UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 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)
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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
November 10, 2001, was:
Class Shares Outstanding
Common Stock, $.01 Par Value 29,979,397
1 of 28
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2001
and December 31, 2000............................................3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2001 and 2000....-.....5
Consolidated Statements of Stockholders' Equity (Deficit) -
Nine months ended September 30, 2001.............................6
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2000....................7
Notes to Consolidated Financial Statements.........................8
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings...................................................27
ITEM 2 - Changes in Securities...............................................27
ITEM 3 - Defaults Upon Senior Securities.....................................27
ITEM 4 - Submission of Matters to a Vote of Security Holders.................27
ITEM 5 - Other Information...................................................27
ITEM 6 - Exhibits and Reports on Form 8-K....................................27
Signatures ..................................................28
2
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, December 31,
2001 2000
(Unaudited)
------------- ------------
(In thousands)
Current assets:
Cash ........................................................................ $ 492 $ 2,004
Account receivable, less allowance for doubtful accounts .................... 6,886 20,718
Equipment inventory ......................................................... 1,467 1,411
Other current assets ........................................................ 443 179
------- -------
Total current assets ........................................................... 9,288 24,312
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved ................................................................. 496,522 481,802
Unproved, not subject to amortization .................................. 10,713 12,831
Other property and equipment ................................................ 62,783 63,720
------- --------
Less accumulated depreciation, depletion, and amortization ............ 273,286 253,569
------- --------
Total property and equipment - net ..................................... 296,732 304,784
------- --------
Deferred financing fees, net of accumulated amortization of $8,232 and $6,917 at
September 30, 2001 and December 31, 2000
respectively ................................................................ 4,267 5,556
Other assets ................................................................... 581 908
-------- --------
Total assets ................................................................ $310,868 $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)
September 30, December 31,
2001 2000
(Unaudited)
----------------- -------------
(In thousands)
Current liabilities:
Accounts payable ............................................................ $ 15,873 $ 22,721
Oil and gas production payable .............................................. 1,639 6,281
Accrued interest ............................................................ 9,517 6,079
Other accrued expenses ...................................................... 680 1,932
Hedge liability ............................................................. 1,962 --
Current maturities of long-term debt ........................................ 495 1,128
--------- ---------
Total current liabilities ................................................. 30,166 38,141
Long-term debt ................................................................. 270,635 266,441
Deferred income taxes .......................................................... 21,500 21,079
Hedge liability ................................................................ 203 --
Future site restoration ........................................................ 4,293 4,305
Minority interest in foreign subsidiary ........................................ -- 12,097
Stockholders' equity (deficit):
Common stock, par value $.01 per share - authorized 200,000,000 shares;
issued 30,145,280 and 22,759,852
shares at September 30, 2001 and December 31, 2000,
respectively .............................................................. 301 227
Additional paid-in capital .................................................. 136,830 130,409
Accumulated deficit ......................................................... (138,244) (131,376)
Treasury stock, at cost, 165,883 shares at September 30, 2001 and
December 31, 2000, respectively ........................................... (964) (964)
Accumulated other comprehensive loss ........................................ (13,852) (4,799)
--------- ---------
Total stockholders' equity (deficit) ........................................... (15,929) (6,503)
--------- ---------
Total liabilities and stockholders' equity (deficit)..... $ 310,868 $ 335,560
========= =========
See accompanying notes to consolidated financial statements
4
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------------------- ---------------------
(In thousands except per share data)
Revenue:
Oil and gas production revenues ................ $ 13,667 $ 15,345 $ 62,043 $ 46,472
Gas processing revenues ........................ 777 672 1,711 2,074
Rig revenues ................................... 199 134 607 384
Other .......................................... 258 226 742 451
-------- -------- -------- --------
14,901 16,377 65,103 49,381
Operating costs and expenses:
Lease operating and production taxes ........... 4,488 4,577 13,679 13,507
Depreciation, depletion, and amortization ...... 8,021 8,746 25,150 26,212
Rig operations ................................. 204 204 548 588
General and administrative ..................... 1,367 1,680 5,051 4,762
General and administrative (Stock-based
compensation) ................................ (1,366) 2,133 (2,767) 2,133
-------- -------- -------- --------
12,714 17,340 41,661 47,202
-------- -------- -------- --------
Operating income .................................. 2,187 (963) 23,442 2,179
Other (income) expense:
Interest income ................................ (46) (155) (74) (482)
Amortization of deferred financing fee ......... 405 508 1,315 1,523
Interest expense ............................... 8,090 7,706 23,700 23,371
Gain on sale of equity investment .............. -- -- -- (33,983)
Other expense .................................. -- 147 16 1,030
-------- -------- -------- --------
8,449 8,206 24,957 (8,541)
-------- -------- -------- --------
Net income (loss) from operations before taxes and
extraordinary item ............................. (6,262) (9,169) (1,515) 10,720
Income tax expense (benefit) ...................... (608) 4,035 3,677 3,739
Minority interest in income of consolidated foreign
subsidiary ..................................... 195 382 1,676 597
-------- -------- -------- --------
Net income (loss) before extraordinary item ....... (5,849) (13,586) (6,868) 6,384
Extraordinary item:
Debt extinguishment ............................ -- -- -- 1,773
-------- -------- -------- --------
Net income (loss) ................................. $ (5,849) $(13,586) $ (6,868) $ 8,157
======== ======== ======== ========
Earnings (loss) per common share:
Net Income (loss) before extraordinary item .. $ (0.22) $ (0.60) $ (0.28) $ 0.28
Extraordinary item ........................... -- -- 0.08
-------- -------- -------- --------
Net income (loss) per common share ................ $ (0.22) $ (0.60) $ (0.28) $ 0.36
======== ======== ======== ========
Earnings (loss) per common share assuming dilution:
Net Income (loss) before extraordinary item .. $ (0.22) $ (0.60) $ (0.28) $ 0.20
