OPA may result in varying civil and criminal penalties and liabilities. Operations of the Company are also subject to the federal Clean Water Act ("CWA") and analogous state laws. In accordance with the CWA, the state of Louisiana has issued regulations prohibiting discharges of produced water in state coastal waters effective July 1, 1997. The Company plans to drill a well in Louisiana coastal waters. Assuming that production from the planned well is feasible, the Company will be obligated to comply with these regulations. Pursuant to other requirements of the CWA, the EPA has adopted regulations concerning discharges of storm water runoff. This program requires covered facilities to obtain individual permits, participate in a group permit or seek coverage under an EPA general permit. While certain of its properties may require permits for discharges of storm water runoff, the Company believes that it will be able to obtain, or be included under, such permits, where necessary, and make minor modifications to existing facilities and operations that would not have a material effect on the Company. Like OPA, the CWA and analogous state laws relating to the control of water pollution provide varying civil and criminal penalties and liabilities for releases of petroleum or its derivatives into surface waters or into the ground. CERCLA, also known as the "Superfund" law, and similar state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The Company also is subject to a variety of federal, state and local permitting and registration requirements relating to protection of the environment. Management believes that the Company is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse effect on the Company. OPERATING HAZARDS AND INSURANCE The oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, craterings, pipe failures, casing collapse, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to the Company 19 22 from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, the Company may be liable for environmental damages caused by previous owners of property purchased and leased by the Company. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for exploration, development or acquisitions or result in the loss of the Company's properties. In accordance with customary industry practices, the Company maintains insurance against some, but not all, of such risks and losses. The Company does not carry business interruption insurance or protect against loss of revenues. There can be no assurance that any insurance obtained by the Company will be adequate to cover any losses or liabilities. The Company cannot predict the continued availability of insurance or the availability of insurance at premium levels that justify its purchase. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect the Company's financial condition and operations. The Company may elect to self-insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on the financial condition and results of operations of the Company. The Company participates in a substantial percentage of its wells on a non-operated basis, which may limit the Company's ability to control the risks associated with oil and natural gas operations. TITLE TO PROPERTIES; ACQUISITION RISKS The Company believes it has satisfactory title to all of its producing properties in accordance with standards generally accepted in the oil and natural gas industry. The Company's properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes and other burdens which the Company believes do not materially interfere with the use of or affect the value of such properties. As is customary in the industry in the case of undeveloped properties, little investigation of record title is made at the time of acquisition (other than a preliminary review of local records). Investigations, including a title opinion of local counsel, are generally made before commencement of drilling operations. The Company's revolving credit facility is secured by substantially all of its oil and natural gas properties. The successful acquisition of producing properties requires an assessment of recoverable reserves, future oil and natural gas prices, operating costs, potential environmental and other liabilities and other factors. Such assessments are necessarily inexact and their accuracy inherently uncertain. In connection with such an assessment, the Company performs a review of the subject properties that it believes to be generally consistent with industry practices, which generally includes on-site inspections and the review of reports filed with various regulatory entities. Such a review, however, will not reveal all existing or potential problems nor will it permit a buyer to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections may not always be performed on every well, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of such problems. There can be no assurances that any acquisition of property interests by the Company will be successful and, if unsuccessful, that such failure will not have an adverse effect on the Company's future results of operations and financial condition. EMPLOYEES At December 31, 1997, the Company had 22 full-time employees, including four geoscientists and three engineers. As drilling and production activities increase, the Company intends to hire additional technical, operational and administrative personnel as appropriate. The Company believes that its relationships with its employees are good. In order to optimize prospect generation and development, the Company utilizes the services of independent consultants and contractors to perform various professional services, particularly in the areas of 3-D seismic data mapping, acquisition of leases and lease options, construction, design, well site surveillance, permitting and environmental assessment. Field and on-site production operation services, such as pumping, 20 23 maintenance, dispatching, inspection and testing, are generally provided by independent contractors. The Company believes that this use of third party service providers has enhanced its ability to contain general and administrative expenses. The Company depends to a large extent on the services of certain key management personnel, the loss of any of which could have a material adverse effect on the Company's operations. The Company does not maintain key-man life insurance with respect to any of its employees. GLOSSARY OF CERTAIN INDUSTRY TERMS The definitions set forth below shall apply to the indicated terms as used herein. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple. After payout. With respect to an oil or gas interest in a property, refers to the time period after which the costs to drill and equip a well have been recovered. Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons. Bbls/d. Stock tank barrels per day. Bcf. Billion cubic feet. Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. Before payout. With respect to an oil or gas interest in a property, refers to the time period before which the costs to drill and equip a well have been recovered. Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. Completion. The installation of permanent equipment for the production of oil or gas or, in the case of a dry hole, the reporting of abandonment to the appropriate agency. Developed acreage. The number of acres which are allocated or assignable to producing wells or wells capable of production. Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. Exploratory well. A well drilled to find and produce oil or gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir or to extend a known reservoir. Farm-in or farm-out. An agreement whereunder the owner of a working interest in an oil and natural gas lease assigns the working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a "farm-in" while the interest transferred by the assignor is a "farm-out." Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. Finding costs. Costs associated with acquiring and developing proved oil and natural gas reserves which are capitalized by the Company pursuant to generally accepted accounting principles, including all costs involved in acquiring acreage, geological and geophysical work and the cost of drilling and completing wells. 21 24 Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned. MBbls. One thousand barrels of crude oil or other liquid hydrocarbons. MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per day. Mcf. One thousand cubic feet. Mcf/d. One thousand cubic feet per day. Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. MMBbls. One million barrels of crude oil or other liquid hydrocarbons. MMBtu. One million British Thermal Units. Mmcf. One million Cubic feet. MMcf/d. One million cubic feet per day. MMcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids, which approximates the relative energy content of crude oil, condensate and natural gas liquids as compared to natural gas. Prices have historically been higher or substantially higher for crude oil than natural gas on an energy equivalent basis. Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells. Normally pressured reservoirs. Reservoirs with a formation-fluid pressure equivalent to 0.465 psi per foot of depth from the surface. For example, if the formation pressure is 4,650 psi at 10,000 feet, then the pressure is considered to be normal. Over-pressured reservoirs. Reservoirs subject to abnormally high pressure as a result of certain types of subsurface formations. Petrophysical study. Study of rock and fluid properties based on well log and core analysis. Present value. When used with respect to oil and natural gas reserves, the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs in effect as of the date indicated, without giving effect to nonproperty-related expenses such as general and administrative expenses, debt service and future income tax expense or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%. Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes. Proved developed nonproducing reserves. Proved developed reserves expected to be recovered from zones behind casing in existing wells. Proved developed producing reserves. Proved developed reserves that are expected to be recovered from completion intervals currently open in existing wells and able to produce to market. Proved developed reserves. Proved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved undeveloped location. A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves. 22 25 Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. PV-10 Value. The present value of estimated future revenues to be generated from the production of proved reserves calculated in accordance with Commission guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expense and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%. Recompletion. The completion for production of an existing well bore in another formation from that in which the well has been previously completed. Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. Royalty interest. An interest in an oil and natural gas property entitling the owner to a share of oil or gas production free of costs of production. 3-D seismic data. Three-dimensional pictures of the subsurface created by collecting and measuring the intensity and timing of sound waves transmitted into the earth as they reflect back to the surface. Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production. Workover. Operations on a producing well to restore or increase production. ITEM 3. LEGAL PROCEEDINGS From time to time the Company is a party to various legal proceedings arising in the ordinary course of business. The Company is not currently a party to any litigation that it believes could have a material adverse effect on the financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3) to Form 10-K, the following information is included in Part I of this Form 10-K. The following table sets forth certain information with respect to executive officers of the Company:
NAME AGE POSITION ---- --- -------- S.P. Johnson IV....................... 41 President and Chief Executive Officer Frank A. Wojtek....................... 42 Chief Financial Officer, Vice President, Secretary and Treasurer George F. Canjar...................... 39 Vice President of Exploration Development Kendall A. Trahan..................... 47 Vice President of Land
23 26 Set forth below is a description of the backgrounds of each of the executive officers of the Company: S.P. Johnson IV has served as the President, Chief Executive Officer and a director of the Company since December 1993. Prior to that, he worked 15 years for Shell Oil Company. His managerial positions included Operations Superintendent, Manager of Planning and Finance and Manager of Development Engineering. Mr. Johnson is a Registered Petroleum Engineer and has a B.S. in Mechanical Engineering from the University of Colorado. Frank A. Wojtek has served as the Chief Financial Officer, Vice President, Secretary, Treasurer and a director of the Company since 1993. In addition, from 1992 to 1997, Mr. Wojtek was the Assistant to the Chairman of the Board of Reading & Bates Corporation ("Reading & Bates", an offshore drilling company). Mr. Wojtek also holds the positions of Vice President and Secretary/Treasurer for Loyd and Associates, Inc. (a private financial consulting and investment banking firm). Mr. Wojtek held the positions of Vice President and Chief Financial Officer of Griffin-Alexander Drilling Company from 1984 to 1987, Treasurer of Chiles-Alexander International Inc. from 1987 to 1989 and Vice President and Chief Financial Officer of India Offshore Inc. from 1989 to 1992, all of which are companies in the offshore drilling industry. Mr. Wojtek is a Certified Public Accountant and holds a B.B.A. in Accounting from the University of Texas. George F. Canjar has been head of the Company's exploration activities since joining the Company in July 1996 and was elected Vice President of Exploration Development in June 1997. Prior thereto he worked for over 15 years for Shell Oil Company and its overseas affiliates where he held various technical and managerial positions, including Technical Manager-Geology & Petrophysics, Section Head Geology & Seismology and Team Leader for numerous integrated production, development, exploration and project execution groups. Mr. Canjar is a Registered Petroleum Engineer, Registered Geologist and has a B.S. in Geological Engineering from the Colorado School of Mines. Kendall A. Trahan has been head of the Company's land activities since joining the Company in March 1997 and was elected Vice President of Land of the Company in June 1997. From 1994 to February 1997, he served as a Director of Joint Ventures Onshore Gulf Coast for Vastar Resources, Inc. From 1982 to 1994, he worked as an Area Landman and then a Division Landman and Director of Business Development for Arco Oil & Gas Company. Prior to that, Mr. Trahan served as a Staff Landman for Amerada Hess Corporation and as an independent landman. He is a Certified Professional Landman and holds a B.S. degree from the University of Southwestern Louisiana. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS (a) The Company's common stock, par value $0.01 per share (the "Common Stock"), has been publicly traded through the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol CRZO since the Company's initial public offering (the "Offering") effective August 6, 1997. The following table sets forth the quarterly high and low bid prices for each indicated quarter of fiscal 1997:
QUARTER ENDED HIGH LOW ------------- ---- ----- September 30, 1997.......................................... 15 10 15/16 December 31, 1997........................................... 17 1/4 7 7/8
There were approximately 48 shareholders of record (excluding brokerage firms and other nominees) of the Company's Common Stock as of March 25, 1998. The Company has not paid any dividends in the past and does not intend to pay cash dividends on its Common Stock in the foreseeable future. The Company currently intends to retain any earnings for the future operation and development of its business, including exploration, development and acquisition activities. The Company's revolving line of credit with Compass Bank (the "Company Credit Facility") and the terms of its 9% Series A Preferred Stock, par value $.01 per share (the "Preferred Stock"), restrict the Company's ability 24 27 to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (b) Use of Proceeds. The Company's Registration Statement on Form S-1 (Registration No. 333-29187), as amended, with respect to the initial public offering of shares of Company's Common Stock was declared effective by the Securities and Exchange Commission on August 5, 1997. In the Offering, the Company sold 2,500,000 shares of Common Stock on August 11, 1997 and 375,000 shares of Common Stock on September 8, 1997 pursuant to the exercise of the underwriters' over-allotment option. The net proceeds to the Company from the Offering were $28.1 million. As of December 31, 1997, the Company has used such net proceeds as follows: (i) to repay $16.5 million of indebtedness outstanding under the Company's revolving credit facilities, (ii) to repay $3.2 million of promissory notes outstanding to certain of the Company's directors and officers and (iii) to provide $8.4 million for capital expenditures. Except as set forth in clause (ii), none of such payments were direct or indirect payments to directors or officers of the Company or their associates, to persons owning ten percent or more of any class of equity securities of the Company or to affiliates of the Company. RECENT SALES OF UNREGISTERED SECURITIES On January 8, 1998, the Company consummated the transactions contemplated by the Stock Purchase Agreement dated January 8, 1998 (the "Purchase Agreement") among the Company, Enron Capital & Trade Resources Corp., a Delaware corporation ("Enron"), and Joint Energy Development Investments II, a Delaware limited partnership ("JEDI II"). Such transactions included (i) the payment by Enron and JEDI II of an aggregate purchase price of $30,000,000, (ii) the sale of 75,000 shares of Preferred Stock, the terms of which are set forth in the Statement of Resolution Establishing Series of Shares designated 9% Series A Preferred Stock, to Enron and 225,000 shares of Preferred Stock to JEDI II, (iii) the grant of warrants (the "Warrants") to purchase 250,000 and 750,000 shares of Common Stock to Enron and JEDI II, respectively, and (iv) the execution and delivery of the Shareholders' Agreement dated January 8, 1998 among the Company, S.P. Johnson IV, Frank A. Wojtek, Steven A. Webster, Paul B. Loyd, Jr., Douglas A.P. Hamilton, DAPHAM Partnership L.P., the Douglas A.P. Hamilton 1997 GRAT, Enron and JEDI II. The Warrants are exercisable during the period beginning January 8, 1999 and ending January 8, 2005 for the purchase of an aggregate of 1,000,000 shares of Common Stock (the "Warrant Shares") at an exercise price of $11.50 per share, subject to certain adjustments. Each Warrant may be exercised by (i) paying the exercise price (A) in cash or (B) by surrender to the Company of shares of Preferred Stock or (ii) exercising the Warrant for a number of net Warrant Shares equal to (x) the number of Warrant Shares issuable upon exercise of the Warrant multiplied by the difference between the average market price of the Common Stock during the 20 trading day period preceding the date of exercise and the exercise price divided by (y) the average market price of the Common Stock during the 20 trading day period preceding the date of exercise. In addition, with the consent of the Company, the holder of the Warrant may receive a cash payment equal to the number of Warrant Shares for which the Warrant is exercised multiplied by the difference between the average market price of the Common Stock during the 20 trading day period preceding the date of exercise and the exercise price. The number of Warrant Shares and exercise price are subject to adjustment in certain circumstances, including (i) if the Company makes a distribution of shares of Common Stock, subdivides or combines its outstanding shares of Common Stock or issues any shares of its capital stock or distributes other assets in a reclassification or reorganization of the Common Stock, (ii) if the Company issues shares of Common Stock or securities exercisable or exchangeable for or convertible into shares of Common Stock for no consideration or for less than the market value of the Common Stock, subject to certain exceptions, and (iii) if the Company engages in a consolidation, merger or business combination with, or sells all or substantially all of its assets to, another corporation. 25 28 The sale of the shares of Preferred Stock and the Warrants pursuant to the Purchase Agreement is exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof as a transaction not involving any public offering. ITEM 6. SELECTED FINANCIAL DATA The financial information of the Company set forth below for the period from inception of operations (September 24, 1993) through December 31, 1993, and for each of the four years ended December 31, 1997, has been derived from the audited combined financial statements of the Company. The following table also sets forth certain pro forma income taxes, net income and net income per share information. The information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements of the Company and the related notes thereto included elsewhere herein.
PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------ 1993 1994 1995 1996 1997 -------------- ------ ------- ------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Oil and natural gas revenues........ $ 5 $ 596 $ 2,428 $ 5,195 $ 8,712 Costs and expenses: Oil and natural gas operating expenses....................... 20 518 1,814 2,384 2,334 Depreciation, depletion and amortization................... 1 98 488 1,136 2,358 General and administrative........ 24 238 425 515 1,591 ----- ------ ------- ------- ---------- Total costs and expenses................ 45 854 2,727 4,035 6,283 ----- ------ ------- ------- ---------- Operating income (loss)............. (40) (258) (299) 1,160 2,429 Interest expense (net of amounts capitalized)...................... -- (7) (192) (80) (98) Other income........................ -- 6 24 20 -- ----- ------ ------- ------- ---------- Income (loss) before income taxes... (40) (259) (467) 1,100 2,331 ----- ------ ------- ------- ---------- Deferred income taxes(1)............ -- -- -- -- 2,300 ----- ------ ------- ------- ---------- Net income (loss)(1)................ $ (40) $ (259) $ (467) $ 1,100 $ 31 ===== ====== ======= ======= ========== Basic (loss) earnings per share(1).......................... $0.00 $(0.04) $ (0.07) $ 0.15 $ 0.00 ===== ====== ======= ======= ========== Diluted (loss) earnings per share(1).......................... $0.00 $(0.04) $ (0.07) $ 0.15 $ 0.00 ===== ====== ======= ======= ========== Basic weighted average shares outstanding....................... 5,210 6,501 7,021 7,476 8,639 Diluted weighted average shares outstanding....................... 5,210 6,501 7,021 7,545 8,810 STATEMENTS OF CASH FLOW DATA: Net cash provided by (used in) operating activities.............. $ 12 $ (258) $ 406 $ 3,325 $ 3,068 Net cash used in investing activities........................ (118) (819) (6,785) (8,221) (28,141) Net cash provided by financing activities........................ 106 1,183 6,343 6,319 26,255 OTHER OPERATING DATA: EBITDA(2)(4)........................ $ (41) $ (158) $ 189 $ 2,296 $ 4,787 Operating cash flow(3)(4)........... (41) (159) 21 2,236 4,689 Capital expenditures................ 113 819 6,857 9,480 32,234 Debt repayments(5).................. -- -- -- 2,084 20,409
26 29
AS OF DECEMBER 31, ---------------------------------------------- 1993 1994 1995 1996 1997 ---- ------ ------ ------- ------- BALANCE SHEET DATA: Working capital............................... $(52) $ 152 $ (265) $(1,025) $(2,276) Property and equipment, net................... 113 803 6,960 15,206 45,083 Total assets.................................. 130 1,057 7,645 18,869 53,658 Long-term debt, including current maturities.................................. -- 533 3,480 9,684 7,950 Equity........................................ 65 452 3,381 4,596 32,895
- --------------- (1) From inception of operation to May 16, 1997, Carrizo and the other entities combined in a series of transactions pursuant to which a number of affiliated entities were combined with the Company in connection with its initial public offering (the "Combination Transactions") were not required to pay federal income taxes due to their status as partnerships or S corporations. The amounts shown reflect pro forma income taxes that represent federal income taxes which would have been reported under Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," had Carrizo and such entities been tax-paying entities during each of the periods presented. See Notes 2 and 4 to the Company's financial statements. (2) EBITDA represents earnings before interest expense, income taxes, depreciation, depletion and amortization. (3) Operating cash flow represents cash flows from operating activities prior to changes in assets and liabilities. (4) Management of the Company believes that EBITDA and operating cash flow may provide additional information about the Company's ability to meet its future requirements for debt service, capital expenditures and working capital. EBITDA and operating cash flow are financial measures commonly used in the oil and gas industry and should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. Because EBITDA excludes some, but not all, items that affect net income and because operating cash flow excludes changes in assets and liabilities and these measures may vary among companies, the EBITDA and operating cash flow data presented above may not be comparable to similarly titled measures of other companies. (5) Debt repayments include amounts refinanced. Forward Looking Statements. The statements contained in all parts of this document, (including any portion attached hereto) including, but not limited to, those relating to the Company's schedule, targets, estimates or results of future drilling, including the number, timing and results of wells, budgeted wells, increases in wells, expected working or revenue interests, prospects budgeted and other future capital expenditures, risk profile of oil and gas exploration, acquisition of 3-D seismic data (including number, timing and size of projects), use of proceeds from the Company's initial public offering and the sale of shares of Preferred Stock and the warrants, expected production or reserves, increases in reserves, acreage, working capital requirements, hedging activities, the ability of expected sources of liquidity to implement its business strategy, budgeted expenditures, future hiring, future exploration activity and any other statements regarding future operations, financial results, business plans and cash needs and other statements that are not historical facts are forward looking statements. When used in this document, the words "anticipate," "budgeted" "potential," "estimate," "expect," "may," "project," "believe" and similar expressions are intended to be among the statements that identify forward looking statements. Such statements involve risks and uncertainties, including, but not limited to, those relating to the Company's dependence on its exploratory drilling activities, the volatility of oil and natural gas prices, the need to replace reserves depleted by production, operating risks of oil and natural gas operations, the Company's dependence on its key personnel, factors that affect the Company's ability to manage its growth and achieve its business strategy, risks relating to its limited operating history, technological changes, significant capital requirements of the Company, the potential impact of government regulations, litigation, competition, the uncertainty of reserve information and future 27 30 net revenue estimates, property acquisition risks and other factors detailed herein and in the Company's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL OVERVIEW The Company began operations in September 1993 and initially focused on the acquisition of producing properties. As a result of the increasing availability of economic onshore 3-D seismic surveys, the Company began to obtain 3-D seismic data and options to lease substantial acreage in 1995 and began to drill its 3-D based prospects in 1996. The Company drilled 20 wells in 1996 and 70 wells in 1997. The Company expects such increases to continue and has budgeted to drill a total of 150 gross wells (71.8 net) in 1998. As a result, depreciation, depletion and amortization, oil and gas operating expenses and production are expected to increase. The Company has typically retained the majority of its interests in shallow, normally pressured prospects and sold a portion of its interests in deeper, over-pressured prospects. The financial statements set forth herein are prepared on the basis of a combination of Carrizo and the entities that were a party to the Combination Transactions. Carrizo and the entities combined with it in the Combination Transactions were not required to pay federal income taxes due to their status as partnerships or Subchapter S corporations, which are not subject to federal income taxation. Instead, taxes for such periods were paid by the shareholders and partners of such entities. On May 16, 1997, Carrizo terminated its status as an S corporation and thereafter became subject to federal income taxes. In accordance with SFAS No. 109, "Accounting for Income Taxes," the Company was required to establish a deferred tax liability in the second quarter of 1997 which resulted in a noncash charge to income of approximately $1.6 million. The Company has primarily grown through the internal development of properties within its exploration project areas, although the Company acquired properties with existing production in the Camp Hill Project in late 1993, the Encinitas Project in early 1995 and the La Rosa Project in 1996. The Company made these acquisitions through the use of limited partnerships with Carrizo or Carrizo Production, Inc. as the general partner. However, as operations have expanded, the Company has increasingly funded its activities through bank borrowings and cash flow from operations in order to retain a greater portion of the interests it develops. Prior to the Offering, Carrizo conducted its oil and natural gas operations directly, with industry partners and through the following affiliated entities: Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd. and Placedo Partners Ltd. Concurrently with the closing of the Offering, Combination Transactions were closed. The Combination Transactions consisted of the following: (i) Carrizo Production, Inc. merged into Carrizo; (ii) Carrizo acquired Encinitas Partners Ltd. in two steps: (a) Carrizo acquired the limited partner interests in Encinitas Partners Ltd. held by certain of the Company's directors and (b) Encinitas Partners Ltd. merged into Carrizo; (iii) La Rosa Partners Ltd. merged into Carrizo; and (iv) Carrizo Partners Ltd. merged into Carrizo. As a result of the merger of Carrizo and Carrizo Partners Ltd., Carrizo became the owner of all of the partnership interest in Placedo Partners Ltd. The Company uses the full-cost method of accounting for its oil and gas properties. Under this method, all acquisition, exploration and development costs, including any general and administrative costs that are directly attributable to the Company's acquisition, exploration and development activities, are capitalized in a "full-cost pool" as incurred. The Company records depletion of its full-cost pool using the unit-of-production method. To the extent that such capitalized costs in the full-cost pool (net of depreciation, depletion and amortization and related deferred taxes) exceed the present value (using a 10% discount rate) of estimated future net after-tax cash flows from proved oil and gas reserves, such excess costs are charged to operations. The Company has not been required to make any such write-downs. Once incurred, a write-down of oil and gas properties is not reversible at a later date. The ceiling test for many full cost companies, including Carrizo, could be negatively impacted by prolonged unfavorable oil and gas prices. The deterioration of prices from year-end levels could result in the Company recording a first quarter 1998 non-cash charge to earnings related to its oil and gas properties. 28 31 RESULTS OF OPERATIONS Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996 Oil and natural gas revenues for 1997 increased 68% to $8.7 million from $5.2 million in 1996. Production volumes for natural gas in 1997 increased 116% to 2,749.2 MMcf from 1,272.5 MMcf in 1996. Average natural gas prices increased 6% to $2.41 per Mcf in 1997 from $2.27 per Mcf in 1996. Production volumes for oil in 1997 increased 5% to 112.5 MBbls from 107.3 MBbls in 1996. Average oil prices decreased 13% to $18.66 per barrel in 1997 from $21.54 per barrel in 1996. The increase in oil and natural gas production was due primarily to new wells being successfully drilled and completed during 1997, along with recompletions of existing wells. The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the years ended December 31, 1996 and 1997:
