UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2004
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19118
ABRAXAS PETROLEUM CORPORATION
______________________________________________________________________
(Exact name of Registrant as specified in its charter)
Nevada 74-2584033
___________________________________ _____________________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
500 N. Loop 1604 East, Suite 100, San Antonio, Texas 78232
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (210) 490-4788
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X or No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ or No X
The number of shares outstanding of each of the issuer's classes of common
stock outstanding as of May 13, 2004 was:
Class Shares Outstanding
_________________________________ ______________________
Common Stock, $.01 Par Value 36,227,708
1 of 35
FORWARD-LOOKING INFORMATION
We make forward-looking statements throughout this document. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe," "expect" or "anticipate" will occur or what we
"intend" to do, and other similar statements), you must remember that our
expectations may not be correct, even though we believe they are reasonable. The
forward-looking information contained in this document is generally located in
the material set forth under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "2004 Outlook" but may be
found in other locations as well. These forward-looking statements generally
relate to our plans and objectives for future operations and are based upon our
management's reasonable estimates of future results or trends. The factors that
may affect our expectations regarding our operations include, among others, the
following:
o our high debt level;
o our ability to raise capital;
o our limited liquidity;
o economic and business conditions;
o price and availability of alternative fuels;
o political and economic conditions in oil producing countries, especially
those in the Middle East;
o our success in development, exploitation and exploration activities;
o planned capital expenditures;
o prices for crude oil and natural gas;
o rates of production of crude oil and natural gas;
o our acquisition and divestiture activities;
o results of our hedging activities; and
o other factors discussed elsewhere in this document.
In addition to these factors, important factors that could cause actual
results to differ materially from our expectations ("Cautionary Statements") are
disclosed under "Risk Factors" in our Annual Report on Form 10-K for the year
ended December 31, 2003 which is incorporated by reference herein. All
subsequent written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their entirety by the
Cautionary Statements.
2
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2004
and December 31, 2003...................................4
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2004 and 2003..............6
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003..............7
Notes to Condensed Consolidated Financial Statements.............8
ITEM 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations..................................17
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risks......28
ITEM 4 - Controls and Procedures.........................................29
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings 30
ITEM 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities................................................30
ITEM 3 - Defaults Upon Senior Securities.....................................30
ITEM 4 - Submission of Matters to a Vote of Security Holders.................30
ITEM 5 - Other Information 30
ITEM 6 - Exhibits and Reports on Form 8-K....................................30
Signatures ..................................................31
3
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2004 2003
(Unaudited)
--- ------------------ --- -------------------
Assets:
Current assets:
Cash ................................................... $ 1,393 $ 493
Accounts receivable, net:
Joint owners.......................................... 548 1,360
Oil and gas production................................ 4,309 5,873
Other................................................. 318 1,090
------------------ -------------------
5,175 8,323
Equipment inventory........................................... 790 782
Other current assets.......................................... 544 572
------------------ -------------------
Total current assets........................................ 7,902 10,170
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved.................................................... 330,292 325,222
Unproved, not subject to amortization.............. 2,247 4,304
Other property and equipment................................. 5,202 4,540
------------------ -------------------
Total................................................ 337,741 334,066
Less accumulated depreciation, depletion, and
amortization............................................ 225,432 222,503
------------------ -------------------
Total property and equipment - net........................ 112,309 111,563
Deferred financing fees, net.................................... 5,536 4,410
Other assets .................................................. 294 294
------------------ -------------------
Total assets.................................................. $ 126,041 $ 126,437
================== ===================
See accompanying notes to condensed consolidated financial statements
4
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets (continued)
(in thousands)
March 31, December 31,