Extraordinary item ........................... -- -- -- 0.05
-------- -------- -------- --------
Net income (loss) per common share ................ $ (0.22) $ (0.60) $ (0.28) $ 0.25
======== ======== ======== ========
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):
Net loss ................... -- -- -- -- -- (6,868) -- (6,868)
Other comprehensive
income (loss):
Hedge loss .............. -- -- -- -- -- -- (2,025) (2,025)
Foreign currency
translation adjustment.. -- -- -- -- -- -- (7,028) (7,028)
--------
Comprehensive income (loss) -- -- -- -- -- -- -- (15,921)
Stock-based compensation .. -- -- -- -- (2,767) -- -- (2,767)
Stock options exercised .. 8,375 -- -- -- 16 -- -- 16
Issuance of common stock
for CVRs ................ 3,386,488 34 -- -- (34) -- -- --
Issuance of common stock
and stock options for
minority interest
acquisition of Grey Wolf
Exploration, Inc. ....... 3,990,565 40 -- -- 9,206 -- -- 9,246
---------- ---------- ---------- ---------- ------------- ------------ --------------- ----------
Balance at September 30,2001
(unaudited) ............... 30,145,280 $ 301 165,883 $ (964) $ 136,830 $ (138,244) $ (13,852) $ (15,929)
========== ========== ========== ========== ============= ============ =============== ==========
See accompanying notes to consolidated financial statements
6
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2001 2000
-----------------------
(In Thousands)
Operating Activities
Net income (loss) .......................................................... $ (6,868) $ 8,157
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, depletion, and amortization ............................. 25,150 26,212
Amortization of deferred financing fees ............................... 1,315 1,523
Stock-based compensation .............................................. (2,767) 2,133
Deferred income tax expense ........................................... 2,957 3,668
Minority interest in income of foreign subsidiary ..................... 1,676 597
Gain on sale of equity investment ..................................... -- (33,983)
Extraordinary gain on extinguishment of debt .......................... -- (1,773)
Issuance of common stock for compensation ............................. -- 46
Issuance of warrants for compensation ................................. -- 147
Changes in operating assets and liabilities:
Accounts receivable ............................................... 13,598 (2,408)
Equipment inventory and other assets .............................. (234) (741)
Accounts payable and accrued expenses ............................. (8,738) 5,205
-------- --------
Net cash provided by operating activities .................................. 26,089 8,783
Investing Activities
Capital expenditures, including purchases and development of properties .... (44,793) (44,271)
Proceeds from sale of oil and gas properties ............................... 15,361 8,451
Acquisition of minority interest ........................................... (2,248) --
Proceeds from sale of equity investment .................................... -- 34,482
-------- --------
Net cash used by investing activities ...................................... (31,680) (1,338)
Financing Activities
Proceeds from long-term borrowings ......................................... 12,866 2,900
Payments on long-term borrowings ........................................... (8,873) (9,644)
Exercise of stock options .................................................. 16 --
Purchase of treasury stock - net ........................................... -- (79)
Deferred financing fees .................................................... -- (582)
Other ...................................................................... 231 2
-------- --------
Net cash provided (used) by financing activities ........................... 4,240 (7,403)
Effect of exchange rate changes on cash .................................... (161) (208)
-------- --------
Increase (decrease) in cash ................................................ (1,512) (166)
Cash at beginning of period ................................................ 2,004 3,799
-------- --------
Cash at end of period ...................................................... $ 492 $ 3,633
======== ========
Supplemental Disclosures
Supplemental disclosures of cash flow information:
Interest paid ......................................................... $ 20,262 $ 19,704
======== ========
Taxes paid ............................................................ $ 505 $ --
======== ========
See accompanying notes to consolidated financial statements
7
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 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 those financial statements and to
the notes to those financial statements for additional details of the
Company's financial condition, results of operations, and cash flows. 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 2001 interim
periods are not necessarily indicative of results that may be expected for
the full year
The consolidated financial statements include the accounts of the
Company, and its wholly-owned foreign subsidiaries, Canadian Abraxas
Petroleum Limited ("Canadian Abraxas") and Grey Wolf Exploration Inc.
("Grey Wolf"). Minority interest represents the minority shareholders'
proportionate share of the equity and income of Grey Wolf prior to the
Company's acquiring the remaining minority interest in September 2001.
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. Acquisition of Minority Interest in Grey Wolf
In September 2001, the Company completed a tender offer for the
minority interest in Grey Wolf acquiring the approximately 52% of capital
stock that was not previously owned. The Company issued 3,990,565 common
shares and 588,916 stock options, valued together at approximately $9.2
million. Additionally, the Company incurred direct costs of approximately
$2.3 million related to the acquisition. The elimination of the minority
interest through an acquisition at a purchase price less than Grey Wolf's
book value in the Company's consolidated financial statements had the
effect of reducing the property, plant, and equipment balance by $3.6
million and deferred income taxes by $1.4 million.
The condensed pro forma financial information presented below
summarizes, on an unaudited pro forma basis, approximate results of the
Company's consolidated results of operations for the three and nine months
ended September 30, 2000 and 2001, assuming the acquisition of the minority
interest in Grey Wolf had occurred at the beginning of each period
presented.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-----------------------------------------------------
(In thousands except per share items
-----------------------------------------------------
Revenue .................................... $ 14,901 $ 16,377 $ 65,103 $ 49,381
========== =========== ========== ==========
Income (loss) before extraordinary item .... (5,654) (13,204) (5,192) 6,981
========== =========== ========== ==========
Net income (loss) .......................... (5,654) (13,204) (5,192) 8,754
========== =========== ========== ==========
Income (loss) before extraordinary item, per
common share ............................ (0.19) (0.50) (0.19) 0.26
========== =========== ========== ==========
Net income (loss) per common share ......... (0.19) (0.50) (0.19) 0.33
========== =========== ========== ==========
Income (loss) before extraordinary item, per
common share - diluted .................. (0.19) (0.50) (0.19) 0.19
========== =========== ========== ==========
Net income (loss) per common share - diluted
(0.19) (0.50) (0.19) 0.24
========== =========== ========== ==========
8
Note 3. Extraordinary Item
In June 2000, the Company retired $7.1 million of its 11.5% Senior
Notes, due 2004, at a discount of $1.7 million. The transaction was
consummated at the then current market value of the notes.
