Permian Basin Provides Strong Growth Visibility for Abraxas Petroleum

Abraxas Petroleum Corp. (AXAS, Financial) is one oil and gas exploration company that has been largely overlooked by investors. The company’s increasing operational activity in the Permian Basin is one of the key reasons to be bullish on the stock. This is the right time to own a winning stock that has the potential to outperform in the long run.

Company overview

Abraxas Petroleum is an exploration and production company that was founded in 1977 and is based in San Antonio. The company primarily focuses on three rich asset bases of Permian Basin, Bakken/Three Forks and Eagle Ford Shale/Austin Chalk. The company currently has a production of 5,955boepd with total proved reserves of 43.2mmboe of which 56% are oil reserves and 40% are developed proved reserves.

Permian Basin advantage

Permian Basin is one of the richest asset bases in the U.S. The asset has low drilling cost because of its complex geographic and technological advantage, which makes it a futile acquisition zone and at the same time helps the company expand its margin. Moreover, Permian Basin is considered to be the epicenter for the U.S. shale resurgence after the price crash in 2014.

In 2016, more than $28 billion was spent to acquire assets in the Permian Basin, which was more than triple what was spent in 2015. This is primarily because the region has excellent pipeline network, abundant labor and favorable winters that allow year-round work. ExxonMobil (XOM, Financial) has announced an investment of $9 billion in the asset which would double its acreage along with others like Occidental Petroleum Corp. (OXY, Financial) and WPX Energy Inc. (WPX, Financial) that have also confirmed their commitments.

Abraxas Petroleum has 5,882 net HBP acres of assets located in the eastern edge of the Delaware Basin in Reeves/Ward/Pecos County. The company has up to five identified potential zones and over 150 identified potential locations in the region. With $6.3 million drilling and completion costs for 5,000-foot laterals, the company has favorable net revenue interest. The company has also been continuously exploring opportunities in the region to expand its position in the Permian Basin. Abraxas Petroleum’s plans to expand its operations in the Permian Basin and the region's asset quality are likely to provide an upside on the company’s revenue growth.

Operational and divestiture plans

Abraxas Petroleum is involved in selling off its noncore assets and focusing on assets the company believes would help it achieve its target of production mix in the years to come. In fiscal 2017 the company aims to have 66% of its production as oil, 22% as gas and 12% as NGL. Keeping this vision in mind the company has sold out approximately $26.9 million of its noncore assets since Jan. 1, 2016. In January 2017, the company closed the sale of its Brooks Draw assets in the Powder River Basin for $11.1 million. In addition to this, Abraxas Petroleum continues to market its remaining assets in the Powder River Basin.

For fiscal 2017 the company plans to produce around 7,800 to 8,600boepd with lease operating expense of $6 to $8 per barrel and cash G&A cost of $10 million to $12.5 million. From the operational perspective, the company completed 4,963-foot effective lateral of the Caprito 99-101H with a 25-stage completion. This has significantly exceeded the expectations resulting in a 24-hour IP rate of 1,267boepd and a 30-day IP rate of 997boepd.

The company further plans to begin its drilling activities in Caprito 98-201H and Caprito 98-301H in February 2017, which would increase the company’s working interest in the region to approximately 90%. The company plans to continue exploring opportunities to expand and its recent acquisition of 24 net acres in the Caprito area suggests there is huge potential in the region. This expansion might provide significant upside to the company’s production.

Apart from the Permian Basin, both the Williston Basin and the Austin Chalk regions have been delivering good operational results. For fiscal 2017, Abraxas Petroleum plans to operate two wells designed to establish economic viability via engineering and geologic modifications. Also, considering increasing potential in the Austin region, the company has planned to increase its investment in the region.

Balance sheet and capex plans

Abraxas Petroleum has revised its 2017 capital budget from $60 million to $110 million after the successful drilling of wells in the Caprito 99-101H. Of the total $52.5 million is allocated for investment in the Permian Basin, $42.2 million is in the Bakken shale and $11 million is in the Austin Chalk. Though Austin Chalk is a small asset an investment of $11 million is primarily to boost production and also ensure full cycle economics.

Abraxas Petroleum currently has total debt of $93 million which has come down significantly from $138 million as of Dec. 31, 2015 primarily due to sale of its noncore assets. Assuming the company will continue to streamline its business and focus more on its core assets, Abraxas Petroleum would be successful in further bringing down its debt. According to the latest presentation the company has a total liquidity of $86 million, which along with fiscal 2017 cash flow from operating activities would be sufficient to fund the capex and short-term obligations. Though the balance sheet is not very impressive yet Abraxas Petroleum’s focused approach in the Delaware Basin would provide production growth. Comparing the company’s liquidity ratios against peer median, Abraxas Petroleum is still better placed than peers Devon Energy Corp. (DVN, Financial) and Linn Energy LLC (LINEQ, Financial).

Conclusion

The company’s focused approach and capex plans in the Permian Basin would boost its production growth, which would eventually have an upside impact on the revenue growth. Considering a more stable oil environment and estimating oil price would be around $60 in fiscal 2017, I am bullish on the growth prospects. The stock has hidden values, and it’s the right time to own the stock, which has the potential to outperform in the long run.

Disclosure: No position in the stocks discussed.

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