2004 2003
(Unaudited)
------------------- -------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable.............................................. $ 4,129 6,756
Oil and gas production payable................................ 2,449 2,290
Accrued interest.............................................. 5,288 2,340
Other accrued expenses........................................ 1,414 1,228
------------------- -------------------
Total current liabilities................................... 13,280 12,614
Long-term debt.................................................. 186,971 184,649
Future site restoration......................................... 1,618 1,377
------------------- -------------------
Total liabilities.......................................... 201,869 198,640
Stockholders'deficit:
Common Stock, par value $.01 per share-
authorized 200,000,000 shares; issued, 36,291,602 and ,
36,024,308 at March 31, 2004 and December 31, 2003
respectively................................................. 363 360
Additional paid-in capital................................... 143,817 141,835
Receivable from stock sale.................................... (97) (97)
Accumulated deficit........................................... (219,259) (213,701)
Treasury stock, at cost, 101,989 shares ...................... (525) (964)
Accumulated other comprehensive (loss) income................. (127) 364
------------------- -------------------
Total stockholders' deficit............................... (75,828) (72,203)
------------------- -------------------
Total liabilities and stockholders' deficit..................... $ 126,041 126,437
=================== ===================
See accompanying notes to condensed consolidated financial statements
5
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended
March 31,
---------------------------------------
2004 2003
----------------- --- -----------------
Revenue:
Oil and gas production revenues................................... $ 10,732 $ 12,772
Gas processing revenue............................................ - 132
Rig revenues...................................................... 175 181
Other............................................................. 28 26
------------- -----------------
10,935 13,111
Operating costs and expenses:
Lease operating and production taxes.............................. 3,367 2,726
Depreciation, depletion and amortization.......................... 3,035 3,142
Rig operations.................................................... 145 166
General and administrative....................................... 1,342 1,395
Stock-based compensation 2,063 36
------------- -----------------
9,952 7,465
------------- -----------------
Operating income ................................................... 983 5,646
Other (income) expense
Interest income................................................... (6) (10)
Interest expense.................................................. 5,119 5,164
Amortization of deferred financing fees........................... 445 377
Financing cost.................................................... 971 3,601
Gain on sale of foreign subsidiaries.............................. - (66,960)
Other............................................................. 11 -
------------- -----------------
6,540 (57,828)
------------- -----------------
Earnings (loss) before cumulative effect of accounting change and
taxes ............................................................ (5,557) 63,474
------------- -----------------
Cumulative effect of accounting change............................... - (395)
------------- -----------------
Earnings (loss) before taxes $ (5,557) 63,079
Income tax expense .................................................. - 377
------------- -----------------
Net earnings (loss).................................................. $ (5,557) $ 62,702
============= =================
Basic earnings (loss) per common share:
Net earnings (loss)............................................... $ (0.15) $ 1.84
Cumulative effect of accounting change............................ - (0.01)
------------- -----------------
Net earnings (loss) per common - basic............................... $ (0.15) $ 1.83
============= =================
Diluted earnings (loss) per common share:
Net earnings (loss)............................................... $ (0.15) $ 1.83
Cumulative effect of accounting change............................ - (0.01)
------------- -----------------
Net earnings (loss) per common share - diluted....................... $ (0.15) $ 1.82
============= =================
See accompanying notes to condensed consolidated financial statements
6
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
March 31,
---------------------------------------------
2004 2003
---------------------------------------------
Cash flows from Operating Activities
Net income (loss)............................................ $ (5,557) $ 62,702
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization..................... 3,035 3,142
Deferred income tax expense (benefit)......................... - 377
Amortization of deferred financing fees....................... 445 377
Non-cash interest and financing cost......................... 3,010 2,159
Accretion of future site restoration......................... 256 414
Stock-based compensation..................................... 2,063 36
Gain on sale of foreign subsidiaries.......................... - (66,960)
Changes in operating assets and liabilities:
Accounts receivable...................................... 3,252 (1,160)
Equipment inventory...................................... (8) 162
