UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A Number 1
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2005
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19118
ABRAXAS PETROLEUM CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 74-2584033
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
500 N. Loop 1604 East, Suite 100, San Antonio, Texas 78232
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (210) 490-4788
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the restraint
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X or No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes ___ No X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ X] No
The number of shares of the issuer's common stock outstanding as of May
10, 2005 was:
Class Shares Outstanding
----- ------------------
Common Stock, $.01 Par Value 37,885,875
1 of 27
Explanatory Note
Abraxas Petroleum Corporation is filing this Amendment Number 1 to Quarterly
Report on Form 10-Q for the period ended March 31, 2005, initially filed with
the SEC on May 13, 2005, in order to correct the accounting for the gain on the
sale of Abraxas' Canadian subsidiary in February 2005. Due to an error in the
accounting for other comprehensive income related to the sale, the gain on the
transaction was understated by $2.2 million and resulted in a restatement of the
Condensed Statement of Operations and the Condensed Consolidated Statement of
Cash Flow for the three months ended March 31, 2005. Pursuant to Rule 12b-15
under the Securities Exchange Act of 1934, the complete text of Form 10-Q as
revised is included in this filing.
Forward-Looking Information
We make forward-looking statements throughout this document. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe", "expect" or "anticipate" will occur or what we
"intend" to do, and other similar statements), you must remember that our
expectations may not be correct, even though we believe they are reasonable. The
forward-looking information contained in this document is generally located in
the material set forth under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations" but may be found in other
locations as well. These forward-looking statements generally relate to our
plans and objectives for future operations and are based upon our management's
reasonable estimates of future results or trends. The factors that may affect
our expectations regarding our operations include, among others, the following:
o our high debt level;
o our success in development, exploitation and exploration activities;
o our ability to make planned capital expenditures;
o declines in our production of crude oil and natural gas;
o prices for crude oil and natural gas;
o our ability to raise equity capital or incur additional indebtedness;
o economic and business conditions;
o political and economic conditions in oil producing countries,
especially those in the Middle East;
o price and availability of alternative fuels;
o our restrictive debt covenants;
o our acquisition and divestiture activities;
o results of our hedging activities; and
o other factors discussed elsewhere in this document.
In addition to these factors, important factors that could cause actual
results to differ materially from our expectations ("Cautionary Statements") are
disclosed under "Risk Factors" in our Annual Report on Form 10-K for the year
ended December 31, 2004 which is incorporated by reference herein. All
subsequent written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their entirety by the
Cautionary Statements.
2
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q/A Number 1
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2005
and December 31, 2004................................................4
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2005 and 2004...........................6
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2005 and 2004...........................7
Notes to Condensed Consolidated Financial Statements..........................8
ITEM 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations...............................................13
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk....................24
ITEM 4 - Controls and Procedures...............................................................25
PART II
OTHER INFORMATION
ITEM 1 - Legal Proceedings 26
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds...........................26
ITEM 3 - Defaults Upon Senior Securities.......................................................26
ITEM 4 - Submission of Matters to a Vote of Security Holders...................................26
ITEM 5 - Other Information.....................................................................26
ITEM 6 - Exhibits..............................................................................26
Signatures ....................................................................27
3
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2005 2004
(Unaudited)
------------------- -------------------
Assets:
Current assets:
Cash ................................................... $ - $ 1,284
Accounts receivable, net:
Joint owners.......................................... 401 471
Oil and gas production................................ 4,270 4,724
Other................................................. 41 66
------------------ -------------------
4,712 5,261
Equipment inventory........................................... 732 735
Other current assets.......................................... 1,189 752
------------------ -------------------
6,633 8,032
Assets held for sale.......................................... - 52,600
------------------ -------------------
Total current assets..................................... 6,633 60,632
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved.................................................... 306,207 297,647
Other property and equipment................................. 3,022 2,930
------------------ -------------------
Total................................................ 309,229 300,577
Less accumulated depreciation, depletion, and
amortization............................................ 224,198 222,500
------------------ -------------------
Total property and equipment - net........................ 85,031 78,077
Deferred financing fees, net.................................... 7,210 7,618
Deferred tax asset.............................................. - 6,060
Other assets .................................................. 298 298
------------------ -------------------
Total assets.................................................. $ 99,172 $ 152,685
================== ===================
See accompanying notes to condensed consolidated financial statements
4
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets (continued)
(in thousands)
March 31, December 31,
2005 2004
(Unaudited)
------------------- -------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable.............................................. $ 8,402 $ 5,622
Oil and gas production payable................................ 2,150 2,443
Accrued interest.............................................. 5,212 2,170
Other accrued expenses........................................ 885 1,654
------------------- -------------------
16,649 11,889
Liabilities related to assets held for sale................... - 66,947
------------------- -------------------
Total current liabilities................................... 16,649 78,836
Long-term debt.................................................. 125,007 126,425
Future site restoration......................................... 905 888
------------------- -------------------
Total liabilities.......................................... 142,561 206,149
Stockholders'deficit:
Common Stock, par value $.01 per share-
authorized 200,000,000 shares; issued, 37,830,502 and,
36,597,045 at March 31, 2005 and December 31, 2004
respectively................................................. 378 366
Additional paid-in capital................................... 146,942 146,185
Accumulated deficit........................................... (191,128) (202,534)
Treasury stock, at cost, 56,477 and 105,989 shares at March
31, 2005 and December 31, 2004 respectively ................. (408) (549)
Accumulated other comprehensive income........................ 827 3,068
------------------- -------------------
Total stockholders' deficit............................... (43,389) (53,464)
------------------- -------------------
Total liabilities and stockholders' deficit..................... $ 99,172 $ 152,685
=================== ===================
See accompanying notes to condensed consolidated financial statements
5
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended
March 31,
---------------------------------------
2005 2004
------------------ -----------------
Revenue:
Oil and gas production revenues................................... $ 7,525 $ 7,783
Rig revenues...................................................... 296 175
Other............................................................. 1 2 2
-------------- -----------------
7,822 7,960
Operating costs and expenses:
Lease operating and production taxes.............................. 2,278 2,288
Depreciation, depletion and amortization.......................... 1,698 1,839
Rig operations.................................................... 218 145
General and administrative....................................... 946 1,049
Stock-based compensation 603 2,063
-------------- -----------------
5,743 7,384
-------------- -----------------
Operating income ................................................... 2,079 576
Other (income) expense
Interest income................................................... (1) (4)
Interest expense.................................................. 3,134 4,908
Amortization of deferred financing fees........................... 451 445