1997 PERIOD COMPARED TO 1996 PERIOD DECEMBER 31, ----------------------- ----------------------- INCREASE % INCREASE 1996 1997 (DECREASE) (DECREASE) ---- ---- ---------- ---------- Production volumes Oil and condensate (MBbls)......... 107.3 112.5 5.2 5% Natural gas (MMcf)................. 1,272.5 2,749.2 1,476.7 116% Average sales prices(1) Oil and condensate (per Bbl)....... $ 21.54 $ 18.66 $ (2.88) (13)% Natural gas (per Mcf).............. 2.27 2.41 0.14 6% Operating revenues Oil and condensate................. $2,310,798 $2,099,699 $ (211,099) (9)% Natural gas........................ 2,883,911 6,611,955 3,728,044 129% ---------- ---------- ---------- Total...................... $5,194,709 $8,711,654 $3,516,945 68% ========== ========== ==========
- --------------- (1) Including impact of hedging. Oil and natural gas operating expenses for 1997 decreased 2% to $2.3 million from $2.4 million in 1996. Oil and natural gas operating expenses decreased primarily as a result of cost reductions in older wells and the addition of lower cost production in new oil and gas wells drilled and completed since December 31, 1995. Operating expenses per equivalent unit in 1997 decreased to $.68 per Mcfe from $1.24 per Mcfe in 1996. The per unit cost decreased as a result of increased production of natural gas, which had lower per unit operating costs. DD&A expense for 1997 increased 118% to $2.4 million from $1.1 million in 1996. This increase was primarily due to the increased production, additional seismic and drilling costs and depreciation on 3-D computer equipment and related software. General and administrative expense for 1997 increased 209% to $1.6 million from $515,000 for 1996 reflecting ramp-up expenses relating to the hiring of additional technical and administrative staff to handle the Company's increased level of drilling and operations, and expenses related to the initial public offering. Interest expense for 1997 increased 90% to $151,000 from $80,000 in 1996. This increase was primarily due to the increase in capital expenditures and related debt levels in anticipation of the initial public offering. As a result of the adoption of SFAS 109 in the second quarter of 1997, the Company recorded a one-time non-cash charge to income of $1.6 million to establish a deferred tax liability. Net income for 1997 decreased to $31,000 from $1.1 million in 1996 as a result of the factors described above. 29 32 Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995 Oil and natural gas revenues for 1996 increased 114% to $5.2 million from $2.4 million in 1995. Production volumes for natural gas in 1996 increased 125% to 1,272.5 MMcf from 565.3 MMcf in 1995. Average natural gas prices increased 42% to $2.27 per Mcf in 1996 from $1.60 per Mcf in 1995. Production volumes for oil in 1996 increased 38% to 107.3 MBbls from 77.6 MBbls in 1995. Average oil prices increased 10% to $21.54 per barrel in 1996 from $19.64 per barrel in 1995. The increase in oil and natural gas production was due primarily to new wells being successfully drilled and completed during 1996, along with recompletions of existing wells. Also contributing to the increase in oil and gas revenues from 1995 to 1996 was the acquisition of the La Rosa properties. The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the years ended December 31, 1995 and 1996:
1996 PERIOD COMPARED DECEMBER 31, TO 1995 PERIOD ----------------------- ----------------------- 1995 1996 INCREASE % INCREASE ---- ---- ---------- ---------- Production volumes Oil and condensate (MBbls)......... 77.6 107.3 29.7 38% Natural gas (MMcf)................. 565.3 1,272.5 707.2 125% Average sales prices(1) Oil and condensate (per Bbl)....... $ 19.64 $ 21.54 $ 1.90 10% Natural gas (per Mcf).............. 1.60 2.27 0.67 42% Operating revenues Oil and condensate................. $1,524,002 $2,310,798 $ 786,796 52% Natural gas........................ 904,046 2,883,911 1,979,865 219% ---------- ---------- ---------- Total...................... $2,428,048 $5,194,709 $2,766,661 114% ========== ========== ==========
- --------------- (1) Including impact of hedging. Oil and natural gas operating expenses for 1996 increased 31% to $2.4 million from $1.8 million in 1995. Oil and natural gas operating expenses increased due to increased production generated from new oil and gas wells drilled and completed since December 31, 1995, as well as the acquisitions of the La Rosa and Encinitas properties. Operating expenses per equivalent unit in 1996 decreased to $1.24 per Mcfe from $1.76 per Mcfe in 1995. The per unit cost decreased as a result of increased production of natural gas which had lower per unit operating costs. DD&A expense for 1996 increased 133% to $1.1 million from $488,000 in 1995. This increase was due to the increase in oil and gas production as well as a 25% increase in the depletion rate (to $0.59 per Mcfe in 1996 from $0.47 per Mcfe in 1995). The increased depletion rate was primarily caused by increased exploration expenditures attributable to 3-D seismic surveys performed for new wells drilled and completed since December 31, 1995. General and administrative expense for 1996 increased 21% to $515,000 from $425,000 for 1995 due primarily to an increase in salary expense as a result of the addition of new employees. Interest expense for 1996 decreased 59% to $80,000 from $192,000 in 1995. This decrease was primarily due to the increase in interest capitalized consistent with increases in capital expenditures. Net income for 1996 increased to $1.1 million from a loss of $467,000 in 1995 as a result of the factors described above. 30 33 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity have included proceeds from the Offering and from the sale of shares of Preferred Stock and the Warrants as discussed below, funds generated by operations, equity capital contributions and borrowings, primarily under revolving credit facilities. Cash flows provided by operations (after changes in working capital) were $406,000, $3.3 million and $3.1 million for 1995, 1996 and 1997, respectively. The increase in cash flows provided by operations in 1996 as compared to 1995 was due primarily to increased revenues from production. The decrease in cash flows provided by operations in 1997 as compared to 1996 was due primarily to increase accounts receivable relating to joint interest billings and prepayments on upcoming outside operated drilling projects. The Company has budgeted capital expenditures in 1998 of approximately $43.3 million. Of this amount, $18.6 million is expected to be used to fund 3-D seismic surveys and land acquisitions and $24.7 million of which is expected to be used for drilling activities in the Company's project areas. The Company budgeted to drill approximately 150 gross wells (71.8 net) in 1998. Actual amounts of capital expenditures and number of wells drilled may differ significantly from such estimates. The Company has continued to reinvest a substantial portion of its cash flows into increasing its 3-D prospect portfolio, improving its 3-D seismic interpretation technology and funding its drilling program. Oil and gas capital expenditures were $6.6 million, $9.1 million and $32.0 million for 1995, 1996 and 1997, respectively. The Company's drilling efforts resulted in the successful completion of 18 gross wells (6.9 net) in 1996 and 46 gross wells (17.5 net) during 1997. The Company has experienced and expects to continue to experience substantial working capital requirements primarily due to the Company's active exploration and development programs and, to a much lesser extent, its technology enhancement programs. While the Company believes that the net proceeds from the Offering, net proceeds from the sale of shares of Preferred Stock and the Warrants, cash flow from operations and borrowings under the Company's credit facility should allow the Company to implement its present business strategy during 1998, additional financing may be required in the future to fund the Company's growth, development and exploration program and continued technological enhancement. In the event such capital resources are not available to the Company, its exploration and other activities may be curtailed. FINANCING ARRANGEMENTS In connection with the Offering, the Company entered into an amended revolving credit agreement with Compass Bank (the "Company Credit Facility"), which provides for a maximum loan amount of $25 million, subject to borrowing base limitations. Prior to the Offering, the Company utilized various credit facilities as well as borrowings from certain directors and officers of the Company. Except for the Company Credit Facility, all of these facilities and borrowings were terminated with the close of the Offering. Under the Company Credit Facility, the principal outstanding is due and payable upon maturity in June 1999 with interest due monthly. The interest rate for borrowings is calculated at a floating rate based on the Compass index rate or LIBOR plus 2 percent. The Company's obligations are secured by certain of its oil and gas properties and cash or cash equivalents included in the borrowing base. Under the Company Credit Facility, Compass, in its sole discretion, will make semiannual borrowing base determinations based upon the proved oil and natural gas properties of the Company. Compass may redetermine the borrowing base and the monthly borrowing base reduction at any time and from time to time. The Company may also request borrowing base redeterminations in addition to its required semiannual reviews at the Company's cost. As of December 31, 1997, the borrowing base was $5,450,000 and borrowings outstanding were $4,950,000. Amounts outstanding under this facility were repaid in the first quarter of 1998. The Company is subject to certain covenants under the terms of the Company Credit Facility, including, but not limited to, (a) maintenance of specified tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net income plus depreciation and other noncash charges, less noncash income) to quarterly debt service (payments made for principal in connection with the credit facility plus payments made for principal 31 34 other than in connection with such credit facility) of no less than 1.25 to 1.00. The Company Credit Facility also places restrictions on, among other things, (a) incurring additional indebtedness, loans and liens, (b) changing the nature of business or business structure, (c) selling assets and (d) paying dividends. In December 1997, the Company and Compass entered into an amendment to the Company Credit Facility that provides for a term loan of $3 million. Interest for borrowings under the term loan was calculated at a floating rate based on the Company's index rate plus 2 percent. The amount outstanding under the term loan as of December 31, 1997 was $3 million. Amounts outstanding under the term loan were repaid in January 1998. In January 1998, the Company consummated the sale of 300,000 shares of Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to affiliates of Enron Corp. The net proceeds received by the Company from this transaction were approximately $28.8 million. A portion of the proceeds were used to repay indebtedness, as described above. The remaining balance is expected to be used primarily for oil and natural gas exploration and development activities in Texas and Louisiana. The Preferred Stock provides for annual cumulative dividends of $9.00 per share, payable quarterly in cash or, at the option of the Company until January 15, 2002, in additional shares of Preferred Stock. The Preferred Stock is required to be redeemed by the Company (i) on January 8, 2005, or (ii) after a request for redemption from the holders of at least 30,000 shares of the Preferred Stock (or, if fewer than such number of shares of Preferred Stock are outstanding, all of the outstanding shares of Preferred Stock) and the occurrence of the following events: (a) the Company has failed at any point in time to declare and pay any two dividends in the amount then due and payable on or before the date the second of such dividends is due and such dividends remain unpaid at such time, (b) the Company breaches certain other covenants concerning the payment of dividends or other distributions on or redemption or acquisition of shares of its capital stock ranking at parity with or junior to the Preferred Stock, (c) for two consecutive fiscal quarterly periods the quarterly Cash Flow (as defined below) of the Company is less than the amount of the dividends accrued in respect to the Preferred Stock, (d) the Company fails to pay certain amounts due on indebtedness for borrowed money or there has otherwise been an acceleration of such indebtedness for borrowed money, (e) there is a violation of the Shareholders' Agreement that is not waived or (f) the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its property and assets which transaction does not provide for the redemption of the Series A Preferred Stock. "Cash Flow" means net income prior to preferred dividends and accretion (i) plus (to the extent included in net income prior to preferred dividends and accretion) depreciation, depletion and amortization and other non-cash charges and losses on the sale of property (ii) minus non-cash income items and required principal payments on indebtedness for borrowed money with a maturity from the original date of incurrence of such indebtedness of six months or greater (excluding voluntary prepayments and refinancings, but including prepayments (other than in connection with refinancings) which would otherwise be due under such indebtedness within a 60-day period following the date of such prepayment). The Preferred Stock also may be redeemed at the option of the Company at any time in whole or in part. All redemptions are at a price per share, together with dividends accumulated and unpaid to the date of redemption, decreasing over time from an initial rate of $104.50 per share to $100.00 per share. A description of the Preferred Stock and the transactions relating to the Purchase Agreement may be found in the Company's Current Report on Form 8-K dated January 8, 1998. EFFECTS OF INFLATION AND CHANGES IN PRICE. The Company's results of operations and cash flows are affected by changing oil and gas prices. If the price of oil and gas increases (decreases), there could be a corresponding increase (decrease) in the operating cost that the Company is required to bear for operations, as well as an increase (decrease) in revenues. Inflation has had a minimal effect on the Company. 32 35 ABILITY TO MANAGE GROWTH AND ACHIEVE BUSINESS STRATEGY The Company's rapid growth has placed, and is expected to continue to place, a significant strain on the Company's financial, technical, operational and administrative resources. The Company has relied in the past and expects to continue to rely on project partners and independent contractors that have provided the Company with seismic survey planning and management, project and prospect generation, land acquisition, drilling and other services. At December 31, 1997, the Company had 22 full-time employees. As the Company increases the number of projects it is evaluating or in which it is participating, there will be additional demands on the Company's financial, technical, operational and administrative resources and continued reliance by the Company on project partners and independent contractors, and these strains on resources, additional demands and continued reliance may negatively affect the Company. The Company's ability to continue its growth will depend upon a number of factors, including its ability to obtain leases or options on properties for 3-D seismic surveys, its ability to acquire additional 3-D seismic data, its ability to identify and acquire new exploratory sites, its ability to develop existing sites, its ability to continue to retain and attract skilled personnel, its ability to maintain or enter into new relationships with project partners and independent contractors, the results of its drilling program, hydrocarbon prices, access to capital and other factors. Although the Company intends to continue to upgrade its technical, operational and administrative resources and to increase its ability to provide internally certain of the services previously provided by outside sources, there can be no assurance that it will be successful in doing so or that it will be able to continue to maintain or enter into new relationships with project partners and independent contractors. The failure of the Company to continue to upgrade its technical, operational and administrative resources or the occurrence of unexpected expansion difficulties, including difficulties in recruiting and retaining sufficient numbers of qualified personnel to enable the Company to expand its seismic data acquisition and drilling program, or the reduced availability of project partners and independent contractors that have historically provided the Company seismic survey planning and management, project and prospect generation, land acquisition, drilling and other services, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has only limited experience operating and managing field operations, and there can be no assurances that the Company will be successful in doing so. Any increase in the Company's activities as an operator will increase its exposure to operating hazards. See "Business and Properties -- Operating Hazards and Insurance." There can be no assurance that the Company will be successful in achieving growth or any other aspect of its business strategy. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, which is a new standard of accounting for stock-based compensation that establishes a fair value method of accounting for awards granted after December 31, 1995, under stock compensation plans. SFAS No. 123 encourages, but does not require, companies to adopt the fair value method of accounting in place of the existing method of accounting for stock-based compensation, whereupon compensation costs are recognized only in situations where stock compensation plans award intrinsic value to recipients at the date of grant. The Company has elected not to adopt the fair value accounting of SFAS No. 123 and will account for any plans under Accounting Principles Board (APB) Opinion No. 25, under which no compensation costs have been recognized. VOLATILITY OF OIL AND NATURAL GAS PRICES The Company's revenues, future rate of growth, results of operations, financial condition and ability to borrow funds or obtain additional capital, as well as the carrying value of its properties, are substantially dependent upon prevailing prices of oil and natural gas. Historically, the markets for oil and natural gas have been volatile, and such markets are likely to continue to be volatile in the future. Prices for oil and natural gas are subject to wide fluctuation in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond the control of the Company. These factors include the level of consumer product demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels, political conditions in the Middle East, 33 36 the foreign supply of oil and natural gas, the price of foreign imports and overall economic conditions. It is impossible to predict future oil and natural gas price movements with certainty. Declines in oil and natural gas prices may materially adversely affect the Company's financial condition, liquidity, ability to finance planned capital expenditures and results of operations. Lower oil and natural gas prices also may reduce the amount of oil and natural gas that the Company can produce economically. See "Business and Properties -- Marketing." The Company periodically reviews the carrying value of its oil and natural gas properties under the full cost accounting rules of the Commission. Under these rules, capitalized costs of proved oil and natural gas properties may not exceed the present value of estimated future net revenues from proved reserves, discounted at 10%. Application of this "ceiling" test generally requires pricing future revenue at the unescalated prices in effect as of the end of each fiscal quarter and requires a write-down for accounting purposes if the ceiling is exceeded, even if prices were depressed for only a short period of time. The Company may be required to write down the carrying value of its oil and natural gas properties when oil and natural gas prices are depressed or unusually volatile. If a write-down is required, it would result in a charge to earnings, but would not impact cash flow from operating activities. Once incurred, a write-down of oil and natural gas properties is not reversible at a later date. In order to reduce its exposure to short-term fluctuations in the price of oil and natural gas, the Company periodically enters into hedging arrangements. The Company's hedging arrangements apply to only a portion of its production and provide only partial price protection against declines in oil and natural gas prices. Such hedging arrangements may expose the Company to risk of financial loss in certain circumstances, including instances where production is less than expected, the Company's customers fail to purchase contracted quantities of oil or natural gas or a sudden, unexpected event materially impacts oil or natural gas prices. In addition, the Company's hedging arrangements limit the benefit to the Company of increases in the price of oil and natural gas. Total natural gas purchased and sold under swap arrangements during the years ended December 31, 1995, 1996 and 1997 was 40,000 MMBtu, 60,000 MMBtu and 210,000 MMBtu, respectively. Income and (losses) realized by the Company under such swap arrangements were ($23,466), ($26,887) and $48,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The Company did not engage in hedging prior to 1995. See "Business and Properties -- Marketing." YEAR 2000 The Company is assessing the impact of the Year 2000 issue on its operations, including the development and implementation of project plans and cost estimates required to make its information systems infrastructure Year 2000 complaint. Based on existing information, the Company believes that anticipated spending necessary to become Year 2000 compliant will not have a material effect on the financial position, cash flows or results of operations of the Company, nor will the Year 2000 issues cause any material adverse effect on the future business operations of the Company. There can be no assurance, however, as to the ultimate effect of the Year 2000 issue on the Company. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The requirements of Item 7A under regulations of the Securities and Exchange Commission are at this time not required or are not applicable and therefore have been omitted. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is included elsewhere in this report. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 34 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to information under the caption "Proposal 1 -- Election of Directors" and to the information under the caption "Section 16(a) Reporting Delinquencies" in the Company's definitive Proxy Statement (the "1998 Proxy Statement") for its annual meeting of shareholders to be held on May 20, 1998. The 1998 Proxy Statement will be filed with the Securities and Exchange Commission (the "Commission") not later than 120 days subsequent to December 31, 1997. Pursuant to Item 401(b) of Regulation S-K, the information required by this item with respect to executive officers of the Company is set forth in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the 1998 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the 1998 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The information required by this item is incorporated herein by reference to the 1998 Proxy Statement, which will be filed with the Commission not later than 120 days subsequent to December 31, 1997. 35 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS THE RESPONSE TO THIS ITEM IS SUBMITTED IN A SEPARATE SECTION OF THIS REPORT. (A)(2) FINANCIAL STATEMENT SCHEDULES All schedules and other statements for which provision is made in the applicable regulations of the Commission have been omitted because they are not required under the relevant instructions or are inapplicable. (A)(3) EXHIBITS +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997 (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). 3.1 -- Amended and Restated Articles of Incorporation of the Company. 3.2 -- Statement of Resolution Establishing Series of Shares designated 9% Series A Preferred Stock. +3.3 -- Amended and Restated Bylaws of the Company, as amended by Amendment No. 1 (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A (Registration No. 000-22915). +4.1 -- First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank dated August 28, 1997 (Incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 4.2 -- First Amendment to First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank dated December 23, 1997. 4.3 -- Second Amendment to First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank dated December 30, 1997. -- The Company is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, the Company agrees to furnish a copy of such instruments to the Commission upon request. +10.1 -- Incentive Plan of the Company (Incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.2 -- Employment Agreement between the Company and S.P. Johnson IV (Incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.3 -- Employment Agreement between the Company and Frank A. Wojtek (Incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.4 -- Employment Agreement between the Company and Kendall A. Trahan (Incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)).
36 39 +10.5 -- Employment Agreement between the Company and George Canjar (Incorporated herein by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). 10.6 -- Indemnification Agreement between the Company and each of its directors and executive officers. +10.7 -- Registration Rights Agreement by and among the Company, Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997 (Incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.8 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among the Company and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek (Incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.9 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among Carrizo Production, Inc. and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek (Incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.10 -- Stock Purchase Agreement dated January 8, 1998 among the Company, Enron Capital & Trade Resources Corp. and Joint Energy Development Investments II Limited Partnership. (Incorporated herein by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated January 8, 1998). +10.11 -- Warrant Certificates (Incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated January 8, 1998.) +10.12 -- Shareholders' Agreement dated January 8, 1998 among the Company, S.P. Johnson IV, Frank A. Wojtek, Steven A. Webster, Paul B. Loyd, Jr., Douglas A.P. Hamilton, DAPHAM Partnership, L.P., The Douglas A.P. Hamilton 1997 GRAT, Enron Capital & Trade Resources Corp. and Joint Energy Development Investments II Limited Partnership. (Incorporated herein by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated January 8, 1998). +10.13 -- Form of Amendment to Executive Officer Employment Agreement. (Incorporated herein by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated January 8, 1998). 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Ryder Scott Company Petroleum Engineers. 23.3 -- Consent of Fairchild, Ancell & Wells, Inc. 27.1 -- Financial Data Schedule. 99.1 -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers as of December 31, 1997. 99.2 -- Summary of Reserve Report of Fairchild, Ancell & Wells, Inc. as of December 31, 1997.
