ljmi, Thanks, you have reminded me why I love to invest in small oil & gas companies. You have cogently summarized the reason that most superstars such as yourself avoid these investments. This then creates an inefficient market, where all the information about a particular company is not always incorporated into its stock price at the time such information is made available.
Carrizo is a perfect example of this. As you have so correctly stated, the average hit rate on typical wells in the Gulf Coast area, even using 3D seismic, is around 50%. But if you look at how this company has done, you would find that since 1996 they have drilled 263 wells and 2 out of every 3 have been successful. They have gotten better as the years have gone on, most recently having a 85% hit rate for '02. So far this year they're 7 for 9. Go back to your theoretical calc and replace "50%" with "80%" and you may reach a different conclusion regarding this company's ability to make any money.
Carrizo's strategy is to drill about 20-30 gross wells a year, and with about 5 of them go for the long shots that could put them on the map. So far they've hit on one of these, in '01, and are gunning for more as we speak. They increased production 34% last year and appear to be on track to increase it another 30% this year, all from the drill bit. Few large companies experience that sort of growth 2 years in a row.
P.S. I guess that means you're not gonna load up on MEXP! <g> |