Financing cost.................................................... - 971
Other............................................................. 9 11
-------------- -----------------
3,593 6,331
-------------- -----------------
Loss from continuing operations ..................................... (1,514) (5,755)
Net income from discontinued operations (net of $6,060 income tax
expense in 2005).................................................. 12,921 198
-------------- -----------------
Net income (loss) ................................................... $ 11,407 $ (5,557)
============== =================
Basic earnings (loss) per common share:
Net earnings (loss) per common from continuing operations......... $ (0.04) $ (0.16)
Discontinued operations .......................................... 0.35 0.01
-------------- -----------------
Net income (loss) per common share - basic.......................... $ 0.31 $ (0.15)
============== =================
Diluted earnings (loss) per common share:
Net earnings (loss) from continuing operations.................... $ (0.04) $ (0.16)
Discontinued operations .......................................... 0.35 0.01
-------------- -----------------
Net income (loss) per common share - diluted........................ $ 0.31 $ (0.15)
============== =================
See accompanying notes to condensed consolidated financial statements
6
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
March 31,
----------------------------------------
2005 2004
----------------- -----------------
Cash flows from Operating Activities
Net income (loss)............................................ $ 11,407 $ (5,557)
Income from discontinued operations........................... (12,921) (198)
----------------- -----------------
Loss from continuing operations............................... (1,514) (5,755)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization................ 1,698 1,839
Accretion of future site restoration..................... 20 45
Amortization of deferred financing fees.................. 451 445
Non-cash interest and financing cost..................... - 3,010
Stock-based compensation................................. 603 2,063
Changes in operating assets and liabilities:
Accounts receivable...................................... 1,573 2,580
Equipment inventory...................................... 3 (8)
Other ................................................... 1,201 11
Accounts payable and accrued expenses.................... 5,454 274
----------------- -----------------
Net cash provided by continuing operations.................... 9,489 4,504
Net cash provided by (used in) discontinued operations........ (4,132) 2,041
----------------- -----------------
Net cash provided by operations.............................. 5,357 6,545
Cash flows from Investing Activities
Capital expenditures, including purchases and development
of properties............................................... (8,652) (2,189)
----------------- -----------------
Net cash used in continuing operations....................... $ (8,652) $ (2,189)
Net cash provided by (used in) discontinued operations........ 26,572 (2,041)
----------------- -----------------
Net cash provided by (used in) investing activities.......... 17,920 (4,230)
Cash flows from Financing Activities
Proceeds from long-term borrowings........................... 553 1,312
Payments on long-term borrowings............................. (1,971) (2,000)
Issuance of common stock for compensation.................... 102 170
Exercise of stock options .................................. 205 190
Deferred financing fees ..................................... (44) (1,571)
----------------- -----------------
Net cash used in continuing operations....................... (1,154) (1,899)
Net cash used in discontinued operations..................... (23,407) -
----------------- -----------------
Net cash (used in) financing activities.......... (24,561) (1,899)
----------------- -----------------
Increase (decrease) in cash.................................. (1,284) 416
Cash, at beginning of period................................. 1,284 -
----------------- -----------------
Cash, at end of period....................................... $ - $ 416
================= =================
Supplemental disclosures of cash flow information:
Interest paid ............................................... $ 77 $ 1,098
================= =================
Non-cash items:
Future site restoration...................................... $ 17 $ 45
================= =================
See accompanying notes to condensed consolidated financial statements
7
Abraxas Petroleum Corporation
Notes to CondensedConsolidated Financial Statements
(Unaudited)
(tabular amounts in thousands except per share data)
Note 1. Basis of Presentation
The accounting policies followed by Abraxas Petroleum Corporation and its
subsidiaries (the "Company" or "Abraxas") are set forth in the notes to the
Company's audited financial statements in the Annual Report on Form 10-K filed
for the year ended December 31, 2004. Such policies have been continued without
change. Also, refer to the notes to those financial statements for additional
details of the Company's financial condition, results of operations, and cash
flows. All the material items included in those notes have not changed except as
a result of normal transactions in the interim, or as disclosed within this
report. The accompanying interim consolidated financial statements have not been
audited by independent accountants, but in the opinion of management, reflect
all adjustments necessary for a fair presentation of the financial position and
results of operations. Any and all adjustments are of a normal and recurring
nature. The results of operations for the three months ended March 31, 2005 are
not necessarily indicative of results to be expected for the full year.
The consolidated financial statements include the accounts of the Company
and its wholly-owned foreign subsidiary, Grey Wolf Exploration Inc. ("Grey
Wolf"). On February 28, 2005 Grey Wolf closed an initial public offering,
resulting in our substantial divestiture of our capital stock and operations in
Grey Wolf. As a result of the disposal of Grey Wolf, the results of operations
of Grey Wolf through February 28, 2005 are reflected in our Financial Statements
as discontinued operations.
Stock-based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Effective July 1, 2000, the Financial Accounting Standards Board ("FASB")
issued FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and were not exercised prior to July 1, 2000, require that
the awards be accounted for as variable until they are exercised, forfeited, or
expired. In January 2003, the Company amended the exercise price to $0.66 on
certain options with an existing exercise price greater than $0.66. The Company
recognized approximately $2.1 million and $ 603,000 in expense during the
quarters ended March 31, 2004 and 2005, respectively, as Stock-based
compensation expense in the accompanying consolidated financial statements.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, "Accounting for Stock-Based Compensation" (SFAS
123), which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1995 under the fair value method prescribed by SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the quarters
ended March 31, 2005 and 2004, risk-free interest rates of 1.5%; dividend yields
of -0-%; volatility factor of the expected market price of the Company's common
stock of .35; and a weighted-average expected life of the option of ten years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
8
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In October 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", (SFAS No. 148), providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirement of SFAS No. 123, "Accounting for Stock-Based
Compensation" to include prominent disclosures in annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company adopted the
disclosure provisions of SFAS No. 148 on December 31, 2002.
Had the Company determined stock-based compensation costs based on the
estimated fair value at the grant date for its stock options, the Company's net
income (loss) per share for the three months ended March 31, 2005 and March 31,
2004 would have been:
Three Months Ended March 31,
---------------------------------------
2005 2004
------------------ ----------------
Net income (loss) as reported $ 11,407 $ (5,557)
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects
603 2,063
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (25) (37)
------------------ ----------------
Pro forma net income (loss) $ 11,985 $ (3,531)
================== ================
Earnings (loss) per share:
Basic - as reported $ 0.31 $ (0.15)
================== ================
Basic - pro forma $ 0.33 $ (0.10)
================== ================
Diluted - as reported $ 0.31 $ (0.15)
================== ================
Diluted - pro forma $ 0.33 $ (0.10)
================== ================
Certain prior year balances have been reclassified for comparative
purposes.
Note 2. Discontinued operations
On February 28, 2005, Grey Wolf completed an IPO resulting in Abraxas
substantially divesting itself of its' investment in Grey Wolf. Pursuant to an
Underwriting Agreement, the underwriters purchased 17.8 million common shares of
Grey Wolf capital stock from Grey Wolf ("Treasury Shares"), and 9.1 million
shares of Grey Wolf common stock owned by Abraxas from Abraxas ("Secondary
Shares") at a purchase price of CDN $2.80 per share.
Grey Wolf utilized the proceeds from the sale of the Treasury Shares to
re-pay and terminate its $35 million term loan and re-pay $1 million in
inter-company debt to Abraxas. Abraxas utilized the $1 million received from
Grey Wolf and the proceeds received from the sale of the Secondary Shares to
re-pay outstanding debt under its $25 million second lien increasing rate bridge
loan.
