UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2001
( ) 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 __
The number of shares of the issuer's common stock outstanding as of May 10,
2001, was:
Class Shares Outstanding
Common Stock, $.01 Par Value 22,599,219
1 of 26
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001
and December 31, 2000.............................3
Consolidated Statements of Operations -
Three Months Ended March 31, 2001 and 2000........5
Consolidated Statement of Stockholders Equity (Deficit)
March 31, 2001 and December 31, 2000..............6
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 and 2000........7
Notes to Consolidated Financial Statements.................9
ITEM 2 - Managements Discussion and Analysis of Financial
Condition andResults of Operations..............17
ITEM 3 - Quantitative and Qualitative Disclosure about
Market Risks....................................23
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings 25
ITEM 2 - Changes in Securities.............................................25
ITEM 3 - Defaults Upon Senior Securities...................................25
ITEM 4 - Submission of Matters to a Vote of Security Holders...............25
ITEM 5 - Other Information 25
ITEM 6 - Exhibits and Reports on Form 8-K..................................25
Signatures ................................................26
2
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, December 31,
2001 2000
(Unaudited)
----------- ------------
(In Thousands)
Assets:
Current assets:
Cash .................................................. $ 2,068 $ 2,004
Accounts receivable, less allowances for doubtful
accounts:
Joint owners ................................... 2,737 3,771
Oil and gas production ......................... 11,070 16,106
Other .......................................... 550 841
-------- ---------
14,357 20,718
Equipment inventory .................................... 1,353 1,411
Other current assets ................................... 212 179
Deferred tax asset ..................................... 3,352 --
-------- ---------
Total current assets ..................................... 21,342 24,312
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved ............................................. 486,632 481,802
Unproved, not subject to amortization .............. 12,079 12,831
Other property and equipment .......................... 64,052 63,720
-------- ---------
Total ......................................... 562,763 558,353
Less accumulated depreciation, depletion, and
amortization ..................................... 257,686 253,569
-------- ---------
Total property and equipment - net ................. 305,077 304,784
Deferred financing fees, net of accumulated
amortization of $7,372 and $6,917 at
March 31, 2001 and December 31, 2000,
respectively ........................................... 5,087 5,556
------- ----------
Other assets ............................................. 2,468 908
-------- ----------
Total assets ........................................... $333,974 $335,560
======== ==========
See accompanying notes to consolidated financial statements
3
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets (continued)
March 31, December 31,
2001 2000
(Unaudited)
-------------- --------------
(In Thousands)
Liabilities and Shareholder's Equity (Deficit)
Current liabilities:
Accounts payable ................................... $ 13,213 $ 22,721
Oil and gas production payable ..................... 9,899 6,281
Accrued interest ................................... 9,524 6,079
Other accrued expenses ............................. 1,133 1,932
Hedge liability .................................... 17,724 --
Current maturities of long-term debt ............... 884 1,128
--------- ----------
Total current liabilities ................ 52,377 38,141
Long-term debt ....................................... 266,786 266,441
Deferred income taxes ................................ 22,696 21,079
Hedge liability ...................................... 7,666 --
Future site restoration .............................. 4,218 4,305
Minority interest in foreign subsidiary .............. 13,215 12,097
Shareholders' equity (deficit):
Common Stock, par value $.01 per share-
Authorized 50,000,000 shares; issued,
22,765,102 and 22,759,852 shares at
March 31, 2001 and December 31, 2000, respectively 227 227
Additional paid-in capital ......................... 131,350 130,409
Accumulated deficit ................................ (131,121) (131,376)
Treasury stock, at cost, 165,883 shares
at March 31, 2001 and December 31, 2000 .......... (964) (964)
Accumulated other comprehensive loss ................. (32,476) (4,799)
--------- ----------
Total shareholders' equity (deficit) ................. (32,984) (6,503)
--------- ----------
Total liabilities and shareholders' equity (deficit) . $ 333,974 $ 335,560
========= ==========
See accompanying notes to consolidated financial statements
4
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
--------------------------------------
2001 2000
---------------- ----------------
(In thousands except per share data)
Revenue:
Oil & gas production revenues..................................... $ 28,249 $ 15,626
Gas processing revenue 436 757
Rig revenues...................................................... 183 131
Other............................................................. 218 203
--------------- ----------------
29,086 16,717
Operating costs and expenses:
Lease operating and production taxes.............................. 4,859 4,629
Depreciation, depletion and amortization.......................... 8,841 8,948
Rig operations.................................................... 153 188
General and administrative....................................... 2,109 1,439
General and administrative (Stock-based Compensation)............ 931 -
--------------- ----------------
16,893 15,204
--------------- ----------------
Operating Income ................................................... 12,193 1,513
Other (income) expense
Interest income................................................... (16) (59)
Interest expense ............................................. 7,781 7,773
Amortization of deferred financing fees........................... 455 507
Gain on sale of equity investment................................. - (33,983)
Other ............................................................ 16 436
--------------- ----------------
8,236 (25,326)
--------------- ----------------
Income from operations before taxes ................................ 3,957 26,839
Income tax expense (benefit)......................................... 2,776 (328)
Minority interest in income of consolidated foreign subsidiary....... (926) (11)
--------------- ----------------
Net income .......................................................... $ 255 $ 27,156
=============== ================
Earnings per share:
Net income per common share - basic.............................. $ .01 $ 1.20
=============== ================
Net income per common - diluted.................................. $ .01 $ .52
=============== ================
See accompanying notes to consolidated financial statements
5
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands except share amounts)
Accumulated
Common Stock Treasury Stock Additional Other
-------------------- ----------------- Paid -In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
----------- -------- ---------------------------------------------------------------
Balance at December 31, 2000.................. 22,759,852 $ 227 165,883 $ (964) $ 130,409 $(131,376) $ (4,799) $ (6,503)
Comprehensive income (loss) - Note 8
Net Income.................................. - - - - - 255 - 255
Other comprehensive income:
Hedge loss................................ - - - - - - (20,588) (20,588)
Foreign currency translation adjustment... - - - - - - (7,089) (7,089)
-----------
Comprehensive income (loss)............ - - - - - - - (27,422)
Stock-based compensation...................... - - - - 931 - - 931
Options exercised............................. 5,250 - - - 10 - - 10
----------- -------- --------- ------- ----------- ------------ --------- ----------
Balance at March 31, 2001..................... 22,765,102 $ 227 165,883 $ (964) $ 131,350 $ (131,121) $(32,476) $ (32,984)
