Abraxas Petroleum (AXAS): Attempt to restart drilling activities

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Abraxas Petroleum (OTC:AXAS) saw its share price nearly triple due to strong oil prices. A scenario with more than $100 of oil in the near term gives Abraxas the opportunity to resume drilling and increase production while spending within cash flow. At $3 per share, Abraxas likely needs to increase production to over 4,000 BOEPD (in a few years) for its stock to have a decent upside from current levels.

Cash flow

As of last report, Abraxas had no hedging for 2022. If this remains the case, it would fully benefit from higher oil prices. At $100 of WTI oil in 2022, I estimate that Abraxas could generate about $20-25 million in positive cash flow during the year if it tried to keep production steady.

Abraxas has also mentioned plans to resume drilling and is in advanced negotiations with new lenders for a credit facility to help restart that drilling.

Value of common shares based on distributions

As previously reported, common stockholders of Abraxas receive 5% of any distribution over $100 million in a future liquidation event. This amount increases to 25% after Angelo Gordon’s preferential amount (of $137 million, increasing 6% per year, compounded quarterly) is covered.

So, if Angelo Gordon’s preferred stock is worth $137 million, a liquidation event that pays out $225 million would result in $2.83 per share going to common shareholders.

The value accruing to common stockholders varies significantly with changes in distribution value. A 22% decrease in payout value (to $175 million) would result in a 52% decrease in value per share (to $1.35) accruing to common shareholders. Conversely, a 22% increase in payout value (to $225 million) would result in a 53% increase in per-share value for common shareholders.

Distribution value ($millions) Abraxas Shareholder Value (per share)
$100 $0.00
$125 $0.15
$150 $0.61
$175 $1.35
$200 $2.09
$225 $2.83
$250 $3.57
$275 $4.32
$300 $5.06
$325 $5.80
$350 $6.54

In two years, the value of the preferred shares would increase to $154.33 million. This would reduce the value accruing to common stockholders by approximately $0.41 per share at majority payout values.

Thus, a distribution of $225 million over two years would translate into a value of $2.42 per share for common stockholders. The table below shows the relationship between the common stock value and the payout value if there is an asset sale two years from now.

Distribution value ($millions) Abraxas Shareholder Value (per share)
$100 $0.00
$125 $0.15
$150 $0.30
$175 $0.94
$200 $1.68
$225 $2.42
$250 $3.16
$275 $3.90
$300 $4.65
$325 $5.39
$350 $6.13

Updated asset value estimate

I had previously valued Abraxas’ current production at $84 million, with its undeveloped acreage adding an additional $34.5 million (at $3,000 per net acre) for a total of $118.5 million. dollars.

This appears to be a fairly accurate assessment of the market value of the assets at the time (early January) as reported by Abraxas $89 million PV-10 PDP at 2021 SEC prices (including fixed oil at $66.55).

The increase in short-term oil prices (on a strip basis) increases the value of current production, so I value it at around $100 million now. If the value of undeveloped acreage rises to $4,000 per net acre, that would translate to a total asset value of $146 million now. This is a 23% increase from my January estimate, which is relatively in line with what upstream producers have seen in terms of increased market capitalization since then.

A distribution value of $146 million would result in relatively low consideration for common shareholders (approximately $0.54 per share). However, strong near-term oil prices give Abraxas room to potentially increase production over the next two years while spending within cash flow.

If Abraxas can increase production to approximately 4,000 BOEPD in two years through efficient development and the acreage value reaches $7,000 per net acre, this would yield an estimated total value of $260.5 million. That would be about $3.47 per common share.

Conclusion

High oil prices are giving Abraxas an opportunity to restart its drilling activities and could potentially allow it to significantly increase production while spending largely within cash flow.

Abraxas likely needs to ramp up production to around 4,000 BOEPD in a few years for its common stock to have a reasonable edge over current levels in a similar commodity price environment. At around $3 per share, Abraxas’ common stock is a bet that it can effectively increase production and improve its acreage value (delivering better pit-level economics than past results) before the assets are sold.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these actions.

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