Abraxas also granted an over-allotment option to the underwriters to
purchase from Abraxas, at the underwriters' election, up to an additional
3,902,360 shares of Grey Wolf common stock held by Abraxas (the "Option
Shares"). On March 24, 2005, the Company was advised of the underwriter's intent
to exercise 3.5 million of the over allotment option shares. Closing for this
exercise occurred on March 31, 2005 and provided approximately $7.6 million that
Abraxas utilized to payoff the remaining balance of its bridge loan and reduce
the outstanding balance under its senior secured revolving credit facility.
The operations of Grey Wolf, previously reported as a business segment, are
reported as discontinued operations for all periods presented in the
accompanying financial statements and the operating results are reflected
separately from the results of continuing operations.
9
Income from discontinued operations for the period ended March 31, 2005
includes a gain on the disposal of Grey Wolf of $21.8 million, less non-cash
income tax of $6.1 million, and a loss from operations, including debt
retirement costs, of $2.8 million.
Note 3. Income Taxes
The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
For the period ended March 31, 2005, there is no current or deferred income
tax expense or benefit due to losses and/or loss carryforwards and valuation
allowance which has been recorded against such benefits.
Note 4. Long-Term Debt
Long-term debt consisted of the following:
March 31 December 31
-----------------------------------
2005 2004
---------------- -----------------
Floating rate Senior Secured Notes due 2009...... $ 125,000 $ 125,000
Senior Secured Revolving Credit Facility......... 7 1,425
---------------- -----------------
125,007 126,425
Less current maturities ......................... - -
---------------- -----------------
$ 125,007 $ 126,425
================ =================
Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in aggregate principal
amount of Floating Rate Senior Secured Notes due 2009. The new notes will mature
on December 1, 2009 and began accruing interest from the date of issuance,
October 28, 2004 at a per annum floating rate of six-month LIBOR plus 7.50%. The
initial interest rate on the new notes is 9.72% per annum. The interest will be
reset semi-annually on each June 1 and December 1, commencing on June 1, 2005.
Interest is payable semi-annually in arrears on June 1 and December 1 of each
year, commencing on June 1, 2005.
Senior Secured Revolving Credit Facility. On October 28, 2004, Abraxas
entered into an agreement for a new revolving credit facility having a maximum
commitment of $15 million, which includes a $2.5 million subfacility for letters
of credit. Availability under the new revolving credit facility is subject to a
borrowing base consistent with normal and customary natural gas and crude oil
lending transactions.
Outstanding amounts under the new revolving credit facility bear interest
at the prime rate announced by Wells Fargo Bank, National Association plus
1.00%.
Subject to earlier termination rights and events of default, the stated
maturity date under the new revolving credit facility is October 28, 2008.
Note 5. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended March 31,
---------------------------------
2005 2004
-------------- ---------------
Numerator:
Net loss before effect of discontinued operations................. $ (1,514) $ (5,755)
Discontinued operations........................................... 12,921 198
-------------- ---------------
Net earnings (loss) available to common stockholders ............. $ 11,407 $ (5,557)
============== ===============
10
Denominator:
Denominator for basic earnings per share - weighted-average shares. 36,603,592 36,011,657
Effect of dilutive securities:
Stock options and Warrants...................................... - -
-------------- ---------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed Conversions................. 36,603,592 36,011,657
============== ===============
Basic earnings (loss) per share:
Net earnings (loss) Continuing operations ......................... $ (0.04) $ (0.16)
Discontinued operations............................................. 0.35 0.01
-------------- ---------------
Net earnings (loss) per common share - basic $ 0.31 $ (0.15)
============== ===============
Diluted earnings (loss) per share:
Net earnings (loss) before cumulative effect of accounting change.. $ (0.04) $ (0.16)
Discontinued operations ............................................ 0.35 0.01
-------------- ---------------
Net earnings (loss) per common share - diluted.......................... $ 0.31 $ (0.15)
============== ===============
For the three months ended March 31, 2004 and 2005, none of the shares
issuable in connection with stock options or warrants are included in diluted
shares. Inclusion of these shares would be antidilutive due to losses from
continuing operations incurred in the periods. Had there not been losses in
these periods, dilutive shares would have been 1,952,370 shares and 1,660,480
shares for the three months ended March 31, 2004 and 2005 respectively.
Note 6. Hedging Program and Derivatives
On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" SFAS 133 as amended by SFAS 137 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB 133" and SFAS 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities. In 2003 the Company elected out of hedge
accounting as prescribed by SFAS 133. Accordingly, instruments are recorded on
the balance sheet at their fair value with adjustments to the carrying value of
the instruments bring recognized in oil and gas income in the current period.
Under the terms of our amended senior credit agreement, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our crude oil and natural gas production for a rolling six month period.
The following table sets forth the Company's current hedge position:
Time Period Notional Quantities Price
---------------------------------- -------------------------------------------- ----------------------
April 2005 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
May - December 2005 9,500 MMbtu of production per day Floor of $5.00
Note 7. Contingencies - Litigation
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. At March 31,
2005, the Company was not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on its
operations.
11
Note 8. Recent Accounting Pronouncements
In March 2005 the FASB issued Interpretation No. 47 "Accounting for
Conditional Asset Retirement Obligations--an interpretation of FASB Statement
No. 143". This Interpretation clarifies that the term conditional asset
retirement obligation as used in FASB Statement No. 143, Accounting for Asset
Retirement Obligations, refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of settlement.
Thus, the timing and (or) method of settlement may be conditional on a future
event. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when
incurred--generally upon acquisition, construction, or development and (or)
through the normal operation of the asset. Uncertainty about the timing and (or)
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. Statement 143 acknowledges that in some cases, sufficient information
may not be available to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset
retirement obligation.
This Interpretation is effective no later than the end of fiscal years
ending after December 15, 2005 (December 31, 2005, for calendar-year
enterprises). Retrospective application for interim financial information is
permitted but is not required. Early adoption of this Interpretation is
encouraged. The Company does not anticipate this interpretation to impact its
financial statements.
12
ABRAXAS PETROLEUM CORPORATION
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Prior to February 2005, Grey Wolf Exploration Inc. was a wholly-owned
Canadian subsidiary of Abraxas. In February 2005, Grey Wolf, closed on an
initial public offering resulting in the substantial divestiture of our capital
stock in Grey Wolf. As a result of the Grey Wolf IPO, and the significant
divestiture of our interest in Grey Wolf, the results of operations of Grey Wolf
are reflected in our Financial Statements and in this document as "Discontinued
Operations" and our remaining operations are referred to in our Financial
Statements and in this document as "Continuing Operations" or "Continued
Operations". Unless otherwise noted, all disclosures are for continuing
operations.
The following is a discussion of our financial condition, results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with our consolidated financial statements and the notes thereto,
included in our Annual Report on Form 10-K filed for the year ended December 31,
2004.
Critical Accounting Policies
There have been no changes from the Critical Accounting Polices described
in our Annual Report on Form 10-K for the year ended December 31, 2004.
General
We are an independent energy company primarily engaged in the development,
and production of natural gas and crude oil. Historically we have grown through
the acquisition and subsequent development and exploitation of producing
properties, principally through the redevelopment of old fields utilizing new
technologies such as modern log analysis and reservoir modeling techniques as
well as 3-D seismic surveys and horizontal drilling. As a result of these
activities, we believe that we have a substantial inventory of low risk
development opportunities, which provide a basis for significant production and
reserve increases. In addition, we intend to expand upon our exploitation and
development activities with complementary low risk exploration projects in our
core areas of operation.