=========== ======== ========= ======= =========== ============ ========= ==========
See accompanying notes to consolidated financial statements
6
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
--------------------------------------------
2001 2000
--------------------------------------------
(In thousands)
Operating Activities
Net income .................................................. $ 255 $ 27,156
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest in income of foreign subsidiary............ 926 11
Gain on sale of equity investment............................ - (33,983)
Depreciation, depletion, and amortization.................... 8,841 8,948
Deferred income tax (benefit) expense........................ 2,695 (453)
Amortization of deferred financing fees...................... 455 507
Stock-based compensation 931 -
Issuance of common stock for compensation.................... - 46
Changes in operating assets and liabilities:
Accounts receivable...................................... 6,585 (2,404)
Equipment inventory...................................... 44 (326)
Other ................................................... (54) 382
Accounts payable and accrued expenses.................... (3,254) 2,881
----------------- ----------------
Net cash provided by operating activities..................... 17,424 2,765
----------------- ----------------
Investing Activities
Capital expenditures, including purchases and development
of properties............................................... (17,861) (11,840)
Proceeds from sale of oil and gas producing properties........ 44 118
Proceeds from sale of equity investment....................... - 33,983
----------------- ----------------
Net cash (used in) provided by investing activities........... $ (17,817) $ 22,261
----------------- ----------------
(Continued)
See accompanying notes to consolidated financial statements
7
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Three Months Ended
March 31,
--------------------------------------
2001 2000
--------------------------------------
(In Thousands)
Financing Activities
Proceeds from long term borrowings............................ $ 3,320 $ 3,052
Exercise of stock options ................................... 10 -
Payments on long-term borrowings.............................. (2,827) (1,024)
Deferred financing fees....................................... - (376)
------------- ---------------
Net cash provided by financing activities..................... 503 1,652
------------- ---------------
Effect of exchange rate changes on cash....................... (46) (18)
------------- ---------------
Increase in cash 64 26,660
Cash, at beginning of period.................................. 2,004 3,799
------------- ---------------
Cash, at end of period........................................ $ 2,068 $ 30,459
============= ===============
Supplemental disclosures of cash flow information:
Interest paid ................................................ $ 4,414 $ 4,232
============= ===============
See accompanying notes to consolidated financial statements
8
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2001
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, 2000. 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 consolidated financial statements include the accounts of the
Company, its wholly-owned foreign subsidiary Canadian Abraxas Petroleum
Limited ("Canadian Abraxas") and its 49% owned foreign subsidiary Grey Wolf
Exploration Inc. ("Grey Wolf"). Minority interest represents the minority
shareholders' proportionate share of the equity and income of Grey Wolf.
The Company is negotiating to purchase additional ownership interest in
Grey Wolf.
Canadian Abraxas' and Grey Wolf's assets and liabilities are translated
to U.S. dollars at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of
shareholders' equity.
Note 2. Long-Term Debt
Long-term debt consists of the following:
March 31 December 31
2001 2000
---------------------------------------
(In thousands)
11.5% Senior Secured Notes due 2004 ("Old Notes") .................... $ 801 $ 801
12.875% Senior Secured Notes due 2003 ("First Lien Notes") ........... 63,500 63,500
11.5% Second Lien Notes due 2004 ("Second Lien Notes") ............... 190,178 190,178
Credit facility payable to a Canadian bank (due 2002),
providing for borrowings to approximately $15,870,000 at the bank's prime
rate plus .125%, 7.50% at March 31, 2001, secured
by the assets of Grey Wolf..................................... 8,287 7,859
Production Payment.............................................. 4,904 5,231
------------------- -------------------
267,670 267,569
Less current maturities ........................................ 884 1,128
------------------- -------------------
$ 266,786 $ 266,441
=================== ===================
Old Notes. On November 14, 1996, the Company consummated the offering
of $215.0 million of it's 11.5% Senior Notes due 2004, Series A, which were
exchanged for the Series B Notes in February 1997. On January 27, 1998, the
Company completed the sale of $60.0 million of the Series C Notes. The
Series B Notes and the Series C Notes were subsequently combined into
$275.0 million in principal amount of the Old Notes in June 1998.
9
Interest on the Old Notes is payable semi-annually in arrears on May 1
and November 1 of each year at the rate of 11.5% per annum. The Old Notes
are redeemable, in whole or in part, at the option of the Company, on or
after November 1, 2000, at the redemption prices set forth below, plus
accrued and unpaid interest to the date of redemption, if redeemed during
the 12-month period commencing on November 1 of the years set forth below:
Year Percentage
----- -----------
2001........................................... 102.875%
2002 and thereafter............................ 100.000%
The Old Notes are joint and several obligations of Abraxas and Canadian
Abraxas and rank pari passu in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes
rank senior in right of payment to all future subordinated indebtedness of
Abraxas and Canadian Abraxas. The Old Notes are, however, effectively
subordinated to the First Lien Notes to the extent of the value of the
collateral securing the First Lien Notes and the Second Lien Notes to the
extent of the value of the collateral securing the Second Lien Notes. The
Old Notes are unconditionally guaranteed, on a senior basis by Sandia. The
guarantee is a general unsecured obligation of Sandia Oil & Gas Company, a
wholly owned subsidiary of the Company and ranks pari passu in right of
payment to all unsubordinated indebtedness of Sandia and senior in right of
payment to all subordinated indebtedness of Sandia. The guarantee is
effectively subordinated to the First Lien Notes and the Second Lien Notes
to the extent of the value of the collateral
Upon a Change of Control, as defined in the Old Notes Indenture, each
holder of the Old Notes will have the right to require the Company to
repurchase all or a portion of such holder's Old Notes at a redemption
price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase. In addition, the Company will be
obligated to offer to repurchase the Old Notes at 100% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase
in the event of certain asset sales.
First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is
payable semi-annually in arrears on March 15 and September 15, commencing
September 15, 1999. The First Lien Notes are redeemable, in whole or in
part, at the option of Abraxas on or after March 15, 2001, at the
redemption prices set forth below, plus accrued and unpaid interest to the
date of redemption, if redeemed during the 12-month period commencing on
March 15 of the years set forth below:
Year Percentage
-------- -----------
2001......................................... 103.000%
2002 and thereafter.......................... 100.000%
At any time, or from time to time, prior to March 15, 2001, Abraxas
may, at its option, use all or a portion of the net cash proceeds of one or
more equity offerings to redeem up to 35% of the aggregate original
principal amount of the First Lien Notes at a redemption price equal to
112.875% of the aggregate principal amount of the First Lien Notes to be
redeemed, plus accrued and unpaid interest.