Other ................................................... (21) 1,650
Accounts payable and accrued expenses.................... 563 (154)
----------------- -----------------
Net cash provided by operations............................... 7,038 2,745
Cash flows from Investing Activities
Capital expenditures, including purchases and development
of properties............................................... (4,230) (4,589)
Proceeds from sale of foreign subsidiaries.................... - 85,824
----------------- -----------------
Net cash provided by (used) in investing activities........... $ (4,230) $ 81,235
Cash flows from Financing Activities
Proceeds from long-term borrowings........................... 1,312 43,189
Payments on long-term borrowings............................. (2,000) (130,903)
Issuance of common stock in connection with exchange......... - 3,651
Issuance of common stock for compensation.................... 170 -
Exercise of stock options .................................. 190 5
Deferred financing fees ..................................... (1,571) (2,529)
----------------- -----------------
Net cash (used) in provided by financing activities.......... (1,899) (86,587)
----------------- -----------------
Effect of exchange rate changes on cash...................... (9) 235
----------------- -----------------
Increase (decrease) in cash.................................. 900 (2,372)
Cash, at beginning of period................................. 439 4,882
----------------- -----------------
Cash, at end of period....................................... $ 1,393 $ 2,510
================= =================
Supplemental disclosures of cash flow information:
Interest paid ............................................... $ 1,098 $ 3,029
================= =================
Non-cash items:
Future site restoration...................................... $ 43 $ (3,116)
================= =================
See accompanying notes to condensed consolidated financial statements
7
Abraxas Petroleum Corporation
Notes to CondensedConsolidated Financial Statements
(Unaudited)
(tabular amounts in thousands except per share data)
Note 1. Basis of Presentation
The accounting policies followed by Abraxas Petroleum Corporation and its
subsidiaries (the "Company" or "Abraxas") are set forth in the notes to the
Company's audited financial statements in the Annual Report on Form 10-K filed
for the year ended December 31, 2003. Such policies have been continued without
change. Also, refer to the notes to those financial statements for additional
details of the Company's financial condition, results of operations, and cash
flows. All the material items included in those notes have not changed except as
a result of normal transactions in the interim, or as disclosed within this
report. The accompanying interim consolidated financial statements have not been
audited by independent accountants, but in the opinion of management, reflect
all adjustments necessary for a fair presentation of the financial position and
results of operations. Any and all adjustments are of a normal and recurring
nature. The results of operations for the three months ended March 31, 2004 are
not necessarily indicative of results to be expected for the full year.
The consolidated financial statements include the accounts of the Company
and its wholly-owned foreign subsidiary, Grey Wolf Exploration Inc. ("New Grey
Wolf"). In January 2003, the Company sold all of the common stock of its
wholly-owned foreign subsidiaries, Canadian Abraxas Petroleum Limited ("Canadian
Abraxas") and Grey Wolf Exploration Inc. ("Old Grey Wolf"). Certain oil and gas
properties were retained and transferred into New Grey Wolf which was
incorporated in January 2003. The operations of Canadian Abraxas and Grey Wolf
are included in the consolidated financial statements through January 23, 2003.
New 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.
Certain prior year balances have been reclassified for comparative
purposes.
Note 2. Income Taxes
The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
For the period ended March 31, 2004, no current taxes have been provided
due to operating losses for tax purposes. Deferred tax expense of $377,000
related to Canadian operations for the period ended March 31, 2003 has been
provided for.
Note 3. Recent Events
On February 23, 2004, the Company entered into an amendment to our existing
senior credit agreement providing for two revolving credit facilities and a new
non-revolving credit facility as described below. Subject to earlier termination
on the occurrence of events of default or other events, the stated maturity date
for these credit facilities is February 1, 2007. In the event of an early
termination, we will be required to pay a prepayment premium, except in the
limited circumstances described in the amended senior credit agreement.
First Revolving Credit Facility. Lenders under the amended senior credit
agreement have provided Abraxas a revolving credit facility with a maximum
borrowing base of up to $20 million. The Company's current borrowing base under
this revolving credit facility is the full $20.0 million, subject to adjustments
based on periodic calculations and mandatory prepayments under the senior credit
8
agreement. The Company has borrowed $6.6 million under this revolving credit
facility, which was used to refinance principal and interest on advances under
it's preexisting revolving credit facility under the senior credit agreement,
and to pay certain fees and expenses relating to the transaction. Outstanding
amounts under this revolving credit facility bear interest at the prime rate
announced by Wells Fargo Bank, N.A. plus 1.125%.