Note 4. Long-Term Debt
Long-term debt consists of the following:
September 30 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% Senior Secured Notes due 2004 ("Second Lien Notes") ............ 190,178 190,178
Credit facility payable to a Canadian bank (due 2002,
renewable), providing for borrowings to approximately
$17,600,000 at the bank's prime rate plus .125%, 6.375%
at September 30, 2001, secured by the assets of Grey Wolf.......... 9,036 7,859
Production Payments................................................... 7,615 5,231
---------------- ------------
271,130 267,569
Less current maturities .............................................. 495 1,128
---------------- ------------
$ 270,635 $ 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 its 11.5% Senior Notes due
2004, Series C. 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 the Company 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 to 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
Oil and Gas Company, a wholly owned subsidiary of the Company. 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 securing the
First Lien Notes and the Second Lien Notes.
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
9
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 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%
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 Abraxas and 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, 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 whereby $269,699,000 of the Old Notes were
exchanged for $188,778,000 of the Second Lien Notes, and 16,078,990 shares
of Abraxas common stock and contingent value rights. 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 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
10
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
Note 5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
2001 2000 2001 2000
-------------- ------------ ------------- ------------
Numerator:
Net income (loss) from continuing operations $ (5,849) $ (13,586) $ (6,868) $ 6,384
-------------- ------------ ------------ ------------
Numerator for basic and diluted earnings per
share - income (loss) continuing operations (5,849) (13,586) (6,868) 6,384
Extraordinary item ........................... -- -- -- 1,773
-------------- ------------ ------------ ------------
Numerator for basic earnings per share -
income (loss) applicable to common stock ... (5,849) (13,586) (6,868) 8,157
Denominator:
Denominator for basic earnings per share -
Weighted-average shares ................. 26,893,198 22,628,599 24,347,669 22,641,993
Effect of dilutive securities:
Stock options, warrants and CVR's ........ -- -- -- 9,979,975
-------------- ------------ ------------ ------------
Dilutive potential common shares Denominator
for diluted earnings per share - adjusted
weighted-average shares and assumed
Conversions .............................. 26,839,198 22,628,599 24,347,669 32,621,968
Basic earnings (loss) per share:
Income (loss) from continuing operations . $ (0.22) $ (0.60) $ (0.28) $ 0.28
Extraordinary item ....................... -- -- -- 0.08
-------------- ------------ ------------ ------------
$ (0.22) $ (0.60) $ (0.28) $ 0.36
============== ============ ============ ============
Diluted earnings (loss) per share:
Income (loss) from continuing operations . $ (0.22) $ (0.60) $ (0.28) $ 0.20
Extraordinary item .................... -- -- -- 0.05
-------------- ------------ ------------ ------------
$ (0.22) $ (0.60) $ (0.28) $ 0.25
============== ============ ============ ============
For the three months and nine months ended September 30, 2001 and for
the three months ended September 30, 2000, none of the shares issuable in
connection with stock options or warrants are included in diluted shares.
11
Inclusion of these shares would be antidilutive due to losses incurred in
the periods. Had there not been losses in these periods, dilutive shares
would have been 933,561 and 1,453,202 shares for the three and nine months
ended September 30, 2001 and 11.4 million shares for the three months ended
September 30, 2000.
Contingent Value Rights ("CVRs")
As part of the exchange offer consummated by the Company in December
1999, 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 issued
3,386,488 shares upon the expiration of the CVRs.
Note 6. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information of Canadian Abraxas, a
wholly owned subsidiary of Abraxas at September 30, 2001 and for the nine
months then ended. Canadian Abraxas is jointly and severally liable with
Abraxas 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.
BALANCE SHEET
Assets Liabilities and Shareholders Equity
(In Thousands)
Total current assets................ $ 2,254 Total current liabilities........$ 4,019
Oil and gas properties - net........ 132,259 11.5% Notes due 2004............ 52,629
Other assets........................ 1,932 Note payable to Abraxas.......... 15,072
--------- Other liabilities................ 24,576
$ 136,445 Equity........................... 40,149
========= ---------
$ 136,445
=========
STATEMENT OF OPERATIONS
Revenues .................................. $ 22,406
Operating costs and expenses .............. 17,650
Interest expense .......................... 5,497
Other expense.............................. 273
Income tax expense ........................ 1,048
----------------
Net loss................................ $ (2,062)
================
Note 7. Business Segments
Business segment information about the Company's third quarter
operations in different geographic areas is as follows:
Three Months Ended September 30, 2001
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 7,687 $ 7,214 $ 14,901
================== ================ ===================
Operating profit (loss)................. $ 2,170 $ (1,358) $ 812
================== ================
General Corporate................................................................. 1,375
Interest expense and amortization of
deferred financing fees........................................................ (8,449)
-------------------
Income before income taxes and extraordinary item................................. $ (6,262)
===================
12
Three Months Ended September 30, 2000
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 4,750 $ 11,627 $ 16,377
================== ================= ===================
Operating profit (loss) ................ $ (516) $ 2,944 $ 2,428
================== =================
General Corporate................................................................. (3,391)
Interest expense and amortization of
deferred financing fees........................................................ (8,206)
-------------------
Income before income taxes and extraordinary item................................. $ (9,169)
===================
Nine months Ended September 30, 2001
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 30,722 $ 34,381 $ 65,103
================== ================= ===================
Operating profit........................ $ 14,023 $ 10,417 $ 24,440
================== =================
General Corporate................................................................. (998)
Interest expense and amortization of
deferred financing fees........................................................ (24,957)
-------------------
Income before income taxes and extraordinary item................................. $ (1,515)
===================
Nine Months Ended September 30, 2000
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 16,033 $ 33,348 $ 49,381
================== ================= ===================
Operating profit ....................... $ 1,208 $ 6,171 $ 7,379
================== =================
General Corporate................................................................. (5,200)
Interest expense and amortization of
deferred financing fees........................................................ (24,412)
Other Income...................................................................... 32,953
-------------------
Income before income taxes and extraordinary item................................. $ 10,720
===================
At September 30, 2001
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In Thousands)
Identifiable assets at September 30, 2001.. $ 127,151 $ 179,980 $ 307,131
================== =================
Corporate assets.................................................................. 3,737
-------------------
Total assets ..................................................................... $ 310,868
===================
At December 31, 2000
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In Thousands)
Identifiable assets at December 31, 2000 $ 132,327 $ 197,229 $ 329,556
================== =================
Corporate assets.................................................................. 6,004
-------------------
Total assets ..................................................................... $ 335,560
===================
Note 8. 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
13
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
September 30, 2001.