Our financial results depend upon many factors which significantly affect
our results of operations including the following:
o the sales prices of natural gas, natural gas liquids and crude oil;
o the level of total sales volumes of natural gas, natural gas liquids
and crude oil;
o the availability of, and our ability to raise additional capital
resources and provide liquidity to meet cash flow needs;
o the level of and interest rates on borrowings; and
o the level and success of exploitation, exploration and development
activity.
Commodity Prices and Hedging Activities. Our results of operations are
significantly affected by fluctuations in commodity prices. Price volatility in
the natural gas market has remained prevalent in the last few years. The table
below illustrates how natural gas prices have fluctuated over the eight quarters
prior to and including the quarter ended March 31, 2005 and contains the last
13
three day average of NYMEX traded contracts price and the prices we realized
during each quarter presented, including the impact of our hedging activities.
Natural Gas Prices by Quarter (in $ per Mcf)
Quarter Ended
----------------------------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar 31, June 30, Sept. Dec. 31, Mar 31,
2003 2003 2003 2004 2004 30, 2004 2004 2005
---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
Index $5.51 $5.10 $4.60 $5.69 $5.97 $5.85 $6.77 $6.30
Realized $5.05 $4.47 $4.29 $4.98 $5.52 $5.24 $6.14 $5.26
The NYMEX natural gas price on May 10, 2005 was $6.69 per Mcf.
The table below illustrates how crude oil prices have fluctuated over the
eight quarters prior to and including the quarter ended March 31, 2005 and
contains the last three day average of NYMEX traded contracts price and the
prices we realized during each quarter presented, including the impact of our
hedging activities.
Crude Oil Prices by Quarter (in $ per Bbl)
Quarter Ended
----------------------------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar 31, June 30, Sept. Dec. 31, Mar 31,
2003 2003 2003 2004 2004 30, 2004 2004 2005
---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
Index $29.87 $30.85 $29.64 $34.76 $38.48 $42.32 $49.46 $47.33
Realized $28.54 $29.55 $29.99 $34.18 $37.29 $42.43 $46.81 $47.13
The NYMEX crude oil price on May 10, 2005 was $52.07 per Bbl.
We seek to reduce our exposure to price volatility by hedging our
production through swaps, floors, options and other commodity derivative
instruments.
Under the terms of our new revolving credit facility, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our crude oil and natural gas production, on an equivalent basis, for a
rolling six month period. We currently have the following hedges in place:
Time Period Notional Quantities Price
---------------------------------------- ----------------------------------------- -------------------
April 2005 7,100 Mmbtu of production per day Floor of $4.50
400 Bbl of crude oil production per day Floor of $25.00
May - December 2005 9,500 Mmbtu of production per day Floor of $5.00
Production Volumes. Because our proved reserves will decline as natural
gas, natural gas liquids and crude oil are produced, unless we acquire
additional properties containing proved reserves or conduct successful
exploitation, exploration and development activities, our reserves and
production will decrease. Our ability to acquire or find additional reserves in
the near future will be dependent, in part, upon the amount of available funds
for acquisition, exploitation and development projects.
We had capital expenditures of $9.3 million for 2004 and $8.7 million in
the first quarter of 2005. As a result of the capital spending limitations
included in our previous credit agreement and our 11 1/2 % secured notes due
2007, we were limited for most of 2004 in our ability to replace existing
production and, consequently, our production volumes decreased during 2004 and
continued to decrease in the first quarter of 2005. If crude oil and natural gas
prices return to depressed levels or if our production levels continue to
decrease, our revenues, cash flow from operations and financial condition will
be materially adversely affected.
14
Availability of Capital. As described more fully under "Liquidity and
Capital Resources" below, our sources of capital going forward will primarily be
cash from operating activities, funding under our new revolving credit facility,
cash on hand, and if an appropriate opportunity presents itself, proceeds from
the sale of properties. We currently have approximately $12.4 million of
availability under our new revolving credit facility.
Exploitation, Exploration and Development Activity. We believe that our
high quality asset base, high degree of operational control and large inventory
of drilling projects position us for future growth. Our properties are
concentrated in locations that facilitate substantial economies of scale in
drilling and production operations and more efficient reservoir management
practices. We operate 94% of the properties accounting for approximately 95% of
our PV-10, giving us substantial control over the timing and incurrence of
operating and capital expenditures. In addition, we have 47 proved undeveloped
locations and have identified over 100 drilling and recompletion opportunities
on our existing acreage, the successful development of which we believe could
significantly increase our daily production and proved reserves. During the
first quarter of 2005 we have incurred capital expenditures of approximately
$8.7 million with 7 wells in South and West Texas. We are currently drilling 1
horizontal well in West Texas and completing and/or testing 1 vertical well in
West Texas and 3 horizontal wells in South Texas.
Our future natural gas and crude oil production, and therefore our success,
is highly dependent upon our ability to find, acquire and develop additional
reserves that are profitable to produce. The rate of production from our natural
gas and crude oil properties and our proved reserves will decline as our
reserves are produced unless we acquire additional properties containing proved
reserves, conduct successful development, exploitation and exploration
activities or, through engineering studies, identify additional behind-pipe
zones or secondary recovery reserves. We cannot assure you that our exploitation
and development activities will result in increases in our proved reserves. In
addition, approximately 49% of our total estimated proved reserves at December
31, 2004 were undeveloped. By their nature, estimates of undeveloped reserves
are less certain. Recovery of such reserves will require significant capital
expenditures and successful drilling operations.
Borrowings and Interest. We currently have indebtedness of approximately
$125.0 million and availability of $12.4 million under our new revolving credit
facility. In connection with the refinancing transactions completed in October
2004, interest on the new notes will be paid in cash. This increase in cash
interest expense will require us to increase our production and cash flow from
operations in order to meet our debt service requirements, as well as to fund
the development of our numerous drilling opportunities.
Outlook for 2005. As a result of final 2004 financial results and current
market conditions, we have updated our operating and financial guidance for year
2005 as follows:
Production:
BCFE (approximately 80% gas)....................... 6.5 - 7.5
Exit Rate (Mmcfe/d)................................... 19-21
Price Differentials (Pre Hedge):
$ Per Bbl.......................................... 0.55
$ Per Mcf.......................................... 0.75
Lifting Costs, $ Per Mcfe............................. 0.85
G&A, $ Per Mcfe....................................... 0.55
Capital Expenditures ($ Millions)..................... 22.0
Results of Operations
The following table sets forth certain of our operating data for the
periods presented. All data is for continuing operations.
15
Three Months Ended
March 31,
------------------------------------
2005 2004
-------------- ---------------
Operating Revenue: (1)
Crude oil sales................................................... $ 2,437 $ 1,924
Natural gas sales ................................................ 5,088 5,804
Natural gas liquids sales......................................... - 55
Rig operations.................................................... 296 175
Other............................................................. 1 2
----------- ------------
$ 7,822 $ 7,960
=========== ============
Operating Income ................................................. $ 2,079 $ 576
Crude oil production (MBbl)....................................... 51.7 56.3
Natural gas production (MMcf)..................................... 967.0 1,166.5
Natural gas liquids production (MBbl)............................. - 2.3
Average crude oil sales price ($/Bbl)............................. $ 47.13 $ 34.18
Average natural gas sales price ($/Mcf)........................... $ 5.26 $ 4.98
Average liquids sales price ($/Bbl)............................... $ - $ 23.55
(1) Revenue and average sales prices are net of hedging activities.