Second Revolving Credit Facility. Lenders under the amended senior credit
agreement have provided a second revolving credit facility, with a maximum
borrowing of up to $30.0 million. This revolving credit facility is not subject
to a borrowing base. The Company has borrowed $30.0 million under this revolving
credit facility, which was used to refinance principal and interest on advances
under our preexisting revolving credit facility, and to pay certain transaction
fees and expenses. Outstanding amounts under this revolving credit facility bear
interest at the prime rate announced by Wells Fargo Bank, N.A. plus 3.00%.
Non-Revolving Credit Facility. The Company has borrowed $15.0 million
pursuant to a non-revolving credit facility, which was used to repay the
preexisting term loan under its senior credit agreement, to refinance principal
and interest on advances under the preexisting revolving credit facility, and to
pay certain transaction fees and expenses. This non-revolving credit facility is
not subject to a borrowing base. Outstanding amounts under this credit facility
bear interest at the prime rate announced by Wells Fargo Bank, N.A. plus 8.00%.
Covenants. Under the amended senior credit agreement, we are subject to
customary covenants and reporting requirements. Certain financial covenants
require us to maintain minimum ratios of consolidated EBITDA (as defined in the
amended senior credit agreement) to adjusted fixed charges (which includes
certain capital expenditures), minimum ratios of consolidated EBITDA to cash
interest expense, a minimum level of unrestricted cash and revolving credit
availability, minimum hydrocarbon production volumes and minimum proved
developed hydrocarbon reserves. In addition, if on the day before the end of
each fiscal quarter the aggregate amount of our cash and cash equivalents
exceeds $2.0 million, we are required to repay the loans under the amended
senior credit agreement in an amount equal to such excess. The amended senior
credit agreement also requires us to enter into hedging agreements on not less
than 40% or more than 75% of our projected oil and gas production. We are also
required to establish deposit accounts at financial institutions acceptable to
the lenders and we are required to direct our customers to make all payments
into these accounts. The amounts in these accounts will be transferred to the
lenders upon the occurrence and during the continuance of an event of default
under the amended senior credit agreement.
In addition to the foregoing and other customary covenants, the amended
senior credit agreement contains a number of covenants that, among other things,
restrict our ability to:
o incur additional indebtedness;
o create or permit to be created liens on any of our properties;
o enter into change of control transactions;
o dispose of our assets;
o change our name or the nature of our business;
o make guarantees with respect to the obligations of third parties;
o enter into forward sales contracts;
o make payments in connection with distributions, dividends or
redemptions relating to our outstanding securities, or
o make investments or incur liabilities.
9
Security. The obligations of Abraxas under the amended senior credit
agreement continue to be secured by a first lien security interest in
substantially all of Abraxas' assets, including all crude oil and natural gas
properties.
Guarantees. The obligations of Abraxas under the amended senior credit
agreement continue to be guaranteed by Abraxas' subsidiaries, Sandia Oil & Gas
Corporation, Sandia Operating Corp. (a wholly-owned subsidiary of Sandia Oil &
Gas), Wamsutter Holdings, Inc., New Grey Wolf, Western Associated Energy
Corporation and Eastside Coal Company, Inc. The guarantees under the amended
senior credit agreement continue to be secured by a first lien security interest
in substantially all of the guarantors' assets, including all crude oil and
natural gas properties.
Events of Default. The amended senior credit agreement contains customary
events of default, including nonpayment of principal or interest, violations of
covenants, inaccuracy of representations or warranties in any material respect,
cross default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in our financial condition.