The First Lien Notes are senior indebtedness of Abraxas secured by a
first lien on substantially all of the crude oil and natural gas properties
of Abraxas and the shares of Grey Wolf owned by Abraxas. The First Lien
Notes are unconditionally guaranteed on a senior basis, jointly and
severally, by Canadian Abraxas, Sandia and Wamsutter Holdings, Inc., a
wholly owned subsidiary of the Company. The guarantees are secured by
substantially all of the crude oil and natural gas properties of the
guarantors and the shares of Grey Wolf owned by Canadian Abraxas.
Upon a Change of Control, as defined in the First Lien Notes Indenture,
each holder of the First Lien Notes will have the right to require Abraxas
to repurchase such holder's First Lien Notes at a redemption price equal to
101% of the principal amount thereof plus accrued and unpaid interest to
the date of repurchase. In addition, Abraxas will be obligated to offer to
repurchase the First Lien Notes at 100% of the principal amount thereof
plus accrued and unpaid interest to the date of redemption in the event of
certain asset sales.
10
The First Lien Notes indenture contains certain covenants that limit
the ability of Abraxas and certain of its subsidiaries, including the
guarantors of the First Lien Notes (the "Restricted Subsidiaries") to,
among other things, incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter
into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of the assets of Abraxas.
The First Lien Notes indenture provides, among other things, that
Abraxas may not, and may not cause or permit the Restricted Subsidiaries,
to, directly or indirectly, create or otherwise cause to permit to exist or
become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas or any
other Restricted Subsidiary, guarantee any indebtedness of Abraxas or any
other Restricted Subsidiary or transfer any of its assets to Abraxas or any
other Restricted Subsidiary except in certain situations as described in
the First Lien Notes indenture.
Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas
consummated an Exchange Offer (see Note 2) whereby $269,699,000 of the Old
Notes were exchanged for $188,778,000 of new Second Lien Notes, and
16,078,990 shares of Abraxas common stock and contingent value rights. See
Note 6. An additional $5,000,000 of the Second Lien Notes were issued in
payment of fees and expenses.
Interest on the Second Lien Notes is payable semi-annually in arrears
on May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian
Abraxas on or after December 1, 2000, at the redemption prices set forth
below, plus accrued and unpaid interest to the date of redemption, if
redeemed during the 12-month period commencing on December 1 of the years
set forth below:
Year Percentage
----- ------------
2001.................................................102.875%
2002 and thereafter..................................100.000%
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude
oil and natural gas properties of Abraxas and Canadian Abraxas and the
shares of Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien
Notes are unconditionally guaranteed on a senior basis, jointly and
severally, by Sandia and Wamsutter. The guarantees are secured by
substantially all of the crude oil and natural gas properties of the
guarantors. The Second Lien Notes are, however, effectively subordinated to
the First Lien Notes and related guarantees to the extent the value of the
collateral securing the Second Lien Notes and related guarantees and the
First Lien Notes and related guarantees is insufficient to pay both the
Second Lien Notes and the First Lien Notes.
Upon a Change of Control, as defined in the Second Lien Notes
Indenture, each holder of the Second Lien Notes will have the right to
require Abraxas and Canadian Abraxas to repurchase such holder's Second
Lien Notes at a redemption price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date of repurchase. In
addition, Abraxas and Canadian Abraxas will be obligated to offer to
repurchase the Second Lien Notes at 100% of the principal amount thereof
plus accrued and unpaid interest to the date of redemption in the event of
certain asset sales.
The Second Lien Notes indenture contains certain covenants that limit
the ability of Abraxas and Canadian Abraxas and certain of their
subsidiaries, including the guarantors of the Second Lien Notes (the
"Restricted Subsidiaries") to, among other things, incur additional
indebtedness, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of Abraxas or Canadian Abraxas.
The Second Lien Notes indenture provides, among other things, that
Abraxas and Canadian Abraxas may not, and may not cause or permit the
Restricted Subsidiaries, to, directly or indirectly, create or otherwise
cause to permit to exist or become effective any encumbrance or restriction
on the ability of such subsidiary to pay dividends or make distributions on
11
or in respect of its capital stock, make loans or advances or pay debts
owed to Abraxas, Canadian Abraxas or any other Restricted Subsidiary,
guarantee any indebtedness of Abraxas, Canadian Abraxas or any other
Restricted Subsidiary or transfer any of its assets to Abraxas, Canadian
Abraxas or any other Restricted Subsidiary except in certain situations as
described in the Second Lien Notes indenture.
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Ended March 31,
-------------------------------------
2001 2000
------------------ -----------------
Numerator:
Numerator for basic and diluted earnings per share - income (in
thousands)........................................................ $ 255 $ 27,156
Denominator:
Denominator for basic earnings per share - weighted-average shares....
22,595,969 22,627,136
Effect of dilutive securities:
Stock options, Warrants and CVR's.................................. 4,681,387 29,945,081
-------------- ---------------
Dilutive potential common shares
Denominator for diluted earnings per share - adjusted weighted-average
shares and assumed Conversions..................................... 27,277,356 52,572,217
Basic earnings per share: .............................................. $ 0.01 $ 1.20
============== ===============
Diluted earnings per share:............................................. $ 0.01 $ 0.52
============== ===============
Contingent Value Rights ("CVRs")
As part of the Exchange Offer consummated by the Company in December
1999 (see Note 2), Abraxas issued contingent value rights or CVRs, which
entitled the holders to receive up to a total of 105,408,978 of Abraxas
common stock under certain circumstances as defined. On May 21, 2001,
Abraxas may be required to issue additional shares to the holders of the
CVRs. The actual number of shares issued will depend on the average market
price of Abraxas common stock over a defined period. Any future issuance of
common stock will result in a transfer from Additional Paid In Capital to
Common Stock. The CVRs will terminate if the market price of Abraxas common
stock exceeds certain prices for a period of 30 trading days during any 45
day consecutive trading day period prior to the expiration date. The target
price on a given date will equal $5.03 plus daily interest at an annual
rate of 11.5% from November 1, 1999. The target price on May 21, 2001 is
$5.97. As of March 31, 2001, based on the Abraxas common stock market price
at that time, CVR holders would have been entitled to receive approximately
3.2 million shares.
