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Rating Action:

Moody's assigns B3 rating to Carrizo's proposed senior unsecured notes

25 Oct 2010

Approximately $325 million of debt securities affected (first time rating)

New York, October 25, 2010 -- Moody's Investors Service assigned Carrizo Oil & Gas, Inc. a B2 Corporate Family Rating, B2 Probability of Default Rating, a Speculative Grade Liquidity (SGL) -- 3 rating, and a B3 (LGD 5, 75%) rating to the company's proposed $325 million senior unsecured notes. The proceeds from the notes offering will be used to reduce revolver drawings and repurchase up to $300 million of convertible senior notes. The rating outlook is stable.

RATINGS RATIONALE

"Carrizo's B2 Corporate Family Rating reflects management's strong operational performance in the Barnett Shale and track record in issuing equity," commented Gretchen French, Moody's Assistant Vice President. "The rating is restrained by the company's smaller size, production concentration, high financial leverage and negative free cash flow generation."

Carrizo's proved reserves and production are concentrated in the Barnett Shale in North Texas, where the company has been operating since 2003. However, this concentration has resulted in Carrizo successfully growing reserves and production through productive internal capital reinvestment. One-year all sources F&D costs in 2009 were a competitive $7.15/boe and three-year F&D costs are also favorable at $11.94. Carrizo's cost structure reflects its early mover advantage in the Barnett, its high degree of operational control of its properties and management's willingness not to drill uneconomic wells even if it means giving up its lease position. The company continues to have a significant drilling inventory in the most economical part of the play.

Carrizo has embarked on a strategy to enhance its geographic diversification and increase its exposure to liquids-rich and oil plays, expanding into the Marcellus, Eagle Ford and Niobrara Shales. However, this diversification strategy still remains in the early stages and is capital intensive. As Carrizo expands into other shale plays it remains to be seen if the company can replicate the capital efficiency it has displayed in the Barnett, particularly in the face of rising service costs. We note that if successful, Carrizo should benefit from higher margins, and, over the near-term, the company's joint venture with Reliance Industries will benefit its cost structure due to the partial drilling carry.

Carrizo has high financial leverage based on debt to production and proved developed (PD) reserves. At June 30, 2010, Carrizo had debt/production of approximately $40,000 boe/d and debt/PD reserves of about $12/boe, both of which are indicative of a Caa rating. The high leverage stems from several years of negative free cash flow generation. Moody's expects Carrizo will continue to generate negative free cash flow through 2013 due to high levels of capital spending as the company expands geographically. However, we also expect continued production and reserve growth, and consider management's track record of issuing equity and entering into joint ventures to help manage its capital spending program.

Carrizo's SGL-3 rating reflects Moody's expectation that Carrizo will have adequate liquidity through the end of the fourth quarter of 2011, despite the expectation of negative free cash flow generation. Supporting its liquidity profile is adequate availability on its revolver, the cash flow benefits of its joint venture in the Marcellus Shale and a supportive hedging program.

The stable rating outlook is based on the expectation that financial leverage will trend down over the near term as the company grows production and proved developed reserves and management prudently manages the financing of its capital spending program.

Moody's believes there is limited upside in the current ratings over the near term. Over the longer term, materially increased scale could be positive for the ratings, assuming the growth was achieved with competitive costs and financial leverage was lower (debt/PD reserves below $9/boe and debt/production less than $20,000).

On the other hand, the ratings could face pressure if production were to fall significantly, the company were to experience materially higher F&D costs, leverage were to remain elevated (debt/PD reserves above $12/boe), or if liquidity were to become constrained.

Carrizo Oil & Gas, Inc., headquartered in Houston, Texas, is an independent exploration and production company.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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New York
Gretchen French
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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Moody's assigns B3 rating to Carrizo's proposed senior unsecured notes
No Related Data.
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