Comparison of Three Months Ended March 31, 2005 to Three Months Ended March 31,
2004
Operating Revenue. During the three months ended March 31, 2005, operating
revenue from crude oil, natural gas and natural gas liquid sales decreased to
$7.5 million from $7.8 for the first quarter of 2004. The decrease in revenue
was primarily due to a decrease in production volumes offset by an increase in
the realized price for natural gas and crude oil. The decrease in production
volumes was due to natural field declines. There were no significant wells
brought on line during the first quarter of 2005 due to capital expenditure
restrictions during most of 2004 and delays in contracting equipment. Decreased
production had a negative impact on revenue of approximately $1.2 million offset
by revenue applicable to increased prices of approximately $946,000.
Average sales prices net of hedging cost for the quarter ended March 31,
2005 were:
o $47.13 per Bbl of crude oil,
o $ 5.26 per Mcf of natural gas
Average sales prices net of hedging cost for the quarter ended March 31, 2004
were:
o $34.18 per Bbl of crude oil,
o $23.55 per Bbl of natural gas liquid, and
o $ 4.98 per Mcf of natural gas
Crude oil production volumes decreased from 56.3 MBbls during the quarter ended
March 31, 2004 to 51.7 MBbls for the same period of 2005. Natural gas production
volumes declined from 1,166.5 MMcf for the three months ended March 31, 2004 to
967.0 MMcf for the same period of 2005. As discussed above, the decreases were
due to natural field declines with no significant new production brought on line
during the first quarter of 2005.
Lease Operating Expenses. Lease operating expenses ("LOE") for the three
months ended March 31, 2005 remained constant at $2.3 million for quarter ended
March 31, 2005 and 2004. LOE on a per Mcfe basis for the three months ended
March 31, 2005 was $1.78 per Mcfe compared to $1.51 for the same period of 2004.
The increase in per Mcfe cost was attributable to the decrease in production
volumes during the first quarter of 2005 as compared to 2004.
16
General and Administrative ("G&A") Expenses. G&A expenses decreased
slightly to $946,000 during the quarter ended March 31, 2005 from $1.0 million
for the first three months of 2004. G&A expense on a per Mcfe basis was $0.74
for the first quarter of 2005 compared to $0.69 for the same period of 2004. The
increase in G&A expense on a per Mcfe basis was primarily due to a decline in
production volumes during the first quarter of 2005 compared to the same period
in 2004.
Stock-based Compensation. In accordance with FIN 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of
Accounting Principles Board Opinion No. ("APB") 25, certain modifications to
fixed stock option awards require that the awards be accounted for as variable
until they are exercised, forfeited, or expired. In January 2003, we amended the
exercise price to $0.66 per share on certain options with an existing exercise
price greater than $0.66 per share. The price of our common stock increased
during the quarter ended March 31, 2005 resulting in the recognition of
approximately $603,000 as stock-based compensation expense for the quarter then
ended. We recognized approximately $2.1 million as stock-based compensation
expense during the quarter ended March 31, 2004 related to these repricings.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense decreased slightly to $1.7 million for the
three months ended March 31, 2005 from $1.8 million for the same period of 2004.
The decline in DD&A was primarily due to decreased production volumes in the
first quarter of 2005 as compared to the same period of 2004. Our DD&A on a per
Mcfe basis for the three months ended March 31, 2005 was $1.33 per Mcfe compared
to $1.21 per Mcfe in 2004.
Interest Expense. Interest expense decreased from $4.9 million for the
first three months of 2004 to $3.1 million in 2005. The decrease in interest
expense was due to the restructuring of our long-term debt in October 2004.
Discontinued Operations. Income from discontinued operations was $12.9
million in the first quarter of 2005 compared to $198,000 for the same period of
2004. Income in 2005 includes a loss from operations, including debt retirement
costs, of $2.8 million and the gain from the disposal of Grey Wolf of $21.8
million offset by $6.1 million of non-cash income tax expense.
Liquidity and Capital Resources
General. The natural gas and crude oil industry is a highly capital
intensive and cyclical business. Our capital requirements are driven principally
by our obligations to service debt and to fund the following costs:
o the development of existing properties, including drilling and
completion costs of wells;
o acquisition of interests in additional natural gas and crude oil
properties; and
o production and transportation facilities.
The amount of capital expenditures we are able to make has a direct impact
on our ability to increase cash flow from operations and, thereby, will directly
affect our ability to service our debt obligations and to continue to grow the
business through the development of existing properties and the acquisition of
new properties.
Our sources of capital going forward will primarily be cash from operating
activities, funding under our new revolving credit facility, cash on hand, and
if an appropriate opportunity presents itself, proceeds from the sale of
properties. However, under the terms of the notes, proceeds of optional sales of
our assets that are not timely reinvested in new natural gas and crude oil
assets will be required to be used to reduce indebtedness and proceeds of
mandatory sales must be used to repay or redeem indebtedness.
Working Capital (Deficit). At March 31, 2005, our current liabilities of
approximately $16.6 million exceeded our current assets of $6.6 million
resulting in a working capital deficit of $10.0 million. This compares to a
working capital deficit of approximately $3.9 million at December 31, 2004.
Current liabilities at March 31, 2005 consisted of trade payables of $8.4
17
million, revenues due third parties of $2.1 million, accrued interest of $5.2
million and other accrued liabilities of $0.9 million.
Capital expenditures. Capital expenditures during the first three months of
2005 were $8.7 million compared to $2.2 million during the same period of 2004.
The table below sets forth the components of these capital expenditures on a
historical basis for the three months ended March 31, 2005 and 2004.
Three Months Ended
March 31
--------------------------------------------
2005 2004
------------------- -----------------
Expenditure category (in thousands):
Development................................................. $ 8,560 $ 2,118
Facilities and other........................................ 92 71
--------------- -----------------
Total................................................... $ 8,652 $ 2,189
=============== =================
During the three months ended March 31, 2005 and 2004, capital expenditures
were primarily for the development of existing properties. For 2004, our capital
expenditures were subject to limitations imposed under our previously existing
credit facility and 11 1/2% secured notes due 2007. These limitations were
removed in connection with the refinancing that was completed in October 2004.
We anticipate making capital expenditures for 2005 of approximately $22.0
million. During the first quarter of 2005 we undertook 7 projects expending
approximately $8.7 million. Our capital expenditures could include expenditures
for acquisition of producing properties if such opportunities arise, but we
currently have no agreements, arrangements or undertakings regarding any
material acquisitions. We have no material long-term capital commitments and are
consequently able to adjust the level of our expenditures as circumstances
dictate. Additionally, the level of capital expenditures will vary during future
periods depending on market conditions and other related economic factors.