Note 4. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information at March 31, 2001 of
Canadian Abraxas, a wholly owned subsidiary of the Company. Canadian
Abraxas is jointly and severally liable for the entire balance of the Old
Notes ($801,000) and the Second Lien Notes ($190.2 million) and is a
guarantor of the First Lien Notes ($63.5 million). The Company has not
presented separate financial statements and other disclosures concerning
Canadian Abraxas because management has determined that such information is
not material to the holders of the Old Notes, the First Lien Notes and the
Second Lien Notes.
12
BALANCE SHEET
--------------------------------------------------------------------------------------------------------------
Assets Liabilities and Shareholders Equity
--------------------------------------------------------------------------------------------------------------
(In Thousands)
Total current assets ............. $ 1,888 Total current liabilities ...... $ 3,143
Oil and gas, and processing Second Lien Notes
properties ................ 144,122 due 2004...................... 52,629
Notes payable to Abraxas
Other assets ..................... 6,906 Petroleum Corporation ....... 24,493
---------------
$ 152,916 Other liabilities .............. 25,268
===============
Stockholder's equity............ 47,383
----------------
$ 152,916
================
STATEMENT OF OPERATIONS
Revenues ...................... $ 10,139
Operating costs and expenses .. 6,399
Interest expense .............. 1,887
Other expense.................. 108
Income tax expense ............ 1,179
------------
Net income ................. $ 566
============
Note 5. Business Segments
Business segment information about our first quarter operations in different
geographic areas is as follows:
Three Months Ended March 31, 2001
----------------------------------------------------------
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
Revenues ................................ $ 13,217 $ 15,869 $ 29,086
================== ================== ===================
Operating profit ........................ $ 7,246 $ 7,283 $ 14,529
================== ==================
General corporate ....................... (2,336)
Interest expense and amortization of
deferred financing fees .............. (8,220)
Other income............................. (16)
-------------------
Income before income taxes ........... $ 3,957
===================
Identifiable assets at March 31, 2001 ... $ 131,646 $ 192,525 $ 324,171
================== ==================
Corporate assets ........................ 9,803
-------------------
Total assets ......................... $ 333,974
===================
Three Months Ended March 31, 2000
----------------------------------------------------------
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
Revenues ................................ $ 6,153 $ 10,564 $ 16,717
================== ================== ===================
Operating profit ........................ $ 1,414 $ 945 $ 2,359
================== ==================
General corporate ....................... (846)
Interest expense and amortization of
deferred financing fees .............. (8,221)
Other income............................. 33,548
-------------------
Income before income taxes ........... $ 26,840
===================
13
Year Ended December 31, 2000
----------------------------------------------------------
U.S. Canada Total
---------------------------------------------------------------- ------------------ -------------------
Identifiable assets...................... $ 132,327 $ 197,229 $ 329,556
================== ==================
Corporate assets......................... 6,004
-------------------
Total assets.......................... $ 335,560
===================
Note 6. Hedging Program and Derivatives
On January 1, 2001, the Company adopted SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS 137 and
SFAS 138. Under SFAS 133, all derivative instruments are recorded on the
balance sheet at fair value. If the derivative does not qualify as a hedge
or is not designated as a hedge, the gain or loss on the derivative is
recognized currently in earnings. To qualify for hedge accounting, the
derivative must qualify either as a fair value hedge, cash flow hedge or
foreign currency hedge. Currently, the Company uses only cash flow hedges
and the remaining discussion will relate exclusively to this type of
derivative instrument. If the derivative qualifies for hedge accounting,
the gain or loss on the derivative is deferred in Other Comprehensive
Income/Loss, a component of Stockholders' Equity, to the extent that the
hedge is effective.
The relationship between the hedging instrument and the hedged item
must be highly effective in achieving the offset of changes in cash flows
attributable to the hedged risk both at the inception of the contract and
on an ongoing basis. Hedge accounting is discontinued prospectively when a
hedge instrument becomes ineffective. Gains and losses deferred in
accumulated Other Comprehensive Income/Loss related to a cash flow hedge
that becomes ineffective, remain unchanged until the related production is
delivered. If the Company determines that it is probable that a hedged
transaction will not occur, deferred gains or losses on the hedging
instrument are recognized in earnings immediately.
Gains and losses on hedging instruments related to accumulated Other
Comprehensive Income/Loss and adjustments to carrying amounts on hedged
production are included in natural gas or crude oil production revenue in
the period that the related production is delivered.
The following table sets forth the Company's hedge position as of March
31, 2001.
Time Period Notional Quantities Price Fair Value
--------------------------------------- ------------------------------ ------------------------------ ----------------
April 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed price swap $2.60-$2.95 $(25) million
gas or 1,000 Bbl/day of natural gas or
crude oil $18.90 Crude oil
On January 1, 2001, in accordance with the transition provisions of
SFAS 133, the Company recorded $31.0 million, net of tax, in Other
Comprehensive Income/Loss representing the cumulative effect of an
accounting change to recognize the fair value of cash flow derivatives. The
Company recorded cash flow hedge derivative liabilities of $38.2 million on
that date and a deferred tax asset of $7.2 million.
During the first quarter of 2001 losses before tax of $7.4 million were
transferred from Other Comprehensive Income/Loss to revenue and the fair
value of outstanding liabilities decreased by $5.4 million. For the three
months ended March 31, 2001, the ineffective portion of the cash flow
hedges were not material
As of March 31, 2001, $20.6 million of deferred net losses on
derivative instruments were recorded in other comprehensive income, of
which $14.4 million is expected to be reclassified to earnings during the
next twelve-month period.
All hedge transactions are subject to the Company's risk management
policy, approved by the Board of Directors. The Company formally documents
all relationships between hedging instruments and hedged items, as well as
its risk management objectives and strategy for undertaking the hedge. This
process includes specific identification of the hedging instrument and the
14
hedged transaction, the nature of the risk being hedged and how the hedging
instrument's effectiveness will be assessed. Both at the inception of the
hedge and on an ongoing basis, the Company assesses whether the derivatives
that are used in hedging transactions are highly effective in offsetting
changes in cash flows of hedged items.
