Abraxas Petroleum (AXAS): Attempting To Restart Drilling Activities

Abraxas Petroleum (OTC:AXAS) has seen its share price nearly triple due to the strength in oil prices. A scenario with $100+ near-term oil does give Abraxas the opportunity to resume drilling and increase its production while spending within cash flow. At $3 per share, Abraxas probably needs to get its production up to 4,000+ BOEPD (in a couple years) for its stock to have decent upside from current levels.

Cash Flow

At last report Abraxas did not have any hedges for 2022. If this remains the case, it would get the full benefit of stronger oil prices. At $100 WTI oil in 2022, I estimate that Abraxas could generate around $20 million to $25 million in positive cash flow during the year if it attempted to keep production flat.

Abraxas has also mentioned that it intends to resume drilling and is in advanced negotiations with new lenders for a credit facility to help jumpstart that drilling.

Common Stock Value Based On Distributions

As discussed before, Abraxas common shareholders get 5% of any distribution above $100 million from a future liquidation event. This increases to 25% after Angelo Gordon’s preference amount (of $137 million, increasing by 6% per year, compounded quarterly) is covered.

Thus if Angelo Gordon’s preferred shares have a value of $137 million, a liquidation event that nets $225 million would result in $2.83 per share going to common shareholders.

The value going to common shareholders varies significantly with changes in the distribution value. A 22% decrease in distribution value (to $175 million) would result in a 52% decrease in the per share value (to $1.35) going to common shareholders. Conversely, a 22% increase in distribution value (to $225 million) would result in a 53% increase in the per share value for common shareholders.

Distribution Value ($ Million)	Value to Abraxas Shareholders (per Share)
$100	$0.00
$125	$0.15
$150	$0.61
$175	$1.35
$200	$2.09
$225	$2.83
$250	$3.57
$275	$4.32
$300	$5.06
$325	$5.80
$350	$6.54

In two years, the value of the preferred shares would increase to $154.33 million. This would reduce the value going to common shareholders by around $0.41 per share at the majority of distribution values.

Thus a $225 million distribution in two years would result in $2.42 per share in value to common shareholders. The below table shows the relationship between common share value and distribution value if there is an asset sale in two years.

Distribution Value ($ Million)	Value to Abraxas Shareholders (per Share)
$100	$0.00
$125	$0.15
$150	$0.30
$175	$0.94
$200	$1.68
$225	$2.42
$250	$3.16
$275	$3.90
$300	$4.65
$325	$5.39
$350	$6.13

Updated Asset Value Estimate

I had previously valued Abraxas’s current production at $84 million, with its undeveloped acreage adding another $34.5 million in value (at $3,000 per net acre) for a total of $118.5 million.

This appears to be a fairly accurate assessment of the market value of the assets at the time (early January) as Abraxas reported PDP PV-10 of $89 million at 2021 SEC prices (including flat $66.55 oil).

The increase in near-term oil prices (based on strip) boosts the value of current production, so I am valuing that at around $100 million now. If the value of the undeveloped acreage goes up to $4,000 per net acre, that would result in a total asset value of $146 million now. This is a 23% increase from my January estimate, which is relatively in-line with what upstream producers have seen in terms of market cap increases since then.

A distribution value of $146 million would result in relatively little consideration to common shareholders (around $0.54 per share). However, the strength in near-term oil prices does give Abraxas the opportunity to potentially increase its production over the next couple years while spending within cash flow.

If Abraxas can increase its production to around 4,000 BOEPD in two years through efficient development, and the value of the acreage goes up to $7,000 per net acre, that would result in a total estimated value of $260.5 million. This would be around $3.47 per common share.

Conclusion

Strong oil prices are giving Abraxas an opportunity to restart drilling activity and potentially could allow it to increase production substantially while largely spending within cash flow.

Abraxas probably needs to get production to around 4,000 BOEPD in a couple years for its common stock to have reasonable upside from current levels in a similar commodity pricing environment.At around $3 per share, Abraxas’s common shares are a bet that it can efficiently grow production and enhance the value of its acreage (through delivering better well-level economics than prior results) before the assets are sold.

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