Time Period Notional Quantities Price Fair Value
--------------------------------------- ------------------------------ ------------------------------ ----------------
October 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed price swap $2.60-$2.95 $ (2.2) 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 nine months of 2001, losses before tax of $12.0
million were transferred from Other Comprehensive Income (Loss) to revenue
and the fair value of outstanding liabilities decreased by $24.0 million.
For the three months and nine months ended September 30, 2001, the
ineffective portion of the cash flow hedges was not material
For the three months and nine months ended September 30, 2001, $4.0
million and $(2.0) million, respectively, of deferred net income (loss) on
derivative instruments were recorded in Other Comprehensive Income /(Loss).
Approximately $2.0 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
September 2001, a commodity price increase of 10% would have resulted in an
unfavorable change in the fair market value of $1.5 million and a commodity
price decrease of 10% would have resulted in a favorable change in fair
market value of $1.1 million
14
Note 9. Contingencies
Litigation - From time to time, the Company is involved in litigation
relating to claims arising out of operations in the normal course of
business. In 2001 the Company and a limited partnership in which a
subsidiary of the Company is the managing general partner were named in a
lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserts breach of contract, fraud and negligent misrepresentation by the
Company related to the responsibility for year 2000 ad valorem taxes on oil
and gas properties sold by the Company and the limited partnership. The
Company believes these charges are without merit. At September 30, 2001,
the Company believes any legal proceedings are not expected, individually
or in the aggregate, to have a material adverse effect on the Company.
Note 10. Comprehensive Income
Comprehensive income includes net income, losses and certain items
recorded directly to Stockholder's Equity and classified as Other
Comprehensive Income (Loss). The following table illustrates the
calculation of comprehensive income (loss) for the three and nine months
ended September 30, 2001:
Accumulated
Other
Comprehensive
Comprehensive Income (loss) Income (loss)
---------------------------------- ------------------
Nine Three As of
Months Months Ended September 30,
Ended 2001
------------------
September 30, 2001
----------------------------------
(In thousands)
Accumulated other comprehensive loss at
December 31, 2000.............................. $ (4,799)
Net loss.................................... $ (6,868) $ (5,849)
----------------- ---------------
Other Comprehensive loss:
Hedging derivatives (net of tax) - See Note 8
Cumulative effect of change in accounting
principle January 1, 2001................. (30,980) -
Reclassification adjustment for settled
hedge contracts........................... 9,749 653
Change in fair market value of
outstanding hedge positions............... 19,206 3,366
----------------- ---------------
(2,025) 4,019
Foreign currency translation adjustment..... (7,028) (4,989)
----------------- ---------------
Other comprehensive income (loss).............. (9,053) (970) (9,053)
----------------- ---------------
Comprehensive income (loss).................... $ (15,921) $ (6,819)
================= =============== -----------------
Accumulated other comprehensive loss at September 30, 2001.......................... $ (13,852)
=================
Note 11. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, Business Combinations, which requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. In July 2001, the FASB also
issued SFAS No. 142, Goodwill and Other Intangible Assets, which
15
discontinues the practice of amortizing goodwill and indefinite lived
intangible assets and initiates an annual review for impairment. Intangible
assets with a determinable useful life will continue to be amortized over
that period. The amortization provisions apply to goodwill and intangible
assets acquired after June 30, 2001. The Company has applied these
standards as a result of the minority interest purchase of Grey Wolf.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires an asset retirement
obligation to be recorded at fair value during the period incurred and an
equal amount recorded as an increase in the value of the related long-lived
asset. The capitalized cost is depreciated over the useful life of the
asset and the obligation is accreted to its present value each period. SFAS
No. 143 is effective for the Company beginning January 1, 2003 with earlier
adoption encouraged. The Company is currently evaluating the impact the
standard will have on its future results of operations and financial
condition.
In August 2001, the FASB issued SFAS No. 144 Accounting for the
Impairment of Disposal of Long-Lived Assets. SFAS No. 144 retains the
requirement to recognize an impairment loss only where the carrying value
of a long-lived asset is not recoverable from its undiscounted cash flows
and to measure such loss as the difference between the carrying amount and
fair value of the asset. SFAS No. 144, among other things, changes the
criteria that have to be met to classify an asset as held-for-sale and
requires that operating losses from the discontinued operations be
recognized in the period that the losses are incurred rather than as of the
measurement date. SFAS No, 144 is effective for the Company beginning
January 1, 2002 with earlier adoption encouraged. The Company is currently
evaluating the impact the standard will have on its future results of
operations and financial condition.
Note 12. Ceiling Limitation - Third Quarter 2001
The Company records the carrying value of its crude oil and natural gas
properties using the full cost method of accounting for oil and gas
properties. Under this method, the Company capitalizes the cost to acquire,
explore for and develop oil and gas properties. Under the full cost
accounting rules, the net capitalized cost of crude oil and natural gas
properties less related deferred taxes, are limited by country, to the
lower of the unamortized cost or the cost ceiling, defined as the sum of
the present value of estimated unescalated future net revenues from proved
reserves, discounted at 10%, plus the cost of properties not being
amortized, if any, plus the lower of cost or estimated fair value of
unproved properties included in the costs being amortized, if any, less
related income taxes. If the net capitalized cost of crude oil and natural
gas properties exceeds the ceiling limit, the Company is subject to a
ceiling limitation writedown to the extent of such excess. A ceiling
limitation writedown is a charge to earnings which does not impact cash
flow from operating activities. However, such writedowns do impact the
amount of the Company's stockholders' equity. The cost ceiling represents
the present value (discounted at 10%) of net cash flows from sales of
future production, using commodity prices on the last day of the quarter,
or alternatively, if prices subsequent to that date have increased, a price
near the periodic filing date of the Company's financial statements. As of
September 30, 2001, the Company's net capitalized cost of oil and gas
properties exceeded the present value of its estimated proved reserves. The
Company did not adjust its capitalized costs because, subsequent to
September 30, 2001, oil and gas prices in both the United States and Canada
increased such that the Company's capitalized cost did not exceed the
present value of its estimated proved oil and gas reserves determined at
such prices.