The fair value of the hedging instrument was determined based on the
base price of the hedged item and NYNEX forward price quotes. As of March
31, 2001, a commodity price increase of 10% would have resulted in an
unfavorable change in the fair market value of $5.7 million and a commodity
price decrease of 10% would have resulted in a favorable change in fair
market value of $5.7 million.
Note 7. Contingencies
Litigation - From time to time, the Company is involved in litigation
relating to claims arising out of our operations in the normal course of
business. At March 31, 2001, we were not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material
adverse effect on us.
Note 8. Comprehensive Income
Comprehensive income includes net income, losses and certain items
recorded directly to Stockholder's Equity and classified as Other
Comprehensive Income.
The following table illustrates the calculation of comprehensive income
(loss) for the quarter ended March 31, 2001:
Three Months Ending
March 31, 2001
(In thousands)
---------------------------------
Accumulated other comprehensive loss at December 31, 2000....................... $ (4,799)
Net Income................................................................... $ 255
Other Comprehensive loss :
Hedging derivatives (net of tax) - See Note 6
Cumulative effect of change in accounting principal January 1, 2001........ (30,980)
Reclassification adjustment for settled hedge contracts.................... 6,013
Change in fair market value of outstanding hedge positions................. 4,379
-------------
(20,588)
Foreign currency translation adjustment...................................... (7,089)
-------------
Other comprehensive loss........................................................ (27,677) (27,677)
-------------
Comprehensive loss.............................................................. (27,422)
============= ------------
Accumulated other comprehensive loss at March 31, 2001.......................... $ (32,476)
============
15
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of 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,
2000.
Results of Operations
The factors which most significantly affect our results of operations are
(1) the sales prices of crude oil and natural gas, (2) the level of total sales
volumes of crude oil and natural gas, and (3) the level and success of
exploration and development activity.
Selected operating data. The following table sets forth certain of our
operating data for the periods presented.
Three Months Ended
March 31,
-----------------------------------
2001 2000
----------- --- ----------
Operating Revenue (in thousands):
Crude Oil Sales ................................................ $ 3,602 $ 2,651
Natural Gas Sales ................................................ 22,426 11,201
Natural Gas Liquids Sales......................................... 2,221 1,774
Processing Revenue................................................ 436 757
Rig Operations.................................................... 183 131
Other............................................................. 218 203
----------- --------------
$ 29,086 $ 16,717
=========== ==============
Operating Income (in thousands)................................... $ 12,193 $ 1,513
Crude Oil Production (MBBLS)...................................... 132.3 168.5
Natural Gas Production (MMCFS).................................... 4,626.8 5,439.9
Natural Gas Liquids Production (MBBLS)............................ 78.1 82.5
Average Crude Oil Sales Price ($/BBL)............................. $ 27.22 $ 15.73
Average Natural Gas Sales Price ($/MCF)........................... $ 4.85 $ 2.06
Average Liquids Sales Price ($/BBL)............................... $ 28.44 $ 21.51
Operating Revenue. During the three months ended March 31, 2001, operating
revenue from crude oil, natural gas and natural gas liquid sales increased to
$28.2 million compared to $15.6 million in the three months ended March 31,
2000. The increase in revenue was primarily due to increased prices realized
during the period, offset by a decline in production volumes. Increased prices
contributed $15.0 million in revenue after deducing losses, before tax, from
hedging activities of $7.4 million while reduced production volumes had a $2.3
million negative impact on revenue.
Average sales prices net of hedging losses for the quarter ended March 31,
2001 were:
o $ 27.22 per Bbl of crude oil,
o $ 28.44 per Bbl of natural gas liquid, and
o $ 4.85 per Mcf of natural gas
Average sales prices net of hedging losses for the quarter ended March 31, 2000
were:
o $15.73 per Bbl of crude oil,
o $21.51 per Bbl of natural gas liquid, and
o $ 2.06 per Mcf of natural gas
16
Crude oil production volumes declined from 168.5 MBbls during the quarter ended
March 31, 2000 to 132.3 MBbls for the same period of 2001, primarily as a result
of the de-emphasis on crude oil drilling in prior periods, a natural decline in
production and the sale of non-core properties in 2000. Natural gas production
volumes declined to 4,626.8 MMcf for the three months ended March 31, 2001 from
5,108.2 MMcf for the same period of 2000. This decline was primarily due to the
sale of non-core properties in late 2000 and the natural decline in production,
partially offset by production from current drilling activities.
Lease Operating Expenses. Lease operating expenses and natural gas
processing costs ("LOE") for the three months ended March 31, 2001 increased
slightly to $4.9 million from $4.6 million for the same period in 2000. The
increase in LOE is primarily due to an increase in production tax expense due to
higher commodity prices in the quarter ended March 31, 2001 compared to the same
period of 2000. Our LOE on a per MCFE basis for the three months ended March 31,
2001 was $0.82 per MCFE compared to $0.67 for the same period of 2000. The
increase in the per MCFE expense was due to a decline in production volumes in
the first quarter of 2001 compared to the same period in 2000 as well as the
increase in overall LOE.
General and adminsitrative ("G&A") Expenses. G&A expenses increased from
$1.4 million for the first three months of 2000 to $2.1 million for the first
three months of 2001. G&A expense on a per MCFE basis was $0.36 for the first
quarter of 2001 compared to $0.21 for the same period of 2000. The increase in
the per MCFE G&A cost is due to higher cost and the decline in production
volumes during the first quarter of 2001 compared to the same period in 2000.
Increased expenses included the loss of overhead reimbursement from a
partnership, the assets of which were sold in March 2000 of approximately
$150,000 and increases in contract labor and professional fees in 2001 as
compared to 2000. The three months ended March 31, 2000 also included insurance
refunds of approximately $104,000, which did not occur in 2001.
G&A - stock-based compensation. Effective July 1, 2000, the Financial
Accounting Standards Board ("FASB") issued FIN 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of Accounting
Principles Board Opinion No. ("APB") 25. Under the interpretation, certain
modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and not exercised prior to July 1, 2000, require that the
awards be accounted for as variable until they are exercised, forfeited, or
expired. In March 1999, we amended the exercise price to $2.06 per share on all
options with an existing exercise price greater than $2.06 per share. We
recognized approximately $931,000 as stock-based compensation expense during the
quarter ended March 31, 2001 related to these repricings.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense decreased slightly to $8.8 million for the
three months ended March 31, 2001 from $8.9 million for the same period of 2000.
