Abraxas: Simplified Capital Structure After Pref Share Exchange

Abraxas Petroleum’s (OTCQX:AXAS) preferred shares were sold by Angelo Gordon to Biglari Holdings (BH) for $80 million. Biglari Holdings then ended up exchanging those preferred shares for 90.6 million Abraxas common shares, giving it roughly 90% ownership of Abraxas’s common shares.

These moves are generally beneficial to Abraxas’s other common shareholders (compared to the situation where the preferred shares still existed), although the transaction value of the preferred share sale points to Abraxas being worth under $100 million (less than $1 per share).

Abraxas has not drilled new wells for several years. I consider it overvalued at its current share price based on the value of its PDP assets, although it may be able to increase its value if it can find a partner to help take on some development costs. Abraxas previously talked about restarting drilling, but so far nothing has come of that.

Preferred Share Sale And Exchange

Angelo Gordon sold its Abraxas preferred shares to Biglari Holdings. These shares entitled the owner to 100% of net liquidation proceeds (up to $100 million) and then 95% of any further proceeds (from $100 million to approximately $140 million), followed by 75% of any proceeds above $140 million. This meant that common shareholders would have received zero with a $100 million sale of Abraxas’s assets, $2 million (or around 20 cents per share) with a $140 million sale of the assets, and around $17 million (around $1.69 per share) with a $200 million sale of the assets.

The $80 million sale price for the preferred shares indicates that there wasn’t much of a market for Abraxas’s assets. If the Delaware Basin assets could have fetched $80 million in a sale, it would have made sense for Angelo Gordon to push for that instead of selling its preferred shares. Abraxas may have been able to increase its working capital position to around $19 million by the end of Q3 2022, so an $80 million asset sale should easily be enough to return more than $80 million to Angelo Gordon after factoring in transaction costs and the costs of winding down the company.

Biglari Holdings ended up exchanging the preferred shares for 90.6 million Abraxas common shares. This gave it approximately 90% ownership of the common shares. Abraxas now has approximately 100.7 million outstanding common shares.

Abraxas’s other common shareholders are better off with this capital structure in a scenario where the net value of its assets are under $220 million. At that valuation ($220 million), Abraxas’s common shares would have been worth $2.18 per share both before and after the exchange.

Value Of Reserves And Stock

Abraxas previously estimated that its Delaware Basin PDP reserves had a PV-10 of $89 million at the end of 2021 based on SEC prices (including $66.55 oil). At current strip prices, this may have increased to around $100 million despite the depletion of PDP reserves from production. Abraxas has not drilled new wells for several years.

I estimate that Abraxas has around $19 million in working capital currently (at the end of Q3 2022). If one values its PDP reserves at 0.7x PDP PV-10 (estimated at $100 million), that would result in a total value of $89 million (or $0.88 per share for Abraxas). This share price is relatively consistent with the valuation implied by Angelo Gordon’s sale of the preferred shares to Biglari Holdings and Biglari’s exchange of those preferred shares for 90.6 million common shares. Assets with limited development potential typically sell for a discount to PDP PV-10.

Abraxas’s value could increase with new development activity that boosts production, or at least halts its production decline. However, Biglari Holdings expressed little interest in directly spending on development for its Southern Oil assets, so it is likely that Abraxas would need to find a development partner to put up capital as part of a joint venture.

Conclusion

Abraxas’s capital structure has been simplified by the recent moves that have eliminated its preferred shares in exchange for 90.6 million additional common shares. I’d estimate Abraxas’s value as around $0.88 per share based on the value of its PDP reserves combined with its estimated $19 million in working capital.

Abraxas’s value could increase if it can replenish its PDP reserves with capital efficient development. However, Abraxas does face some challenges in accomplishing that as its assets are not top-tier and it would likely need to find development partners to help fund new development activities.