Should the prices of crude oil and natural gas decline from current levels, our
cash flows will decrease which may result in a reduction of the capital
expenditures budget. If we decrease our capital expenditures budget, we may not
be able to offset crude oil and natural gas production volumes decreases caused
by natural field declines and sales of producing properties.
Sources of Capital. The net funds provided by and/or used in each of the
operating, investing and financing activities relating to continuing operations
are summarized in the following table and discussed in further detail below:
Three Months Ended
March 31,
----------------------------------------------
2005 2004
------------------- ----------------------
Net cash provided by operating activities $ 9,489 $ 4,504
Net cash used in investing activities (8,652) (2,189)
Net cash used in financing activities (1,154) (1,899)
------------------- ----------------------
Total $ (317) $ 416
=================== ======================
Operating activities during the three months ended March 31, 2005 provided
us $9.5 million cash compared to providing $4.5 million in the same period in
2004. Net income plus non-cash expense items during 2004 and 2005 and net
changes in operating assets and liabilities accounted for most of these funds.
Financing activities used $1.2 million for the first three months of 2005
compared to using $1.9 million for the same period of 2004. Most of these funds
were used to reduce our long-term debt and for financing fees. Investing
activities used $8.7 million during the three months ended March 31, 2005
compared to using $2.2 million for the quarter ended March 31, 2004.
Expenditures during the quarter ended March 31, 2005 and March 31, 2004 were
primarily for the development of existing properties.
Future Capital Resources. We currently have four principal sources of
liquidity going forward: (i) cash from operating activities, (ii) funding under
our new revolving credit facility, (iii) cash on hand, and (iv) if an
appropriate opportunity presents itself, the sale of producing properties. While
we are no longer subject to limitations on capital expenditures under our 11
1/2% secured notes due 2007, covenants under the indenture for the new notes and
the new revolving credit facility restrict our use of cash from operating
activities, cash on hand and any proceeds from asset sales. Under the terms of
the notes, proceeds of optional sales of our assets that are not timely
18
reinvested in new natural gas and crude oil assets will be required to be used
to reduce indebtedness and proceeds of mandatory sales must be used to redeem
indebtedness. The terms of the new notes and the new revolving credit facility
also substantially restrict our ability to:
o incur additional indebtedness;
o grant liens;
o pay dividends or make certain other restricted payments;
o merge or consolidate with any other person; or
o sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
Our cash flow from operations depends heavily on the prevailing prices of
natural gas and crude oil and our production volumes of natural gas and crude
oil. Historically downturns in commodity prices have reduced our cash flow from
operating activities. Although we have hedged a portion of our natural gas and
crude oil production and will continue this practice as required pursuant to the
new revolving credit facility, future natural gas and crude oil price declines
would have a material adverse effect on our overall results, and therefore, our
liquidity. Low natural gas and crude oil prices could also negatively affect our
ability to raise capital on terms favorable to us.
Our cash flow from operations will also depend upon the volume of natural
gas and crude oil that we produce. Unless we otherwise expand reserves, our
production volumes may decline as reserves are produced. Due to sales of
properties in 2002 and 2003, and restrictions on capital expenditures under the
terms of our old notes, we now have significantly reduced reserves and
production as compared with pre-2003 levels. In the future, if an appropriate
opportunity presents itself, we may sell additional properties, which could
further reduce our production volumes. To offset the loss in production volumes
resulting from natural field declines and sales of producing properties, we must
conduct successful, exploitation, exploration and development activities,
acquire additional producing properties or identify additional behind-pipe zones
or secondary recovery reserves. While we have had some success in pursuing these
activities since January 1, 2003, we have not been able to fully replace the
production volumes lost from natural field declines and property sales. During
the first quarter of 2005 we have incurred capital expenditures of approximately
$8.7 million with 7 wells in South and West Texas. We are currently drilling 1
horizontal well in West Texas and completing and/or testing 1 vertical well in
West Texas and 3 horizontal wells in South Texas. We believe our numerous
drilling opportunities will allow us to increase our production volumes;
however, our drilling activities are subject to numerous risks, including the
risk that no commercially productive natural gas or crude oil reservoirs will be
found. The risk of not finding commercially productive reservoirs will be
compounded by the fact that 49% of our total estimated proved reserves at
December 31, 2004 were undeveloped. If the volume of natural gas and crude oil
we produce decreases, our cash flow from operations may decrease.
Our total indebtedness and cash interest expense as a result of issuing the
new notes and entering into the new revolving credit facility require us to
increase our production and cash flow from operations in order to meet our debt
service requirements, as well as to fund the development of our numerous
drilling opportunities. The ability to satisfy these new obligations will depend
upon our drilling success as well as prevailing commodity prices.
Contractual Obligations
We are committed to making cash payments in the future on the following
types of agreements:
o Long-term debt
o Operating leases for office facilities
19
We have no off-balance sheet debt or unrecorded obligations and we have not
guaranteed the debt of any other party. Below is a schedule of the future
payments that we are obligated to make based on agreements in place as of March
31, 2005:
Payments due in:
----------------------------- --------------------------------------------------------------------------
Contractual Obligations Total Less than More than 5
(dollars in thousands) one year 1-3 years 3-5 years years
----------------------------- ------------- -------------- ------------- ------------- -------------- --
Long-Term Debt (1) $ 125,007 $ - $ - $ 125,007 -
Operating Leases (2) 277 254 23 - -
(1) These amounts represent the balances outstanding under the revolving credit
facility and the new notes. These repayments assume that we will not draw
down additional funds.
(2) Office lease obligations. The lease for office space for Abraxas expires in
2006.
Other obligations. We make and will continue to make substantial capital
expenditures for the acquisition, exploitation, development, exploration and
production of crude oil and natural gas. In the past, we have funded our
operations and capital expenditures primarily through cash flow from operations,
sales of properties, sales of production payments and borrowings under our bank
credit facilities and other sources. Given our high degree of operating control,
the timing and incurrence of operating and capital expenditures is largely
within our discretion.
Long-Term Indebtedness.
March 31 December 31
-----------------------------------
2005 2004
---------------- -----------------
(In thousands)
Floating rate senior secured notes due 2009....... $ 125,000 $ 125,000
Senior secured revolving credit facility.......... 7 1,425
---------------- -----------------
125,007 126,425
Less current maturities .......................... - -
---------------- -----------------
$ 125,007 $ 126,425
================ =================
Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in principal aggregate
amount of Floating Rate Senior Secured Notes due 2009. The new notes will mature
on December 1, 2009 and began accruing interest from the date of issuance,
October 28, 2004 at a per annum floating rate of six-month LIBOR plus 7.50%. The
initial interest rate on the new notes is 9.72% per annum. The interest will be
reset semi-annually on each June 1 and December 1, commencing on June 1, 2005.
Interest is payable semi-annually in arrears on June 1 and December 1 of each
year, commencing on June 1, 2005.
The new notes rank equally among themselves and with all of our
unsubordinated and unsecured indebtedness, including our new credit facility and
senior in right of payment to our existing and future subordinated indebtedness.