Our DD&A on a per MCFE basis for the three months ended March 31, 2001 was $1.50
per MCFE compared to $1.29 in 2000. The per MCFE increase is due to higher
finding costs added to the full cost pool in 2000 and the first quarter of 2001
as well as reduced production volumes in 2001.
Interest Expense . Interest expense remained constant at $7.8 million for
the first three months of 2001 and 2000. An increase in the interest expense in
connection with our production payment financing was offset by a reduction in
interest expense related to our repurchase of certain Old Notes and Second Lien
Notes, during 2000.
Minority interest. Minority interest in the net income of our 49% owned
subsidiary, Grey Wolf, increased to $926,000 for the three months ended March
31, 2001 compared to $11,000 for the same period of 2000. This increase is due
to increased profitability of Grey Wolf, primarily due to higher commodity
prices received in 2001 compared to 2000.
Income taxes. Income taxes increased to an expense of $2.8 million for the
first three months of 2001 compared to a benefit of $328,000 for the same period
of 2000. This increase is due to increased profitability in our Canadian
operations, primarily as a result of higher commodity prices.
17
General. Our revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas and
the volumes of crude oil, natural gas and natural gas liquids we produce. The
average natural gas price that we realized during the first quarter of 2001
increased by 135% from $2.06 per MCF during the first three months of 2000 to
$4.85 during the first three months of 2001, including the impact of a loss from
hedging activities of $7.4 million during the quarter ended March 31, 2001.
Crude oil prices increased to $27.22 per BBL during the first three months of
2001 from $15.73 per BBL during the first three months of 2000. Natural gas
liquids prices increased to $28.44 per BBL in the first quarter of 2001 compared
to $21.51 per BBL in the first quarter of 2000. In addition, our proved reserves
will decline as crude oil, natural gas and natural gas liquids are produced
unless we are successful in acquiring properties containing proved reserves or
conducts successful exploration and development activities. In the event crude
oil, natural gas and natural gas liquids decline from their current levels or if
our production levels decrease, our revenues, cash flow from operations and
profitability will be materially adversely affected.
Liquidity and Capital Resources
General. Capital expenditures excluding property divestitures during the
first three months of 2001 were $17.8 million compared to $11.8 million during
the same period of 2000. The table below sets forth the components of these
capital expenditures on a historical basis for the three months ended March 31,
2001 and 2000.
Three Months Ended
March 31
--------------------------------------------
2001 2000
---------------------- ---------------------
Expenditure category (in thousands):
Acquisitions................................................ $ 22 $ 22
Development................................................. 17,726 11,451
Facilities and other........................................ 88 367
--------------- ---------------
Total................................................... $ 17,836 $ 11,840
=============== ===============
At March 31, 2001, we had current assets of $21.3 million and current
liabilities of $52.4 million resulting in a working capital deficit of $31.1
million. This included a net deficit of $14.4 million related to hedging
activities. This compares to a working capital deficit of $13.8 million at
December 31, 2000 and working capital of $20.3 million at March 31, 2000. The
material components of our current liabilities at March 31, 2001 include trade
accounts payable of $13.2 million, revenues due third parties of $9.9 million,
hedge liability of $17.7 million and accrued interest of $9.5 million.
Operating activities during the three months ended March 31, 2001 provided
us $17.4 million cash compared to $2.8 million in the same period in 2000. Net
income plus non-cash expense items during 2001 and net changes in operating
assets and liabilities accounted for most of these funds. Investing activities
used $17.8 million net during the first three months of 2001, which was utilized
primarily for the development of crude oil and natural gas properties and other
facilities. This compares to providing $22.3 million net during the first three
months of 2000, $34.0 million of which were proceeds from the sale of the assets
of Abraxas Wamsutter, L.P., a partnership of which one of our subsidiaries is
the general partner, and certain contiguous assets we owned, and $11.8 million
of which was utilized for the development of crude oil and natural gas
properties and other facilities. Financing activities provided $503,000 for the
first three months of 2001 compared to providing $1.7 million for the same
period of 2000.
Our current budget for capital expenditures for the last nine months of
2001 other than acquisition expenditures is approximately $24.5 million. Such
expenditures will be made primarily for the development of existing properties.
Additional capital expenditures may be made for acquisitions 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.
Current Liquidity Needs. Since January 1999, we have sought to improve our
liquidity in order to allow us to meet our debt service requirements and to
maintain and increase existing production.
Our sale in March 1999 of our First Lien Notes allowed us to refinance our
bank debt, meet our near-term debt service requirements and make limited crude
oil and natural gas capital expenditures.
18
In October 1999, we sold a dollar denominated production payment for $4.0
million relating to existing natural gas wells in the Edwards Trend in South
Texas and during 2000, we sold additional production payments for $6.4 million
relating to additional natural gas wells in the Edwards Trend. In 2001, we have
received $10.5 million ($2.5 million in March and an additional $8.0 million in
April) relating to additional south Texas gas wells and facilities. We have the
ability to sell up to $50 million to Mirant for drilling opportunities in the
Edwards Trend.
In December 1999, Abraxas and our wholly-owned Canadian subsidiary,
Canadian Abraxas Petroleum Limited, completed an Exchange Offer whereby we
exchanged the Second Lien Notes, common stock, and contingent value rights for
approximately 98.43% of our outstanding Old Notes. The Exchange Offer reduced
our long term debt by $76 million net of fees and expenses.
In March 2000, we sold our interest in certain crude oil and natural gas
properties that we owned and operated in Wyoming. Simultaneously, a partnership
of which one of our subsidiaries was the general partner, accounted for on the
equity method of accounting sold its interest in crude oil and natural gas
properties in the same area. Our net proceeds from these transactions were
approximately $34.0 million.
In March 2001, we announced that we had engaged Credit Lyonnais Securities
(USA) Inc. and CIBC World Markets Corp. to assist us in a review of alternative
financial strategies. Under the terms of this engagement, we may restructure,
refinance or recapitalize some or all of our existing debt and/or issue equity
securities.
We are continuing to rationalize our significant non-core Canadian assets
to allow us to continue to grow while reducing our debt. We may sell non-core
assets or seek partners to fund a portion of the exploration costs of
undeveloped acreage and are considering other potential strategic alternatives.