- --------------- + Incorporated by reference as indicated. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the last quarter of the period covered by this Annual Report on Form 10-K. 37 40 CARRIZO OIL & GAS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Carrizo Oil & Gas, Inc. -- Report of Independent Public Accountants.................. F-2 Balance Sheets, December 31, 1996 and 1997................ F-3 Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997.................................... F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997....................... F-5 Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997.................................... F-6 Notes to Financial Statements............................. F-7
F-1 41 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Carrizo Oil & Gas, Inc.: We have audited the accompanying balance sheets of Carrizo Oil & Gas, Inc. (a Texas corporation) as of December 31, 1996 and 1997, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and 1997, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 6, 1998 F-2 42 CARRIZO OIL & GAS, INC BALANCE SHEETS
AS OF DECEMBER 31, -------------------------- 1996 1997 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 1,492,603 $ 2,674,837 Accounts receivable, trade................................ 1,654,032 1,794,175 Accounts receivable, joint interest owners................ 82,296 1,841,329 Accounts receivable from related parties.................. 79,578 -- Advances to operators..................................... -- 1,817,990 Other current assets...................................... 15,472 108,633 ----------- ----------- Total current assets.............................. 3,323,981 8,236,964 PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and gas properties)............................... 15,205,587 45,082,833 OTHER ASSETS................................................ 339,789 338,638 ----------- ----------- $18,869,357 $53,658,435 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, trade................................... $ 4,326,299 $10,433,479 Other current liabilities................................. 22,976 79,328 ----------- ----------- Total current liabilities......................... 4,349,275 10,512,807 NOTES PAYABLE TO RELATED PARTIES............................ 2,773,935 -- LONG-TERM DEBT.............................................. 6,910,000 7,950,000 DEFERRED INCOME TAXES....................................... -- 2,300,267 OTHER LONG-TERM LIABILITIES................................. 240,197 -- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value (10,000,000 shares authorized with none issued and outstanding)........... -- -- Common stock, $0.01 par value (40,000,000 shares authorized with 7,500,000 and 10,375,000 issued and outstanding at December 31, 1996 and 1997, respectively).......................................... 75,000 103,750 Additional paid-in capital................................ 4,186,000 32,845,727 Retained earnings......................................... 334,950 365,690 Deferred compensation..................................... -- (419,806) ----------- ----------- 4,595,950 32,895,361 ----------- ----------- $18,869,357 $53,658,435 =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 43 CARRIZO OIL & GAS, INC. STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1996 1997 ---------- ---------- ---------- OIL AND NATURAL GAS REVENUES............................ $2,428,048 $5,194,709 $8,711,654 COSTS AND EXPENSES: Oil and natural gas operating expenses (exclusive of depreciation shown separately below)............... 1,813,406 2,384,145 2,334,009 Depreciation, depletion and Amortization.............. 487,949 1,135,797 2,358,256 General and administrative............................ 425,198 514,644 1,590,358 ---------- ---------- ---------- Total costs and Expenses...................... 2,726,553 4,034,586 6,282,623 ---------- ---------- ---------- OPERATING INCOME (LOSS)................................. (298,505) 1,160,123 2,429,031 OTHER INCOME AND EXPENSES: Interest income....................................... -- -- 53,417 Interest expense...................................... (274,585) (312,409) (713,999) Interest expense, related parties..................... (35,059) (189,881) (137,067) Capitalized interest.................................. 117,288 422,493 699,625 Other income.......................................... 24,251 19,525 -- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES....................... (466,610) 1,099,851 2,331,007 INCOME TAXES............................................ -- -- 2,300,267 ---------- ---------- ---------- NET INCOME (LOSS)....................................... $ (466,610) $1,099,851 $ 30,740 ========== ========== ========== BASIC EARNINGS (LOSS) PER SHARE (Note 2)................ $ (0.07) $ 0.15 $ 0.00 ========== ========== ========== DILUTED EARNINGS (LOSS) PER SHARE (Note 2).............. $ (0.07) $ 0.15 $ 0.00 ========== ========== ========== BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (Note 2).................................. 7,020,951 7,475,650 8,638,699 ========== ========== ========== DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (Note 2).................................. 7,020,951 7,545,063 8,809,572 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-4 44 CARRIZO OIL & GAS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 1 AND 2)
COMMON STOCK ADDITIONAL RETAINED TOTAL --------------------- PAID-IN EARNINGS DEFERRED STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION EQUITY ---------- -------- ----------- ---------- ------------ -------------- BALANCE, January 1, 1995......... 6,590,601 $ 65,906 $ 684,094 $ (298,291) $ -- $ 451,709 Net loss....................... -- -- -- (466,610) -- (466,610) Distributions.................. -- -- (104,000) -- -- (104,000) Common stock issued to unitholders.................. 860,699 8,607 3,491,393 -- -- 3,500,000 ---------- -------- ----------- ---------- --------- ----------- BALANCE, December 31, 1995....... 7,451,300 74,513 4,071,487 (764,901) -- 3,381,099 Net income..................... -- -- -- 1,099,851 -- 1,099,851 Distributions.................. -- -- (335,000) -- -- (335,000) Common stock issued to unitholders.................. 48,700 487 449,513 -- -- 450,000 ---------- -------- ----------- ---------- --------- ----------- BALANCE, December 31, 1996....... 7,500,000 75,000 4,186,000 334,950 -- 4,595,950 Net income..................... -- -- -- 30,740 -- 30,740 Distributions.................. -- -- (90,000) -- -- (90,000) Public offering................ 2,875,000 28,750 28,050,049 -- -- 28,078,799 Deferred compensation related to certain stock options..... -- -- 699,678 -- (699,678) -- Amortization of deferred compensation................. -- -- -- -- 279,872 279,872 ---------- -------- ----------- ---------- --------- ----------- BALANCE, December 31, 1997....... 10,375,000 $103,750 $32,845,727 $ 365,690 $(419,806) $32,895,361 ========== ======== =========== ========== ========= ===========
The accompanying notes are an integral part of these financial statements. F-5 45 CARRIZO OIL & GAS, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1996 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................. $ (466,610) $ 1,099,851 $ 30,740 Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation, depletion and amortization....... 487,949 1,135,797 2,358,256 Deferred income taxes.......................... -- -- 2,300,267 Changes in assets and liabilities -- Accounts receivable............................ (245,365) (1,457,950) (1,819,598) Other current assets........................... (9,433) 322 (93,161) Accounts payable, trade........................ 518,166 2,422,257 475,268 Interest payable to related parties and other current liabilities.......................... 120,946 125,164 (183,845) ----------- ----------- ----------- Net cash provided by operating activities.............................. 405,653 3,325,441 3,067,927 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures -- accrual basis............. (6,857,057) (9,479,561) (32,234,351) Adjustment to cash basis.......................... 71,664 1,258,132 5,911,784 Advances to operators............................. -- -- (1,817,990) ----------- ----------- ----------- Net cash used in investing activities..... (6,785,393) (8,221,429) (28,140,557) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of stock................... -- -- 28,078,799 Proceeds from debt issuance....................... 2,083,684 6,910,000 18,544,454 Debt repayments................................... -- (2,083,684) (20,408,934) Proceeds from related party notes payable......... 863,696 1,377,739 130,545 Capital contributions............................. 3,500,000 450,000 -- Capital distributions............................. (104,000) (335,000) (90,000) ----------- ----------- ----------- Net cash provided by financing activities.............................. 6,343,380 6,319,055 26,254,864 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... (36,360) 1,423,067 1,182,234 CASH AND CASH EQUIVALENTS, beginning of year.............................................. 105,896 69,536 1,492,603 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year.............. $ 69,536 $ 1,492,603 $ 2,674,837 =========== =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest (net of amounts capitalized)................................... $ 122,471 $ -- $ 151,441
The accompanying notes are an integral part of these financial statements. F-6 46 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS, COMBINATION AND OFFERING: NATURE OF OPERATIONS Carrizo Oil & Gas, Inc. (Carrizo, a Texas corporation; together with its affiliates and predecessors, the Company) is an independent energy company engaged in the exploration, development, exploitation and production of oil and natural gas. It's operations are focused on Texas and Louisiana Gulf Coast trends, primarily the Frio, Wilcox and Vicksburg trends. The Company has acquired or is in the process of acquiring 1,170 square miles of 3-D seismic data. Additionally, the Company has assembled approximately 419,953 gross acres under lease or option. THE COMBINATION Carrizo was formed in 1993 and is the surviving entity after a series of combination transactions (the Combination). The Combination included the following transactions: (a) Carrizo Production, Inc. (a Texas corporation and an affiliated entity with ownership identical to Carrizo) was merged into Carrizo and the outstanding shares of capital stock of Carrizo Production, Inc. were exchanged for an aggregate of 343,000 shares of common stock of Carrizo (the Common Stock); (b) Carrizo acquired Encinitas Partners Ltd. (a Texas limited partnership of which Carrizo Production, Inc. served as the general partner) as follows: Carrizo acquired from the shareholders who serve as directors of Carrizo (the Founders) their limited partner interests in Encinitas Partners Ltd. for an aggregate consideration of 468,533 shares of Common Stock and, on the same date, Encinitas Partners Ltd. was merged into Carrizo and the outstanding limited partner interests in Encinitas Partners Ltd. were exchanged for an aggregate of 860,699 shares of Common Stock; (c) La Rosa Partners Ltd. (a Texas limited partnership of which Carrizo served as the general partner) was merged into Carrizo and the outstanding limited partner interests in La Rosa Partners Ltd. were exchanged for an aggregate of 48,700 shares of Common Stock; and (d) Carrizo Partners Ltd. (a Texas limited partnership of which Carrizo served as the general partner) was merged into Carrizo and the outstanding limited partner interests in Carrizo Partners Ltd. were exchanged for an aggregate of 569,068 shares of Common Stock. The Combination was accounted for as a reorganization of entities as prescribed by Securities and Exchange Commission (SEC) Staff Accounting Bulletin 47 because of the high degree of common ownership among, and the common control of, the combining entities. Accordingly, the accompanying financial statements have been prepared using the historical costs and results of operations of the affiliated entities. There were no significant differences in accounting methods or their application among the combining entities. All intercompany balances have been eliminated. Certain reclassifications have been made to prior period amounts to conform to the current period's financial statement presentation. INITIAL PUBLIC OFFERING Simultaneous with the Combination, the Company completed its initial public offering (the Offering) of 2,875,000 shares of its common stock at a public offering price of $11.00 per share. The Offering provided the Company with proceeds of approximately $28.1 million, net of expenses. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: OIL AND NATURAL GAS PROPERTIES Investments in oil and natural gas properties are accounted for using the full-cost method of accounting. All costs directly associated with the acquisition, exploration and development of oil and natural gas properties are capitalized. Such costs include lease acquisitions, seismic surveys, and drilling and completion equipment. No general and administrative costs were capitalized in 1995 or 1996. During the year ended December 31, 1997, the Company capitalized as oil and natural gas properties $279,872 of deferred compensation related to stock options granted to personnel directly associated with exploration activities (See Note 7). F-7 47 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Oil and natural gas properties are amortized based on the unit-of-production method using estimates of proved reserve quantities. Investments in unproved properties are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. Unevaluated properties are evaluated quarterly for impairment on a property-by-property basis. If the results of an assessment indicate that the properties are impaired, the amount of impairment is added to the proved oil and natural gas property costs to be amortized. The amortizable base includes estimated future development costs and, where significant, dismantlement, restoration and abandonment costs, net of estimated salvage values. The depletion rate per thousand cubic feet equivalent (Mcfe) for 1995, 1996, 1997, was $0.47, $0.59, and $0.69, respectively. Dispositions of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves. The net capitalized costs of proved oil and gas properties are subject to a "ceiling test," which limits such costs to the estimated present value, discounted at a 10 percent interest rate, of future net cash flows from proved reserves, based on current economic and operating conditions. If net capitalized costs exceed this limit, the excess is charged to operations through depreciation, depletion and amortization. No write-down of the Company's oil and natural gas assets was necessary in 1995, 1996 or 1997. Depreciation of other property and equipment is provided using the straight-line method based on estimated useful lives ranging from five to 10 years. FINANCING COSTS Offering costs of $11,992 through December 31, 1997 have been deferred and are anticipated to be applied against Preferred Stock offering proceeds (see Note 9). Long-term debt financing costs of $47,194 and $226,247 as of December 31, 1996 and 1997, respectively, are capitalized as deferred assets and are being amortized over the term of the loans. STATEMENTS OF CASH FLOWS For statement of cash flow purposes, all highly liquid investments with original maturities of three months or less are considered to be cash equivalents. FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, receivables, payables and long-term debt. The carrying amount of cash, receivables and payables approximates fair value because of the short-term nature of these items. The carrying amount of long-term debt approximates fair value as the individual borrowings bear interest at floating market interest rates. HEDGING ACTIVITIES The Company periodically enters into hedging arrangements to manage price risks related to oil and natural gas sales and not for speculative purposes. The Company's hedging arrangements apply only to a portion of its anticipated production, provide only partial price protection against declines in oil and natural gas prices and limit potential gains from future increases in prices. For financial reporting purposes, gains and losses related to hedging are recognized as income when the hedged transaction occurs. Historically, gains and losses from hedging activities have not been material. Total oil and natural gas quantities hedged in 1995, 1996 and 1997 were 9,000 Bbls, 3,000 Bbls and 0 Bbls, respectively, and 40,000 MMBtu, 60,000 MMBtu, and 210,000 MMBtu, respectively. At December 31, 1997, the Company had 364,000 MMBtu of outstanding hedged positions (at an average price of $2.86 per MMBtu for first quarter 1998 production.) These instruments had a fair value market of $250,000 as of December 31, 1997. F-8 48 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES Through May 15, 1997, Carrizo and its affiliated entities either had elected to be treated as S Corporations under the Internal Revenue Code or were otherwise not taxed as entities for federal income tax purposes. The taxable income or loss was therefore allocated to the equity owners of Carrizo and the affiliated entities. Accordingly, no provision was made for income taxes in the accompanying historical financial statements for the years ended December 31, 1995 and 1996. On May 16, 1997, Carrizo terminated its status as an S corporation and thereafter became subject to federal income taxes. The Company, beginning with the termination of its tax exempt status, provides income taxes for the difference in the tax and financial reporting bases of its assets and liabilities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The termination of its tax exempt status in 1997 required the Company to establish a deferred tax liability, which resulted in a one-time noncash charge to income in 1997 of $1,623,000. The Company has entered into tax indemnification agreements with the founders of the Company pertaining to periods in which the Company was an S Corporation. Had Carrizo been a taxpaying entity prior to May 17, 1997, its net income and earnings per share would have been as follows:
PRO FORMA ------------------------ 1996 1997 ---------- ---------- (UNAUDITED) Net income (after unaudited pro forma income taxes of $395,946 and $816,852 in 1996 and 1997, respectively...... $ 703,905 $1,514,155 ========== ========== Basic and diluted earnings per share........................ $ 0.09 $ 0.17 ========== ========== Weighted average diluted number of common shares outstanding............................................... 7,545,063 8,809,572 ========== ==========
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates include depreciation, depletion and amortization of proved oil and natural gas properties. Oil and natural gas reserve estimates, which are the basis for unit-of-production depletion and the ceiling test, are inherently imprecise and are expected to change as future information becomes available. CONCENTRATION OF CREDIT RISK Substantially all of the Company's accounts receivable result from oil and natural gas sales or joint interest billings to third parties in the oil and natural gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk in that these entities may be similarly affected by changes in economic and other conditions. Historically, the Company has not experienced credit losses on such receivables. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128 "Earnings Per Share." The Company adopted this standard effective December 15, 1997. As a result of the simple nature of the Company's capital structure, this adoption had no impact on the calculation of earnings per share. F-9 49 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Basic earnings per share represents the amount of earnings available to each share of common stock outstanding during the period. Diluted earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the period plus each share that would have been outstanding assuming the issuance of common shares for all potentially dilutive common shares outstanding during the period. For Carrizo, the difference between basic and diluted earnings per share for all periods is stock options. For certain periods in 1997, the Company had outstanding 250,000 stock options which were antidilutive or have not been included in the calculation as the exercise price exceeded the market value. Historical earnings per share for the years 1995 and 1996 reflect the effects of the Company's stock split and the issuance of shares in the Combination, applied retroactively to the date that the corresponding partnership units were issued. 3. PROPERTY AND EQUIPMENT: At December 31, 1996 and 1997, property and equipment consisted of the following:
DECEMBER 31, -------------------------- 1996 1997 ----------- ----------- Proved oil and natural gas properties..................... $ 9,217,027 $26,994,076 Unproved oil and natural gas properties................... 7,455,698 21,678,368 Other equipment........................................... 62,073 225,069 ----------- ----------- Total property and equipment.................... 16,734,798 48,897,513 Accumulated depreciation, depletion and amortization...... (1,529,211) (3,814,680) ----------- ----------- Property and equipment, net............................... $15,205,587 $45,082,833 =========== ===========
Oil and natural gas properties not subject to amortization consist of the cost of undeveloped leaseholds, undesignated seismic costs, exploratory wells in progress, and secondary recovery projects before the assignment of proved reserves. These costs are reviewed periodically by management for impairment, with the impairment provision included in the cost of oil and natural gas properties subject to amortization. Factors considered by management in its impairment assessment include drilling results by the Company and other operators, the terms of oil and natural gas leases not held by production, production response to secondary recovery activities and available funds for exploration and development. Of the $21,678,368 of unproved property costs at December 31, 1997 being excluded from the amortizable base, $1,421,642, $2,269,807 and $17,986,919 were incurred in 1995, 1996 and 1997, respectively. The Company expects it will complete its evaluation of the properties representing the majority of these costs within the next three years. 4. INCOME TAXES Actual income tax expense differs from income tax expense computed by applying the U. S. federal statutory corporate rate of 35 percent to pretax income as follows:
YEAR ENDED DECEMBER 31, 1997 ------------ Provision at the statutory tax rate......................... $ 816,852 Increase resulting from election to forgo tax exempt status.................................................... 1,483,415 ---------- $2,300,267 ==========
F-10 50 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Deferred income tax assets and liabilities result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. At December 31, 1997, the tax effects of these temporary differences, resulted principally from the following:
DECEMBER 31, 1997 ------------ Deferred income tax asset: Statutory depletion carryforward.......................... $ 78,159 Deferred income tax liabilities: Intangible drilling costs................................. 1,944,634 Capitalized interest...................................... 433,792 ---------- 2,378,426 ---------- Deferred income tax liability..................... $2,300,267 ==========
5. LONG-TERM DEBT: At December 31, 1996 and 1997, notes payable and long-term debt consisted of the following:
DECEMBER 31, ------------------------ 1996 1997 ---------- ---------- Notes payable to shareholders (due April, 1998)............. $2,773,935 $ -- Bridge Loan payable to Compass Bank......................... -- 3,000,000 $10 million revolving credit facility (due June 1, 1998).... 2,910,000 -- $25 million revolving credit facility (due June 1, 1999).... 4,000,000 4,950,000 ---------- ---------- $9,683,935 $7,950,000 ========== ==========
In June 1996, the Company entered into a $10 million revolving credit facility with Compass Bank (the Encinitas Facility). Proceeds from this facility were used to pay off an existing loan from Texas Commerce Bank (TCB) as well as fund exploration and development activities. The facility was subject to a borrowing base calculation and had a commitment of $3,350,000 with $2,910,000 outstanding at December 31, 1996. The facility was also available for letters of credit, one of which was issued for $224,000. The Encinitas Facility was repaid with proceeds from the Offering. In December 1996, Carrizo entered into a separate $25 million revolving credit facility with Compass Bank, which was subject to a borrowing base determination, and total commitment was $6 million at December 31, 1996. Interest on this facility was the prime rate as defined by Compass Bank plus .75 percent, and the borrowings were due on June 1, 1998. In connection with the Offering, Carrizo amended the revolving credit facility with Compass Bank, (the "Company Credit Facility"), to provide for a maximum loan amount of $25 million, subject to borrowing base limitations. Under the Company Credit Facility, the principal outstanding was due and payable upon maturity in June 1999 with interest due monthly. The interest rate for borrowings is calculated at a floating rate based on the Compass index rate or LIBOR plus 2 percent. The Company's obligations are secured by certain of its oil and gas properties and cash and cash equivalents included in the borrowing base. Under the Company Credit Facility, Compass, in its sole discretion, will make semiannual borrowing base determinations based upon the proved oil and natural gas properties of the Company. Compass may redetermine the borrowing base and the monthly borrowing base reduction at any time and from time to time. The Company may also request borrowing base redeterminations in addition to its required semiannual reviews at the Company's cost. F-11 51 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Proceeds from this facility were used to provide working capital for exploration and development activity. Substantially all of Carrizo's oil and natural gas property and equipment was pledged as collateral under this facility. At December 31, 1996, and 1997, borrowings under this facility totaled $4,000,000 and $4,950,000, respectively, with an additional $2,000,000 and $276,000, respectively, available for future borrowings. The facility was also available for letters of credit, one of which had been issued for $224,000 at December 31, 1997. The weighted average interest rate for 1996 and 1997 on the Facility was 9 percent. The Company is subject to certain covenants under the terms of the Company Credit Facility, including but not limited to (a) maintenance of specified tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net income plus depreciation and other noncash expenses, less noncash net income) to quarterly debt service (payments made for principal in connection with each credit facility plus payments made for principal other than in connection with such credit facility) of no less than 1.25 to 1.00. The Company Credit Facility also place restrictions on, among other things, (a) incurring additional indebtedness, guaranties, loans and liens, (b) changing the nature of business or business structure, (c) selling assets and (d) paying dividends. In December 1997, the Company entered into a term loan facility with Compass Bank bearing interest at 10.5% and due June 1, 1998 (the Bridge Loan). Proceeds from the facility were used to fund continuing exploration activities until the Company had completed its Preferred Stock sale discussed in Note 9. At December 31, 1997, $3,000,000 was outstanding under the Bridge loan. The Bridge Loan was due the earlier of April 1998 or concurrent with the Preferred Stock sale. The Company had outstanding borrowings from certain shareholders totaling $2,773,935 at December 31, 1996. These loans bore interest at the TCB prime rate, and were repaid in August 1997 out of the proceeds of the Offering. Accrued interest on shareholder borrowings at December 31, 1996 was included in other long-term liabilities. All amounts outstanding under the Company's debt facilities were refinanced in January 1998 with the proceeds from the Preferred Stock sale. As a result, all debt at December 31, 1997 has been classified as long term. 6. COMMITMENTS AND CONTINGENCIES: From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the financial position or results of operations of the Company. At December 31, 1997, Carrizo was obligated under a noncancelable operating lease for office space. Rent expense for the years ended December 31, 1995, 1996 and 1997, was $7,600, $14,900 and $80,000, respectively. Following is a schedule of the remaining future minimum lease payments under this lease: 1998............................................. $ 108,700 1999............................................. $ 108,700 2000............................................. $ 54,350
7. STOCKHOLDERS' EQUITY: On June 4, 1997, the board of directors authorized a 521-for-1 split of the Company's stock and increased the number of authorized shares to 40 million shares of common stock and 10 million shares of preferred stock. All share amounts presented in these financial statements are presented on a retroactive, post-split basis. F-12 52 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) On July 19, 1996, and March 1, 1997, the Company entered into separate stock option agreements (the "Pre-IPO Options") with two executives of Carrizo whereby such employees were granted the option to purchase 138,825 shares and 83,295 shares of Carrizo common stock, respectively, at an exercise price of $3.60 per share. The options vest ratably through August 1, 1998, and March 1, 1999, respectively. The Company did not record any compensation expense related to the July, 1996 options because the related exercise price was at or above the estimated fair value of Carrizo's common stock at the time such options were granted. In connection with an initial public offering, the Company recorded deferred compensation related to the March 1997 stock option agreement as additional paid-in capital and an offsetting contra-equity account. This compensation accrual is based on the difference between the option price and the fair value of Carrizo's common stock when the options were granted (using an estimate of the initial public offering common stock price as an estimate of fair value). The deferred compensation is amortized in the period in which the options vest, which resulted in $279,972 being recorded in the year ended December 31, 1997. In June of 1997, the Company established the Incentive Plan of Carrizo Oil & Gas, Inc. ("the Incentive Plan"). The Company accounts for this plan under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost been determined consistent with SFAS No. 123 for all options, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1996 1997 ---------- --------- Net income (loss)..................... As reported $1,099,851 $ 30,740 Pro forma $1,038,490 $(193,722) Diluted net income (loss) per share... As reported $ 0.14 $ -- Pro forma $ 0.13 $ (.02)
The Company may grant options ("Incentive Plan Options") to purchase up to 1,000,000 shares under the Incentive Plan and has granted options on 250,000 shares through December 31, 1997. Under the Incentive Plan, the option exercise price equals the stock market price on the date of grant. Options granted under the plan vest ratably over three years and have a term of ten years. A summary of the status of the Company's stock options at December 31, 1996 and 1997 is presented in the table below:
1996 ------------------------------------------- WEIGHTED AVERAGE RANGE OF EXERCISE EXERCISE SHARES PRICES PRICES ------- ---------------- -------- Outstanding at beginning of year............. -- -- Granted (Pre-IPO Options).................... 138,825 $3.60 $0-3.60 ------- ----- Outstanding at end of year................... 138,825 $3.60 $0-3.60 ======= ===== Exercisable at end of year................... 46,275 Weighted average fair value per share of options granted during the year............ $ 2.21
F-13 53 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997 -------------------------------------- WEIGHTED AVERAGE RANGE OF EXERCISE EXERCISE SHARES PRICES PRICES ------- -------- ----------- Outstanding at beginning of year............... 138,825 $3.60 $ 0-3.60 Granted (Pre-IPO Options)...................... 83,295 $3.60 $ 0-3.60 Granted (Incentive Plan Options)............... 250,000 11.00 $ 0-11.00 ------- ----- Outstanding at end of year..................... 472,120 $7.52 $3.60-11.00 ======= ===== Exercisable at end of year..................... 120,315 Weighted average fair value per share of options granted during the year.............. $ 6.91
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in both 1996 and 1997: risk free interest rate of 6.82% and 6.26% respectively, expected dividend yield of 0%, expected life of 10 years and expected volatility of 30% and 39.4%, respectively. 8. RELATED-PARTY TRANSACTIONS: In August 1996, the Company entered into the Master Technical Services Agreement (the MTS Agreement) with Reading & Bates Development Co. (R&B), which is a subsidiary of R&B Falcon Corporation, a company that was created by the merger of Falcon Drilling Company, Inc. and Reading & Bates Corporation. Paul Loyd, a member of the board of the Company, was the chairman of the board, president, chief executive officer and a director of Reading & Bates Corporation. Under the MTS Agreement, certain employees of the Company provide engineering and technical services to R&B at market rates in connection with R&B's technical service, procurement and construction projects in offshore drilling and floating production. The Company billed $117,726 and $103,161 in service fees under this agreement in 1996 and 1997, respectively. The Company had an agreement with Loyd & Associates Inc., which is owned by Paul Loyd, a director of Carrizo, and Frank Wojtek, vice president, chief financial officer and a director of Carrizo, to provide certain financial consulting and administrative services at market rates to the Company. Payments were made monthly and total payments to Loyd & Associates Inc. for services rendered were $60,000, $60,000 and $38,113 in 1995, 1996 and 1997, respectively. These expenditures were included in general and administrative expenses for each year. This arrangement was terminated in August, 1997 concurrent with the Company's initial public offering. 9. SUBSEQUENT EVENT: SALES OF PREFERRED STOCK AND WARRANTS In January 1998, the Company consummated the sale of 300,000 shares of Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to affiliates of Enron Corp. The net proceeds received by the Company from this transaction were approximately $28.8 million. A portion of the proceeds were used to repay indebtedness, as described in Note 5, above. The remaining proceeds are expected to be used primarily for oil and natural gas exploration and development activities in Texas and Louisiana. The Preferred Stock provides for annual cumulative dividends of $9.00 per share, payable quarterly in cash or, at the option of the Company until January 15, 2002, in additional shares of Preferred Stock. The Warrants, which had a fair value at issuance of $0.30 per share, will be accreted through the term of the Preferred Stock. Had the F-14 54 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Preferred Stock sale been completed as of December 31, 1997, the Company's pro forma capitalization would have been as follows:
CAPITALIZATION AT DECEMBER 31, 1997 --------------------------- ACTUAL PRO FORMA ----------- ----------- Bridge Loan................................................. $ 3,000,000 $ -- Company Credit Facility..................................... 4,950,000 -- Mandatorily Redeemable Preferred Stock...................... -- 28,500,000 ----------- ----------- 7,950,000 28,500,000 Stockholders' Equity........................................ 32,895,000 33,195,000 ----------- ----------- Total Capitalization........................................ $40,845,000 $61,695,000 =========== ===========
The Preferred Stock is required to be redeemed by the Company (i) on January 8, 2005, or (ii) after a request for redemption from the holders of at least 30,000 shares of the Preferred Stock (or, if fewer than such number of shares of Preferred Stock are outstanding, all of the outstanding shares of Preferred Stock) and the occurrence of certain events. The Preferred Stock also may be redeemed at the option of the Company at any time in whole or in part. All redemptions are at a price per share, together with dividends accumulated and unpaid to the date of redemption, decreasing over time from an initial rate of $104.50 per share to $100 per share. The Warrants (i) enable the holders to purchase 1,000,000 shares of Common Stock at a price of $11.50 per share (payable in cash, by "cashless exercise" and certain other methods), subject to adjustments, (ii) expire after a seven-year term, and (iii) are exercisable after one year. 10. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED): The following disclosures provide unaudited information required by SFAS No. 69, "Disclosures About Oil and Gas Producing Activities." COSTS INCURRED Costs incurred in oil and natural gas property acquisition, exploration and development activities are summarized below:
YEAR ENDED DECEMBER 31 ------------------------------------- 1995 1996 1997 ---------- ---------- ----------- Property acquisition costs -- Unproved...................................... $ 316,820 $ 50,720 $ -- Proved........................................ 3,588,173 1,907,890 14,820,049 Exploration cost................................ 2,364,056 4,724,102 14,222,674 Development costs............................... 208,696 1,955,917 2,257,375 ---------- ---------- ----------- Total costs incurred(1)............... $6,477,745 $8,638,629 $31,300,098 ========== ========== ===========
- --------------- (1) Excludes capitalized interest on unproved properties of $117,288, $422,493 and $699,625 for the years ended December 31, 1995, 1996 and 1997, respectively. OIL AND NATURAL GAS RESERVES Proved reserves are estimated quantities of oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing F-15 55 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) economic and operating conditions. Proved developed reserves are proved reserves that can reasonably be expected to be recovered through existing wells with existing equipment and operating methods. Proved oil and natural gas reserve quantities at December 31, 1996 and 1997, and the related discounted future net cash flows before income taxes are based on estimates prepared by Ryder Scott Company and Fairchild, Ancell & Wells, Inc., independent petroleum engineers. Such estimates have been prepared in accordance with guidelines established by the Securities and Exchange Commission. Amounts at December 31, 1995, and for the periods then ended were rolled back from December 31, 1996, balances, ignoring the impact of revisions of estimates during those periods, if any. The Company's net ownership interests in estimated quantities of proved oil and natural gas reserves and changes in net proved reserves, all of which are located in the continental United States, are summarized below:
BARRELS OF OIL AND CONDENSATE AT DECEMBER 31, --------------------------------- 1995 1996 1997 --------- --------- --------- Proved developed and undeveloped reserves -- Beginning of year................................. 3,785,000 3,810,000 3,895,000 Purchases of oil and gas properties............... 103,000 12,000 -- Discoveries....................................... -- 180,000 285,000 Extensions........................................ -- -- 1,102,000 Production........................................ (78,000) (107,000) (112,500) --------- --------- --------- End of year......................................... 3,810,000 3,895,000 5,169,500 ========= ========= ========= Proved developed reserves at end of year............ 1,100,000 1,048,000 1,146,000 ========= ========= =========
THOUSANDS OF CUBIC FEET OF NATURAL GAS AT DECEMBER 31, ----------------------------------- 1995 1996 1997 --------- ---------- ---------- Proved developed and undeveloped reserves -- Beginning of year............................... 272,000 5,437,000 12,148,000 Purchases of oil and gas properties............. 5,730,000 338,000 7,696,000 Discoveries and extensions...................... -- 7,646,000 6,946,000 Revisions....................................... -- -- (7,190,000) Sales of oil and gas properties................. -- -- (4,709,000) Production...................................... (565,000) (1,273,000) (2,749,000) --------- ---------- ---------- End of year....................................... 5,437,000 12,148,000 12,142,000 ========= ========== ========== Proved developed reserves at end of year.......... 3,810,000 8,110,000 9,299,000 ========= ========== ==========
F-16 56 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STANDARDIZED MEASURE The standardized measure of discounted future net cash flows relating to the Company's ownership interests in proved oil and natural gas reserves as of year-end is shown below:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1996 1997 ----------- ------------ ------------ Future cash inflows......................... $77,739,000 $126,155,000 $103,842,000 Future oil and natural gas operating expenses.................................. 43,529,000 47,675,000 55,484,000 Future development costs.................... 7,918,000 9,375,000 13,230,000 Future income tax expenses.................. 7,163,000 19,864,000 6,870,000 ----------- ------------ ------------ Future net cash flows....................... 19,129,000 49,241,000 28,258,000 10% annual discount for estimating timing of cash flows................................ 7,148,000 16,220,000 7,285,000 ----------- ------------ ------------ Standardized measure of discounted future net cash flows............................ $11,981,000 $ 33,021,000 $ 20,973,000 =========== ============ ============
Future cash flows are computed by applying year-end prices of oil and natural gas to year-end quantities of proved oil and natural gas reserves. Prices used in computing year end 1996 and 1997 future cash flows were $20.88 and $16.37 for oil, respectively and $3.69 and $2.56 for natural gas, respectively. Such prices declined significantly in the first quarter of 1998. The ceiling test for many full cost companies, including Carrizo, could be negatively impacted by prolonged unfavorable oil and gas prices. A deterioration of prices from year-end levels could result in the Company recording a first quarter 1998 non-cash charge to earnings related to its oil and gas properties. Future operating expenses and development costs are computed primarily by the Company's petroleum engineers by estimating the expenditures to be incurred in developing and producing the Company's proved oil and natural gas reserves at the end of the year, based on the year-end costs and assuming continuation of existing economic conditions. Future income taxes are based on year-end statutory rates, adjusted for tax basis and applicable tax credits. A discount factor of 10 percent was used to reflect the timing of future net cash flows. The standardized measure of discounted future net cash flows is not intended to represent the replacement cost or fair market value of the Company's oil and natural gas properties. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates. F-17 57 CARRIZO OIL & GAS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) CHANGE IN STANDARDIZED MEASURE Changes in the standardized measure of future net cash flows relating to proved oil and natural gas reserves are summarized below:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1995 1996 1997 ----------- ----------- ------------ Changes due to current-year operations -- Sales of oil and natural gas, net of oil and natural gas operating expenses.... $ (614,000) $(2,811,000) $ (6,378,000) Extensions and discoveries............... -- 19,641,000 16,074,000 Purchases of oil and gas properties...... 2,770,000 2,079,000 6,954,000 Changes due to revisions in standardized variables -- Prices and operating expenses............ 6,343,000 9,781,000 (29,115,000) Income taxes............................. (1,307,000) (8,834,000) 11,410,000 Estimated future development costs....... -- (670,000) (2,683,000) Quantities............................... -- -- (3,449,000) Sales of reserves in place............... -- -- (3,933,000) Accretion of discount.................... 968,000 1,647,000 4,634,000 Production rates (timing) and other...... (2,677,000) 207,000 (5,562,000) ----------- ----------- ------------ Net change................................. 5,483,000 21,040,000 (12,048,000) Beginning of year.......................... 6,498,000 11,981,000 33,021,000 ----------- ----------- ------------ End of year................................ $11,981,000 $33,021,000 $ 20,973,000 =========== =========== ============
Sales of oil and natural gas, net of oil and natural gas operating expenses, are based on historical pretax results. Sales of oil and natural gas properties, extensions and discoveries, purchases of minerals in place and the changes due to revisions in standardized variables are reported on a pretax discounted basis. F-18 58 SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH ---------- ----------- ---------- ---------- 1997 Revenues................................... $1,853,170 $ 2,311,854 $2,069,237 $2,477,393 Expenses, net.............................. 1,137,554 3,675,879 1,787,800 2,079,681 ---------- ----------- ---------- ---------- Net Income................................. $ 715,616 $(1,364,025) $ 281,437 $ 397,712 ========== =========== ========== ========== Diluted Net Income (Loss) Per Share(1)(2)............................. $ 0.09 $ (0.18) $ 0.03 $ 0.04 ========== =========== ========== ========== 1996 Revenues................................... $ 790,513 $ 1,428,139 $1,588,354 $1,387,703 Expenses, net.............................. 646,166 1,085,439 1,085,781 1,277,472 ---------- ----------- ---------- ---------- Net Income................................. $ 144,347 $ 342,700 $ 502,573 $ 110,231 ========== =========== ========== ========== Diluted Net Income Per Share(1)(2)......... $ 0.02 $ 0.04 $ 0.07 $ 0.01 ========== =========== ========== ==========
- --------------- (1) The sum of individual quarterly net income per common share may not agree with year-to-date net income per common share as each period's computation is based on the weighted average number of common shares outstanding during that period. (2) Net income per common share amounts have been restated to conform to the provisions of SFAS No. 128, "Earnings Per Share." 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CARRIZO OIL & GAS, INC. By: /s/ FRANK A. WOJTEK ---------------------------------- Frank A. Wojtek Chief Financial Officer, Vice President, Secretary and Treasurer Date: March 31, 1998. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME CAPACITY DATE ---- -------- ---- /s/ S.P. JOHNSON IV President, Chief Executive Officer March 31, 1998 - ----------------------------------------------------- and Director (Principal S.P. Johnson IV Executive Officer) /s/ FRANK A. WOJTEK Chief Financial Officer, Vice March 31, 1998 - ----------------------------------------------------- President, Secretary, Treasurer Frank A. Wojtek and Director (Principal Financial Officer and Principal Accounting Officer) /s/ STEVEN A. WEBSTER Chairman of the Board March 31, 1998 - ----------------------------------------------------- Steven A. Webster /s/ DOUGLAS A. P. HAMILTON Director March 31, 1998 - ----------------------------------------------------- Douglas A. P. Hamilton /s/ PAUL B. LOYD, JR. Director March 31, 1998 - ----------------------------------------------------- Paul B. Loyd, Jr.