Note 4. Long-Term Debt
Long-term debt consisted of the following:
March 31 December 31
-----------------------------------
2004 2003
---------------- -----------------
(In thousands)
11.5% Secured Notes due 2007 ("new notes")....... $ 137,258 137,258
Senior Secured Credit Agreement.................. 49,713 47,391
---------------- -----------------
186,971 184,649
Less current maturities ......................... - -
---------------- -----------------
$ 186,971 $ 184,649
================ =================
New Notes. In connection with the financial restructuring completed in
January 2003, Abraxas issued $109.7 million in principal amount of it's 11 1/2%
Secured Notes due 2007, Series A, or new notes, in exchange for our 11 1/2%
Senior Notes due 2004 tendered in the exchange offer. The new notes were issued
under an indenture with U.S. Bank, N. A. In accordance with SFAS 15, the basis
of the new notes exceeds the face amount of the new notes by approximately $19.0
million. Such amount will be amortized over the term of the new notes as an
adjustment to the yield of the new notes.
The new notes accrue interest from the date of issuance, at a fixed annual
rate of 11 1/2%, payable in cash semi-annually on each May 1 and November 1,
commencing May 1, 2003, provided that, if we fail, or are not permitted pursuant
to our senior credit agreement or the intercreditor agreement between the
trustee under the indenture for the new notes and the lenders under the senior
credit agreement, to make such cash interest payments in full, we will pay such
unpaid interest in kind by the issuance of additional new notes with a principal
amount equal to the amount of accrued and unpaid cash interest on the new notes
plus an additional 1% accrued interest for the applicable period. Upon an event
of default, the new notes accrue interest at an annual rate of 16.5%.
The new notes are secured by a second lien or charge on all of our current
and future assets, including, but not limited to, all of our crude oil and
natural gas properties. All of Abraxas' current subsidiaries, Sandia Oil & Gas,
Sandia Operating, Wamsutter, New Grey Wolf, Western Associated Energy and
Eastside Coal Company are guarantors of the new notes, and all of Abraxas'
future subsidiaries will guarantee the new notes. If Abraxas cannot make
payments on the new notes when they are due, the guarantors must make them
instead.
The new notes and related guarantees
10
o are subordinated to the indebtedness under the senior credit
agreement;
o rank equally with all of Abraxas' current and future senior
indebtedness; and
o rank senior to all of Abraxas' current and future subordinated
indebtedness, in each case, if any.
The new notes are subordinated to amounts outstanding under the senior
credit agreement both in right of payment and with respect to lien priority and
are subject to an intercreditor agreement.
Abraxas may redeem the new notes, at its option, in whole at any time or in
part from time to time, at redemption prices expressed as percentages of the
principal amount set forth below. If Abraxas redeems all or any new notes, it
must also pay all interest accrued and unpaid to the applicable redemption date.
The redemption prices for the new notes during the indicated time periods are as
follows:
Period Percentage
From January 24, 2004 to June 23, 2004.......................97.1674%
From June 24, 2004 to January 23, 2005.......................98.5837%
Thereafter..................................................100.0000%
Under the indenture, the Company is subject to customary covenants which, among
other things, restricts our ability to:
o borrow money or issue preferred stock;
o pay dividends on stock or purchase stock;
o make other asset transfers;
o transact business with affiliates;
o sell stock of subsidiaries;
o engage in any new line of business;
o impair the security interest in any collateral for the notes;
o use assets as security in other transactions; and
o sell certain assets or merge with or into other companies.
In addition, we are subject to certain financial covenants including covenants
limiting our selling, general and administrative expenses and capital
expenditures, a covenant requiring Abraxas to maintain a specified ratio of
consolidated EBITDA, as defined in the indenture, to cash interest and a
covenant requiring Abraxas to permanently, to the extent permitted, pay down
debt under the senior credit agreement and, to the extent permitted by the
senior credit agreement, the new notes or, if not permitted, paying indebtedness
under the senior credit agreement.
The indenture contains customary events of default, including nonpayment of
principal or interest, violations of covenants, inaccuracy of representations or
warranties in any material respect, cross default and cross acceleration to
certain other indebtedness, bankruptcy, material judgments and liabilities,
change of control and any material adverse change in our financial condition.