Each of our subsidiaries, Eastside Coal Company, Inc., Sandia Oil & Gas
Corporation, Sandia Operating Corp., Wamsutter Holdings, Inc. and Western
Associated Energy Corporation (collectively, the "Subsidiary Guarantors"), has
unconditionally guaranteed, jointly and severally, the payment of the principal,
premium and interest on the new notes on a senior secured basis. In addition,
any other subsidiary or affiliate of ours, that in the future guarantees any
other indebtedness with us, or our restricted subsidiaries, will also be
required to guarantee the new notes.
The new notes and the Subsidiary Guarantors' guarantees thereof, together
with our new credit facility and the Subsidiary Guarantors' guarantees thereof,
are secured by shared first priority perfected security interests, subject to
certain permitted encumbrances, in all of our and each of our restricted
subsidiaries' material property and assets, including substantially all of our
and their natural gas and crude oil properties and all of the capital stock (or
20
in the case of an unrestricted subsidiary that is a controlled foreign
corporation, up to 65% of the outstanding capital stock) of any entity, owned by
us and our restricted subsidiaries (collectively, the "Collateral").
After April 28, 2007, we may redeem all or a portion of the new notes at
the redemption prices set forth in the indenture with U.S. Bank National
Association under which the new notes were issued, plus accrued and unpaid
interest to the date of redemption. Prior to that date, we may redeem up to 35%
of the aggregate original principal amount of the new notes using the net
proceeds of one or more equity offerings, in each case at the redemption price
equal to the product of (i) the principal amount of the new notes being so
redeemed and (ii) a redemption price factor of 1.00 plus the per annum interest
rate on the new notes (expressed as a decimal) on the applicable redemption date
plus accrued and unpaid interest to the applicable redemption date, provided
certain conditions are also met.
If we experience specific kinds of change of control events, each holder of
new notes may require us to repurchase all or any portion of such holder's new
notes at a purchase price equal to 101% of the principal amount of the new
notes, plus accrued and unpaid interest to the date of repurchase.
The indenture governing the new notes contains covenants that, among other
things, limit our ability to:
o incur or guarantee additional indebtedness and issue certain types of
preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make other
restricted payments, including repurchasing, redeeming or retiring
capital stock or subordinated debt or making certain investments or
acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o permit restrictions on the ability of our subsidiaries to distribute or
lend money to us;
o cause a restricted subsidiary to issue or sell its capital stock; and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of our and our restricted subsidiaries.
The indenture also contains customary events of default, including
nonpayment of principal or interest, violations of covenants, cross default and
cross acceleration to certain other indebtedness, including our new credit
facility, bankruptcy, and material judgments and liabilities.
Senior Secured Revolving Credit Facility. On October 28, 2004, we entered
into an agreement for a new revolving credit facility having a maximum
commitment of $15 million, which includes a $2.5 million subfacility for letters
of credit. Availability under the new revolving credit facility is subject to a
borrowing base consistent with normal and customary natural gas and crude oil
lending transactions.
Outstanding amounts under the new revolving credit facility bear interest
at the prime rate announced by Wells Fargo Bank, National Association plus
1.00%. Subject to earlier termination rights and events of default, the stated
maturity date under the new revolving credit facility is October 28, 2008.
We are permitted to terminate the new revolving credit facility, and under
certain circumstances, may be required, from time to time, to permanently reduce
the lenders' aggregate commitment under the new revolving credit facility. Such
termination and each such reduction is subject to a premium equal to the
21
percentage listed below multiplied by the lenders' aggregate commitment under
the new revolving credit facility, or, in the case of partial reduction, the
amount of such reduction.
Year % Premium
-------------- --------------------
1 1.5
2 1.0
3 0.5
4 0.0
Each of our current subsidiaries has guaranteed, and each of our future
restricted subsidiaries will guarantee, our obligations under the new revolving
credit facility on a senior secured basis. In addition, any other subsidiary or
affiliate of ours, that in the future guarantees any of our other indebtedness
or of our restricted subsidiaries will be required to guarantee our obligations
under the new revolving credit facility. Obligations under the new revolving
credit facility are secured, together with the new notes, by a shared first
priority perfected security interest, subject to certain permitted encumbrances,
in all of our and each of our restricted subsidiaries' material property and
assets, including substantially all of our and their natural gas and crude oil
properties and all of the capital stock (or in the case of an unrestricted
subsidiary that is a controlled foreign corporation, up to 65% of the
outstanding capital stock) in any entity, owned by us and our restricted
subsidiaries.
Under the new revolving credit facility, we are subject to customary
covenants, including certain financial covenants and reporting requirements. The
new revolving credit facility requires us to maintain a minimum net cash
interest coverage and also requires us to enter into hedging agreements on not
less than 25% or more than 75% of our projected natural gas and crude oil
production.
In addition to the foregoing and other customary covenants, the new
revolving credit facility contains a number of covenants that, among other
things, restrict Abraxas' ability to:
o incur or guarantee additional indebtedness and issue certain types of
preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make other
restricted payments, including repurchasing, redeeming or retiring
capital stock or subordinated debt or making certain investments or
acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o make any change in the principal nature of our business;
o prepay, redeem, purchase or otherwise acquire any of our or our
restricted subsidiaries' indebtedness;
o permit a change of control;
o directly or indirectly make or acquire any investment;
o cause a restricted subsidiary to issue or sell our capital stock; and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of Abraxas and our restricted subsidiaries.
22
The new revolving credit facility also contains customary events of
default, including nonpayment of principal or interest, violations of covenants,
cross default and cross acceleration to certain other indebtedness, bankruptcy
and material judgments and liabilities, and is subject to an Intercreditor,
Security and Collateral Agency Agreement, which specifies the rights of the
parties thereto to the proceeds from the Collateral.
Intercreditor Agreement. The holders of the new notes, together with the
lenders under our new credit facility, are subject to an Intercreditor, Security
and Collateral Agency Agreement, which specifies the rights of the parties
thereto to the proceeds from the Collateral. The Intercreditor Agreement, among
other things, (i) creates security interests in the Collateral in favor of a
collateral agent for the benefit of the holders of the new notes and the new
credit facility lenders and (ii) governs the priority of payments among such
parties upon notice of an event of default under the Indenture or the new credit
facility.
So long as no such event of default exists, the collateral agent will not
collect payments under the new credit facility documents or the indenture
governing the new notes and other new note documents (collectively, the "Secured
Documents"), and all payments will be made directly to the respective creditor
under the applicable Secured Document. Upon notice of an event of default and
for so long as an event of default exists, payments to each new credit facility
lender and holder of the new notes from us and our current subsidiaries and
proceeds from any disposition of any collateral, will, subject to limited
exceptions, be collected by the collateral agent for deposit into a collateral
account and then distributed as provided in the following paragraph.