60 EXHIBIT INDEX +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997 (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). 3.1 -- Amended and Restated Articles of Incorporation of the Company. 3.2 -- Statement of Resolution Establishing Series of Shares designated 9% Series A Preferred Stock. +3.3 -- Amended and Restated Bylaws of the Company, as amended by Amendment No. 1 (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A (Registration No. 000-22915). +4.1 -- First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank dated August 28, 1997 (Incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 4.2 -- First Amendment to First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank dated December 23, 1997. 4.3 -- Second Amendment to First Amended, Restated, and Combined Loan Agreement between the Company and Compass Bank dated December 30, 1997. -- The Company is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, the Company agrees to furnish a copy of such instruments to the Commission upon request. +10.1 -- Incentive Plan of the Company (Incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.2 -- Employment Agreement between the Company and S.P. Johnson IV (Incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.3 -- Employment Agreement between the Company and Frank A. Wojtek (Incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.4 -- Employment Agreement between the Company and Kendall A. Trahan (Incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.5 -- Employment Agreement between the Company and George Canjar (Incorporated herein by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). 10.6 -- Indemnification Agreement between the Company and each of its directors and executive officers. +10.7 -- Registration Rights Agreement by and among the Company, Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997 (Incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)).
61 +10.8 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among the Company and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek (Incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.9 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among Carrizo Production, Inc. and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek (Incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +10.10 -- Stock Purchase Agreement dated January 8, 1998 among the Company, Enron Capital & Trade Resources Corp. and Joint Energy Development Investments II Limited Partnership. (Incorporated herein by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated January 8, 1998). +10.11 -- Warrant Certificates (Incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated January 8, 1998.) +10.12 -- Shareholders' Agreement dated January 8, 1998 among the Company, S.P. Johnson IV, Frank A. Wojtek, Steven A. Webster, Paul B. Loyd, Jr., Douglas A.P. Hamilton, DAPHAM Partnership, L.P., The Douglas A.P. Hamilton 1997 GRAT, Enron Capital & Trade Resources Corp. and Joint Energy Development Investments II Limited Partnership. (Incorporated herein by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated January 8, 1998). +10.13 -- Form of Amendment to Executive Officer Employment Agreement. (Incorporated herein by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated January 8, 1998). 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Consent of Ryder Scott Company Petroleum Engineers. 23.3 -- Consent of Fairchild, Ancell & Wells, Inc. 27.1 -- Financial Data Schedule. 99.1 -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers as of December 31, 1997. 99.2 -- Summary of Reserve Report of Fairchild, Ancell & Wells, Inc. as of December 31, 1997.
- --------------- + Incorporated by reference as indicated. EX-3.1 2 AMENDED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF CARRIZO OIL & GAS, INC. ARTICLE ONE Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts these Amended and Restated Articles of Incorporation, which accurately copy the Articles of Incorporation of the Company in effect on the date hereof, as further amended by these Amended and Restated Articles of Incorporation as hereinafter set forth, and contain no other change in any provisions thereof. ARTICLE TWO The Articles of Incorporation of the Company are amended by these Amended and Restated Articles of Incorporation as follows: The amendments made by these Amended and Restated Articles of Incorporation (the "Amendments") alter or change Articles One through Eleven and delete Article Twelve of the Articles of Incorporation. The full text of each provision altered or added is as set forth in Article Five hereof. The Amendments effect a 521 for 1 stock split of the outstanding shares of the common stock, par value $0.01 per share, of the Company (the "Common Stock") and increase the number of authorized shares of capital stock of all classes from 100,000 to 50,000,000. Simultaneously with the effective date of the Amendments (the "Effective Date"), each issued and outstanding share of previously authorized Common Stock ("Old Common Stock"), shall thereby and thereupon be reclassified, changed and split up into 5,210,000 validly issued, fully paid and nonassessable shares of Common Stock, par value $0.01 per share, of the Company ("New Common Stock"). Each holder of a certificate or certificates that immediately prior to the Effective Date represented outstanding shares of Old Common Stock (the "Old Certificates," whether one or more) shall be entitled to receive upon surrender of such Old Certificates to the Company for cancellation, a certificate or certificates (the "New Certificates," whether one or more) representing the number of whole shares of the New Common Stock into which and for which the shares of the Old Common Stock formerly represented by such Old Certificates so surrendered, are reclassified, changed and 1 2 split up under the terms hereof. From and after the Effective Date, Old Certificates shall represent only the right to receive New Certificates pursuant to the provisions hereof. No certificates or scrip representing fractional share interests in the New Common Stock will be issued, and no such fractional share interest will entitle the holder thereof to vote, or to any rights of a shareholder of the Company. Any fractional shares otherwise issuable will be rounded up to the nearest whole share. ARTICLE THREE The Amendments have been effected in conformity with the provisions of the Texas Business Corporation Act, and the Amended and Restated Articles of Incorporation were duly adopted by all of the shareholders of the Company pursuant to a written consent dated June 4, 1997. ARTICLE FOUR On that date there were 10,000 shares of Common Stock outstanding, all of which were entitled to vote on the Amendments. All 10,000 shares of Common Stock were voted in favor of the Amendments. ARTICLE FIVE The Articles of Incorporation of the Company filed with the Secretary of State of the State of Texas on September 24, 1993 are hereby superseded by the following Amended and Restated Articles of Incorporation, which accurately copy the entire text thereof as amended hereby: AMENDED AND RESTATED ARTICLES OF INCORPORATION OF CARRIZO OIL & GAS, INC. ARTICLE ONE The name of the corporation is Carrizo Oil & Gas, Inc. 2 3 ARTICLE TWO The period of its duration is perpetual. ARTICLE THREE The purpose or purposes for which the corporation is organized is the transaction of all lawful business for which a corporation may be incorporated under the corporation laws of the State of Texas. ARTICLE FOUR The aggregate number of shares that the corporation shall have the authority to issue, is 50,000,000 shares, consisting of 40,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred Stock, par value $0.01 per share. The descriptions of the different classes of capital stock of the corporation and the preferences, designations, relative rights, privileges and powers, and the restrictions, limitations and qualifications thereof, of said classes of stock are as follows: Division A The shares of Preferred Stock may be divided into and issued in one or more series, the relative rights and preferences of which series may vary in any and all respects. The board of directors of the corporation is hereby vested with the authority to establish series of Preferred Stock by fixing and determining all the preferences, limitations and relative rights of the shares of any series so established, to the extent not provided for in these Articles of Incorporation or any amendment hereto, and with the authority to increase or decrease the number of shares within each such series; provided, however, that the board of directors may not decrease the number of shares within a series below the number of shares within such series that is then issued. The authority of the board of directors with respect to each such series shall include, but not be limited to, determination of the following: (1) the distinctive designation and number of shares of that series; (2) the rate of dividend (or the method of calculation thereof) payable with respect to shares of that series, the dates, terms and other conditions upon which such dividends shall be payable, and the relative rights of priority of such dividends to dividends payable on any other class or series of capital stock of the corporation; 3 4 (3) the nature of the dividend payable with respect to shares of that series as cumulative, noncumulative or partially cumulative, and if cumulative or partially cumulative, from which date or dates and under what circumstances. (4) whether shares of that series shall be subject to redemption, and, if made subject to redemption, the times, prices, rates, adjustments and other terms and conditions of such redemption (including the manner of selecting shares of that series for redemption if fewer than all shares of such series are to be redeemed); (5) the rights of the holders of shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation (which rights may be different if such action is voluntary than if it is involuntary), including the relative rights of priority in such event as to the rights of the holders of any other class or series of capital stock of the corporation; (6) the terms, amounts and other conditions of any sinking or similar purchase or other fund provided for the purchase or redemption of shares of that series; (7) whether shares of that series shall be convertible into or exchangeable for shares of capital stock or other securities of the corporation or of any other corporation or entity, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange; (8) the extent, if any, to which the holders of shares of that series shall be entitled (in addition to any voting rights provided by law) to vote as a class or otherwise with respect to the election of directors or otherwise; (9) the restrictions and conditions, if any, upon the issue or reissue of any additional Preferred Stock ranking on a parity with or prior to shares of that series as to dividends or upon liquidation, dissolution or winding up; (10) any other repurchase obligations of the corporation, subject to any limitations of applicable law; and (11) notwithstanding their failure to be included in (1) through (10) above, any other designations, preferences, limitations or relative rights of shares of that series. Any of the designations, preferences, limitations or relative rights (including the voting rights) of any series of Preferred Stock may be dependent on facts ascertainable outside these Articles of Incorporation. 4 5 Shares of any series of Preferred Stock shall have no voting rights except as required by law or as provided in the preferences, limitations and relative rights of such series. Division B 1. Dividends. Dividends may be paid on the Common Stock out of any assets of the corporation available for such dividends subject to the rights of all outstanding shares of capital stock ranking senior to the Common Stock in respect of dividends. 2. Distribution of Assets. In the event of any liquidation, dissolution or winding up of the corporation, after there shall have been paid to or set aside for the holders of capital stock ranking senior to the Common Stock in respect of rights upon liquidation, dissolution or winding up the full preferential amounts to which they are respectively entitled, the holders of the Common Stock shall be entitled to receive, pro rata, all of the remaining assets of the corporation available for distribution to its shareholders. 3. Voting Rights. The holders of the Common Stock shall be entitled to one vote per share for all purposes upon which such holders are entitled to vote. Division C 1. No Preemptive Rights. No shareholder of the corporation shall by reason of his holding shares of any class have any preemptive or preferential right to acquire or subscribe for any additional, unissued or treasury shares of any class of the corporation now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying any right, option or warrant to subscribe to or acquire shares of any class now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividends or voting or other rights of such shareholder, and the board of directors may issue or authorize the issuance of shares of any class, or any notes, debentures, bonds or other securities convertible into or carrying rights, options or warrants to subscribe to or acquire shares of any class, without offering any such shares of any class, either in whole or in part, to the existing shareholders of any class. 2. Share Dividends. Subject to any restrictions in favor of any series of Preferred Stock provided in the relative rights and preferences of such series, the corporation may pay a share dividend in shares of any class or series of capital stock of the corporation to the holders of shares of any class or series of capital stock of the corporation. 3. No Cumulative Voting. Cumulative voting for the election of directors is expressly prohibited as to all shares of any class or series. 5 6 ARTICLE FIVE The corporation will not commence business until it has received for the issuance of its shares consideration of the value of One Thousand Dollars ($1,000.00), consisting of any tangible or intangible benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed or other securities of the corporation. ARTICLE SIX The street address of the corporation's registered office is 14811 St. Mary's Lane, Suite 148, Houston, Texas 77079, and the name of its registered agent at such address is Frank A. Wojtek. ARTICLE SEVEN 1. Number and Term of Directors. The number of directors shall be fixed by, or in the manner provided by, the bylaws of the corporation. The number of directors constituting the current board of directors is five, and the names and addresses of such persons constituting the board of directors, who are to serve until their successors are elected and qualified are as follows: Name Address ---- ------- Steven A. Webster 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 S. P. Johnson, IV 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Frank A. Wojtek 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Douglas A. P. Hamilton 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Paul B. Loyd, Jr. 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 2. Removal of Directors. No director of the Corporation shall be removed from such office by vote or other action of the shareholders of the Corporation or otherwise, except by the affirmative vote of holders of at least a majority of the then outstanding Voting Stock (as defined below), voting together as a single class. The term "Voting Stock" shall mean all outstanding shares 6 7 of all classes and series of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation, considered as one class; and, if the Corporation shall have shares of Voting Stock entitled to more or less than one vote for any such share, each reference in these Articles of Incorporation to a proportion or percentage of Voting Stock shall be calculated by reference to the portion or percentage of votes entitled to be cast by holders of such shares generally in the election of directors of the Corporation. Prior to the date (the "Public Status Date") of the closing of the Corporation's first offering of the Common Stock to the general public registered under a registration statement filed by the Corporation with the Securities and Exchange Commission, any such removal of a director of the Corporation may be with or without cause. On and after the Public Status Date, no director of the Corporation shall be removed from such office, except for cause, which shall be deemed to exist only if: (i) such director has been convicted, or such director is granted immunity to testify where another has been convicted, of a felony by a court of competent jurisdiction (and such conviction is no longer subject to direct appeal); (ii) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board (as defined below) at any regular or special meeting of the board of directors called for such purpose to have been grossly negligent or guilty of willful misconduct in the performance of his duties to the Corporation in a matter of substantial importance to the Corporation; (iii) such director has been adjudicated by a court of competent jurisdiction to be mentally incompetent, which mental incompetency directly affects his ability to perform as a director of the Corporation; or (iv) such director has been found by a court of competent jurisdiction (and such finding is no longer subject to direct appeal) or by the affirmative vote of at least a majority of the Whole Board at any regular or special meeting of the board of directors called for such purpose to have breached such director's duty of loyalty to the Corporation or its shareholders or to have engaged in any transaction with the Corporation from which such director derived an improper personal benefit. No director of the Corporation so removed may be nominated, re-elected or reinstated as a director of the Corporation so long as the cause for removal continues to exist. The term "Whole Board" shall mean the total number of authorized directors of the Corporation whether or not there exist any vacancies in previously authorized directorships. This paragraph shall be subject to the rights, if any, of holders of any class or series of stock to elect directors and remove directors elected by them. ARTICLE EIGHT A director of the corporation shall not be liable to the corporation or its shareholders for monetary damages for an act or omission in the director's capacity as a director, except that this article does not eliminate or limit the liability of a director for: (1) a breach of a director's duty of loyalty to the corporation or its shareholders; (2) an act or omission not in good faith that constitutes a breach of duty of that director to the corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (3) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the 7 8 director's office; or (4) an act or omission for which the liability of a director is expressly provided for by an applicable statute. If the Texas Miscellaneous Corporation Laws Act or the Texas Business Corporation Act (the "TBCA") is amended to authorize action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by such statutes, as so amended. Any repeal or modification of this article shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. ARTICLE NINE Prior to the Public Status Date, any action required or permitted to be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or counterpart consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those shareholders who did not consent in writing to the action. ARTICLE TEN The vote of shareholders required for approval of any amendment of the articles of incorporation of the corporation for which the TBCA requires a shareholder vote, shall be (in lieu of any greater vote required by the TBCA) the affirmative vote of the holders of a majority of the outstanding Voting Stock entitled to vote thereon, unless any class or series of shares is entitled to vote as a class thereon, in which event the vote required shall be the affirmative vote of the holders of a majority of the outstanding shares within each class or series of shares entitled to vote thereon as a class and at least a majority of the outstanding Voting Stock otherwise entitled to vote thereon. ARTICLE ELEVEN Special meetings of shareholders may be called by the corporation's chairman of the board, the president or the board of directors. Subject to the provisions of the corporation's bylaws governing special meetings, holders of not less than 50% of the outstanding shares of stock entitled to vote at the proposed special meeting may also call a special meeting of shareholders by furnishing the corporation a written request which states the purpose or purposes of the proposed meeting in the manner set forth in the bylaws. 8 9 EXECUTED AND EFFECTIVE this 5th day of June, 1997. CARRIZO OIL & GAS, INC. By: /s/ S. P. JOHNSON, IV ------------------------------- S. P. Johnson, IV President 9 EX-3.2 3 STATEMENT OF RESOLUTION ESTABLISHING SERIES SHARES 1 EXHIBIT 3.2 CARRIZO OIL & GAS, INC. STATEMENT OF RESOLUTION ESTABLISHING SERIES OF SHARES DESIGNATED 9% SERIES A PREFERRED STOCK Pursuant to Article 2.13 of the Texas Business Corporation Act Carrizo Oil & Gas, Inc., a Texas corporation (the "Corporation"), hereby certifies: A. That, pursuant to the authority contained in Article IV of the Restated Articles of Incorporation of the Corporation (the "Articles of Incorporation") and in accordance with the provisions of Article 2.13 of the Texas Business Corporation Act (the "TBCA"), the Board of Directors of the Corporation has duly adopted, by unanimous written consent dated as of January 6, 1998, the following resolution creating and providing for the establishment and issuance of a series of shares of Preferred Stock as hereinafter described, providing for the designations, preferences, limitations and relative, voting, redemption and other rights thereof and the qualifications, limitations or restrictions thereof, in addition to those set forth in the Articles of Incorporation, all in accordance with the provisions of Article 2.13 of the TBCA. RESOLVED, that pursuant to Article IV of the Articles of Incorporation, which authorizes the issuance of 50,000,000 shares of stock, consisting of 10,000,000 shares of preferred stock, par value of $.01 per share (the "Preferred Stock"), none of which is outstanding, and 40,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), the Corporation hereby provides for the issuance of a series of 500,000 shares of Preferred Stock, designated as 9% Series A Preferred Stock ("Series A Preferred Stock"), and hereby approves the designation, issuance and sale by this Corporation of 500,000 shares of the Series A Preferred Stock and hereby provides for the following designations, preferences, limitations and relative, voting, redemption and other rights thereof and the qualifications, limitations or restrictions thereof: 1. Designation of the Series. There shall be a series of Preferred Stock designated as "9% Series A Preferred Stock", par value $.01 per share, consisting of 500,000 shares. Each share of Series A Preferred Stock shall be referred to herein as a "Series A Preferred Share" or "Share". 1 2 2. Voting. (a) Except as provided in this Section 2 or as otherwise required by law, the Series A Preferred Stock shall not have any right to vote for the election of directors or for any other purpose. So long as the Series A Preferred Stock is outstanding, the Corporation shall not, without the affirmative vote of the holders of a majority of the Shares entitled to vote thereon (unless a higher percentage is required by law or the Articles of Incorporation) or written consent of the holders of a majority of all outstanding Shares, voting or consenting separately as a class: (i) authorize or issue, or increase the authorized amount of, (A) any Senior Stock (as defined herein) or Parity Stock (as defined herein) or (B) any security convertible into or exchangeable or exercisable for Senior Stock or Parity Stock; provided that the foregoing shall not restrict the issuance of additional shares of Series A Preferred Stock pursuant to the first two paragraphs of Section 3 of this Statement of Resolution; (ii) amend the Articles of Incorporation to: (A) increase or decrease the aggregate number of authorized shares of Series A Preferred Stock, (B) increase or decrease the par value of the shares of Series A Preferred Stock, (C) effect an exchange, reclassification or cancellation of all or part of the shares of Series A Preferred Stock, (D) effect an exchange, or create a right of exchange, of all or any part of the shares of another class into the shares of Series A Preferred Stock, (E) change the designations, preferences, limitations, or relative rights of the shares of Series A Preferred Stock, (F) change the shares of Series A Preferred Stock into the same or a different number of shares, either with or without par value, of the same class or series or another class or series, (G) create a new class or series of shares having rights and preferences equal, prior or superior to the shares of Series A Preferred Stock, or increase the rights and preferences of any class or series having rights and preferences equal, prior or superior to the shares of Series A Preferred Stock, or increase the rights and preferences of any class or series having rights or preferences later or inferior to the shares of Series A Preferred Stock in such a manner as to become equal, prior or superior to the shares of Series A Preferred Stock or (H) cancel or otherwise affect dividends on the shares of Series A Preferred Stock which had accrued but had not been declared; (iii) merge or effect a share exchange with any corporation or other entity (as defined in Article 1.02 of the TBCA) if (A) the plan of merger contains provisions that if contained in a proposed amendment to the Articles of Incorporation would require approval under clause (ii) above, (B) shares of Series A Preferred Stock are to be exchanged pursuant to the plan of exchange or (C) the Corporation is the sole surviving corporation in the merger and (1) the voting power of the number of voting shares (as defined in Article 5.03 of the TBCA) outstanding immediately after the merger, plus the voting power of the number of voting shares 2 3 issuable as a result of the merger (either by the conversion of securities issued pursuant to the merger or the exercise of rights to purchase securities issued pursuant to the merger), exceeds by more than 30 percent the voting power of the total number of voting shares of the Corporation outstanding immediately before the merger; or (2) the number of participating shares (as defined in Article 5.03 of the TBCA) outstanding immediately after the merger, plus the number of participating shares issuable as a result of the merger (either by the conversion of securities issued pursuant to the merger or the exercise of rights to purchase securities issued pursuant to the merger),exceeds by more than 30 percent the total number of participating shares of the corporation outstanding immediately before the merger; and (iv) sell, lease, exchange or otherwise dispose (not including any pledge, mortgage, deed of trust or trust indenture, but including any sale, lease, exchange or other disposition in foreclosure, liquidation or otherwise in any attempt to realize upon the value of such pledge, mortgage, deed of trust or other trust indenture) of all, or substantially all, the property and assets of the Corporation, with or without the good will of the Corporation, whether or not made in the usual and regular course of its business and whether in a single transaction or series of related transactions, if such sale, lease, exchange or other disposition would adversely impact the preferences, rights, powers or privileges of the holders of the Series A Preferred Stock. Except as otherwise set forth herein, to the extent that the holders of the Series A Preferred Stock shall have the right to vote as a class (alone or together with any other series of stock of the Corporation) pursuant to the requirements of applicable law on any matter not set forth herein as requiring the vote of such holders, the approval of such matter shall require only the vote of the holders of a majority of the Shares entitled to vote thereon (unless a higher percentage is required by law or the Articles of Incorporation) or written consent of the holders of a majority of the Shares entitled so to vote. Without limiting the generality of the foregoing, to the extent the vote of holders of Series A Preferred Stock is required (pursuant to provisions of current law or any change thereto) for approval of (1) any plan of merger, consolidation or exchange for which the TBCA requires a shareholder vote, (2) any disposition of assets for which the TBCA requires a shareholder vote, (3) any dissolution of the Corporation for which the TBCA requires a shareholder vote, and (4) any amendment of the articles of incorporation of the Corporation for which the TBCA requires a shareholder vote, such vote shall be (in lieu of any greater vote required by the TBCA) the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred Stock entitled to vote thereon. (b) If the Corporation fails to redeem the required number of Series A Preferred Shares (1) on January 8, 2005 as required by Section 4(b)(i) or (2) on the applicable Redemption Date (as defined herein) as required by Section 4(b)(ii) (excluding Section 4(b)(ii)(E) and (F)), then the number of directors constituting the Board of Directors shall, effective as of the time of election of such additional directors as hereinafter provided and without further action, be increased by that 3 4 number of directors constituting the Board of Directors plus one additional director and the holders of shares of Series A Preferred Stock shall have, in addition to the other voting rights set forth herein, the exclusive right, voting separately as a single class, to elect the directors of the Corporation to fill such newly created directorships (the remaining directors to be elected by other classes of stock entitled to vote therefor) at each meeting of shareholders held for the purpose of electing directors. Such additional directors shall continue as directors and such additional voting right shall continue until such time as the shares of Series A Preferred Stock presented for redemption and required to be redeemed as provided in Section 4(b) (excluding Section 4(b)(ii)(E) and (F)) have been redeemed or all necessary funds have been set aside for payment as provided in Section 6, as the case may be, at which time (A) such additional directors shall cease to be directors, (B) such additional voting right of the holders of Series A Preferred Stock shall terminate and (C) the number of directors constituting the Board of Directors shall, without further action, be decreased to that number of directors remaining as directors following the effect of clause (A) above (but subject to later adjustment in accordance with the Articles of Incorporation and the Bylaws); provided that this sentence shall not limit the effect of the preceding sentence upon the failure by the Corporation to redeem the required number of Series A Preferred Shares upon the occurrence of any subsequent redemption obligation provided in Section 4(b). The rights under this subparagraph expire at such time as the Corporation has repurchased or redeemed all of the outstanding Series A Preferred Stock. (c) Unless and for so long as holders of Series A Preferred Stock are entitled to elect directors pursuant to Section 2(b), if the Corporation fails to redeem the required number of Series A Preferred Shares on the applicable Redemption Date (as defined herein) as required by Section 4(b)(ii)(E), then the number of directors constituting the Board of