Why Abraxas Petroleum Is Well-Positioned for Long-Term Gains

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May 22, 2015

Considering Abraxas Petroleum's (AXAS, Financial) operations in North Dakota, it lately concluded the drilling of four key wells to approximately 21,000 feet each located on the Jore Federal West pad in a record reduced cost and record time.

Abraxas has approximately a 76% operational interest in these key wells and hence, they have a major effect on the company’s profitability. The company-captured drilling rig, Raven Rig, is shifting to middle Bakken well and one three-well Northwest pad for two Three Forks, where Abraxas is estimated to have an interest of approximately 60%. There are declining costs in North Dakota and are believed to further reduce in the near future.

Better times ahead

The notable drilling operations of Abraxas in North Dakota at lowered costs and significant optimized production at the Raven Rig is forecasted to keep Abraxas ahead of its competition in terms of production and profitability.

Since the last decade, the integrated hydraulic fracturing and horizontal drilling has allowed access to huge volumes of oil and natural gas, that were earlier not feasible to drill from low permeability geological formations made from sandstone, shale and carbonate (such as, limestone).

Growth factors

There are several reserves of shale oil and natural gas resources being identified by the key drilling majors across the U.S. The Barnett Shale in Texas is continually producing natural gas for over a decade. An additional major shale gas play is the Marcellus Shale located in the eastern United States. However the Marcellus and Barnett formations are recognized shale gas plays in the United States; over 30 U.S. states cover shale formations.

The newer technologies developed for shale oil and natural gas drilling over a decade period has enabled the energy drilling majors to multiply the shale oil and natural gas production. The Barnett Shale and the Marcellus Shale are two major sources of oil and natural gas production throughout the U.S.

Barnett Shale, which was primarily pioneered by the Mitchell Energy and Development Corporation for the production of oil and natural gas, achieved a breakthrough in early 2000 by innovatively developing a hydraulic fracturing technique that delivered commercial volumes of shale gas.

Copying upon the success of Barnett Shale, several other key drilling giants began drilling wells in this Shale itself. Hence, the Barnett Shale was delivering approximately half a trillion cubic feet (Tcf) of natural gas per year. Going forward, key natural gas producers added self-reliance to their abilities to gainfully generate natural gas in the Barnett Shale, with extra evidence offered by significant well results in the Fayetteville Shale in northern Arkansas. Producers began growing other shale formations that include the Utica and Marcellus Shales in northern Appalachia, the Eagle Ford in southern Texas, the Woodford in Oklahoma and Haynesville, in north Louisiana, and eastern Texas.

The significant exploration efforts put in along with a notable success achieved by the key oil and natural gas drilling companies across the Shale area has accelerated the drilling activities through several other key wells in the U.S.

The above graph depicts the expanding number of the key Shale gas producers throughout the U.S. with only a few producers in the fiscal year 2000 to notable number of producers in 2014, signifying the attractiveness and benefit of producing oil and natural gas across the area with the developing technology.

Moving ahead, the oil and gas industry is dealing with the poor oil pricing environment by cutting on its 2015 exploration budgets by nearly 30%, which could significantly decelerate the exploration activities. But, in order to deliver value, Wood Mackenzie expects the industry to be dealing with the lasting cost inflation problem, and believes the average exploration costs to decline by a third, reducing the affects of budget cuts.

The rising number of major oil and gas drilling companies is believed to contract the market share of each of them from the overall shale production. These companies should be further hurt by the declining oil pricing environment and the growing exploration costs.

Conclusion

Overall, the investors are advised to invest into Abraxas Petroleum Corp. looking at the satisfactory company valuation with trailing P/E and forward P/E ratios of 5.22 and 14.13 respectively, also better than the industry’s average P/E of 10.75 which indicate that the company growth is at lower price than the industry’s growth.

The PEG ratio of 2.85 is better than its key competitors such as Chesapeake Energy Corporation and Chevron Corporation having PEG ratios of -7.97 and -16.09 respectively. The profit margin of 47.30% is impressive. However, Abraxas needs to optimize its debt-laden balance sheet with huge total debt of 78.79 million against weaker total cash of $3.77 million only to plan for future growth investments.