Note 13. Subsequent events
Subsequent to September 30, 2001, the Company completed the sale of
non-core oil and gas properties for approximately $14.3 million ($4.3
million represents proceeds from a Canadian property sale with the balance
associated with two United States property sales).
16
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 the 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:
o the sales prices of crude oil and natural gas
o the level of total sales volumes of crude oil and natural gas, and
o 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 Nine Months Ended
September 30 September 30
2001 2000 2001 2000
----------- ----------- ----------- ----------
Operating Revenue (in thousands):
Crude Oil Sales............................... $ 2,968 $ 2,454 $ 9,674 $ $7,681
Natural Gas Sales............................. 9,640 11,044 47,504 33,555
Natural Gas Liquids Sales..................... 1,059 1,847 4,865 5,236
Processing Revenue............................ 777 672 1,711 2,074
Rig Operations................................ 199 134 607 384
Other......................................... 258 226 742 451
--------- -------- --------- --------
$ 14,901 $ 16,377 $ 65,103 $ 49,381
========= ======== ========= ========
Operating Income (Loss) (in thousands)........ $ 2,187 $ (963) $ 23,442 $ $2,179
Crude Oil Production (MBBLS).................. 118 144 373 474
Natural Gas Production (MMCFS)................ 4,264 4,764 13,420 15,312
Natural Gas Liquids Production (MBBLS)........... 59 79 203 243
Average Crude Oil Sales Price ($/BBL)............ $ 25.06 $ 16.99 $ 25.91 $ 16.20
Average Natural Gas Sales Price $/MCF)........... $ 2.26 $ 2.32 $ 3.54 $ 2.19
Average Liquids Sales Price ($/BBL).............. $ 18.05 $ 23.35 $ 24.02 $ 21.50
Comparison of Three Months Ended September 30, 2001 to Three Months Ended
September 30, 2000
Operating Revenue. During the three months ended September 30, 2001,
operating revenue from crude oil, natural gas and natural gas liquid sales
decreased to $13.7 million from $15.3 million for the same period in 2000. The
decrease in revenue from crude oil, natural gas and natural gas liquids was
primarily due to decreased production volumes during the three months ended
September 30, 2001 as compared to the same period of 2000. The decrease in
production volumes had a $2.1 million impact on revenue, which was partially
offset by increased prices received in 2001 as compared to 2000. Increased crude
oil prices contributed $1.0 million to revenue, which was partially offset by
lower prices received for natural gas and natural gas liquids.
The average sales prices, net of hedging activities, for the quarter ended
September 30, 2001 were:
o $25.06 per Bbl of crude oil,
o $18.05 per Bbl of natural gas liquid, and
o $ 2.26 per Mcf of natural gas
17
The average sales prices, net of hedging activities, for the quarter ended
September 30, 2000 were:
o $16.99 per Bbl of crude oil,
o $23.35 per Bbl of natural gas liquid, and
o $ 2.32 per Mcf of natural gas
Crude oil production declined from 144.4 Mbbls for the three months ended
September 30, 2000 to 118.4 Mbbls for the same period of 2001. This decline is
primarily due to natural field depletion and the sale of non-core properties
during 2001. Revenue from natural gas production declined from $11.0 million for
the quarter ended September 30, 2000 to $9.6 million for the same period of
2001. Natural gas production volumes declined from 4,764 Mmcf for the three
months ended September 30, 2000 to 4,264 Mmcf for the same period of 2001. The
decline in natural gas production volumes was the result of the sale of various
non-core properties, primarily in our Canadian operations. The decrease in
natural gas production volume decreased revenue by $1.1 million, and a slight
decrease in commodity prices had caused $0.3 million decrease on natural gas
revenue. Natural gas revenue was also negatively impacted by $0.8 million from
hedging activities in the third quarter of 2001. Natural gas liquids revenue
decreased to $1.1 million for the quarter ended September 30, 2001 compared to
$1.8 million for the same period of 2000. Decreased prices received for natural
gas liquids during the third quarter of 2001 impacted revenue by $0.3 million.
Production volume declines had a $0.5 million negative impact on revenue during
the three months ended September 30, 2001. Production decreased from 79.1 MBbls
for the three months ended September 30, 2000 to 58.6 MBbls for the same period
of 2001. The decline in natural gas liquids volumes was due primarily to the
decline in natural gas production volumes in the areas in which we process
liquids.
Lease Operating Expenses. Lease operating expenses and natural gas
processing costs ("LOE") for the three months ended September 30, 2001 decreased
slightly from $4.6 million for the three months ended September 30, 2000 to $4.5
million for the same period of 2001. The Company's LOE on a per MCFE basis for
the three months ended September 30, 2001 was $0.84 compared to $0.75 for the
same period of 2000. The increase on a per MCFE basis was primarily due to
decreased production volumes during the third quarter of 2001 as compared to
2000.
G&A Expenses. General and administrative ("G&A") expenses decreased from
$1.6 million for the three months ended September 30, 2000 to $1.4 million for
the same period of 2001. G&A expense on a per MCFE basis decreased from $0.28
for the quarter ended September 30, 2000 to $0.26 for the same period of 2001.