Directors shall, effective as of the time of election of such additional directors as hereinafter provided and without further action, be increased by the number equal to the difference between (i) the whole number nearest to the quotient of (A) the number of directors then constituting the Board of Directors (unless such number is less than two, in which case the number of directors then constituting the Board of Directors shall be deemed to be two for purposes of this calculation) divided by (B) 0.73 and (ii) the number of directors then constituting the Board of Directors, and the holders of shares of Series A Preferred Stock shall have, in addition to the other voting rights set forth herein, the exclusive right, voting separately as a single class, to elect the directors of the Corporation to fill such newly created directorships (the remaining directors to be elected by other classes of stock entitled to vote therefor) at each meeting of shareholders held for the purpose of electing directors. Such additional directors shall continue as directors and such additional voting right shall continue until such time as the shares of Series A Preferred Stock presented for redemption and required to be redeemed as provided in Section 4(b)(ii)(E) have been redeemed or all necessary funds have been set aside for payment as provided in Section 6, as the case may be, at which time (A) such additional directors shall cease to be directors, (B) such additional voting right of the holders of Series A Preferred Stock shall terminate and (C) the number of directors constituting the Board of Directors shall, without further action, be decreased to that number of directors remaining as directors following the effect of clause (A) above (but subject to later adjustment in accordance with the Articles of Incorporation and the Bylaws); provided that this sentence shall not limit the effect of the preceding sentence upon the 4 5 failure by the Corporation to redeem the required number of Series A Preferred Shares upon the occurrence of any subsequent redemption obligation provided in Section 4(b). The rights under this subparagraph expire at such time as the Corporation has repurchased or redeemed all of the outstanding Series A Preferred Stock. (d) The rights of holders of shares of Series A Preferred Stock to take any action as provided in this Statement of Resolutions may be exercised at any annual meeting of shareholders or at a special meeting of shareholders held for such purpose or at any adjournment thereof, or without a meeting, without prior notice and without a vote, if a consent or counterpart consents in writing, setting forth the action so taken, shall be signed by the holder or holders of Shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all Shares entitled to vote on the action were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those holders of Series A Preferred Shares who did not consent in writing to the action. For the taking of any action as provided in this Section 2 by the holders of shares of Series A Preferred Stock or for any action as to which the holders of Series A Preferred Stock are entitled to vote, each such holder shall have one vote for each share of such stock standing in its name on the transfer books of the Corporation as of any record date fixed for such purpose or, if no such date be fixed, at the close of business on the business day next preceding the day on which notice is given, or if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. So long as the right to vote pursuant to Section 2(b) or Section 2(c) continues (and unless such right has been exercised by written consent of the minimum number of shares required to take such action), upon the written request of holders of a majority of the shares of Series A Preferred Stock outstanding addressed to the Secretary of the Corporation at the principal office of the Corporation, the Secretary of the Corporation shall call a special meeting of the holders of shares entitled to vote as provided herein. Such meeting shall be held within thirty (30) days after delivery of such request to the Secretary, at the place and upon the notice provided by law and in the bylaws of the Corporation, as then in effect (the "Bylaws"), for the holding of meetings of shareholders. Each director elected by the holders of shares of Series A Preferred Stock as provided in Section 2(b) or Section 2(c) shall, unless such director's term shall expire earlier, hold office until the annual meeting of shareholders next succeeding such director's election or until such director's successor, if any, is elected and qualified. In case any vacancy shall occur among the directors elected by the holders of shares of Series A Preferred Stock as provided in Section 2(b) or Section 2(c), such vacancy may be filled for the unexpired portion of the term by majority vote of the remaining directors theretofore elected by such holders (if there is one or more remaining directors), or each such director's successor in office. If any such vacancy is not so filled within 20 days after the creation thereof or if all directors 5 6 so elected by the holders of Series A Preferred Stock shall cease to serve as directors before their terms shall expire, the holders of the Series A Preferred Stock then outstanding and entitled to vote for such directors may, by written consent as herein provided, or at a special meeting of such holders called as provided herein, elect successors to hold office for the unexpired term of the directors whose places shall be vacant. Holders of shares of Series A Preferred Stock wishing to nominate one or more individuals to stand for election pursuant to Section 2(b) or Section 2(c) at an annual or special meeting must provide written notice thereof to the Board of Directors not less than two business days in advance of the meeting. Directors that are elected by holders of Series A Shares shall be elected by a plurality of the votes cast by the holders of Shares entitled to vote in such election at a meeting of holders of such Shares at which a quorum is present. Any director elected by the holders of shares of Series A Preferred Stock may be removed from office with or without cause only by the vote or written consent of the holders of at least a majority of the outstanding shares of Series A Preferred Stock. A special meeting of the holders of shares of Series A Preferred Stock for such purpose may be called in accordance with the procedures set forth in Section 2(b) or Section 2(c). 3. Dividends. The fifteenth day of January (but not January 15, 1998), April, July and October on which the Series A Preferred Stock shall be outstanding shall be deemed to be a "Dividend Due Date" (except that if any such date is a Saturday, Sunday or legal holiday, then the next succeeding date that is not a Saturday, Sunday or legal holiday shall be the Dividend Due Date). The holders of Series A Preferred Shares shall be entitled to receive, if, when and as declared by the Board of Directors out of funds legally available therefor, cumulative dividends at the rate of $9.00 per year on each Series A Preferred Share and no more, calculated on the basis of a year of 360 days consisting of twelve 30-day months, payable quarterly on each Dividend Due Date, with respect to the quarterly period ending on the Record Date (as defined herein) with respect to such Dividend Due Date. Dividends will be paid, at the option of the Corporation, (i) in cash or (ii) until and including the January 15, 2002 Dividend Due Date, by issuing additional fully paid and nonassessable shares of Series A Preferred Stock (or fractions thereof) at the annual rate of 0.09 of a Share of Series A Preferred Stock on each Series A Preferred Share. Dividends on each Series A Preferred Share (or fraction thereof) shall accumulate and be cumulative from and after the date of initial issuance of Series A Preferred Shares (or in the event of a Share (or fraction thereof) initially issued after the first issuance of any Shares, from the immediately preceding Dividend Due Date or, if none, from the date of such first issuance). The record date for the payment of dividends shall be the last day of December, March, June or September, as the case may be, immediately preceding the relevant Dividend Due Date (the "Record Date"). For purposes hereof, the term "legal holiday" shall mean any day on which banking institutions are authorized to close in New York, New York or Houston, Texas. Each fractional share of Series A Preferred Stock outstanding shall be entitled to a ratably proportionate amount of all dividends accruing with respect to each outstanding share of 6 7 Series A Preferred Stock pursuant to this Section 3 and all such dividends with respect to such outstanding fractional shares shall be cumulative and shall accrue, and shall be payable in the same manner and at such times as provided for in this Section 3 with respect to dividends on each outstanding share of Series A Preferred Stock. Each fractional share of Series A Preferred Stock outstanding shall also be entitled to a ratably proportionate amount of all distributions made with respect to each outstanding share of Series A Preferred Stock pursuant to this Section 3, and all such distributions shall be payable in the same manner and at such times as provided for in this Section 3 with respect to distributions on each outstanding share of Series A Preferred Stock. On each Dividend Due Date all dividends which shall be accumulated on each Series A Preferred Share outstanding on such Dividend Due Date shall be deemed to become "due". Any dividend which shall not be paid on the Dividend Due Date on which it shall become due shall be deemed to be "past due" until such dividend shall be paid or until the Series A Preferred Share with respect to which such dividend became due shall no longer be outstanding, whichever is the earlier to occur. If any dividend payable pursuant to this Section 3 is not paid on the Dividend Due Date therefor, then the amount of such dividend shall be computed as if the amount thereof had been compounded quarterly from the date of such Dividend Due Date to the date such dividend is paid. When dividends are not paid in full upon all shares of Parity Stock (including Series A Preferred Stock), all dividends declared upon shares of Parity Stock will be declared pro rata, subject to either rounding or the elimination of fractional shares in accordance with Texas law, so that in all cases the amount of dividends declared per share on the Parity Stock bears to each other the same ratio that the accumulated dividends per share on the shares of Parity Stock bear to each other. So long as any Series A Preferred Shares are outstanding, (i) no dividends in cash, securities or other property may be declared, paid or set aside for payment or any other distribution made upon any Junior Stock (other than dividends or distributions in Junior Stock or dividends of rights to purchase preferred or common stock of the type commonly known as "poison pill rights"; provided that such poison pill rights shall not be triggered solely as a result of the exercise of the rights and remedies under this Statement of Resolution, the Stock Purchase Agreement dated as of January 8, 1998 by and among the Corporation and Enron Capital & Trade Resources Corp., a Delaware corporation ("Enron"), and Joint Energy Development Investments II Limited Partnership, a Delaware limited partnership ("JEDI II"), the Warrant Certificates dated as of January 8, 1998 issued pursuant to such Stock Purchase Agreement and/or the Shareholders' Agreement dated as of January 8, 1998 (as it may from time to time be amended) by and among the Company, S. P. Johnson IV, Frank A. Wojtek, Paul B. Loyd, Jr., Steven A. Webster, Douglas A. P. Hamilton, DAPHAM Partnership L.P., Douglas A. P. Hamilton 1997 GRAT, Enron and JEDI II (the "Shareholders' Agreement"), and (ii) except for redemptions, purchases or acquisitions of Series A Preferred Stock, no Parity Stock may be (A) redeemed pursuant to a sinking fund or otherwise (unless all the Parity Stock is redeemed or a pro rata redemption is made from all holders of Parity Stock, the amount allocable to each series of such Parity Stock being determined on the basis of the aggregate liquidation preference of the outstanding shares of each series and the shares of each series are to be redeemed only on a pro rata basis) or (B) purchased or otherwise acquired for any consideration by the Corporation; and (iii) no Junior Stock may be redeemed or acquired for 7 8 consideration except by conversion into or exchange for other Junior Stock; provided however that the Corporation shall be entitled to pay in cash such sum as may be required to eliminate fractional shares. "Parity Stock" shall collectively mean all equity securities of the Corporation which rank on a parity with the Series A Preferred Stock, as to dividends (when such term is used with respect to the payment of dividends), as to payments upon redemption (when such term is used with respect to payments upon redemption) or as to the distribution of assets upon liquidation, dissolution or winding up of the Corporation (when such term is used with respect to the distribution of assets upon liquidation, dissolution or winding up), whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Series A Preferred Stock, if the holders of such class of stock and the Series A Preferred Stock shall be entitled to the receipt of dividends (when such term is used with respect to the payment of dividends) or of amounts payable upon redemption (when such term is used with respect to payments upon redemption) or distributable upon liquidation, dissolution or winding up of the Corporation (when such term is used with respect to the distribution of assets upon liquidation, dissolution or winding up), as the case may be, in proportion to their respective amounts of accrued and unpaid dividends per share or redemption or liquidation prices, without preference or priority of one over the other. "Junior Stock" shall collectively mean all equity securities (including the common stock, par value $.01 per share) of the Corporation which do not have a preference or priority over the Series A Preferred Stock, as to dividends (when such term is used with respect to the payment of dividends), as to payments upon redemption (when such term is used with respect to payments upon redemption) or as to the distribution of assets upon liquidation, dissolution or winding up of the Corporation (when such term is used with respect to the distribution of assets upon liquidation, dissolution or winding up), if the holders of Series A Preferred Stock shall be entitled to receipt of dividends (when such term is used with respect to the payment of dividends) or of amounts payable upon redemption (when such term is used with respect to payments upon redemption) or distributable upon liquidation, dissolution or winding up of the Corporation (when such term is used with respect to the distribution of assets upon liquidation, dissolution or winding up), as the case may be, in preference or priority to the holders of shares of such stock. "Senior Stock" shall collectively mean all equity securities of the Corporation which rank prior to the Series A Preferred Stock, as to dividends (when such term is used with respect to the payment of dividends), as to payments upon redemption (when such term is used with respect to payments upon redemption) or as to the distribution of assets upon liquidation, dissolution or winding up of the Corporation (when such term is used with respect to the distribution of assets upon liquidation, dissolution or winding up), if the holders of such class shall be entitled to the receipt of dividends (when such term is used with respect to the payment of dividends) or of amounts payable upon redemption (when such term is used with respect to payments upon redemption) or distributable upon liquidation, dissolution or winding up of the Corporation (when such term is used with respect to the distribution of assets upon liquidation, dissolution or winding up), as the case may be, in preference or priority to the holders of Series A Preferred Stock. Any reference to "dividend" or "distribution" in this Section 3 shall not be deemed to include any distribution made in connection with any liquidation, dissolution or winding up of the 8 9 Corporation, whether voluntary or involuntary, unless such reference specifically refers to such liquidation, dissolution or winding up of the Corporation. 4. Redemption. (a) The Series A Preferred Shares may be redeemed at the option of the Corporation, upon 30 days' prior written notice, as a whole at any time or in part from time to time, at a Redemption Price (as set forth in (i) through (iv) below) per share, together with all dividends accumulated and unpaid to the Redemption Date (as defined below), as follows: (i) if the Redemption Date occurs within 12 months of the date of initial issuance of the Series A Preferred Shares, $104.50 per share; (ii) if the Redemption Date occurs after 12 months from but within 24 months of the date of initial issuance of the Series A Preferred Shares, $102.25 per share; (iii) if the Redemption Date occurs after 24 months from but within 36 months of the date of initial issuance of the Series A Preferred Shares, $101.125 per share; and (iv) if the Redemption Date occurs after 36 months from the date of initial issuance of the Series A Preferred Shares, $100.00 per share. (b)(i) The Series A Preferred Shares shall be called for redemption by the Corporation and redeemed on January 8, 2005 at a Redemption Price per share of $100 plus all dividends accumulated and unpaid to the Redemption Date. (ii) The Series A Preferred Shares shall be redeemed by the Corporation at a Redemption Price (as set forth in (i) through (iv) of Section 4(a)) per share, together with all dividends accumulated and unpaid to the Redemption Date, on a Redemption Date occurring no later than 90 days following a request for redemption by holders of at least 30,000 of the Series A Preferred Shares (as adjusted for any stock splits or combinations from the date of initial issuance, or if fewer than such number of Series A Preferred Shares are outstanding at such time, then all of the outstanding Series A Preferred Shares) and the occurrence of one of the following events (an "Optional Redemption Event"): (A) at any point in time the Corporation has failed to declare and pay any two dividends in the amount then due and payable on or before the Dividend Due Date for the second of such dividends and such dividends remain unpaid at such time or (B) the Corporation breaches any covenant set forth in the penultimate paragraph of Section 3 hereof or (C) for two consecutive fiscal quarterly periods after the initial date of issuance of any Series A Preferred Stock, the quarterly Cash Flow (as defined below) of the Corporation is less than the 9 10 amount of the dividends accrued in respect to the Series A Preferred Stock during such fiscal quarter (provided that solely for purposes of this provision, notwithstanding anything in this Statement of Resolution to the contrary, all dividends shall be deemed to be accrued in cash) or (D) (1) the Corporation shall have failed to pay more than $50,000 of any obligation on any indebtedness for borrowed money of more than $1,000,000 when such amount more than $50,000 becomes due and payable and such failure shall continue after the applicable grace period, if any, granted by the lender for such indebtedness; or (2) any other event shall occur or condition shall exist under any indebtedness for borrowed money at a time when the outstanding principal amount thereunder is at least $1,000,000, if such event or condition has caused the acceleration of such indebtedness or (E) there is a violation (which has not been waived) of Section 2.1 of the Shareholders' Agreement or (F) there occurs by the Corporation a sale, lease, exchange or other disposition (not including any pledge, mortgage, deed of trust or trust indenture, but including any sale, lease, exchange or other disposition in foreclosure, liquidation or otherwise in any attempt to realize upon the value of such pledge, mortgage, deed of trust or other trust indenture) of all, or substantially all, the property and assets, with or without the good will of the Corporation, whether or not made in the usual and regular course of its business and whether in a single transaction or series of related transactions which sale, lease, exchange or other disposition does not provide for the redemption of the Series A Preferred Stock (and without limiting the generality of any other provision hereof, such right to be redeemed constitutes a preference, right, power and privilege of the holders of the Series A Preferred Stock); provided, however, that if an Optional Redemption Event has previously occurred, any subsequent event shall not be deemed to be an Optional Redemption Event. For purposes hereof, "Cash Flow" shall mean net income prior to preferred dividends and accretion (i) plus (to the extent included in net income prior to preferred dividends and accretion) depreciation, depletion and amortization and other non-cash charges and losses on the sale of property and (ii) minus non-cash income items and required principal payments on indebtedness for borrowed money with a maturity from the original date of incurrence of such indebtedness of six months or greater (excluding voluntary prepayments and refinancings, but including prepayments (other than in connection with refinancings) which would otherwise be due under such indebtedness within a 60-day period following the date of such prepayment). A request for redemption pursuant to this Section 4(b)(ii) may be made by holders, (1) at any time after such Optional Redemption Event and not later than 45 days after the Corporation provides notice to holders of Series A Preferred Shares of such Optional Redemption Event and (2) on one or more occasions from and after the expiration of such 45-day period with respect to an Optional Redemption Event until all Series A Preferred Shares are redeemed, within 30 days following the date the Corporation files with the Securities and Exchange Commission its Annual Report on Form 10-K or its Quarterly Report on Form 10-Q with respect to the first 10 11 six months of its fiscal year, unless the Corporation fails to make any such filing on or before March 31 with respect to such Annual Report and August 15 with respect to such Quarterly Report, in which case a request may be made any time from and after such dates until 30 days following the date the Corporation makes such filing. (c) For purposes hereof, "Redemption Date" shall mean the applicable date of any redemption of the Series A Preferred Shares made by the Corporation pursuant to this Section 4 and "Redemption Price" shall mean the applicable redemption price per share paid by the Corporation for any redemption of the Series A Preferred Shares pursuant to this Section 4. No sinking fund shall be established for the Series A Preferred Stock. Notice of any redemption of the Series A Preferred Shares required to be given by the Corporation shall be mailed by means of certified mail (return receipt requested), postage paid, addressed to the holders of record of the Series A Preferred Shares, at their respective addresses then appearing on the books of the Corporation and last known address (if different), and transmitted by facsimile to holders of Series A Preferred Shares that have provided the Corporation with facsimile instructions (at the facsimile number so provided), at least twenty (20) but not more than sixty (60) days prior to the Redemption Date, and each such notice shall be deemed received by the holder of record three days following deposit with the United States Postal Service. Each notice of redemption shall specify (i) the Redemption Date that has been selected by the Company (but which must be within 60 days of the date of the mailing of the notice of redemption and in all cases no later than January 8, 2005), (ii) the Redemption Price, (iii) the place for payment and for delivering the stock certificate(s) and transfer instrument(s) in order to collect the Redemption Price (which shall be at a reasonable location in the United States), (iv) whether all or less than all Series A Preferred Shares are being redeemed and the total number of Series A Preferred Shares being redeemed and (v) whether the redemption is pursuant to Section 4(a) or (b) hereof, and if pursuant to Section 4(b)(ii), that the redemption is pursuant to one or more of clause (A) through (F) thereof. If fewer than all the outstanding Series A Preferred Shares are to be redeemed pursuant to Section 4(a), the Corporation will select those to be redeemed as nearly pro rata as practicable. Failure by the Corporation to give any notice described in this paragraph, or the formal insufficiency of any such notice, shall not prejudice or effect the rights of any holders of Series A Preferred Shares to cause the Corporation to redeem any such shares held by such holder. The Corporation shall, within five business days of its having concluded that an Optional Redemption Event has occurred, transmit notice of such Optional Redemption Event to holders of Series A Preferred Shares, which notice shall set forth a description of such event. Such notice shall be mailed by means of certified mail (return receipt requested), postage paid, addressed to the holders of record of Series A Preferred Shares, at their respective addresses then appearing on the books of the Corporation and last known address (if different) and transmitted by facsimile to holders of Series A Preferred Shares that have provided the Corporation with facsimile instructions (at the facsimile number so provided). Any request for redemption given by the holder or holders of the Series A Preferred Shares pursuant to Section 4(b) shall be mailed by means of certified mail 11 12 (return receipt requested), postage paid, addressed to the Corporation at its registered office, and transmitted by facsimile to the Corporation (at the following facsimile number: (281) 496-0884; or such other facsimile number as the Corporation provides by notice to holders of Series A Preferred Shares). If any holder of Series A Preferred Shares making such request for redemption has not received notice of such Optional Redemption Event from the Corporation, but has concluded that an Optional Redemption Event has occurred, such holder shall include in such request for redemption a description of such Optional Redemption Event. After the Redemption Date for any Series A Preferred Shares, the holder of such shares shall not be entitled to receive payment of the Redemption Price for such Shares until such holder shall cause to be delivered to the place specified in the notice given (which shall be at a reasonable location in the United States) with respect to such redemption the certificate(s) representing such Series A Preferred Shares and, if required by the Corporation, duly endorsed to the Corporation or in blank and accompanied by instruments of transfer to the Corporation. No interest shall accrue on the Redemption Price of any Series A Preferred Share after its Redemption Date. At the close of business on the Redemption Date for any Series A Preferred Share, such Share shall (provided the Redemption Price of such Share has been paid or properly provided for in accordance with Section 6) be deemed to cease to be outstanding and all rights of any person other than the Corporation in such Share shall be extinguished on the Redemption Date (including all rights to receive future dividends with respect to such Share) except for the right to receive the Redemption Price, without interest, for the Shares in accordance with the provisions of this Section 4, subject to applicable escheat laws. Subject to Section 3 hereof, the Corporation shall have the right at any time to acquire any Series A Preferred Shares from the owner of such Shares on such terms as may be agreeable to such owner without offering any other shareholder an equal opportunity to sell his stock to the Corporation, and no purchase by the Corporation from any shareholder pursuant to this paragraph shall be deemed to create any right on the part of any other shareholder to sell any Series A Preferred Stock (or any other stock) to the Corporation. (d) Redemption Subject to Applicable Law. Notwithstanding the redemption rights granted to the holders of Series A Preferred Shares in this Section 4, the Corporation shall redeem shares of Series A Preferred Stock only if funds therefor are legally available under the TBCA, as from time to time amended, which as of the date of this Statement of Resolution provides that a corporation may effect a redemption only if (i) after giving effect to the redemption, the corporation would not be insolvent, (ii) the net assets of the corporation are not less than the amount of the proposed redemption or (iii) funds are otherwise legally available therefor under the TBCA. Without limiting the generality of any provision hereof or of any applicable law, failure to redeem the Series A Preferred Shares in accordance with the requirements of this Section 4 shall result in the holders of such Shares having the voting rights specified in Section 2(b) or Section 2(c) and shall result in dividends continuing to accrue on such Shares (and all other rights and obligations 12 13 continuing as set forth in this Statement of Resolution), and shall result in the payment of the Redemption Price of such Shares to continue as an obligation (but not to be deemed to be a debt) of the Corporation. In the event that the total amount of funds legally available for redemption of shares of Series A Preferred Stock and any other Parity Stock is insufficient to redeem the Series A Preferred Shares and any shares of other Parity Stock that are the subject of a notice of redemption, then the Series A Preferred Shares and any shares of other Parity Stock shall be redeemed ratably based on the aggregate redemption amount payable with respect to the shares of Series A Preferred Stock and any shares of other Parity Stock then redeemable. If a notice of redemption is given and the Corporation is unable to redeem the shares of Series A Preferred Stock that are the subject of such notice of redemption because funds therefor are not legally available to the Corporation as described above, the obligation of the Corporation to redeem such shares of Series A Preferred Stock shall continue until the Corporation redeems such Series A Preferred Stock in accordance with this Section 4(d). 