Upon notice of any such event of default and so long as an event of default
exists, funds in the collateral account will be distributed by the collateral
agent generally in the following order of priority:
first, to reimburse the collateral agent for expenses incurred in
protecting and realizing upon the value of the Collateral;
second, to reimburse the new credit facility administrative agent and
the trustee, on a pro rata basis, for expenses incurred in protecting and
realizing upon the value of the Collateral while any of these parties was acting
on behalf of the Control Party (as defined below);
third, to reimburse the new credit facility administrative agent and
the trustee, on a pro rata basis, for expenses incurred in protecting and
realizing upon the value of the Collateral while any of these parties was not
acting on behalf of the Control Party;
fourth, to pay all accrued and unpaid interest (and then any unpaid
commitment fees) under the new credit facility;
fifth, if, the collateral coverage value of three times the outstanding
obligations under the new credit facility would be met after giving effect to
any payment under this clause "fifth," to pay all accrued and unpaid interest on
the new notes;
sixth, to pay all outstanding principal of (and then any other unpaid
amounts, including, without limitation, any fees, expenses, premiums and
reimbursement obligations) the new credit facility;
seventh, to pay all accrued and unpaid interest on the new notes (if
not paid under clause "fifth");
eighth, to pay all outstanding principal of (and then any other unpaid
amounts, including, without limitation, any premium with respect to) the new
notes; and
ninth, to pay each new credit facility lender, holder of the new notes,
and other secured party, on a pro rata basis, all other amounts outstanding
under the new credit facility and the new notes.
To the extent there exists any excess monies or property in the collateral
account after all of ours and our subsidiaries' obligations under the new credit
facility, the indenture and the new notes are paid in full, the collateral agent
will be required to return such excess to us.
23
The collateral agent will act in accordance with the Intercreditor
Agreement and as directed by the holders of the new notes and the new credit
facility lenders, acting as a single class, by vote of the holders of a majority
of the aggregate principal amount of outstanding obligations under the new notes
and the new credit facility.
The Intercreditor Agreement provides that the lien on the assets
constituting part of the Collateral that is sold or otherwise disposed of in
accordance with the terms of each Secured Document may be released if (i) no
default or event of default exists under any of the Secured Documents, (ii) we
have delivered an officers' certificate to each of the collateral agent, the
trustee, the new credit facility administrative agent certifying that the
proposed sale or other disposition of assets is either permitted or required by,
and is in accordance with the provisions of, the applicable Secured Documents
and (iii) the collateral agent has acknowledged such certificate.
The Intercreditor Agreement provides for the termination of security
interests on the date that all obligations under the Secured Documents are paid
in full.
Hedging Activities.
Our results of operations are significantly affected by fluctuations in
commodity prices and we seek to reduce our exposure to price volatility by
hedging our production through commodity derivative instruments. Under the
senior credit agreement, we are required to maintain hedge positions on not less
than 25% or more than 75% of our projected oil and gas production for a six
month rolling period.
Net Operating Loss Carryforwards.
At December 31, 2004, we had $184.0 million of net operating loss
carryforwards for U.S. tax purposes. These loss carryforwards will expire
through 2022 if not utilized.
Uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, we have established a valuation allowance of $73.0 million for
deferred tax assets at December 31, 2004 and March 31, 2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
As an independent crude oil and natural gas producer, our revenue, cash
flow from operations, other income and profitability, reserve values, access to
capital and future rate of growth are substantially dependent upon the
prevailing prices of crude oil, natural gas and natural gas liquids. Declines in
commodity prices will materially adversely affect our financial condition,
liquidity, ability to obtain financing and operating results. Lower commodity
prices may reduce the amount of crude oil and natural gas that we can produce
economically. Prevailing prices for such commodities are subject to wide
fluctuation in response to relatively minor changes in supply and demand and a
variety of additional factors beyond our control, such as global political and
economic conditions. Historically, prices received for crude oil and natural gas
production have been volatile and unpredictable, and such volatility is expected
to continue. Most of our production is sold at market prices. Generally, if the
commodity indexes fall, the price that we receive for our production will also
decline. Therefore, the amount of revenue that we realize is partially
determined by factors beyond our control. Assuming the production levels we
attained during the quarter ended March 31, 2005, a 10% decline in crude oil,
natural gas and natural gas liquids prices would have reduced our operating
revenue, cash flow and net income by approximately $752,500 for the quarter.
Hedging Sensitivity
On January 1, 2001, we adopted SFAS 133 as amended by SFAS 137 and SFAS
138. Under SFAS 133, all derivative instruments are recorded on the balance
sheet at fair value. In 2003 we elected not to designate derivative instruments
as hedges. Accordingly the instruments are recorded on the balance sheet at fair
value with changes in the market value of the derivatives being recorded in
current oil and gas revenue.
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Under the terms of our new revolving credit facility, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our natural gas and crude oil production for a rolling six month period.
Interest rate risk
At March 31, 2005, as a result of the financial restructuring that occurred
in October 2004, we had $125.0 million in outstanding indebtedness under the
floating rate senior secured notes due 2009. The notes bear interest at a per
annum rate of six-month LIBOR plus 7.5%. The rate is redetermined on June 1 and
December 1 of each year, beginning June 1, 2005. The current rate on the new
notes is 9.72%. For every percentage point that the LIBOR rate rises, our
interest expense would increase by approximately $1.3 million on an annual
basis. At March 31, 2005 we had $7,000 of outstanding indebtedness under our new
revolving credit facility. Interest on this facility accrues at the prime rate
announced by Wells Fargo Bank plus 1.00%. For every percentage point increase in
the announced prime rate, our interest expense would increase by approximately
$70 on an annual basis.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of Abraxas' "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e)and 15d-15(e)) and concluded
that the disclosure controls and procedures were effective and designed to
ensure that material information relating to Abraxas and our consolidated
subsidiaries which is required to be included in our periodic Securities and
Exchange Commission filings would be made known to them by others within those
entities. There were no changes in our internal controls that could materially
affect, or are reasonably likely to materially affect our financial reporting.
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ABRAXAS PETROLEUM CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no changes in legal proceedings from that described in the
Company's Annual Report of Form 10-K for the year ended December 31, 2004, and
in Note 7 in the Notes to Condensed Consolidated Financial Statements contained
in Part I of this report on Form 10-Q/A Number 1.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On November 3, 2004, Abraxas Petroleum Corporation ("Abraxas") filed a
Current Report on Form 8-K which described Abraxas' completion of a financial
restructuring on October 28, 2004. In connection with the October 2004
restructuring, and also as described in the November 3, 2004 Current Report on
Form 8-K, Abraxas issued to Guggenheim Corporate Funding, LLC ("Guggenheim")
warrants to purchase up to 1,000,000 shares of the Abraxas' common stock at a
purchase price of $0.01 per share.
On March 31, 2005, pursuant to the terms of the warrants, Guggenheim
exercised its warrants to purchase 1,000,000 shares of our common stock by
providing Abraxas notice of such exercise and instructing Abraxas to issue
996,479 shares and withhold 3,521 shares of stock otherwise issuable upon
exercise of the warrants as consideration for the shares to be issued pursuant
to the warrants.
In connection with issuing the warrants and the shares to Guggenheim,
Abraxas relied on the exemption from registration requirements provided by
Section 4(2) of the Securities Act of 1933, as amended, in that no public
offering was involved.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits
(a) Exhibits
Exhibit 31.1 Certification - Robert L.G. Watson, CEO
Exhibit 31.2 Certification - Chris E. Williford, CFO
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 -
Robert L.G. Watson, CEO
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 - Chris
E. Williford, CFO
26
ABRAXAS PETROLEUM CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: March 30, 2006 By:/s/Robert L.G. Watson
-----------------------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: March 30, 2006 By:/s/Chris Williford
-----------------------------------
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
27