Stock-based compensation expense. Effective July 1, 2000, the Financial
Accounting Standards Board ("FASB") issued FIN 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB 25. Under
the interpretation, certain modifications to fixed stock option awards occurring
subsequent to December 15, 1998, and when these awards 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 March 1999, the Company amended the
exercise price to $2.06 on all options with an exercise price greater than
$2.06. We recognized a credit of approximately $(1.4) million as stock-based
compensation expense during the third quarter of 2001. The credit recognized in
the quarter was due to a decline in the price of our common stock.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense decreased from $8.7 million for the three
months ended September 30, 2000, to $8.0 million in the same period of 2001. The
Company's DD&A on a per MCFE basis for the three months ended September 30, 2001
was $1.51 per MCFE compared to $1.44 in 2000. The decrease in total DD&A was
primarily due to decreased production during the third quarter of 2001. The per
MCFE increase is due to higher finding cost in the later part of 2000 and the
first nine months of 2001.
Interest Expense. Interest expense increased to $8.1 million for the three
months ended September 30, 2001 from $7.7 million for the same period of 2000.
This increase was the result of higher debt levels during the first nine months
of 2001 compared to the same period of 2000. Long-term debt increased from
$264.6 million at September 30, 2000 to $271.1 million at September 30, 2001.
Other Expense. Other expense for the three months ended September 30, 2000
were $147,000. This represents a non-cash expense connected with the issuance of
warrants in August 2000 to a third party company to provide financial advisory
services.
Income taxes. Income tax expense was a benefit of $608,000 for the three
months ended September 30, 2001 compared to an expense of $4.0 million for the
18
same period of 2000. Income tax expense for the three months ended September 30,
2000 included $3.5 million as a result of the reversal of a $3.5 million
deferred tax asset during the quarter when it was determined that it would not
be utilized.
Ceiling Limitation - Third Quarter 2001. The Company records the carrying
value of its crude oil and natural gas properties using the full cost method of
accounting for oil and gas properties. Under this method, the Company
capitalizes the cost to acquire, explore for and develop oil and gas properties.
Under the full cost accounting rules, the net capitalized cost of crude oil and
natural gas properties less related deferred taxes, are limited by country, to
the lower of the unamortized cost or the cost ceiling, defined as the sum of the
present value of estimated unescalated future net revenues from proved reserves,
discounted at 10%, plus the cost of properties not being amortized, if any, plus
the lower of cost or estimated fair value of unproved properties included in the
costs being amortized, if any, less related income taxes. If the net capitalized
cost of crude oil and natural gas properties exceeds the ceiling limit, the
Company is subject to a ceiling limitation writedown to the extent of such
excess. A ceiling limitation writedown is a charge to earnings which does not
impact cash flow from operating activities. However, such writedowns do impact
the amount of the Company's stockholders' equity. The cost ceiling represents
the present value (discounted at 10%) of net cash flows from sales of future
production, using commodity prices on the last day of the quarter, or
alternatively, if prices subsequent to that date have increased, a price near
the periodic filing date of the Company's financial statements. As of September
30, 2001, the Company's net capitalized cost of oil and gas properties exceeded
the present value of its estimated proved reserves. The Company did not adjust
its capitalized costs because, subsequent to September 30, 2001, oil and gas
prices in both the United States and Canada increased such that the Company's
capitalized cost did not exceed the present value of its estimated proved oil
and gas reserves determined at such prices.
Comparison of Nine Months Ended September 30, 2001 to Nine Months Ended
September 30, 2000
Operating Revenue. During the nine months ended September 30, 2001,
operating revenue from crude oil, natural gas and natural gas liquid sales
increased from $46.5 million in the nine months ended September 30, 2000 to
$62.0 million for the same period in 2001. The increase in revenue was primarily
attributable to higher prices realized during the nine months ended September
30, 2001 as compared to the same period of 2000. After deducting losses from
hedging activities of $12.0 million, increased prices contributed $22.2 million
in additional revenue. Reduced production volumes had a $6.7 million negative
impact on revenue.
The average sales prices, net of hedging activities, for the nine months
ended September 30, 2001 were:
o $25.91 per Bbl of crude oil,
o $24.02 per Bbl of natural gas liquid, and
o $ 3.54 per Mcf of natural gas
The average sales prices, net of hedging activities, for the nine months
ended September 30, 2000 were:
o $16.20 per Bbl of crude oil,
o $21.50 per Bbl of natural gas liquid, and
o $ 2.19 per Mcf of natural gas
Crude oil production decreased from 474.3 MBbls for the first nine months
of 2000 to 373.4 MBbls for the same period of 2001. Natural gas production
volumes declined to 13,420 MMcf for the nine months ended September 30, 2001
from 15,312 MMcf for the same period of 2000. The decline in crude oil and
natural gas production was primarily the result of the sale of non-core
properties, primarily in Canada, during the second half of 2000 and first nine
months of 2001 and the natural field decline in production. Natural gas liquids
volumes declined from 243.5 MBbls for the nine months ended September 30, 2000
to 202.5 MBbls for the same period of 2001. The decline in natural gas liquids
was primarily due to the natural field decline in production in the areas that
we process liquids.
Lease Operating Expenses. LOE and natural gas processing expenses were
$13.7 million for the nine months ended September 30, 2001 compared to $13.5
million for the same period in 2000. The increase was due primarily to higher
production taxes paid as the result of higher commodity prices in 2001 compared
to 2000. The Company's LOE on a per MCFE basis for the nine months ended
September 30, 2001 was $0.81 compared to $0.69 for the same period of 2000. The
increase on a per MCFE basis was primarily due to general decreased production
volumes during the first nine months of 2001 as compared to the same period of
2000.
G&A Expenses. G&A expenses increased from $4.8 million for the nine months
ended September 30, 2000 to $5.1 million for the same period of 2001. The
19
increase was primarily due to the loss of overhead reimbursement of
approximately $300,000 due to the sale of properties in March 2000, and
increased insurance cost. G&A expense on a per MCFE basis increased from $0.24
for the nine months ended September 30, 2000 to $0.30 for the same period of
2001.