We will have three principal sources of liquidity going forward: (i) cash
on hand, (ii) cash flow from operations, and (iii) the production payment. We
also intend to continue to sell certain non-core properties, although the terms
of the First Lien Notes indenture, the Second Lien Notes indenture and the Old
Notes indenture substantially limit our use of proceeds from such sales.
We expect that the significantly improved commodity prices realized by us
compared to those received in the prior year and the expiration of a significant
portion of the crude oil and natural gas hedges that we had put in place in
earlier years will improve our liquidity position in 2001. Should commodity
prices fall, all of our capital expenditures are discretionary and can be
delayed to maintain liquidity. While the availability of capital resources
cannot be predicted with certainty and is dependent upon a number of factors
including factors outside of management's control, management believes that the
net cash flow from operations plus cash on hand, cash available under the
production payment and the proceeds from the sale of additional non-core
properties will be adequate to fund operations and planned capital expenditures.
Long-Term Indebtedness.
Old Notes. On November 14, 1996, the Company consummated the offering of
$215.0 million of it's 11.5% Senior Notes due 2004, Series A, which were
exchanged for the Series B Notes in February 1997. On January 27, 1998, the
Company completed the sale of $60.0 million of the Series C Notes. The Series B
Notes and the Series C Notes were subsequently combined into $275.0 million in
principal amount of the Old Notes in June 1998.
Interest on the Old Notes is payable semi-annually in arrears on May 1 and
November 1 of each year at the rate of 11.5% per annum. The Old Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas,
on or after November 1, 2000, at the redemption prices set forth below, plus
accrued and unpaid interest to the date of redemption, if redeemed during the
12-month period commencing on November 1 of the years set forth below:
Year Percentage
----- -----------
2001..................................... 102.875%
2002 and thereafter...................... 100.000%
19
The Old Notes are joint and several obligations of Abraxas and Canadian
Abraxas and rank pari passu in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. The Old Notes are, however, effectively subordinated to
the First Lien Notes to the extent of the value of the collateral securing the
First Lien Notes and the Second Lien Notes to the extent of the value of the
collateral securing the Second Lien Notes. The Old Notes are unconditionally
guaranteed, on a senior basis by Sandia. The guarantee is a general unsecured
obligation of Sandia and ranks pari passu in right of payment to all
unsubordinated indebtedness of Sandia and senior in right of payment to all
subordinated indebtedness of Sandia. The guarantee is effectively subordinated
to the First Lien Notes and the Second Lien Notes to the extent of the value of
the collateral
Upon a Change of Control, as defined in the Old Notes Indenture, each
holder of the Old Notes will have the right to require the Company to repurchase
all or a portion of such holder's Old Notes at a redemption price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. In addition, the Company will be obligated to offer to repurchase
the Old Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase in the event of certain asset sales.
First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. The First Lien Notes are redeemable, in whole or in part, at the option of
Abraxas on or after March 15, 2001, at the redemption prices set forth below,
plus accrued and unpaid interest to the date of redemption, if redeemed during
the 12-month period commencing on March 15 of the years set forth below:
Year Percentage
------ ----------
2001................................................. 103.000%
2002 and thereafter.................................. 100.000%
At any time, or from time to time, prior to March 15, 2001, Abraxas may, at
its option, use all or a portion of the net cash proceeds of one or more equity
offerings to redeem up to 35% of the aggregate original principal amount of the
First Lien Notes at a redemption price equal to 112.875% of the aggregate
principal amount of the First Lien Notes to be redeemed, plus accrued and unpaid
interest.
The First Lien Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and Wamsutter. The guarantees are secured by substantially all
of the crude oil and natural gas properties of the guarantors and the shares of
Grey Wolf owned by Canadian Abraxas.
Upon a Change of Control, as defined in the First Lien Notes Indenture,
each holder of the First Lien Notes will have the right to require Abraxas to
repurchase such holder's First Lien Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Abraxas will be obligated to offer to repurchase the
First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption in the event of certain asset sales.
The First Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the First Lien Notes (the "Restricted Subsidiaries") to, among other things,
20
incur additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur liens, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of Abraxas.
The First Lien Notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the Restricted Subsidiaries, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except in certain situations as described in the First Lien Notes
indenture.
Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas
consummated an Exchange Offer (see Note 2) whereby $269,699,000 of the Old Notes
were exchanged for $188,778,000 of new Second Lien Notes, and 16,078,990 shares
of Abraxas common stock and contingent value rights. See Note 6. An additional
$5,000,000 of the Second Lien Notes were issued in payment of fees and expenses.
Interest on the Second Lien Notes is payable semi-annually in arrears on
May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas
on or after December 1, 2000, at the redemption prices set forth below, plus
accrued and unpaid interest to the date of redemption, if redeemed during the
12-month period commencing on December 1 of the years set forth below:
Year Percentage
------ ------------
2001........................................ 102.875%
2002 and thereafter......................... 100.000%
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the Second Lien Notes and
related guarantees and the First Lien Notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.
Upon a Change of Control, as defined in the Second Lien Notes Indenture,
each holder of the Second Lien Notes will have the right to require Abraxas and
Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas
will be obligated to offer to repurchase the Second Lien Notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption in the event of certain asset sales.
The Second Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and Canadian Abraxas and certain of their subsidiaries,
including the guarantors of the Second Lien Notes (the "Restricted
Subsidiaries") to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas or
Canadian Abraxas.
The Second Lien Notes indenture provides, among other things, that Abraxas
and Canadian Abraxas may not, and may not cause or permit the Restricted
Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, Canadian
Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of
Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of
its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary
except in certain situations as described in the Second Lien Notes indenture.
Hedging Activities.
On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under
SFAS 133, all derivative instruments are recorded on the balance sheet at fair
value. If the derivative does not qualify as a hedge or is not designated as a
hedge, the gain or loss on the derivative is recognized currently in earnings.
21
To qualify for hedge accounting, the derivative must qualify either as a fair
value hedge, cash flow hedge or foreign currency hedge. Currently, the Company
uses only cash flow hedges and the remaining discussion will relate exclusively
to this type of derivative instrument. If the derivative qualifies for hedge
accounting, the gain or loss on the derivative is deferred in Other
Comprehensive Income/Loss, a component of Stockholder's Equity, to the extent
that the hedge is effective.
