Abraxas Petroleum - Old ABP
June 20, 2001 - 6:49pm EST by
2001 2002
Price: 3.40 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 88 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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ABP has a NAV per share of $14.80. Abraxas Petroleum is a small ($104 mil market cap) but highly leveraged ($370 mil TEV) oil and gas (78%) E&P company operating in Texas, Wyoming and Alberta. Estimated asset value per share is $14.80.
EBITDA for 1Q01 was $22 million. Company entered 2Q with production 6% above 1Q average. Estimate $96 million EBITDA for 2001 and $118 million for 2002, putting respective years’ P/EBITDA at 0.9x and 0.7x and TEV/EBITDA at 3.7x and 3.0x.

Its great attraction is high ownership position of highly exploitable producing properties and high ownership of large acreage in 2 extremely promising exploratory plays. Given the more than 260 rather low risk drill sites already identified on their producing properties and the early stage of the company’s efforts to date (28 successful wells), cash flow can be expected to expand very dramatically over next few years without putting much of a dent in exploitation potential and without any benefit of the company’s enormous exploration potential. (See below for property descriptions.) Finally, low-priced hedges ($2.75) expire Fall, 2002, which will add $19-20 million annually to cash flow (75 cents share).

So why isn’t ABP higher? The company became dangerously over- leveraged in acquiring properties in mid/late 90’s and missed an equity-financing window as energy prices turned down. In December, 1999, it swapped 16.1 million shares (then valued around $1 each) for $81 million in debt. These bondholders took a majority of board seats and received contingent-value-rights (CVR’s) that would result in the issuance to them of another 105 million shares unless ABP stock price passed certain hurdles by 5/18/01. The resultant uncertainly as to the value of existing shareholdings (facing possible 5 to 1 dilution) was finally resolved on 5/18/01 with the determination that only 3.2 million shares would be issued to CVR holders on 5/21/01. As bondholders had sold at least 95% of their prior equity holdings, it is logical to assume that they have also been selling the additional 3.2 million. In the 10 trading days since issuance (through 6/11/01), volume has exceeded 3.5 million shares, suggesting that selling pressure (and buyer flight) from the company’s 1999 restructuring may be at or near its end.

Abraxas will issue 3.9 million shares to buy the 51% of Canadian E&P partner Grey Wolf Exploration it does not already own for 0.6 shares ABP for each GWX share. ( ABP management owns another 15% of GWX.). The transaction (in July?) will add 50 cents to ABP book value and 10 cents to 2001 EPS, and will help de-leverage and greatly simplify ABP. Consolidation should enable ABP to more easily re-finance its high-cost bonds- all of which are callable. Re-financing could add 25 cents to 30 cents to per share cash flow. As of year-end 2000, ABP had a net operating loss carryforward of $101.8 million and similarly in Canada had C $11.4 million in carry-forwards.

Now for the guts of the story:

Abraxas uses horizontal drilling technology, aided by 3D seismic, to exploit known heterogeneous reservoirs, with the following advantages: a) attractive economics, b.)low- cost, large acreage blocks, c.) multiple replication d.)optimal exploitation with 3D guidance, e.) low dry-hole risk (note below the success ratio of wells drilled) Aspects of the properties that clearly highlight these advantages are described below. However, I recommend “AbraxasPetroleum.com” for its detailed description of each of the producing and exploration properties (“Areas of Operation”). Also see the link to “SmallCapCenter.com” for detailed thoughts on the Ladyfern exploratory play.

Four producing properties contain conservatively (0 reserves for direct offsets) and independently engineered proven reserves of 238BCF. Probable reserves (3rd party engineered, PV10 risked at 50%.) total 147 BCF. Gas gathering and processing on Canadian properties generates over $4 million in cash flow. All properties (both E&P) are adjacent to pipeline systems. Values in millions estimated as follows: proven reserves--$428, probable reserves--$113, gas processing plants--$45, acreage--$50, GWX market value (c $3.80)--$15. Total asset value = $651 million; less debt of $267 mil. leaves $384 million or $14.80 per share of equity value.

ABP started drilling the Montoya (Texas) formation in December, 2000. The first 13000 A position is 75% ABP/25% EOG for Montoya formation only; ABP retains rights to other formations. Adjacent to original block, ABP acquired an additional 13000 A (100%) where 3D seismic work was recently completed with the first well scheduled for later this year. In the J.V. property, first 2 wells successfully producing, 3 more to be carried by EOG, and 30 additional drill sites identified in this very high potential, low risk play.

ABP has been drilling Brooks Draw, Wyoming (Powder River Basin) since late 1999 with four potential zones. 5 out of 6 wells were successful with 1 mechanical failure, which is producing marginally. The 6th well will be on stream shortly. 3D seismic has been completed on most of 62,000 contiguous acres (100% ABP) with 200 additional sites so far identified.

