Abraxas Petroleum Corporation (AXAS, Financial) is a small cap exploration and production company based in San Antonio, Texas. The company has a market cap of $472 million and has been trending higher since last year in terms of stock price. The company is currently trading at a price of $5 and this article discusses why the upside will continue.
EBITDA Expansion from Change in Production Mix
Over the last 18 months, the company has strategically shifted its focus to core assets. Last year, it sold its non-operating assets in Bakken and Wyoming. The proceeds were used to buy core assets in Eagle Ford and to repay debt. The positive impact is evident in the company’s balance sheet with the leverage (debt/EBITDA) declining from 18x in 2012 to 1x in 2013.
| Â | 2013 | 2012 |
| Debt | 43.9 | 124.8 |
| EBITDA | 41.5 | 6.7 |
| Debt/EBITDA | 1.0 | 18.6 |
In addition to this there has been a change in the product mix, which has impacted margins. Abraxas has been increasing its oil and liquid production as a percentage of total production. There has been a 63% rise in the oil and liquid production since first quarter 2012 and this has resulted in an EBITDA margin expansion of 1500 basis points. With this trend expected to continue, the company is well positioned to generate robust EBITDA and further increase its operating margin.
| Â | 1Q14 | 1Q12 |
| EBITDA | 14.9 | 7.0 |
| Revenue | 25.9 | 16.3 |
| EBITDA margin | 58% | 43% |
Capital Expenditure to Translate Into Robust Growth
The company has an approved capital budget of $105 million for fiscal 2014 with 40% allocated for the development and completion of well drilling in Eagle Ford and 51% is allocated for the development of their wells in Bakken Shale.
The current capital expenditure program is focused on two key assets, which can yield strong results in terms of production upside. The potential of the assets is evident from the fact that Abraxas has 9901 net acres of assets in Eagle Ford with a majority of its assets in Jourdanton. The company has 100% working interest in Jourdanton with a potential of 90+ wells. As these wells are drilled, production upside is imminent.
This capital expenditure programme of the company suggests that Abraxas plans to add more rig units and hence de-risk more assets. It is estimated that with a capital investment of $95 million in these assets, production growth could potentially be 24% for fiscal2014. This implies that the company is well set for robust growth in the current financial year. This should help the stock to sustain its upside over the medium-term.
Source: Company Presentation
Attractive Valuations
Considering the above factors, the company is well placed to grow in terms of production and this will translate into healthy revenue and EBITDA growth. The undervaluation is clear considering the fact that the company is currently trading at a PE of 11.2 with an estimated earnings growth for fiscal 2014 and fiscal 2015 at 215% and 29% respectively. This would result in a considerably low PEG, and hence suggests the company is grossly undervalued with respect to the future earnings potential.
Conclusion
Abraxas Petroleum Corporation has robust growth lined up for the next two years. The company’s stock has trended higher over the last year, discounting the positives in the foreseeable future. However, PEG valuation still suggests that the company has more upside. Investors can consider the stock with a medium-term time horizon.
