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Abraxas Petroleum Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 9, 2009 06:19PM

Abraxas Petroleum Corp. (AXAS) filed Quarterly Report for the period ended 2009-09-30. Abraxas Petroleum Corporation is an independent energy company engagedprimarily in the acquisition, exploration, exploitation and production of crude oil and natural gas. They seek to complement their acquisition and development activities by selectively participating in exploration projects with experienced industry partners. Abraxas Petroleum Corp. has a market cap of $87 million; its shares were traded at around $1.746 with a P/E ratio of 3.6 and P/S ratio of 0.9.

Highlight of Business Operations:

Recently, the prices of oil and gas have been volatile. During the first six months of 2008, prices for oil and gas rose to record or near-record levels, however during the third quarter of 2008, and subsequently, there was a significant drop in prices. New York Mercantile Exchange (NYMEX) spot prices for West Texas Intermediate (WTI) crude oil averaged $113.45 per barrel (Bbl) for the nine month period ended September 30, 2008. WTI ended the quarter at $100.64 per barrel. NYMEX Henry Hub spot prices for natural gas averaged $9.68 per million British thermal units (MMBtu) during first nine months of 2008 and ended the quarter at $7.21. During the first nine months of 2009, prices of oil and gas declined significantly from the levels experienced during the first nine months of 2008. During the first nine months of 2009, WTI averaged $57.18 per Bbl and Henry Hub averaged $3.80 per MMBtu. Prices closed the quarter at $70.61 per Bbl of oil and $3.38 per MMBtu of gas and continue to be significantly lower when compared to the same period of 2008. Subsequent to the end of the third quarter, both oil and gas prices have improved. As of November 6, 2009, WTI and Henry Hub were $ 77.43 per Bbl and $4.60 per MMBtu, respectively. If commodity prices decline, our revenue and cash flow from operations could also decline. In addition, lower commodity prices could also significantly reduce the amount of oil and gas we can produce economically. The current global recession has had a significant impact on commodity prices and our operations. If gas prices remain depressed, our revenues, profitability and cash flow from operations may decrease which could cause us to alter our business plans, including reducing our drilling activities.

Declines in commodity prices could also result in downward adjustments to our estimated proved reserves under applicable accounting rules. Under these rules, if the net capitalized cost of oil and gas properties exceeds the PV-10 of our reserves, we must charge the amount of the excess to earnings. For example, as of December 31, 2008, our net capitalized costs of oil and gas properties exceeded the present value of our estimated proved reserves by $116.4 million resulting in a write-down of $116.4 million. These amounts were calculated considering 2008 year-end prices of $44.60 per Bbl for oil and $5.62 per Mcf for gas as adjusted to reflect the expected realized prices for each of our oil and gas reserves compared to each of the full cost pools. This charge did not impact cash flow from operating activities, but did reduce our stockholders equity and earnings. The risk that we will be required to write-down the carrying value of our oil and gas properties increases when oil and gas prices are low. In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves. An expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period.

Borrowings and Interest. At September 30, 2009, we and the Partnership had a total of $141.1 million outstanding under the Credit Facility, the Partnership Credit Facility and the Subordinated Credit Agreement. Upon the closing of the Merger on October 5, 2009, the Credit Facility, the Partnership Credit Facility and the Subordinated Credit Agreement were refinanced and amended and restated by the new credit facility. We borrowed $145.0 million under the new credit facility in connection with the Merger and at October 5, 2009 had availability of $10.0 million. If interest expense increases as a result of higher interest rates or increased borrowings, more cash flow from operations would be used to meet debt service requirements. As a result, we would need to increase our cash flow from operations in order to fund the development of our numerous drilling opportunities which, in turn, will be dependent upon the level of our production volumes and commodity prices. In order to mitigate its interest rate exposure, the Partnership entered into an interest rate swap, effective August 12, 2008, to fix its floating LIBOR-based debt. The Partnership s two-year interest rate swap arrangement for $100 million at a fixed rate of 3.367% expires on

Operating Revenue. During the three months ended September 30, 2009, operating revenue from oil and gas sales decreased by $15.7 million to $13.2 million compared to $28.9 million during the same period of 2008. The decrease in revenue was primarily due to significantly lower commodity prices during the third quarter of 2009 as compared to the same period of 2008. The decrease in commodity prices had a negative impact of $15.8 million to revenue. An increase in oil production contributed $353,000 to revenue which was partially offset by a decrease in gas production, which had a negative impact on revenue of $254,000. Oil production volumes increased from 140 MBbls for the quarter ended September 30, 2008 to 146 MBbls for the same period of 2009. The increase in oil production was primarily from new wells brought on production during 2009 partially offset by natural field declines. Gas production volumes decreased from 1,663 MMcf for the three months ended September 30, 2008 to 1,572 MMcf. The decrease in gas production was primarily due to natural field declines partially offset by new production.

Depreciation, Depletion and Amortization (“DD&A”) Expenses. DD&A expense decreased to $4.1 million for the three months ended September 30, 2009 as compared to $5.8 million for the same period of 2008. The decrease in DD&A was primarily the result of an increase in the reserve base for the quarter ended September 30, 2009 as compared to 2008 as well as a decrease in production. Our DD&A per BOE for the three months ended September 30, 2009 was $10.12 per BOE compared to $13.92 per BOE in 2008.

Income (loss) from derivative contracts. We account for derivative gains and losses based on realized and unrealized amounts. The realized derivative gains or losses are determined by actual derivative settlements during the period. Unrealized gains and losses are based on the periodic mark to market valuation of derivative contracts in place. Our derivative contract transactions do not qualify for hedge accounting as prescribed by ASC 815; therefore, fluctuations in the market value of the derivative contract are recognized in earnings during the current period. Our derivative contracts consist of commodity swaps and interest rate swaps. The estimated unearned value of our derivative contracts is a net liability of approximately $10.9 million as of September 30, 2009. For the quarter ended September 30, 2009, we realized a gain on our derivative contracts of $3.7 million. For the quarter ended September 30, 2009, we incurred an unrealized loss on our derivative contracts of $8.2 million. The realized gain on the commodity swaps of $4.4 million for the quarter ended September 30, 2009 was the result of the commodity swap settlement for July 2009 and the monetization of certain derivative contracts on July 29, 2009 and the realized loss on the interest rate swap of $680,000 was the result of floating interest rates b

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