5. Liquidation. In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Corporation (for the purposes of this Section 5, a "Liquidation"), before any distribution of assets shall be made to the holders of any Junior Stock of the Corporation, the holder of each Series A Preferred Share then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, an amount equal to the amount set forth below plus all dividends accumulated and unpaid on such Share on the date fixed for the distribution of assets of the Corporation to the holders of Series A Preferred Stock: (A) if the Liquidation occurs within 12 months of the date of initial issuance of the Series A Preferred Shares, $104.50 per share; (B) if the Liquidation occurs after 12 months from but within 24 months of the date of initial issuance of the Series A Preferred Shares, $102.25 per share; (C) if the Liquidation occurs after 24 months from but within 36 months of the date of initial issuance of the Series A Preferred Shares, $101.125 per share; and (D) if the Liquidation occurs after 36 months from the date of initial issuance of the Series A Preferred Shares, $100.00 per share. If upon any Liquidation of the Corporation, the assets available for distribution to the holders of Series A Preferred Stock and any Parity Stock issued by the Corporation which shall then be outstanding (hereinafter in this paragraph called the "Total Amount Available") shall be insufficient to pay the holders of all outstanding Series A Preferred Stock and all such Parity Stock the full amounts (including all dividends accumulated and unpaid) to which they shall be entitled by reason of such Liquidation of the Corporation, then there shall be paid to the holders of the 13 14 Series A Preferred Stock in connection with such Liquidation of the Corporation, an amount equal to the product derived by multiplying the Total Amount Available times a fraction, the numerator of which shall be the full amount to which the holders of the Series A Preferred Stock shall be entitled under the terms of the preceding paragraph by reason of such Liquidation of the Corporation and the denominator of which shall be the total amount which would have been distributed by reason of such Liquidation of the Corporation with respect to the Series A Preferred Stock and all Parity Stock then outstanding had the Corporation possessed sufficient assets to pay the maximum amount which the holders of all such stock would be entitled to receive in connection with such Liquidation of the Corporation. The voluntary sale, conveyance, lease, exchange or transfer of all or substantially all the property or assets of the Corporation (unless in connection therewith the Liquidation of the Corporation is specifically approved) or the share exchange with, or the merger or consolidation of the Corporation into or with any other corporation, or the merger of any other corporation into the Corporation, or any purchase or redemption of some or all of the shares of any class or series of stock of the Corporation, shall not be deemed to be a Liquidation of the Corporation for the purpose of this Section 5. The holder of any Series A Preferred Shares shall not be entitled to receive any payment owed for such Shares under this Section 5 until such holder shall cause to be delivered to the Corporation at such reasonable location in the United States as the Corporation may designate the certificate(s) representing such Series A Preferred Shares and, if required by the Corporation, duly endorsed to the Corporation or in blank or accompanied by instruments of transfer to the Corporation or in blank. As in the case of the Redemption Price, no interest shall accrue on any payment upon liquidation after the due date thereof, provided that the Corporation has duly provided therefor in Section 6 below. After payment of the full amount of the liquidating distribution, the Series A Preferred Stock will not entitle the holder thereof to any further participation in any distribution of assets by the Corporation. 6. Payments. In the event a redemption is required pursuant to Section 4 hereof and payment is not made with respect to the required number of Series A Preferred Shares 90 days after the Redemption Date or in the event of a liquidation occurs pursuant to Section 5 hereof and payment is not made with respect to all Series A Preferred Shares 90 days after the date fixed for distribution of assets of the Corporation, the Corporation shall be obligated to deposit funds for the payment of the Redemption Price for such Series A Preferred Shares pursuant to this Section 6. The Corporation may, but shall not be obligated to, provide funds for any payment of the Redemption Price for any Series A Preferred Shares prior to 90 days after the Redemption Date or any amount distributable with respect to any Series A Preferred Shares under Section 5 hereof prior to 90 days after the date fixed for distribution of assets of the Corporation by depositing such funds pursuant to this Section 6. The Corporation shall make any deposit of funds contemplated by this Section 6 with a commercial bank or trust company selected by the Corporation having a capital and surplus 14 15 in excess of $100,000,000 and having its principal place of business in Houston, Texas, Dallas, Texas or New York, New York, in trust for the benefit of the holder of such Series A Preferred Shares under arrangements providing for such funds to be invested, to the greatest extent possible, in securities issued by the United States Department of Treasury and providing irrevocably for payment upon delivery of certificate(s) representing such Series A Preferred Shares and, if required by the Corporation, duly endorsed to the Corporation or in blank and accompanied by instruments of transfer to the Corporation. All interest and other income earned by any funds while they shall be deposited as contemplated by this Section 6 shall be paid to holders of Series A Preferred Shares receiving payments of funds deposited pursuant to this Section 6, pro rata based on the number of Series A Preferred Shares then entitled to receive payment of such funds. Any payment which may be owed for the payment of the Redemption Price for any Series A Preferred Shares pursuant to Section 4 or the payment of any amount distributed with respect to any Series A Preferred Shares under Section 5 shall be deemed to have been "paid or properly provided for" upon the earlier to occur of: (i) the date upon which the funds sufficient to make such payment shall be deposited in a manner contemplated by the preceding paragraph or (ii) the date upon which a check payable to the person entitled to receive such payment shall be delivered to such person or mailed to such person at either the address of such person then appearing on the books of the Corporation or such other address as the Corporation shall deem reasonable, provided such check shall provide good funds when presented for payment, and provided further that in the event any holder of Series A Preferred Shares is entitled to receive over $3,000,000 as payment of the Redemption Price for such Shares and such holder has requested payment by wire transfer and provided payment instructions to the Corporation three days prior to the Redemption Date, the Corporation shall make such payment by wire transfer in accordance with such instruction. 7. Status of Reacquired Series A Preferred Shares. Shares issued and reacquired by the Corporation (including Series A Preferred Shares that have been redeemed) shall have the status of authorized and unissued shares of Preferred Stock undesignated as to series, subject to later issuance. 8. Preemptive Rights. The Series A Preferred Stock is not entitled to any preemptive or subscription rights in respect of any securities of the Corporation. 9. Ranking. The Series A Preferred Stock shall rank senior to the common stock, par value $.01 per share, of the Corporation, and all other series of the Corporation's Preferred Stock as to the payment of dividends, as to payments upon redemption and as to the distribution of assets upon liquidation, dissolution or winding up unless, after the approval under Section 2(a) has been obtained, the terms of such other series provide otherwise. 15 16 10. Severability of Provisions. Whenever possible, each provision hereof shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. IN WITNESS WHEREOF, this Statement of Resolution has been executed by an officer of the Corporation, this 8th day of January, 1998. CARRIZO OIL & GAS, INC. By: /s/ S.P. JOHNSON IV --------------------------------------- S. P. Johnson IV President and Chief Executive Officer 16 EX-4.2 4 1ST AMEND. TO COMBINED LOAN AGREEMENT 1 EXHIBIT 4.2 FIRST AMENDMENT TO FIRST AMENDED, RESTATED, AND COMBINED LOAN AGREEMENT BY AND BETWEEN CARRIZO OIL & GAS, INC. AND COMPASS BANK This First Amendment to the Loan Agreement (this "First Amendment") by and between CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"), and COMPASS BANK, a Texas chartered bank (the "Bank"), is entered into on this 23rd day of December 1997 and shall be effective as of that date for all purposes. W I T N E S S E T H: Borrower and Bank entered into a First Amended, Restated, and Amended Loan Agreement dated August 28, 1997 (the "Loan Agreement"). Capitalized terms used, but not defined, herein shall have the meanings prescribed therefor in the Loan Agreement. Borrower has requested that Bank consent to the transaction described on Exhibit "A" attached to this Third Amendment, and Bank has agreed to do so according to the terms set forth herein, which shall be incorporated into the Loan Agreement. NOW, THEREFORE, in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by Borrower and Bank, and each intending to be legally bound hereby, the parties agree as follows: I. Specific Amendments to Loan Agreement. Article I is hereby amended by adding the following definitions thereto: "ECT Transaction" means the transaction described on Exhibit "A" to the First Amendment. "First Amendment" means the First Amendment to this Agreement executed by Borrower and Bank on December 23, 1997. Section 5.19 shall be amended in its entirety, conditioned and effective upon the closing of the ECT Transaction, to read as follows: 5.19 Tangible Net Worth Requirement. Borrower shall maintain a total Tangible Net Worth of not less than the greater of: (a) $50,000,000.00, or (b) the Tangible Net Worth of Borrower as of December 31, 1997, minus $10,000,000.00; increasing by: (x) fifty percent (50%) of net income (excluding losses) of Borrower subsequent to December 31, 1 2 1997, and (y) one hundred percent (100%) of any increases in shareholders' equity resulting from the sale or issuance of stock in Borrower subsequent to December 31, 1997. For purposes of this Section, shareholders' equity shall be deemed to include the consideration paid to Borrower for its sale of the 300,000 shares of 9% Series A Preferred Stock, par value $0.01 per share, pursuant to the ECT Transaction, as well as any consideration paid to Borrower for the exercise of any of the 1,000,000 warrants that are exercisable for the purchase of 1,000,000 shares of common stock of Carrizo, par value $0.01 per share, pursuant to the ECT Transaction, but shareholder's equity shall exclude the value of any such 9% Series A Preferred Stock that is subsequently redeemed by the issuance of common stock of Borrower. II. Certain Consents. The Bank has consented, and does hereby consent, to the ECT Transaction, subject to, and in accordance with, the terms of the letter agreement between the Bank and Borrower that is attached as Exhibit "A" to this First Amendment, and Borrower does hereby ratify, adopt, and confirm the terms and provisions of such letter agreement, which are incorporated herein by reference, as if set forth in full herein. III. Reaffirmation of Representations and Warranties. To induce Bank to enter into this First Amendment, Borrower hereby reaffirms, as of the date hereof, its representations and warranties contained in Article IV of the Loan Agreement and in all other documents executed pursuant thereto, and additionally represents and warrants as follows: A. The execution and delivery of this First Amendment and the performance by Borrower of its obligations under this First Amendment are within Borrower's power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required) , and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of Borrower or of any agreement binding upon Borrower. B. The Loan Agreement as amended by this First Amendment, represents the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with its terms, subject as to enforcement only to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally. C. No Event of Default or Unmatured Event of Default has occurred and is continuing as of the date hereof. IV. Defined Terms. Except as amended hereby, terms used herein that are defined in the Loan Agreement shall have the same meanings herein. V. Reaffirmation of Loan Agreement. This First Amendment shall be deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as further amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Loan Agreement 2 3 herein and in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Loan Agreement as amended hereby. VI. Entire Agreement. The Loan Agreement, as hereby further amended, embodies the entire agreement between Borrower and Bank and supersedes all prior proposals, agreements and understandings relating to the subject matter hereof. Borrower certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth in the Loan Agreement as hereby further amended and the other documents previously executed or executed of even date herewith. VII. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. This First Amendment has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. Courts within the State of Texas shall have jurisdiction over any and all disputes between Borrower and Bank, whether in law or equity, including, but not limited to, any and all disputes arising out of or relating to this First Amendment or any other Loan Document; and venue in any such dispute whether in federal or state court shall be laid in Harris County, Texas. VIII. Severability. Whenever possible each provision of this First Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this First Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this First Amendment. IX. Execution in Counterparts. Each party hereto acknowledges that this Agreement may be executed in several counterparts by each party at different. times and in different locations; that each separate counterpart bearing the signature of any party may be effectively delivered to the other parties by the delivery of an electronic facsimile sent via telecopier; that each party so delivering any such counterpart shall be bound by its facsimile signature thereon; and that the signature pages from counterparts signed by each party may be collated into one or more copies of this agreement, which shall constitute one and the same agreement among all parties hereto. X. Section Captions. Section captions used in this First Amendment are for convenience of reference only, and shall not affect the construction of this First Amendment. XI. Successors and Assigns. This First Amendment shall be binding upon Borrower and Bank and their respective successors and assigns, and shall inure to the benefit of Borrower and Bank, and the respective successors and assigns of Bank. XII. Non-Application of Chapter 15 of Texas Credit Codes. The provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article 5069-15) are specifically 3 4 declared by the parties hereto not to be applicable to the Loan Agreement as hereby further amended or any of the other Loan Documents or to the transactions contemplated hereby. XIII. Notice. THIS FIRST AMENDMENT TOGETHER WITH THE LOAN AGREEMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the day and year first above written. BANK BORROWER COMPASS BANK CARRIZO OIL & GAS, INC. By: /s/ Kathleen J. Bowen By: /s/ Frank A. Wojtek -------------------------------- -------------------------------- Kathleen J. Bowen Frank A. Wojtek Vice President Vice President 4 5 EXHIBIT A [Letterhead of Compass Bank] January 6, 1998 Mr. Frank A. Wojtek Vice President-Finance Carrizo Oil & Gas, Inc. 14811 St. Mary's Lane, Suite 148 Houston, TX 77079 Re: First Amended, Restated and combined Loan Agreement by and among Carrizo Oil & Gas, Inc. and Compass Bank dated August 28, 1997 (the "Carrizo Loan Agreement") Dear Frank: Compass Bank ("Compass") understands that Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), desires to effect the sale of (i) 300,000 shares of a newly established series of preferred stock designated as 9% Series A Preferred Stock, par value $0.01 per share, of the Company (the "Preferred Stock"), and (ii) 1,000,000 warrants (the "Warrants," and together with the Preferred Stock, the "Securities") exercisable for the purchase of 1,000,000 shares of the common stock, par value $0.01 per share, of the Company to Enron Capital & Trade Resources Corp. and Joint Energy Development Investments II Limited Partnership. Compass further understands that (i) the holders of the Preferred Stock will be entitled to receive, if, when and as declared by the Board a f Directors of the Company out of funds legally available therefor, cumulative dividends at the rate of $9.00 per year on each share of Preferred Stock, payable quarterly, (ii) additional shares of Preferred Stock may be issued as payment in kind of such dividends, and (iii) the Preferred Stock is subject to redemption by the Company at the option of the Company, and at the option of the holder thereof upon a change of control of the Company, and must be redeemed upon the occurrence of certain events or on January 8, 2005. A copy of the Statement of Resolution establishing the terms of the Preferred Stock is set forth on Annex A hereto. Compass hereby consents to the issuance of the Securities and waives any violations of or events of default under the Carrizo Loan Agreement that result from such issuance. Without limiting the generality of the foregoing (capitalized terms used but not defined herein have the meaning assigned to them in the Carrizo Loan Agreement): 6 A. Compass hereby agrees that, for the purposes of Section 5.07 of the Carrizo Loan Agreement, the designation of the Preferred Stock and the issuance and sale of the Securities do not, and will not upon exercise of the Warrants, constitute a material adverse change in the condition of the Company. B. Compass hereby consents, for the purposes of Section 6.07 of the Carrizo Loan Agreement, which provides that the Company shall not declare or pay my dividend or make any distribution on, or purchase or redeem for value any interest in the Company, to any redemption of the Preferred Stock by the Company and to any payment of dividends on the Preferred Stock, that may be made in accordance with the terms of the Preferred Stock as set forth on Annex A hereto, provided that at the time of the payment of any such dividend or distribution or the purchase or redemption of any of the Preferred Stock, no Event of Default has occurred and is continuing and no Event of Default would result immediately, or would occur solely upon the giving of notice or the passage of time or both, as the result of the payment of any such dividend or distribution or the purchase or redemption of such Preferred Stock. All other terms and conditions remain the same. Very truly yours, COMPASS BANK By: /s/ Kathleen J. Bowen -------------------------------- Kathleen J. Bowen Vice President EX-4.3 5 2ND AMEND. TO COMBINED LOAN AGREEMENT 1 EXHIBIT 4.3 SECOND AMENDMENT TO FIRST AMENDED, RESTATED, AND COMBINED LOAN AGREEMENT BY AND BETWEEN CARRIZO OIL & GAS, INC. AND COMPASS BANK This Second Amendment to the Loan Agreement (this "Second Amendment") by and between CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"), and COMPASS BANK, a Texas chartered bank (the "Bank"), is entered into on this 30th day of December 1997, and shall be effective as of that date for all purposes. W I T N E S S E T H: Borrower and Bank entered into a First Amended, Restated, and Amended Loan Agreement dated August 28, 1997, and a First Amendment thereto dated December 23, 1997 (collectively, the "Loan Agreement"). Capitalized terms used, but not defined, herein shall have the meanings prescribed therefor in the Loan Agreement. Borrower has requested that Bank provide a term loan to Borrower in the amount of $3,000,000.00, and Bank has agreed to do so according to the terms set forth herein, which shall be incorporated into the Loan Agreement. NOW, THEREFORE, in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by Borrower and Bank, and each intending to be legally bound hereby, the parties agree as follows: I. Specific Amendments to Loan Agreement. Article I is hereby amended by adding the following definitions thereto: "Floating Rate" means: (a) with respect to the Revolving Loan evidenced by the Note, the Index Rate in effect from time, and (b) with respect to the Term Loan evidenced by the Term Note, the Index Rate in effect from time to time plus two percent (2.00%). "Notes" means, collectively, the Note and the Term Note, and any extension, renewal, rearrangement of, or substitute for either of such Notes. All references to the defined term, "Note", if throughout this Agreement, as it existed prior to the Second Amendment, shall be construed to refer to both of the Notes, with the exception of the references to the term, "Note," in the definitions of Floating Rate, Loan Excess, and Note, and in Sections 2.01 through 2.03, 2.08, 2.09, 3.01, 3.04 and Exhibit "B," all of which shall remain singular and shall be construed to refer to the Note evidencing the Revolving Loan. 1 2 "Preferred Stock Closing" means the closing of the ECT Transaction, as defined in the First amendment. "Revolving Loan (s)" means the Loan (s) made pursuant to Section 2.01 hereof. "Second Amendment" means the Second Amendment to this Agreement executed by Borrower and Bank on December 30, 1997. "Term Loan" means that certain $3,000,000.00 term loan made or to be made by Bank to Borrower pursuant to Section 2.18 hereof. "Term Loan Maturity Date" means April 23, 1998, or the date of Borrower's Preferred Stock Closing. "Term Note" means the promissory note in the original face amount of $3,000,000.00 dated December 30, 1997, made by Borrower payable to the order of Bank, in substantially the form attached to the Second Amendment as Exhibit "A," together with all deferrals, renewals, extensions, amendments, modifications or rearrangements thereof, which promissory note shall evidence the advances to Borrower by Bank pursuant to Section 2.18 hereof. Article II is hereby amended to add the following sections: 2.18 Term Loan. Subject to the terms and conditions and relying on the representations and warranties contained in this Agreement, Bank agrees to make the Term Loan to Borrower in a single advance on or after December 30, 1997. 2.19 The Term Note. The obligation of Borrower to repay the Term Loan shall be evidenced by the Term Note. 2.20 Repayment of Term Loan. Interest on the Term Note, calculated as aforesaid in Section 2.04, shall be repaid by Borrower in monthly installments on the first day of each month following the advance from Bank to Borrower pursuant to Section 2. 18, through and including the Term Loan Maturity Date, when the entire unpaid balance of the Term Note, inclusive of principal and interest, shall be paid in full. 2.21 Voluntary Prepayment of the Term Note. Borrower shall have the right and option to prepay, at any time subject to the contemporaneous payment of the prepayment fee prescribed below, the entire balance outstanding on the Term Note, together with all accrued, unpaid interest. No partial prepayments shall be permitted. If Borrower prepays the indebtedness evidenced by the Term Note prior to the Term Loan Maturity Date, then as consideration for and as a condition to such prepayment privilege, Borrower shall simultaneously pay Bank a fee in the amount of $30,000.00. 2 3 Article III is hereby amended to add the following Section 3.17. 3.1.7 Conditions Precedent in Connection With the Second Amendment. The obligation of Bank to make the Term Loan referred to in Section 2.18 of this Agreement is subject to satisfaction of the following conditions precedent: (a) Receipt of Term Note, Second Amendment and Certificate of Compliance. Bank shall have received the Term Note, multiple counterparts of the Second Amendment, as requested by Bank, and the Certificate of Compliance duly executed by an authorized officer for Borrower. (b) Receipt of Certified Copy of Corporate Proceedings and Certificate of Incumbency. Bank shall have received from Borrower copies of the resolutions of its board of directors authorizing the transactions set forth in the Second Amendment and the execution of the Second Amendment and the Term Note, such copy or copies to be certified by the secretary or an assistant secretary as being true and correct and in full force and effect as of the date of such certificate. In addition, Bank shall have received from Borrower a certificate of incumbency signed by the secretary or an assistant secretary setting forth (a) the names of the officers executing the Second Amendment and the Term Note (b) the office (s) to which such Persons have been elected and in which they presently serve and (c) an original specimen signature of each such person. (c) Accuracy of Representations and Warranties and No Event of Default. The representations and warranties contained in Article IV of this Agreement shall be true and correct in all material respects on the date of the making of such Term Loan with the same effect as though such representations and warranties had been made on such date; and no Event of Default shall have occurred and be continuing or will have occurred at the completion of the making of such Loan. (d) Legal Matters Satisfactory to Special Counsel to Bank. All legal matters incident to the consummation of the transactions contemplated by the Second Amendment shall be satisfactory to the firm of Hutcheson & Grundy, L.L.P., special counsel for Bank. (e) No Material Adverse Change. No material adverse change shall have occurred since the date of this Agreement in the condition, financial or otherwise, of Borrower. (f) Facility Fee. Bank shall have received the balance of the Facility Fee in the amount of $20,000.00 ($7,000.00 of which has previously been paid) as provided in that commitment letter attached to the Summary of Terms and Conditions between Bank and Borrower dated December 24, 1997. 3 4 Section 5.01 is hereby amended in its entirety as follows: 5.01 Use of Funds. Use the proceeds advanced under the Revolving Loan to acquire Oil and Gas Properties, conduct developmental drilling, and use as working capital for other ordinary business activities of Borrower, and use the proceeds advanced under the Term Loan to fund the cost of three dimensional seismic data programs, acquire Oil and Gas Properties, and conduct developmental drilling, and furnish Bank such evidence as it may reasonably require with respect to such uses. II. Reaffirmation of Representations and Warranties. To induce Bank to enter into this Second Amendment, Borrower hereby reaffirms, as of the date hereof, its representations and warranties contained in Article IV of the Loan Agreement and in all other documents executed pursuant thereto, and additionally represents and warrants as follows: A. The execution and delivery of this Second Amendment and the performance by Borrower of its obligations under this Second Amendment are within Borrower's power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of Borrower or of any agreement binding upon Borrower. B. The Loan Agreement as amended by this Second Amendment, represents the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with its terms, subject as to enforcement only to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally. C. No Event of Default or Unmatured Event of Default has occurred and is continuing as of the date hereof. III. Defined Terms. Except as amended hereby, terms used herein that are defined in the Loan Agreement shall have the same meanings herein. IV. Reaffirmation of Loan Agreement. This Second Amendment shall be deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as further amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Loan Agreement herein and in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Loan Agreement as amended hereby. V. Entire Agreement. The Loan Agreement, as hereby further amended, embodies the entire agreement between Borrower and Bank and supersedes all prior proposals, agreements and understandings relating to the subject matter hereof. Borrower certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth in the Loan Agreement 4 5 as hereby further amended and the other documents previously executed or executed of even date herewith. VI. Governing Law. THIS SECOND AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. This Second Amendment has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. Courts within the State of Texas shall have jurisdiction over any and all disputes between Borrower and Bank, whether in law or equity, including, but not limited to, any and all disputes arising out of or relating to this Second Amendment or any other Loan Document; and venue in any such dispute whether in federal or state court shall be laid in Harris County, Texas. VII. Severability. Whenever possible each provision of this Second Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Second Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Second Amendment. VIII. Execution in Counterparts. Each party hereto acknowledges that this Agreement may be executed in several counterparts by each party at different times and in different locations; that each separate counterpart bearing the signature of any party may be effectively delivered to the other parties by the delivery of an electronic facsimile sent via telecopier; that each party so delivering any such counterpart shall be bound by its facsimile signature thereon; and that the signature pages from counterparts signed by each party may be collated into one or more copies of this agreement, which shall constitute one and the same agreement among all parties hereto. IX. Section Captions. Section captions used in this Second Amendment are for convenience of reference only, and shall not affect the construction of this Second Amendment. X. Successors and Assigns. This Second Amendment shall be binding upon Borrower and Bank and their respective successors and assigns, and shall inure to the benefit of Borrower and Bank, and the respective successors and assigns of Bank. XI. Non-Application of Chapter 15 of Texas Credit Codes. The provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article 5069-15) are specifically declared by the parties hereto not to be applicable to the Loan Agreement as hereby further amended or any of the other Loan Documents or to the transactions contemplated hereby. XII. Notice. THIS SECOND AMENDMENT TOGETHER WITH THE LOAN AGREEMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS 5 6 OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the day and year first above written. BANK BORROWER COMPASS BANK CARRIZO OIL & GAS, INC. By: /s/ Kathleen J. Bowen By: /s/ Frank A. Wojtek ----------------------------- ----------------------------- Kathleen J. Bowen Frank A. Wojtek Vice President Vice President 6 7 EXHIBIT "A" NOTE $3,000,000.00 Houston, Texas December 30, 1997 On the dates hereinafter prescribed, for value received, CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"), having an address at 14811 St. Mary's Lane, Suite 148, Houston, Texas 77079, promises to pay to the order of COMPASS BANK (herein called "Bank"), at its principal offices at 24 Greenway Plaza, Fourteenth Floor, 'Houston, Harris County, Texas 77046, (i) the principal amount of THREE MILLION AND NO/100 DOLLARS ($3,000,000.00), and (ii) interest on the principal balance remaining unpaid from the date of the advance until maturity at a rate of interest equal to lesser of (a) the "Floating Rate" (as hereinafter defined), calculated on the basis of a year of 365 or 366 days, as the case may be, and for the actual number of days elapsed (including the first day but excluding the last day), or (b) the Maximum Rate (as hereinafter defined). Any increase or decrease in interest rate resulting from a change in the Maximum Rate shall be effective immediately when such change becomes effective, without notice to Borrower, unless Applicable Law (as defined below) requires that such increase or decrease not be effective until a later time, in which event such increase or decrease shall be effective at the earliest time permitted under the provisions of such law. Notwithstanding the foregoing, if during any period the Floating Rate exceeds the Maximum Rate, the rate of interest in effect on this Note shall be limited to the Maximum Rate during each such period, but at all times thereafter the rate of interest in effect on this Note shall be the Maximum Rate until the total amount of