Industry Analysis Carrizo is an exploration and production company that engages in oil and gas industry. The industry can divide into three sectors: upstream, midstream and downstream. Upstream companies explore for and produce hydrocarbons, midstream companies transport hydrocarbons and finished products, and downstream companies refine hydrocarbons into finished products and distribute the products. Although the market cap of Carrizo is small, the company is an industry leader in horizontal development drilling. Industry Driver The prices of oil and gas are the main index indicating the status of the oil and gas industry. As a sector of oil and gas industry, exploration & production (E&P) companies’ revenue depend heavily on the prices. …show more content…
OPEC products 42 percent of the world’s crude oil. The 12 member countries establish the organization to make agreement on the supply of crude oil during a certain period to make sure the balance of the global market. As the emergence of shale resources in the United States, the global oil and gas industry have changed a lot. In the third quarter of 2014, the daily production of OPEC was 1.5 million barrels more than the predicted demand. However, facing the competition on market share from the United States and OPEC’s financial pressure, OPEC decided not to cut down their production of oil. The decision was made at the meeting in Vienna, Austria in December 2014. As a result, the oil price decrease by 46.6 percent in 2014. Comparing with oil market, which is global, gas market is more like to be regional, because gas is harder and costs more to transport. Domestically, the distance from the production region to users can influence the gas price a little bit. The main factor that influences the gas price is also the supply-demand relationship. As United States is producing more and more gas from shale, the domestic surplus supply of gas is large, which makes the present gas price in U.S. low. Gas price is also in the annually seasonal business cycle. As the main source to heat during the cold winter, the gas price usually increases as the temperature …show more content…
Even though thousands of energy companies exist in the E&P industry, the threat of entry is still low, because the new player needs to overcome large capital investment and restrictive government regulations. Take Carrizo, which is only a small-cap oil & gas company, the capital expenditures for oil and gas properties at the end of 2013 were $ 786.98 million. Both finding cost and drilling cost are extremely high, and the cost is increasing in recent years. The new player will bear high risks at the same time. There is large possibility that the drilling would end with a dry well or a poor production well. In addition, finding, locating, drilling and producing oil and gas need specific technical expertise. The company will cost to find specialists in different areas, such as drilling engineering, geology and operations. The restrictive government regulation is also a barrier to enter the industry. It costs a lot to get the permission to explore an undeveloped area. The competition among the existing E&P companies is already fierce, which makes it difficult for a new company to enter the