Senior Credit Agreement. In connection with the financial restructuring,
Abraxas entered into a new senior credit agreement providing a term loan
facility and a revolving credit facility which was amended in February 2004. A
summary description of the senior credit agreement, as amended, is set forth in
Note 3.
11
Note 5. Stock-based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Effective July 1, 2000, the Financial Accounting Standards Board ("FASB")
issued FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and were not exercised prior to July 1, 2000, require that
the awards be accounted for as variable until they are exercised, forfeited, or
expired. In January 2003, the Company amended the exercise price to $0.66 on
certain options with an existing exercise price greater than $0.66. The Company
recognized approximately $36,000 and $2.1 million in expense during the quarters
ended March 31, 2003 and 2004, respectively, as Stock-based compensation expense
in the accompanying consolidated financial statements.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, "Accounting for Stock-Based Compensation" (SFAS
123), which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1995 under the fair value method prescribed by SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the quarters
ended March 31, 2004 and 2003, risk-free interest rates of 1.5%; dividend yields
of -0-%; volatility factor of the expected market price of the Company's common
stock of .35; and a weighted-average expected life of the option of ten years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In October 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", (SFAS No. 148), providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirement of SFAS No. 123, "Accounting for Stock-Based
Compensation" to include prominent disclosures in annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company adopted the
disclosure provisions of SFAS No. 148 on December 31, 2002.
Had the Company determined stock-based compensation costs based on the
estimated fair value at the grant date for its stock options, the Company's net
income (loss) per share for the three months ended March 31, 2004 and March 31,
2003 would have been:
---------------------------------------
Three Months Ended March 31,
---------------------------------------
2004 2003
------------------ ----------------
Net income (loss) as reported $ (5,557) $ 62,702
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 2,063 36
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (37) (67)
12
------------------ ----------------
Pro forma net income (loss) $ (3,531) $ 62,671
================== ================
Earnings (loss) per share:
Basic - as reported $ (0.15) $ 1.84
================== ================
Basic - pro forma $ (0.10) $ 1.84
================== ================
Diluted - as reported $ (0.15) $ 1.83
================== ================
Diluted - pro forma $ (0.10) $ 1.82
================== ================
Note 6. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended March 31,
-------------------------------------
2004 2003
------------------ ---------------
Numerator:
Numerator for basic and diluted earnings per share
Net earnings (loss) before cumulative effect of accounting change (in
thousands)........................................................ $ (5,557) $ 63,097
Cumulative effect of accounting change................................. - (395)
-------------- ---------------
Numerator for basic and diluted earnings per share
Net earnings (loss) available to common stockholders (in thousands)... $ (5,557) $ 62,702
============== ===============
Denominator:
Denominator for basic earnings per share - weighted-average shares...... 36,011,657 34,181,118
Effect of dilutive securities:
Stock options and Warrants......................................... - 319,472
-------------- ---------------
Denominator for diluted earnings per share - adjusted weighted-average
shares and assumed Conversions..................................... 36,011,657 34,500,590
============== ==============
Basic earnings (loss) per share:
Net earnings (loss) before cumulative effect of accounting change . $ (0.15) $ 1.84
Cumulative effect of accounting change.............................. - (0.01)
-------------- ---------------
Net earnings (loss) per common share - basic $ (0.15) $ 1.83
============== ===============
Diluted earnings (loss) per share:
Net earnings (loss) before cumulative effect of accounting change.. $ (0.15) $ 1.83
Cumulative effect of accounting change.............................. - (0.01)
-------------- --------------
Net earnings (loss) per common share - diluted.......................... $ (0.15) $ 1.82
============== ===============
For the three months ended March 31, 2004, none of the shares issuable in
connection with stock options or warrants are included in diluted shares.
Inclusion of these shares would be antidilutive due to losses incurred in the
period. Had there not been losses in this period, dilutive shares would have
been 1,952,370 shares for the three months ended March 31, 2004.