interest accrued on this Note equals the total amount of interest which would have accrued hereon if the Floating Rate had at all times been in effect. All payments on this Note shall be applied first to accrued interest and the balance, if any, to principal. "Floating Rate" means a per annum interest rate equal to the Index Rate (as defined below) in effect from time to time plus two percent (2.0%), provided that at such time no Event of Default or Unmatured Event of Default (as defined in the First Amended, Restated and Combined Loan Agreement dated August 28, 1997, between Borrower and Bank (the "Loan Agreement")) has occurred and is continuing; then thereafter, "Floating Rate" shall mean a per annum interest rate equal to the Index Rate in effect from time to time plus five percent (5%). "Index Rate" means at any time, the prime rate established in The Wall Street Journal's "Money Rates" or similar table. If multiple prime rates are quoted in the table, then the highest prime rate will be the Index Rate. In the event that the prime rate is no longer published by The Wall Street Journal in the "Money Rates" or similar table, then Bank may select an alternative published index based upon comparable information as a substitute Index Rate. Upon the selection of a substitute Index Rate, the applicable interest rate shall thereafter vary in relation to the substitute 7 8 index. Such substitute index shall be the same index that is generally used as a substitute by Bank on all Index Rate loans. The Index Rate is eight and one-half percent (8.50%) as of the date of this Agreement. "Maximum Rate" means the Maximum Rate of non-usurious interest permitted from day to day by applicable law, including as to Article 5069-1.04, Vernon's Texas Revised Civil Statutes Annotated (and as the same may be incorporated by reference in other Texas statutes), but otherwise without limitation, that rate based upon the "indicated weekly rate ceiling." "Applicable Law" means that law in effect from time to time and applicable to this Note which lawfully permits the charging and collection of the highest permissible lawful, non-usurious rate of interest on this Note, including laws of the State of Texas and laws of the United States of America. It is intended that Article 1.04, Title 79, Revised Civil Statutes of Texas, 1927, as amended (Article 5069-1.04, as amended, Vernon's Texas Civil Statutes) shall be included in the laws of the State of Texas in determining Applicable Law; and for the purpose of applying said Article 1.04 to this Note, the interest ceiling applicable to this Note under said Article 1.04 shall be the indicated weekly rate ceiling from time to time in effect. Borrower and Bank hereby agree that Chapter 15 of Subtitle 3, Title 79, Revised Civil Statutes of Texas, 1925, as amended, shall not apply to this Note or the loan transaction evidenced by, and referenced in, the Loan Agreement in any manner, including without limitation, to any account or arrangement evidenced or created by, or provided for in, this Note. "Business Day"' shall mean any day on which banks are open for general banking business in the State of Texas, other than a Saturday, a Sunday, a legal holiday or any other day on which banks in the State of Texas are required or authorized by law or executive order to close. The principal sum of this Note shall be due and payable on or before the earlier of: (a) the Term Loan Maturity Date, as prescribed in the Loan Agreement, (b) Borrower's Preferred Stock Closing, as defined in the Loan Agreement, or (c) Borrower's payment in full of the revolving indebtedness evidenced by the Note dated August 28, 1997, executed pursuant to the Loan Agreement; interest to accrue upon the principal sum from time to time owing and unpaid hereunder shall be due and payable in monthly installments, as it accrues, with the first such monthly installment of interest hereon being due and payable on the first day of February 1998, and with such subsequent installments of interest being due and payable on the first day of each succeeding month thereafter; provided, however, the final installment of interest hereunder shall be due and payable not later than the maturity of the principal sum hereof, howsoever such maturity may be brought about. When the first (1st) day of a calendar month falls upon a Saturday, Sunday or legal holiday, the payment of interest and principal, if any, due upon such date shall be due and payable upon the next succeeding Business Day. 8 9 In no event shall the aggregate of the interest on this Note, plus any other amounts paid in connection with the loan evidenced by this Note which would under Applicable Law be deemed "interest," ever exceed the maximum amount of interest which, under Applicable Law, could be lawfully charged on this Note. Bank and Borrower specifically intend and agree to limit contractually the interest payable on this Note to not more than an amount determined at the Maximum Rate. Therefore, none of the terms of this Note or any other instruments pertaining to or securing this Note shall ever be construed to create a contract to pay interest at a rate in excess of the Maximum Rate, and neither Borrower nor any other party liable herefor shall ever be liable for interest in excess of that determined at the Maximum Rate, and the provisions of this paragraph shall control over all provisions of this Note or of any other instruments pertaining to or securing this Note. If any amount of interest taken or received by Bank shall be in excess of the maximum amount of interest which, under Applicable Law, could lawfully have been collected on this Note, then the excess shall be deemed to have been the result of a mathematical error by the parties hereto and shall be refunded promptly to Borrower. All amounts paid or agreed to be paid in connection with the indebtedness evidenced by this Note which would under Applicable Law be deemed "Interest" shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread throughout the full term of this Note. This Note is secured by all security agreements, collateral assignments, mortgages and lien instruments executed by Borrower (or by any other party) in favor of Bank, including those executed simultaneously herewith, those executed heretofore and those hereafter executed, and including specifically and without limitation the "Security Instruments" described and defined in the Loan Agreement. This Note is issued pursuant to the Loan Agreement. Reference is hereby made to the Loan Agreement for a statement of the rights and obligations of the holder of this Note and the duties and obligations of Borrower in relation thereto; but neither this reference to the Loan Agreement nor any provisions thereof shall affect or impair the absolute and unconditional obligation of Borrower to pay any outstanding and unpaid principal of and interest on this Note when due, in accordance with the terms of the Loan Agreement. In the event of default in the payment when due of any of the principal of or any interest on this Note, or in the event of default under the terms of the Loan Agreement or any of the Security Instruments, or if any event occurs or condition exists which authorizes the acceleration of the maturity of this Note under any agreement made by Borrower, Bank (or other holder of this Note) may, at its option, without presentment or demand or any notice to Borrower or any other person liable herefor, declare the unpaid principal balance of and accrued interest on this Note to be immediately due and payable. If this Note is collected by suit or through the Probate or Bankruptcy Court, or any judicial proceeding, or if this Note is not paid at maturity, however such maturity may be brought about, and is placed in the hands of an attorney for collection, then Borrower agrees to pay reasonable attorneys' 9 10 fees, not to exceed 10% of the full amount of principal and interest owing hereon at the time this Note is placed in the hands of an attorney. Borrower and all sureties, endorsers and guarantors of this Note, including, but not limited to, Guarantor, waive demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate maturity, notice of acceleration of maturity, and all other notices, filing of suit and diligence in collecting this Note or enforcing any of the security herefor, and agree to any substitution, exchange or release of any such security or the release of any party primarily or secondarily liable hereon and further agrees that it will not be necessary for Bank, in order to enforce payment of this Note by them, to first institute suit or exhaust its remedies against any Borrower or others liable herefor, or to enforce its rights against any security herefor, and consent to any one or more extensions or postponements of time of payment of this Note on any terms or any other indulgences with respect hereto, without notice thereof to any of them. Bank may transfer this Note, and the rights and privileges of Bank under this Note shall inure to the benefit of Bank's representatives, successors or assigns. Executed this 30th day of December 1997. CARRIZO OIL & GAS, INC. By: /s/ Frank A. Wojtek --------------------------- Frank A. Wojtek Vice President 10 EX-10.6 6 INDEMNIFICATION AGREEMENT 1 Exhibit 10.6 CARRIZO OIL & GAS, INC. INDEMNIFICATION AGREEMENT This Agreement ("Agreement") is made and entered into as of the 4th day of June, 1997, by and between Carrizo Oil & Gas, Inc., a Texas corporation (the "Corporation"), and ___________________ ("Indemnitee"). RECITALS A. Highly competent persons are becoming more reluctant to serve corporations as directors, executive officers or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation. B. The Board of Directors of the Corporation (the "Board") has determined that the inability to attract and retain such persons would be detrimental to the best interests of the Corporation and its shareholders and that the Corporation should act to assure such persons that there will be increased certainty of such protection in the future. C. The Board has also determined that it is reasonable, prudent and necessary for the Corporation, in addition to purchasing and maintaining directors' and officers' liability insurance, contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law and to provide an arrangement of self-insurance so that they will serve or continue to serve the Corporation free from undue concern that they will not be so indemnified. D. Indemnitee is willing to serve, continue to serve and on behalf of the Corporation on the condition that he be so indemnified. E. On June 4, 1997, the Amended and Restated Bylaws of the Corporation were approved by the Board and by the Corporation's shareholders which Bylaws provided for indemnification, advancement of expenses, arrangements of insurance and self-insurance and specifically authorized the Corporation to enter into indemnification agreements that contractually provide to indemnitees the benefits of the provisions of Article V of such Bylaws and that include related provisions and which agreements facilitate indemnitees' receipt of such benefits and such other indemnification protections as may be deemed appropriate. In consideration of the mutual covenants herein contained, the parties agree as follows: - 1 - 2 ARTICLE I CERTAIN DEFINITIONS As used herein, the following words and terms shall have the following respective meanings (whether singular or plural): "Change in Control" means a change in control of the Corporation occurring after the date of this Agreement of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Corporation is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if at any time after the date of this Agreement (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 40% or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) the Corporation is a party to a merger, consolidation, share exchange, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter or (iii) during any 15-month period, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. "Claim" means an actual or threatened claim or request for relief. "Corporate Status" means the status of a person who is or was a director, officer, partner, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Corporation. "Disinterested Director" means a director of the Corporation who is not a named defendant or respondent to the Proceeding or subject to a Claim in respect of which indemnification is sought by Indemnitee. "Expenses" means all attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types - 2 - 3 customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating or being or preparing to be a witness in a Proceeding. "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither contemporaneously is, nor in the five years theretofore has been, retained to represent: (a) the Corporation or Indemnitee in any matter material to either such party, (b) any other party to the Proceeding giving rise to a claim for indemnification hereunder or (c) the beneficial owner, directly or indirectly, of securities of the Corporation representing 40% or more of the combined voting power of the Corporation's then outstanding voting securities. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitee's rights under this Agreement. "other enterprise" shall include, but shall not be limited to, an "other entity" as defined in Section 1.01 of the TBCA (including any amendment that may from time to time be made to such Section. "person" shall have the meaning ascribed to such term in Sections 13(d) and 14(d) of the Exchange Act. "Proceeding" means any threatened, pending or completed action, suit, arbitration, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative (except one initiated by Indemnitee pursuant to Article VI of this Agreement to enforce his rights under this Agreement), and any appeal in or related to any such action, suit, arbitration, investigation, hearing or proceeding and any inquiry or investigation that could lead to such an action, suit, proceeding or arbitration. "TBCA" means the Texas Business Corporation Act and any successor statute thereto as either of them may from time to time be amended. ARTICLE II SERVICES BY INDEMNITEE Indemnitee agrees to serve as a director of the Corporation. Indemnitee may from time to time also agree to serve, as the Corporation may request from time to time, as a director, officer, partner, employee, agent or fiduciary of either the Corporation or any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in which the Corporation has an interest. Indemnitee and the Corporation each acknowledge that they have entered into this Agreement as a means of inducing Indemnitee to serve the Corporation in such capacities. Indemnitee may at any time and for any reason resign from such position or positions (subject to any - 3 - 4 other contractual obligation or any obligation imposed by operation of law). The Corporation shall have no obligation under this Agreement to continue Indemnitee in any such position or positions. ARTICLE III INDEMNIFICATION Section 3.1. General. The Corporation shall indemnify, and advance Expenses, to Indemnitee to the fullest extent permitted by applicable law in effect on the date hereof and to such greater extent as applicable law may thereafter from time to time permit. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the right to be indemnified and to have Expenses advanced in all Proceedings to the fullest extent permitted by Article 2.02-1 of the TBCA. The provisions set forth in this Agreement are provided in addition to and as a means of furtherance and implementation of, and not in limitation of, the obligations expressed in this Article III. No requirement, condition to or limitation of any right to indemnification under this Article III, or to advancement of Expenses under Articles III and IV shall in any way limit the rights of Indemnitee under Section 7.3. Section 3.2. Additional Indemnity of the Corporation. Indemnitee shall be entitled to indemnification pursuant to this Section 3.2 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any Proceeding (except to the extent limited by Section 3.3). Pursuant to this Section 3.2, Indemnitee shall be indemnified against Expenses, judgments, penalties (including excise or similar taxes), fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any Claim therein, if (1) he conducted himself in good faith; (2) he reasonably believed: (a) in the case of conduct in his official capacity, that his conduct was in the Corporation's best interest; and (b) in all other cases, that his conduct was at least not opposed to the Corporation's best interests and, (3) in the case of any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. Nothing in this Section 3.2 shall limit the benefits of Section 3.1 or any other Section hereunder. Section 3.3. Limitation on Indemnity. The Indemnification otherwise available to an Indemnitee under Section 3.2 shall be limited to the extent set forth in this Section 3.3. In the event that an Indemnitee is found liable to the Corporation or is found liable on the basis that personal benefit was improperly received by the Indemnitee whether or not the benefit resulted from an action taken in Indemnitee's official capacity the Indemnitee shall, with respect to the Claim in the Proceeding in which such finding is made, be indemnified only against reasonable Expenses actually incurred by him in connection with that Claim. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any Claim in such Proceeding as to which Indemnitee shall have been adjudged to be liable for willful or intentional misconduct in the performance of his duty to the Corporation; provided, however, that, if applicable law so permits, indemnification against such Expenses shall nevertheless be made by the Corporation in such event if and only to the extent that the court in which such Proceeding shall have been brought or is pending, shall determine. - 4 - 5 ARTICLE IV EXPENSES Section 4.1. Expenses of a Party Who Is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him in connection with any Proceeding to which Indemnitee is a party by reason of his Corporate Status and in which Indemnitee is successful, on the merits or otherwise. In the event that Indemnitee is not wholly successful, on the merits or otherwise, in a Proceeding but is successful, on the merits or otherwise, as to any Claim in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to each Claim. For purposes of this Section 4.1 and without limitation, the termination of a Claim in a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Claim. Section 4.2. Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness or otherwise participates in any Proceeding at a time when he is not named a defendant or respondent in the Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. Section 4.3. Advancement of Expenses. The Corporation shall pay all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding or Claim, whether brought by the Corporation or otherwise, in advance of any determination respecting entitlement to indemnification pursuant to Article V hereof within 10 days after the receipt by the Corporation of a written request from Indemnitee requesting such payment or payments from time to time, whether prior to or after final disposition of such Proceeding or Claim. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee. Indemnitee hereby undertakes and agrees that he will reimburse and repay the Corporation for any Expenses so advanced to the extent that it shall ultimately be determined by a court in a final adjudication from which there is no further right of appeal, that Indemnitee is not entitled to be indemnified against such Expenses. ARTICLE V PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION Section 5.1. Request by Indemnitee. To obtain indemnification under this Agreement, Indemnitee shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary or an Assistant Secretary of the Corporation shall, promptly upon - 5 - 6 receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. Section 5.2. Determination of Request. Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 5.1 hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (a) if a Change in Control shall have occurred, by Independent Counsel (selected in accordance with Section 5.3) in a written opinion to the Board, a copy of which shall be delivered to Indemnitee, unless Indemnitee shall request that such determination be made in accordance with Article 2.02-1F (1) or (2) of the TBCA; (b) if a Change in Control shall not have occurred, in accordance with Article 2.02-1 of the TBCA. If it is so determined that Indemnitee is entitled to indemnification hereunder, payment to Indemnitee shall be made within 10 days after such determination. Indemnitee shall cooperate with the person making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person making such determination shall be borne by the Corporation (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Corporation hereby agrees to indemnify and hold harmless Indemnitee therefrom. Section 5.3. Independent Counsel. If a Change in Control shall have occurred and Indemnitee elects that the determination as to indemnification is to be made by Independent Counsel, the Independent Counsel shall be selected by Indemnitee, and Indemnitee shall give written notice to the Corporation within 10 days advising it of the identity of the Independent Counsel so selected (unless Indemnitee shall request that such selection be made by the Board, in which event the Corporation shall give written notice to Indemnitee within 10 days after receipt of Indemnitee's request for indemnification advising him of the identity of the Independent Counsel so selected). In either event, Indemnitee or the Corporation, as the case may be, may, within seven days after such written notice of selection shall have been given, deliver to the Corporation or to Indemnitee, as the case may be, a written objection to such selection. Any objection to selection of Independent Counsel pursuant to this Section 5.3 may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of the definition of "Independent Counsel" in Article I hereof, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is timely made, the Independent Counsel so selected may not serve as Independent Counsel unless and until a court has determined that such objection is without merit. In the event of a timely written objection to a choice of Independent Counsel, the party originally selecting the Independent Counsel shall have seven days to make an alternate selection of Independent Counsel and to give written notice of such selection to the other party, after which time such other party shall have five days to make a written objection to such alternate selection. If, within 30 days after submission by Indemnitee of a written request for indemnification pursuant to Section 5.1 hereof, no Independent Counsel shall have been selected and not objected to, either the Corporation or Indemnitee may petition a court of competent jurisdiction (the "Court") for resolution - 6 - 7 of any objection that shall have been made by the Corporation or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom an objection is so resolved or the person so appointed shall act as Independent Counsel under Section 5.2 hereof. The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 5.2, and the Corporation shall pay all reasonable fees and expenses incident to the procedures of this Section 5.3, regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 6.1(c) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). Section 5.4. Presumptions and Effect of Certain Proceedings. (a) If a Change in Control shall have occurred, the Indemnitee shall be presumed (except as otherwise expressly provided in this Agreement) to be entitled to indemnification under this Agreement upon submission of a request for indemnification under Section 5.1, and thereafter the Corporation shall have the burden of proof in overcoming that presumption in reaching a determination contrary to that presumption. The presumption shall be used by Independent Counsel (or other person or persons determining entitlement to indemnification) as a basis for a determination of entitlement to indemnification unless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation, review and analysis of Independent Counsel (or such other person or persons) convinces him by clear and convincing evidence that the presumption should not apply. (b) If the person or persons empowered or selected under Article V of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 60 days after receipt by the Corporation of the request by Indemnitee therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a knowing misstatement by Indemnitee of a material fact, or knowing omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating to such determination; and provided, further, that the 60-day limitation set forth in this Section 5.4(b) shall not apply and such period shall be extended as necessary (i) if within 30 days after receipt by the Corporation of the request for indemnification under Section 5.1 the Board has resolved to submit such determination to the shareholders pursuant to Section 5.2(b) of this Agreement for their consideration at an annual meeting thereof to be held within 90 days after such receipt and such determination is made thereat, or a special meeting of shareholders is called within 30 days after such receipt for the purpose of making such determination, such meeting is held for such purpose - 7 - 8 within 60 days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 5.2(a) of this Agreement, in which case the applicable period shall be as set forth in Section 6.1(c). (c) The termination of any Proceeding or of any Claim by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) by itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did conduct himself in good faith and in a manner that he reasonably believed in the case of conduct in his official capacity, that was in the best interests of the Corporation or, in all other cases, that was not opposed to the best interests of the Corporation or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. Indemnitee shall be deemed to have been found liable in respect of any Claim only after he shall have been so adjudged by a court in competent jurisdiction after exhaustion of all appeals therefrom. ARTICLE VI CERTAIN REMEDIES OF INDEMNITEE Section 6.1. Indemnitee Entitled to Adjudication in an Appropriate Court. In the event (a) a determination is made pursuant to Article V that Indemnitee is not entitled to indemnification under this Agreement; (b) there has been any failure by the Corporation to make timely payment or advancement of any amounts due hereunder; or (c) the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 5.2 and such determination shall not have been made and delivered in a written opinion within 90 days after (i) such Independent Counsel's being appointed, (ii) the overruling by the Court of objections to such counsel's selection or (iii) expiration of all periods for the Corporation or Indemnitee to object to such counsel's selection, Indemnitee shall be entitled to commence an action seeking an adjudication in an appropriate court of the State of Texas, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence such action seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such action pursuant to this Section 6.1, or such right shall expire. The Corporation agrees not to oppose Indemnitee's right to seek any such adjudication or award in arbitration. Section 6.2. Adverse Determination Not to Affect any Judicial Proceeding. In the event that a determination shall have been made pursuant to Article V that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Article VI shall be conducted in all respects as a de novo trial or arbitration on the merits, and Indemnitee shall not be prejudiced by reason of such initial adverse determination. In any judicial proceeding or - 8 - 9 arbitration commenced pursuant to this Article VI, the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. Section 6.3. Company Bound by Determination Favorable to Indemnitee in any Judicial Proceeding or Arbitration. If a determination shall have been made or deemed to have been made pursuant to Article V that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Article VI, absent a knowing misstatement by Indemnitee of a material fact, or a knowing omission of a material fact necessary to make a statement by Indemnitee not materially misleading, in connection with the request for indemnification. Section 6.4. Corporation Bound by the Agreement. The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Article VI that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Agreement. Section 6.5. Indemnitee Entitled to Expenses of Judicial Proceeding. In the event that Indemnitee seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all expenses (of the types described in the definition of Expenses in Article I) actually and reasonably incurred by him in such judicial adjudication or arbitration but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses or other benefit sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be reasonably prorated in good faith by counsel for Indemnitee. Notwithstanding the foregoing, if a Change in Control shall have occurred, Indemnitee shall be entitled to indemnification under this Section 6.5 regardless of whether Indemnitee ultimately prevails in such judicial adjudication or arbitration. ARTICLE VII MISCELLANEOUS Section 7.1. Non-Exclusivity. The rights of Indemnitee to receive indemnification and advancement of Expenses under this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Articles of Incorporation or Bylaws of the Corporation, any other agreement, vote of shareholders or a resolution of directors, or otherwise. No amendment or alteration of the Articles of Incorporation or Bylaws of the Corporation or any provision thereof shall adversely affect Indemnitee's rights hereunder and such rights shall be in addition to any rights Indemnitee may have under the Corporation's Articles of Incorporation, Bylaws and the TBCA or otherwise. To the extent that there is a change in the TBCA (whether by statute or judicial decision) which allows greater - 9 - 10 indemnification by agreement than would be afforded currently under the Corporation's Articles of Incorporation or Bylaws and this Agreement, it is the intent of the parties hereto that the Indemnitee shall enjoy by virtue of this Agreement the greater benefit so afforded by such change. Section 7.2. Insurance and Subrogation. (a) To the extent that the Corporation maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such person serves at the request of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee, agent or fiduciary under such policy or policies. (b) In the event of any payment by the Corporation under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. (c) The Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any Bylaw, insurance policy, contract, agreement or otherwise. Section 7.3. Self Insurance of the Corporation. The parties hereto recognize that the Corporation may, but is not required to, procure or maintain insurance or other similar arrangements, at its expense, to protect itself and any person, including the Indemnitee, who is or was a director, officer, employee, agent or fiduciary of the Corporation or who is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any expense, liability or loss asserted against or incurred by such person, in such a capacity or arising out of his status as such a person, whether or not the Corporation would have the power to indemnify such person against such expense or liability. In considering the cost and availability of such insurance, the Corporation, (through the exercise of the business judgment of its directors and officers), may from