The relationship between the hedging instrument and the hedged item must be
highly effective in achieving the offset of changes in cash flows attributable
to the hedged risk both at the inception of the contract and on an ongoing
basis. Hedge accounting is discontinued prospectively when a hedge instrument
becomes ineffective. Gains and losses deferred in accumulated Other
Comprehensive Income/Loss related to a cash flow hedge that becomes ineffective,
remain unchanged until the related production is delivered. If the Company
determines that it is probable that a hedged transaction will not occur,
deferred gains or losses on the hedging instrument are recognized in earnings
immediately.
Gains and losses on hedging instruments related to accumulated Other
Comprehensive Income and adjustments to carrying amounts on hedged production
are included in natural gas or crude oil production revenue in the period that
the related production is delivered.
The following table sets forth the Company's position as of March 31, 2001.
Time Period Notional Quantities Price Fair Value
--------------------------------------- ------------------------------ ------------------------------- ---------------
April 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed price swap $2.60-$2.95 $(25) million
gas or 1,000 Bbl/day of natural gas or
crude oil $18.90 Crude oil
On January 1, 2001, in accordance with the transition provisions of SFAS
133, the Company recorded $31.0 million, net of tax, in other comprehensive loss
representing the cumulative effect of an accounting change to recognize the fair
value of cash flow derivatives. The Company recorded cash flow hedge derivative
liabilities of $38.2 million on that date and a deferred tax asset of $7.2
million.
During the first quarter of 2001 losses before tax of $7.4 million were
transferred from Other Comprehensive Income/Loss to revenue and the fair value
of outstanding liabilities decreased by $5.4 million. For the three months ended
March 31, 2001, the ineffective portion of the cash flow hedges were not
material.
As of March 31, 2001, $20.6 million of deferred net losses on derivative
instruments were recorded in Other Comprehensive Income/Loss, of which $14.4
million is expected to be reclassified to earnings during the next twelve-month
period.
All hedge transactions are subject to the Company's risk management policy,
approved by the Board of Directors. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk
management objectives and strategy for undertaking the hedge. This process
includes specific identification of the hedging instrument and the hedged
transaction, the nature of the risk being hedged and how the hedging
instrument's effectiveness will be assessed. Both at the inception of the hedge
and on an ongoing basis, the Company assesses whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows of hedged items.
The fair value of the hedging instrument was determined based on the base
price of the hedged item and NYMEX forward price quotes. As of March 31, 2001, a
commodity price increase of 10% would have resulted in an unfavorable change in
the fair market value of $5.7 million and a commodity price decrease of 10%
would have resulted in a favorable change in fair market value of $5.7 million.
Net Operating Loss Carryforwards.
At December 31, 2000, the Company had, subject to the limitation discussed
below, $101.8 million of net operating loss carryforwards for U.S. tax purposes.
These loss carryforwards will expire from 2001 through 2020 if not utilized. At
December 31, 2000, the Company had approximately $11.4 million of net operating
loss carryforwards for Canadian tax purposes. These carryforwards will expire
from 2001 through 2020 if not utilized.
As a result of the acquisition of certain partnership interests and crude
oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 occurred in December 1991. Accordingly, it is expected that the use
of the U.S. net operating loss carryforwards generated prior to December 31,
1991 of $4.9 million will be limited to approximately $235,000 per year.
22
During 1992, the Company acquired 100% of the common stock of an unrelated
corporation. The use of net operating loss carryforwards of the acquired
corporation of $257,000 acquired in the acquisition are limited to approximately
$115,000 per year.
As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $8.3 million will be limited as described above and in the following
paragraph.
An ownership change under Section 382 occurred in December 1999, following
the issuance of additional shares, as described in Note 5. It is expected that
the annual use of U.S. net operating loss carryforwards subject to this Section
382 limitation will be limited to approximately $363,000, subject to the lower
limitations described above. Future changes in ownership may further limit the
use of the Company's carryforwards.
The annual Section 382 limitation may be increased during any year, within
5 years of a change in ownership, in which built-in gains that existed on the
date of the change in ownership are recognized.
In addition to the Section 382 limitations, uncertainties exist as to the
future utilization of the operating loss carryforwards under the criteria set
forth under FASB Statement No. 109. Therefore, the Company has established a
valuation allowance of $34.8 million for deferred tax assets at December 31,
2000 and March 31, 2001.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Commodity Price Risk
Our exposure to market risk rests primarily with the volatile nature of
crude oil, natural gas and natural gas liquids prices. We manage crude oil and
natural gas prices through the periodic use of commodity price hedging
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources". Assuming the production
levels we attained during the three months ended March 31, 2001, a 10% decline
in crude oil, natural gas and natural gas liquids prices would have reduced our
operating revenue, cash flow and net income (loss) by approximately $2.8 million
for the three months ended March 31, 2001.
Hedging Sensitivity
The fair value of our hedge instrument was determined based on NYMEX
forward price quotes as of March 31, 2001. As of March 31, 2001, a commodity
price increase of 10% would have resulted in an unfavorable change in the fair
market value of our hedging instrument of $5.7 million and a commodity price
decrease of 10% would have resulted in a favorable change in the fair value of
our hedge instrument of $5.7 million.
The following table sets forth our hedge position as of March 31, 2001.
Time Period Notional Quantities Price Fair Value
- ------------------------------------------------ --------------------------- ---------------------------- --------------------
April 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed price swap $(25) million
gas or 1,000 Bbl/day of $2.60-$2.95 natural gas or
crude oil $18.90 Crude oil
Interest rate risk
At March 31, 2001, substantially all of our long-term debt is at fixed
interest rates and not subject to fluctuations in market rates.
Foreign currency
Our Canadian operations are measured in the local currency of Canada. As a
result, our financial results could be affected by changes in foreign currency
23
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported a pre tax earnings of $2.1 million for the three months
ended March 31, 2001. It is estimated that a 5% change in the value of the U.S.
dollar to the Canadian dollar would have changed our pre tax income by
approximately $105,000. We do not maintain any derivative instruments to
mitigate the exposure to translation risk. However, this does not preclude the
adoption of specific hedging strategies in the future.
Disclosure Regarding Forward-Looking Information
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this report
regarding our financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to have been correct. 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 which is incorporated by
reference herein and this report. 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.
24
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
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 and Reports on Form 8-K
(b) Reports on Form 8-K:
NONE
25
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABRAXAS PETROLEUM CORPORATION
(Registrant)
Date: May 15, 2001 By:/s/
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: May 15, 2001 By:/s/
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
26