Stock-based compensation expense. Effective July 1, 2000, the Financial
Accounting Standards Board ("FASB") issued FIN 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB 25. Under
the interpretation, certain modifications to fixed stock option awards occurring
subsequent to December 15, 1998, and when these awards 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 March 1999, the Company amended the
exercise price to $2.06 on all options with an existing exercise price greater
than $2.06. We recognized a credit of approximately $(2.8) million as
stock-based compensation expense during the nine months ended September 30, 2001
related to these repricings. The credit was due to a decline in the market price
of our common stock from December 31, 2000 to September 30, 2001.
Depreciation, Depletion and Amortization Expenses. DD&A expense decreased
from $26.2 million for the nine months ended September 30, 2000, to $25.2
million for the same period of 2001. The Company's DD&A on a per MCFE basis for
the nine months ended September 30, 2001 was $1.49 per MCFE compared to $1.34 in
2000. The decrease in total DD&A was due to decreased production during the
first nine months of 2000. The per MCFE increase is due to higher finding cost
in the first nine months of 2001.
At September 30, 2001, the Company's net capitalized cost of oil and gas
properties exceeded the present value of its estimated proved reserves. The
Company did not adjust it's capitalized costs because subsequent to September
30, 2001, oil and gas prices both in the United States and Canada increased such
that the Company's capitalized cost did not exceed the present value of its
estimated proved oil and gas reserves determined at such prices.
Interest Expense. Interest expense increased to $23.7 million for the nine
months ended September 30, 2001 from $23.4 million for the nine months ended
September 30, 2000. This increase was the result of higher debt levels during
the first nine months of 2001 compared to the same period of 2000. Long-term
debt increased from $264.6 million at September 30, 2000 to $271.1 million at
September 30, 2001
Other Expense. Other expense was $1.0 million for the nine months ended
September 30, 2000. Included in this amount is $147,000 of non-cash expense in
connection with the issuance of warrants in August, 2000 to a third party
financial advisor, approximately $400,000 in non-recurring costs incurred in our
Canadian operations in connection with the acquisition of New Cache Petroleums,
L.T.D. in 1999 and approximately $436,000 in connection with the settlement of a
lawsuit in April 2000.
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
prices of natural gas and, crude oil and natural gas liquids we receive
increased during the first nine months of 2001. The average natural gas price we
realized increased to $3.54 per MCF during the first nine months of 2001,
including the impact of a loss from hedging activities of $12.0 million,
compared with $2.19 per MCF during the same period of 2000. Crude oil prices
increased from $16.20 per BBL during the first nine months of 2000, to $25.91
for the nine months ended September 30, 2001. Natural gas liquids prices
increased to $24.02 per BBL for the nine months ended September 30, 2001
compared to $21.50 per BBL in the same period of 2000. We experienced a decline
in commodity prices during the quarter ended September 30, 2001 as compared to
the average prices received during the nine months ended September 30, 2001 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 conduct successful exploration and development
activities. In the event crude oil, natural gas and natural gas liquid prices
return to depressed levels or if our production levels further decrease, our
revenues, cash flow from operations and profitability will be materially
adversely affected.
Liquidity and Capital Resources
General: Capital expenditures during the nine months ended September 30,
2001 were $44.8 million compared to $44.3 million during the same period of
2000. The table below sets forth the components of these capital expenditures on
a historical basis for the nine months ended September 30, 2001 and 2000.
20
Nine Months Ended
September 30
----------------------------------------
2001 2000
------------------ ---------------------
Expenditure category (in thousands):
Development and Acquisitions $ 44,466 $ 43,130
Facilities and other 327 1,141
-------------- ---------------
Total $ 44,793 $ 44,271
============== ===============
At September 30, 2001, we had current assets of $9.3 million and current
liabilities of $30.2 million resulting in a working capital deficit of $20.9
million. This compares to working capital deficit of $13.8 million at December
31, 2000 and a working capital deficit of $9.7 million at September 30, 2000.
The material components of our current liabilities at September 30, 2001 include
trade accounts payable and revenues due third parties of $17.5 million, accrued
interest of $9.5 million and a hedge liability of $2.0 million.
Operating activities during the nine months ended September 30, 2001
provided $26.4 million in cash compared to $8.8 million in the same period in
2000. Net loss plus non-cash expense items during 2001and net changes in
operating assets and liabilities accounted for most of these funds. Investing
activities required $32.0 million net during the first nine months of 2001,
$44.5 million of which was utilized for the development of crude oil and natural
gas properties. Divestitures of oil and gas properties provided $15.4 million.
This compares to $1.3 million required during the same period of 2000, $42.8
million of which was utilized for the development of oil and gas properties.
Divestitures of oil and gas properties, including equity investment, provided
$34.5 million. Financing activities provided $4.2 million for the first nine
months of 2001 compared to requiring $7.4 million for the same period of 2000.
The Company's current budget for capital expenditures for the last three
months of 2001, other than acquisition expenditures, is approximately $8.0
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 the
Company currently has no agreements, arrangements or undertakings regarding any
material acquisitions. The Company has no material long-term capital commitments
and is consequently able to adjust the level of its 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 commodity prices return to depressed levels or decline further,
reductions in the capital expenditure budget may be required.
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.
In October 1999, we sold a dollar denominated production payment to Mirant
Americas Energy Capital, LP. ("Mirant") for $4.0 million relating to existing
natural gas wells in the Edwards Trend in South Texas. During 2000, we sold
additional production payments to Mirant for $6.4 million relating to additional
natural gas wells in the Edwards Trend. In 2001, we have received $11.7 million
from Mirant ($2.5 million in March, $8.0 million in April and $1.2 million in
October) relating to additional south Texas gas wells and facilities. In the
future, we have the ability to sell additional production payments to Mirant for
drilling opportunities in the Edwards Trend. The current arrangement with Mirant
allows for cumulative total production payments of up to $50 million.
In December 1999, Abraxas and Canadian Abraxas, 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, Abraxas 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.
During 2001, we have had proceeds of approximately $15.4 million from the
sale of non-core properties in Canada.
21
In October 2001, we sold non-core United States properties for approximately
$10.0 million and non-core Canadian properties for approximately $4.3 million.