time to time, purchase insurance which provides for any and all of (i) deductibles, (ii) limits on payments required to be made by the insurer, or (iii) coverage exclusions and/or coverage which may not be as comprehensive as that which might otherwise be available to the Corporation but which otherwise available insurance the officers or directors of the Corporation determine is inadvisable for the Corporation to purchase given the cost involved. The purchase of insurance with deductibles, limits on payments and coverage exclusions will be deemed to be in the best interest of the Corporation - 10 - 11 but may not be in the best interest of the Indemnitee. As to the Corporation, purchasing insurance with deductibles, limits on payments and coverage exclusions is similar to the Corporation's practice of self-insurance in other areas. In order to protect Indemnitee who would otherwise be more fully or entirely covered under such policies, the Corporation shall indemnify and hold Indemnitee harmless to the extent (i) of such deductibles, (ii) of amounts exceeding payments required to be made by an insurer or (iii) of coverage under policies of officer's and director's liability insurance that are available, were available or which became available to the Corporation or which are generally available to companies comparable to the Corporation but which the officers or directors of the Corporation determine is inadvisable for the Corporation to purchase, given the cost involved. The obligation of the Corporation in the preceding sentence shall be without regard to whether the Corporation would otherwise be entitled to indemnify such officer or director under the other provisions of this Agreement, or under any law, agreement, vote of shareholders or directors or other arrangement. Notwithstanding the foregoing provisions of this Section 7.3, the Indemnitee shall not be entitled to indemnification for the results of his conduct that is intentionally adverse to the interests of the Corporation. Without limiting the generality of any provision of this Agreement, the procedures in Article V hereof shall, to the extent applicable, be used for determining entitlement to indemnification under this Section 7.3. This Agreement is authorized by Section 2.02-1(R) of the TBCA as in effect on June 4, 1997, and further is intended to establish an arrangement of self-insurance pursuant to that section. Section 7.4. Certain Settlement Provisions. The Corporation shall have no obligation to indemnify Indemnitee under this Agreement for amounts paid in settlement of a Proceeding or Claim without the Corporation's prior written consent. The Corporation shall not settle any Proceeding or Claim in any manner that would impose any fine or other obligation on Indemnitee without Indemnitee's consent. Neither the Corporation nor Indemnitee shall unreasonably withhold their consent to any proposed settlement. Section 7.5. Exculpation of Directors. If Indemnitee is or was a director of the Corporation, he shall not in that capacity be liable to the Corporation or its shareholders for monetary damages for an act or omission in Indemnitee's capacity as a director, except that Indemnitee's liability shall not be eliminated or limited for: (a) a breach of Indemnitee's duty of loyalty to the Corporation or its shareholders; (b) an act or omission not in good faith that constitutes a breach of duty of the director to the Corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (c) a transaction from which Indemnitee received an improper benefit, whether or not the benefit resulted from an action taken within the scope of Indemnitee's office; or (d) an act or omission for which the liability of Indemnitee is expressly provided for by statute. Section 7.6. Duration of Agreement. This Agreement shall continue for so long as Indemnitee serves as a director of the Corporation or as a director, officer, partner, employee, agent or fiduciary of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in which the Corporation has an interest, and thereafter shall survive until and terminate upon the later to occur of: (a) 20 years after the date that Indemnitee shall have ceased to - 11 - 12 serve as a director of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Corporation; (b) the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement of expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Article VI relating thereto; or (c) the expiration of all statutes of limitation applicable to possible Claims arising out of Indemnitee's Corporate Status. This Agreement shall be binding upon the Corporation and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors, legal representatives and administrators. Section 7.7. Notice by Each Party. Indemnitee agrees to promptly notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document or communication relating to any Proceeding or Claim for which Indemnitee may be entitled to indemnification or advancement of Expenses hereunder. The Corporation agrees to promptly notify Indemnitee in writing, as to the pendency of any Proceeding or Claim which may involve a claim against the Indemnitee for which Indemnitee may be entitled to indemnification or advancement of Expenses hereunder. Section 7.8. Amendment. This Agreement may not be modified or amended except by a written instrument executed by or on behalf of each of the parties hereto. Section 7.9. Waivers. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party entitled to enforce such term only by a writing signed by the party against which such waiver is to be asserted. Unless otherwise expressly provided herein, no delay on the part of any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. Section 7.10. Entire Agreement. This Agreement and the documents expressly referred to herein constitute the entire agreement between the parties hereto with respect to the matters covered hereby, and any other prior or contemporaneous oral or written understandings or agreements with respect to the matters covered hereby are expressly superseded by this Agreement. Section 7.11. Severability. If any provision of this Agreement (including any provision within a single section, paragraph or sentence) or the application of such provision to any person or circumstance, shall be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement or affect the application of such provision to other persons or circumstances, and the parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom and the remainder of this Agreement will have the same force and effectiveness as if such part or parts had never been included herein; provided, however, that the - 12 - 13 parties shall negotiate in good faith with respect to an equitable modification of the provision or application thereof declared to be invalid, unenforceable or void. Any such finding of invalidity or unenforceability shall not prevent the enforcement of such provision in any other jurisdiction to the maximum extent permitted by applicable law. Section 7.12. Notices. Unless otherwise expressly provided herein, all notices, requests, demands, consents, waivers, instructions, approvals and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered to or mailed, certified mail return receipt requested, first-class postage paid, addressed as follows: If to the Corporation, to it at: Carrizo Oil & Gas, Inc. 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Attn: Chief Financial Officer If to Indemnitee, to him at: ------------------------- or to such other address or to such other individuals as any party shall have last designated by notice to the other parties. All notices and other communications given to any party in accordance with the provisions of this Agreement shall be deemed to have been given when delivered or sent to the intended recipient thereof in accordance with the provisions of this Section 7.12. Section 7.13. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas without regard to the principles of conflict of laws. Section 7.14. Headings. The Article and Section headings in this Agreement are for convenience of reference only, and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof. Section 7.15. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. Section 7.16. Certain Persons Not Entitled to Indemnification. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of expenses hereunder with respect to any Proceeding or any Claim therein, brought - 13 - 14 or made by such person against the Corporation, except as specifically provided in Article V or Article VI hereof. Section 7.17. Indemnification for Negligence, Gross Negligence, etc. Without limiting the generality of any other provision hereunder, it is the express intent of this Agreement that Indemnitee be indemnified and expenses be advanced regardless of Indemnitee's acts of negligence, gross negligence, intentional or willful misconduct to the extent that indemnification and advancement of expenses is allowed pursuant to the terms of this Agreement. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered to be effective as of the date first above written. CARRIZO OIL & GAS, INC. By: ----------------------------------------- Name: Title: INDEMNITEE -------------------------------------------- Name: - 14 - 15 Schedule of Indemnification Agreements The Registrant has entered into an Indemnification Agreement in the form hereof with each of S.P. Johnson IV, Frank A. Wojtek, Paul B. Loyd, Jr., Douglas A. P. Hamilton and Steven A. Webster. - 15 - EX-23.1 7 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement No. 333-35245 on Form S-8. ARTHUR ANDERSEN LLP Houston, Texas March 31, 1998 EX-23.2 8 CONSENT OF RYDER SCOTT COMPANY PETROLEUM ENGINEERS 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No. 333-35245; the "Registration Statement") of Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), relating to the 1997 Incentive Plan of the Company of information contained in our reserve report that is summarized as of December 31, 1997 in our summary letter dated February 26, 1998, relating to the oil and gas reserves and revenue, as of December 31, 1997, of certain interests of the Company. We hereby consent to all references to such reports, letters and/or to this firm in each of the Registration Statement and the Prospectus to which the Registration Statement relates, and further consent to our being named as an expert in each of the Registration Statement and the Prospectus to which the Registration Statement relates. [Signature of Ryder Scott Company] Ryder Scott Company Petroleum Engineers Houston, Texas March 27, 1998 EX-23.3 9 CONSENT OF FAIRCHILD, ANCELL & WELLS, INC. 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No. 333-35245; the "Registration Statement") of Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), relating to the 1997 Incentive Plan of the Company of information contained in our reserve report that is summarized as of December 31, 1997 in our summary letter dated February, 25, 1998, relating to the oil and gas reserves and revenue, as of December 31, 1997, of certain interests of the Company. We hereby consent to all references to such reports, letters and/or to this firm in each of the Registration Statement and the Prospectus to which the Registration Statement relates, and further consent to our being named as an expert in each of the Registration Statement and the Prospectus to which the Registration Statement relates. [Signature of Fairchild, Ancell & Wells, Inc.] Fairchild, Ancell & Wells, Inc. Houston, Texas March 27, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 JAN-1-1997 DEC-31-1997 2,674,837 0 1,794,175 0 0 8,236,964 45,082,833 0 53,658,435 10,512,807 0 0 0 103,750 32,791,611 53,658,435 8,711,654 8,711,654 2,334,009 6,282,623 0 0 98,024 2,331,007 2,300,267 30,740 0 0 0 30,740 0.00 0.00
EX-99.1 11 SUMMARY OF RESERVE REPORT - RYDER SCOTT COMPANY 1 EXHIBIT 99.1 March 31, 1998 Carrizo Oil & Gas, Inc. 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Gentlemen: At your request, we have prepared an estimate of the reserves, future production, and income attributable to certain leasehold interests of Carrizo Oil & Gas, Inc. (Carrizo) as of December 31, 1997. The subject properties are located in the states of Louisiana and Texas. The income data were estimated using the Securities and Exchange Commission (SEC) guidelines for future price and cost parameters. The estimated reserves and future income amounts presented in this report are related to hydrocarbon prices. December 1997 hydrocarbon prices were used in the preparation of this report as required by SEC guidelines; however, actual future prices may vary significantly from December 1997 prices. Therefore, volumes of reserves actually recovered and amounts of income actually received may differ significantly from the estimated quantities presented in this report. The results of this study are summarized below. SEC PARAMETERS Estimated Net Reserves and Income Data Certain Leasehold Interests of CARRIZO OIL & GAS, INC. As of December 31, 1997 - --------------------------------------------------------------------------------
Proved ---------------------------------------------------- Developed Total --------------------------------------- Producing Non-Producing Undeveloped Proved ----------- ----------- ----------- ----------- NET REMAINING RESERVES Oil/Condensate - Barrels 205,067 39,185 228,081 472,333 Plant Products - Barrels 74,769 119,012 0 193,781 Gas - MMCF 4,330 3,806 2,843 10,979 INCOME DATA Future Gross Revenue $14,218,979 $10,638,011 $9,763,906 $34,620,896 Deductions 3,205,343 2,112,227 2,846,179 8,163,749 ----------- ----------- ---------- ----------- Future Net Income (FNI) $11,013,636 $ 8,525,784 $6,917,727 $26,457,147 Discounted FNI @ 10% $ 9,221,567 $ 5,373,375 $4,437,984 $19,032,926
2 Carrizo Oil & Gas, Inc. March 31, 1998 Page 2 Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas volumes are sales gas expressed in millions of cubic feet (MMCF) at the official temperature and pressure bases of the areas in which the gas reserves are located. The future gross revenue is after the deduction of production taxes. The deductions are comprised of the normal direct costs of operating the wells, ad valorem taxes, recompletion costs, development costs, and certain abandonment costs net of salvage. The future net income is before the deduction of state and federal income taxes and general administrative overhead, and has not been adjusted for outstanding loans that may exist nor does it include any adjustment for cash on hand or undistributed income. No attempt was made to quantify or otherwise account for any accumulated gas production imbalances that may exist. Gas reserves account for approximately 73 percent and liquid hydrocarbon reserves account for the remaining 27 percent of total future gross revenue from proved reserves. RESERVES INCLUDED IN THIS REPORT The proved reserves included herein conform to the definition as set forth in the Securities and Exchange Commission's Regulation S-X Part 210.4-10 (a) as clarified by subsequent Commission Staff Accounting Bulletins. The definition of proved reserves is included in the section entitled "Definitions of Reserves" which is attached with this report. The proved developed non-producing reserves included herein are comprised of shut-in and behind pipe categories. The various reserve status categories are defined in the section entitled "Reserve Status Categories (SEC)" which is attached with this report. ESTIMATES OF RESERVES In general, the reserves included herein were predominantly estimated by the volumetric method due to the limited production history of the wells considered in this study. However, performance methods were used in certain cases where characteristics of the data indicated this method was more appropriate in our opinion. The reserves estimated by the performance method utilized extrapolations of various historical data in those cases where such data were definitive. Reserves were estimated by the volumetric method in those cases where there were inadequate historical performance data to establish a definitive trend or where the use of production performance data as a basis for the reserve estimates was considered to be inappropriate. The reserves included in this report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Moreover, estimates of reserves may increase or decrease as a result of future operations. FUTURE PRODUCTION RATES Initial production rates are based on the current producing rates for those wells now on production. Test data and other related information were used to estimate the anticipated initial production rates for those wells or locations which are not currently producing. If no production decline trend has been established, future production rates were held constant, or adjusted for the effects of curtailment where appropriate, until a decline in ability to produce was anticipated. An estimated rate of decline was then applied to depletion of the reserves. If a decline trend has been established, this 3 Carrizo Oil & Gas, Inc. March 31, 1998 Page 3 trend was used as the basis for estimating future production rates. For reserves not yet on production, sales were estimated to commence at an anticipated date furnished by Carrizo. In general, we estimate that future gas production rates limited by allowables or marketing conditions will continue to be the same as the average rate for the latest available 12 months of actual production until such time that the well or wells are incapable of producing at this rate. The well or wells were then projected to decline at their decreasing delivery capacity rate. Our general policy on estimates of future gas production rates is adjusted when necessary to reflect actual gas market conditions in specific cases. The future production rates from wells now on production may be more or less than estimated because of changes in market demand or allowables set by regulatory bodies. Wells or locations which are not currently producing may start producing earlier or later than anticipated in our estimates of their future production rates. HYDROCARBON PRICES Carrizo furnished us with prices in effect at December 31, 1997 and these prices were held constant except for known and determinable escalations. In accordance with Securities and Exchange Commission guidelines, changes in liquid and gas prices subsequent to December 31, 1997 were not taken into account in this report. Future prices used in this report are discussed in more detail in the section entitled "Hydrocarbon Pricing Parameters" which is attached with this report. COSTS Operating costs for the leases and wells in this report are based on the operating expense reports of Carrizo and include only those costs directly applicable to the leases or wells. When applicable, the operating costs include a portion of general and administrative costs allocated directly to the leases and wells under terms of operating agreements. No deduction was made for indirect costs such as general administration and overhead expenses, loan repayments, interest expenses, and exploration and development prepayments that are not charged directly to the leases or wells. Development costs were furnished to us by Carrizo and are based on authorizations for expenditure for the proposed work or actual costs for similar projects. The estimated net cost of abandonment after salvage was included for properties where abandonment costs net of salvage are significant. At the request of Carrizo, their estimate of zero abandonment costs after salvage value for onshore properties was used in this report. Ryder Scott has not performed a detailed study of the abandonment costs nor the salvage value and makes no warranty for Carrizo's estimate. Current costs were held constant throughout the life of the properties. GENERAL While it may reasonably be anticipated that the future prices received for the sale of production and the operating costs and other costs relating to such production may also increase or decrease from existing levels, such changes were, in accordance with rules adopted by the SEC, omitted from consideration in making this evaluation. 4 Carrizo Oil & Gas, Inc. March 31, 1998 Page 4 The estimates of reserves presented herein were based upon a detailed study of the properties in which Carrizo owns an interest; however, we have not made any field examination of the properties. No consideration was given in this report to potential environmental liabilities which may exist nor were any costs included for potential liability to restore and clean up damages, if any, caused by past operating practices. Carrizo has informed us that they have furnished us all of the accounts, records, geological and engineering data, and reports and other data required for this investigation. The ownership interests, prices, and other factual data furnished by Carrizo were accepted without independent verification. The estimates presented in this report are based on data available through November 1997. Neither we nor any of our employees have any interest in the subject properties and neither the employment to make this study nor the compensation is contingent on our estimates of reserves and future income for the subject properties. This report was prepared for the exclusive use and sole benefit of Carrizo Oil & Gas, Inc. The data, work papers, and maps used in this report are available for examination by authorized parties in our offices. Please contact us if we can be of further service. Very truly yours, RYDER SCOTT COMPANY PETROLEUM ENGINEERS Michael F. Stell, P.E. Vice President MFS/ag 5 DEFINITIONS OF RESERVES PROVED RESERVES (SEC DEFINITION) Proved reserves of crude oil, condensate, natural gas, and natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalation based on future conditions. Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. In certain instances, proved reserves are assigned on the basis of a combination of core analysis and electrical and other type logs which indicate the reservoirs are analogous to reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. The area of a reservoir considered proved includes (1) that portion delineated by drilling and defined by fluid contacts, if any, and (2) the adjoining portions not yet drilled that can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of data on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Reserves that can be produced economically through the application of improved recovery techniques are included in the proved classification when these qualifications are met: (1) successful testing by a pilot project or the operation of an installed program in the reservoir provides support for the engineering analysis on which the project or program was based, and (2) it is reasonably certain the project will proceed. Improved recovery includes all methods for supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, including (1) pressure maintenance, (2) cycling, and (3) secondary recovery in its original sense. Improved recovery also includes the enhanced recovery methods of thermal, chemical flooding, and the use of miscible and immiscible displacement fluids. Proved natural gas reserves are comprised of non-associated, associated and dissolved gas. An appropriate reduction in gas reserves has been made for the expected removal of natural gas liquids, for lease and plant fuel, and for the exclusion of non-hydrocarbon gases if they occur in significant quantities and are removed prior to sale. Estimates of proved reserves do not include crude oil, natural gas, or natural gas liquids being held in underground or surface storage. Proved reserves are estimates of hydrocarbons to be recovered from a given date forward. They may be revised as hydrocarbons are produced and additional data become available. 6 RESERVE STATUS CATEGORIES (SEC) Reserve status categories define the development and producing status of wells and/or reservoirs. PROVED DEVELOPED Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. Developed reserves may be subcategorized as producing or non-producing using the SPE/WPC Definitions: Producing Reserves sub-categorized as producing are expected to be recovered from completion intervals which are open and producing at the time of the estimate. Improved recovery reserves are considered producing only after the improved recovery project is in operation. Non-Producing Reserves sub-categorized as non-producing include shut-in and behind pipe reserves. Shut-in reserves are expected to be recovered from (1) completion intervals which are open at the time of the estimate but which have not started producing, (2) wells which were shut-in for market conditions or pipeline connections, or (3) wells not capable of production for mechanical reasons. Behind pipe reserves are expected to be recovered from zones in existing wells, which will require additional completion work or future recompletion prior to the start of production. PROVED UNDEVELOPED Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with reasonable certainty that there is continuity of production from the existing productive formation. Estimates for proved undeveloped reserves are attributable to any acreage for which an application of fluid injection or other improved technique is contemplated, only when such techniques have been proved effective by actual tests in the area and in the same reservoir. 7 HYDROCARBON PRICING PARAMETERS SECURITIES AND EXCHANGE COMMISSION PARAMETERS OIL AND CONDENSATE Carrizo furnished us with oil and condensate prices in effect at December 31, 1997 and these prices were held constant to depletion of the properties. In accordance with Securities and Exchange Commission guidelines, changes in liquid prices subsequent to December 31, 1997 were not considered in this report. PLANT PRODUCTS Carrizo furnished us with plant product prices in effect at December 31, 1997 and these prices were held constant to depletion of the properties. GAS Carrizo furnished us with gas prices in effect at December 31, 1997 and with its forecasts of future gas prices which take into account SEC guidelines, current spot market prices, contract prices, and fixed and determinable price escalations where applicable. In accordance with SEC guidelines, the future gas prices used in this report make no allowances for future gas price increases which may occur as a result of inflation nor do they make any allowance for seasonal variations in gas prices which may cause future yearly average gas prices to be somewhat lower than December 31, 1997 gas prices. For gas sold under contract, the contract gas price including fixed and determinable escalations, exclusive of inflation adjustments, was used until the contract expires and then was adjusted to the current market price for the area and held at this adjusted price to depletion of the reserves. EX-99.2 12 SUMMARY OF RESERVE REPORT - FIARCHILD, ANCELL 1 EXHIBIT 99.2 February 25, 1998 Carrizo Oil & Gas, Inc. 14811 St. Mary's Lane, Suite 148 Houston, Texas 77079 Re: Reserves Evaluation to the Interests of Carrizo Oil & Gas Corp. Heavy Oil Properties, Anderson County, Texas Gentlemen: Fairchild, Ancell & Wells, Inc. (FAW) has performed an engineering evaluation to estimate proved reserves and future cash flows from heavy oil (steamflood) properties to the interests of Carrizo Oil & Gas Corporation in Anderson County, Texas. This evaluation was authorized by Mr. S.P. Johnson IV, President of Carrizo Oil & Gas Corporation (Carrizo). Projections of the anticipated future annual oil production and future cash flows have also been prepared utilizing property development schedules provided by Carrizo. The reserves and future cash flows to the evaluated interests were based on economic parameters and operating conditions considered applicable and are pursuant to the financial reporting requirements of the Securities and Exchange Commission (SEC). December, 1997 hydrocarbon prices were used in the preparation of this report and current costs were held constant throughout the life of the properties. The results of the study are summarized below. SUMMARY ESTIMATED PROVED RESERVES AND FUTURE CASH FLOWS CAMP HILL FIELD ANDERSON COUNTY, TEXAS TO THE INTERESTS OF CARRIZO OIL & GAS CORP. EFFECTIVE 1/1/98
Future Cash Flows (Before NPI) (M$) Net --------------------------------------- Reserves Mbbls Undiscounted Discounted at 10% -------------- ------------ ----------------- Proved Producing 901.5 5,218.8 3,993.5 Proved Undeveloped 3,795.8 7,759.5 3,135.4 Total Proved 4,697.3 12,978.3 7,128.9
2 Carrizo Oil & Gas, Inc. Page 2 February 23, 1998 FUTURE CASH FLOW -- TOTAL PROJECT BY YEAR (AFTER NET PROFITS INTEREST)
Future Cash Flows (M$) -------------------------------------- Year Undiscounted Discounted at 10% ---- ------------ ----------------- 1998 157.9 150.6 1999 1,555.8 1,348.6 2000 997.6 786.1 2001 926.4 663.7 2002 1,141.1 743.1 2003 964.9 571.2 2004 1,276.7 687.1 2005 1,257.0 615.0 2006 595.2 264.7 2007 516.2 208.7 2008 1,372.3 504.5 2009 1,148.4 383.8 2010 358.4 108.9 2011 8.1 2.2 TOTAL 12,276.2 7,038.2
The estimated reserves and future cash flows shown in this report are for proved developed producing and proved undeveloped reserves. Our estimates do not include any value which might be attributed to interests in undeveloped acreage beyond those tracts for which reserves have been assigned. In performance of this evaluation, we have relied upon information furnished by Carrizo with respect to property interests owned, production from such properties, current costs of operation and development, current prices for production, agreements relating to current and future operations and sale of production. With respect to the technical files supplied by Carrizo, we have accepted the authenticity and sufficiency of the data contained therein. Future cash flow is presented after deducting production taxes and after deducting future capital costs and operating expenses, but before consideration of Federal income taxes. The future cash flow has been discounted at an annual rate of 10 percent to determine its "present worth." The present worth is shown to indicate the effect of time on the value of money and should not be construed as being the fair market value of the properties Our estimates of future revenue do not include any salvage value for the lease and well equipment nor the costs of abandoning the properties. Fairchild, Ancell & Wells, Inc. expresses no opinion as to the fair market value of the evaluated properties. 3 Carrizo Oil & Gas, Inc. Page 3 February 23, 1998 The reserves included in this report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts. Because of governmental policies and uncertainties of supply and demand, the actual sales rates and the prices actually received for the reserves along with the costs incurred in recovering such reserves may vary from those assumptions included in this report. Also, estimates of reserves may increase or decrease as a result of future operations. In evaluating the information at our disposal concerning this report, we have excluded from our consideration all matters as to which legal or accounting, rather than engineering, interpretation may be controlling. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering data and, therefore, our conclusions necessarily represent only informed professional judgments. The titles to the properties have not been examined by Fairchild, Ancell & Wells, Inc. nor has the actual degree or type of interest owned been independently confirmed. We are independent petroleum engineers and geologists; we do not own an interest in these properties and are not employed on a contingent basis. Basic geologic and field performance data together with our engineering work sheets are maintained on file in our office and are available for review. It has been a pleasure to serve you by preparing this engineering evaluation. Yours very truly, Fairchild, Ancell & Wells, Inc. -----END PRIVACY-ENHANCED MESSAGE-----