Drilling began in mid-2000 on the Caroline/Pouce Coupe (Alberta) properties where ABP (100%) holds 79,000 net A with gas gathering and processing. 11 out of 12 wells have been successful with 1 temporarily abandoned for mechanical reasons. 47 additional sites have been identified so far, however, the company recently completed shooting 3D seismic on its Canadian properties.

Edwards Trend (Texas) drilling has been proceeding since late 1997 on 11000 A (100% ABP). 12 out of 13 wells have been successful and 3 additional wells be completed & produce in 2Q.

ABP has 2 exploration properties with company-making potential. ABP has 33%-100% in 24000 A (11000 net) in the ladyfern area of British Columbia. These properties are immediately adjacent to, on-trend with, and structurally similar to properties where Murphy, Apache and others have recent discovery wells with sustained rates of gas production of 30-70 mmcfpd. and with estimated reserves averaging 30 bcf per well.

The company states that a successful ABP well at the low end (30 mmcfpd) of that range would at a 33% working interest add $1 to NAV and 15% to total company production. The company has extensive and very encouraging 3D seismic data and has identified initial drill targets for this winter. ABP is a rare small cap. leveraged play on the Ladyfern area that Apache calls “quite possibly, on a gross basis in North America, is the largest thing we’ve ever found.” Investors seem to have focused heavily on this play in pushing up Murphy Oil.

Last but not least (actually most) is Norman Wells in the Mackenzie Valley (Northwest Territories) where ABP has 331,000 net acres including 116,000 A immediately adjacent to the Norman Wells producing field—the 4th largest oil field in Canada. ABP acquired its first property interests here in 1997. Recently, activity in the area has been very strong, with industry belief that the area has reserves equivalent to Prudhoe Bay. An oil pipeline currently crosses directly over ABP property as does a proposed gas pipeline which would likely be completed in a time frame relevant to any major development by ABP.

ABP deploys all of its cash flow into CAPEX for obvious reasons. Though the 5-year potential appreciation is enormous, it is unlikely to be realized by public shareholders, as a takeover before this year’s or next year’s winter drilling season in Ladyfern seems highly likely (i.e., nearing 100% probability over 16 months). If such a bid came very soon, it also seems likely that shareholders would suffer a discount to my estimate of net asset value (perhaps 30% but still about 3x today’s values), although a bidding contest could result once the ball got rolling since there are a reasonable number of logical partners, starting with those with existing Ladyfern interests such as MUR,APA,DVN, and others both well known and lesser known. (And note: ABP is hardly as unknown among major industry participants as it is among investors and Wall Streeters.) Given the extroadinary property-acquisition opportunity (unusually embedded in a small company), a takeover is likely sooner than later, but should it wait to next year, shareholders may well benefit handsomely for all or some of the following reasons:

1) Likely: Natural gas companies get embraced by Wall Street which today is still doubting of NG’s future despite huge new demand coming on stream from new electricity generation, despite the inability to expand N.A. production beyond (at best) 1-2%, even with oil rigs and other services near full utilization, despite historically low storage reserves even after recent large storage additions. Wall Street’s embrace would add impetus and higher prices to the gathering acquisition storm brewing in the N. American natural gas industry.
2) In the Bag: Higher gas production, debt refinancing and no hedges make huge increase in cash flow very visible in 2H/4Q02.
3) In the Bag: Aftermath of CVR shares issuance (today’s current buying opportunity) becomes ancient history—so risk premium drops significantly.
4) Possible: 1(+) Murphy-sized well(s) in Ladyfern would start fireworks.
5) Almost in the bag: Reasonably significant additions to proved and probable reserves in current producing properties keeps the hard measures of value on the rise.



1) Selling pressure from the 3 .2 million contingent-value-rights shares issued 5/21/01 probably near an end as 4.2 million shares have traded in 22 trading days since.
2) Stock selling at 23% of estimated hard asset value of $14.80 per share.
3) Asset value per share will rise quickly and steadily as exploitation of low-risk producing properties has just recently begun
4) EBITDA over 18 months ending 12/31/02 projected at $6.54/share or $169 million vs. equity market capitalization of $88 million vs. TEV of $354 million. While still in the early stages of its development program in 4Q02, the company nevertheless should exit the quarter at annual rate of $136 million (155% of current equity cap and 38% of TEV).
5) Exploration properties (342,000 net A.)—being on trend with and adjacent to huge discoveries—look like good bets and are of the company-making variety (very unusual for a company this size).
6) Management clearly willing to sell company (and bondholders hold majority of board seats).
7) Gas hedges at $2.75 expire Fall 2002.
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