Abraxas Petroleum (AXAS, Financial) turned to losses in its recently reported fiscal first quarter results along with significant decline in its top line. The numbers were mainly driven by weak commodity prices, which more than offset its year-over-year increase in production. In spite of this, the fundamentals of the company are improving, and it managed to improve its production even while reducing its debt levels. The same is pictured in the chart below. Let’s see in detail whether the company be will able to continue this momentum in the days ahead.
A look at the prospects
In addition, the company-owned rigs in North Dakota continue to report impressive results, so much so that the management has decided to drill more wells in 2015 than originally planned. The biggest advantage is that, because of its service cost savings, these new wells will increase its capital expenditure budget by only $1 million, which should still generate free cash flow.
Therefore, the company elected to get the closed wells back in business. It was a good decision to wait, yielding positive results from different regions. For example in the Eagle Ford, frac cost is expected to reduce about 38% with similar performance in the Grass Farm well.
On the macro front positive cues are coming in with expectations of improving oil prices. According to a recent report:
“EIA projects the Brent crude oil price will average $61/b in 2015, $1/b higher than in last month's STEO, with prices rising from an average of $54/b in the first quarter to an average of $63/b for the remainder of the year. The Brent crude oil price is projected to average $70/b in 2016.”
A similar forecast is given by EIU as shown in the chart below. But at the same time EIA it also cautioned that these projections are subject to various geopolitical factors such as lifting of sanctions against Iran, and others. Hence it will be a matter of time to see how things move in this direction.
Conclusion
But in spite of these uncertainties the company looks poised for growth. Abraxas’ current stock price seems undervalued considering its P/S multiple of 2.38 compared to the industry average of 7.05. However its forward P/E of 16.94 compared to a trailing P/E of 5.19 indicates stunted growth. But considering that the oil prices might improve in the days ahead, earnings is also expected to get better. Therefore in the light of these facts Abraxas Petroleum seems to be a good long-term bet.