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 payments with
Mirant. 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 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 continue to
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 agreement with Mirant 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 its 11.5% Senior Notes due 2004.
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 the Company 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 to 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 Oil and Gas Company, a wholly owned
subsidiary of the Company.. 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 securing the First Lien Notes and the Second Lien Notes.
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,
22
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%
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
Abraxas and 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,
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 whereby $269,699,000 of the Old Notes were
exchanged for $188,778,000 of the Second Lien Notes, and 16,078,990 shares of
Abraxas common stock and contingent value rights. 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
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
23
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.
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 at September
30, 2001.
Time Period Notional Quantities Price Fair Value
--------------------------------------- ------------------------------ -------------------------- -------------------
October 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed price swap $(2.2) million
gas or 1,000 Bbl/day of $2.60-$2.95 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 nine months of 2001, losses before tax of $12.0 million
were transferred from Other Comprehensive Income/(Loss) to revenue and the fair
value of outstanding liabilities decreased by $24.0 million. For the three
months and nine months ended September 30, 2001, the ineffective portion of the
cash flow hedges were not material
24
For the three months and nine months ended September 30, 2001, $4.0 million
and $(2.0) million, respectively, of deferred net income (loss) on derivative
instruments were recorded in Other Comprehensive Income (Loss). Approximately
$2.0 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 September 30,
2001, a commodity price increase of 10% would have resulted in an unfavorable
change in the fair market value of $1.5 million and a commodity price decrease
of 10% would have resulted in a favorable change in fair market value of $1.1
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.
Certain of the NOL carryforwards are subject to limitations due to
transactions in prior years which resulted in a change of ownership under
Section 382. It is expected that the use of NOL carryforwards related to these
transactions will be limited to varying amounts between $115,000 to $363,000 per
year.
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 for deferred tax assets at December 31, 2000 and September
30, 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 nine months ended September 30, 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
$6.2 million for the nine months ended September 30, 2001.
Hedging Sensitivity
The fair value of our hedge instrument was determined based on NYMEX
forward price quotes as of September 30, 2001. As of September 30, 2001, a
commodity price increase of 10% would have resulted in an unfavorable change in
the fair market value of our hedging instrument of $1.5 million and a commodity
price decrease of 10% would have resulted in a favorable change in the fair
value of our hedge instrument of $1.1 million.
The following table sets forth our hedge position as of September 30, 2001
Time Period Notional Quantities Price Fair Value
- ------------------------------------------------ --------------------------- ---------------------------- --------------------
October 1, 2001 - October 31, 2002 20,000 Mcf/day of Fixed price swap $(2.2) million
natural gas or 1,000 $2.60-$2.95 natural gas or
Bbl/day of crude oil $18.90 Crude oil
25
Interest rate risk
At September 30, 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
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported pre-tax earnings of $4.4 million for the nine months ended
September 30, 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 $220,000. 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.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, which requires the purchase method of accounting
for business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. In July 2001, the FASB also issued SFAS No. 142,
Goodwill and Other Intangible Assets, which discontinues the practice of
amortizing goodwill and indefinite lived intangible assets and initiates an
annual review for impairment. Intangible assets with a determinable useful life
will continue to be amortized over that period. The amortization provisions
apply to goodwill and intangible assets acquired after June 30, 2001. The
Company has applied these standards as a result of the purchase of the minority
interest of Grey Wolf.
In June 2001 the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires an asset retirement obligation to be recorded
at fair value during the period incurred and an equal amount recorded as an
increase in the value of the related long-lived asset. The capitalized cost is
depreciated over the useful life of the asset and the obligation is accreted to
its present value each period. SFAS No. 143 is effective for the Company
beginning January 1, 2003 with earlier adoption encouraged. The Company is
currently evaluating the impact the standard will have on its future results of
operations and financial condition.
In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment
of Disposal of Long-Lived Assets. SFAS No. 144 retains the requirement to
recognize an impairment loss only where the carrying value of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure such loss as
the difference between the carrying amount and fair value of the asset. SFAS No.
144, among other things, changes the criteria that have to be met to classify an
asset as held-for-sale and requires that operating losses from the discontinued
operations be recognized in the period that the losses are incurred rather than
as of the measurement date. SFAS No, 144 is effective for the Company beginning
January 1, 2002 with earlier adoption encouraged. The Company is currently
evaluating the impact the standard will have on its future results of operations
and financial condition.
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.
26
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On September 17, 2001, the Company issued 588,916 common stock
options at an average exercise price of $2.49 in connection with the
acquisition of the minority interest in Grey Wolf. These options were
issued in exchange for outstanding Grey Wolf options and in
consideration of the waiver by certain Grey Wolf option holders to
have all of their Grey Wolf options vest upon the completion of the
tender offer. The options were issued pursuant to the exemption from
the registration requirements set forth in Section 4(2) of the
Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on August 30, 2001 the
following proposals were adopted by the margins indicated:
1. Election of two directors for term of three years, to hold office
until the expiration of his term in 2004 or until a successor shall
have been elected & qualified.
Number of Shares
For Withheld
Robert L.G. Watson 21,307,249 344,261
James C. Phelps 21,575,337 76,173
2. Proposal to approve the offer and issuance of shares in connection
with the Grey Wolf Exploration, Inc. offer and any compulsory
acquisition transaction and subsequent acquisition transaction.
Number of Shares
For Against Abstain
---------------------------------------------
10,625,166 156,011 84,421
3. Proposal to approve an amendment of the Long term Incentive Plan
to increase the number of shares of common stock reserved for
issuance under the plan.
Number of Shares
For Against Abstain
---------------------------------------------
8,783,064 1,995,113 87,421
4. Approval of the appointment of Deloitte & Touche LLP as the
Company's auditors.
Number of Shares
For Against Abstain
-------------------------------------------
21,410,975 225,766 14,769
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
None
(b)Reports on Form 8-K
None
27
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: November 14, 2001 By:/s/
------------------- -------------------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: November 14, 2001 By:/s/
------------------- -------------------------------
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
28