Note 7. Hedging Program and Derivatives
On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" SFAS 133 as amended by SFAS 137 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB 133" and SFAS 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities". 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
13
derivative must qualify either as a fair value hedge, cash flow hedge or foreign
currency hedge. As of March 31, 2004, the derivatives that the Company had in
place were not designated as hedges, accordingly, changes in the fair value of
the derivatives are recorded in current period oil and gas revenue.
Under the terms of our amended senior credit agreement, we are required to
maintain hedging positions with respect to not less than 40% nor more than 75%
of our crude oil and natural gas production for a rolling six month period
The following table sets forth the Company's current hedge position:
Time Period Notional Quantities Price
- --------------------------------------------------------------------- ----------------------
May 2004 500 Bbls of crude oil production per day Floor of $22.00
June 2004 4,500 MMbtu of production per day Floor of $4.25
800 Bbls of crude production per day Floor of $22.00
July 2004 2,000 MMbtu of production per day Floor of $4.00
4,500 MMbtu of production per day Floor of $4.25
500 Bbls of crude oil production per day Floor of $22.00
August 2004 7,100 MMbtu of production per day Floor of $4.25
400 Bbls of crude oil production per day Floor of $24.00
September 2004 7,100 MMbtu of production per day Floor of $4.25
400 Bbls of crude oil production per day Floor of $24.00
October 2004 7,100 MMbtu of production per day Floor of $4.25
400 Bbls of crude oil production per day Floor of $24.00
November 2004 7,100 MMbtu of production per day Floor of $4.25
400 Bbls of crude oil production per day Floor of $24.00
December 2004 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
Note 8. Contingencies - Litigation
In 2001, Abraxas and Abraxas Wamsutter L.P. were named as defendants 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 Abraxas and
Abraxas Wamsutter, L.P. related to the responsibility for year 2000 ad valorem
taxes on crude oil and natural gas properties sold by Abraxas and Abraxas
Wamsutter, L.P. In February 2002, a summary judgment was granted to the
plaintiff in this matter and a final judgment in the amount of $1.3 million was
entered. Abraxas has filed an appeal. We believe these charges are without
merit. We have established a reserve in the amount of $845,000, which represents
our estimated share of the judgment.
In 2003, Abraxas and Leam Drilling Systems each filed suit against the
other relating to certain drilling services that Leam contracted to provide
Abraxas. Abraxas believes that the services were provided in a grossly negligent
manner and that Leam committed fraud. Leam has asserted that Abraxas failed to
pay approximately $639,000 for services rendered. The case is pending in Bexar
County, Texas.
Additionally, from time to time, we are involved in litigation relating to
claims arising out of its operations in the normal course of business. At March
31, 2004, we were not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on our
operations.
Note 9. Comprehensive Income
Comprehensive income includes net income (losses) and certain items
recorded directly to Stockholders' Deficit and classified as Other Comprehensive
Income.
The following table illustrates the calculation of comprehensive income
(loss) for the quarters ended March 31, 2004 and 2003:
14
Three Months Ended March 31
2004 2003
--------------------- ---------------
Net income (loss)......................................... $ (5,557) $ 62,702
Other Comprehensive income:
Hedging derivatives (net of tax)
Change in fair market value of outstanding hedge
positions............................................ - 102
Foreign currency translation adjustment................ (491) 5,427
-------------- --------------
Other comprehensive income (loss)......................... (491) 5,529
-------------- --------------
Comprehensive income (loss)............................... $ (6,048) $ 68,231
============== ==============
Note 10. Business Segments
Business segment information about our first quarter operations in
different geographic areas is as follows:
Three Months Ended March 31, 2004
----------------------------------------------------------
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
Revenues ................................ $ 7,783 $ 2,949 $ 10,732
================== ================== ===================
Operating profit ........................ $ 3,712 $ 407 $ 4,119
================== ==================
General corporate ....................... (3,136)
Interest expense, financing cost and
amortization of deferred financing
fees ................................. (6,529)
Other................................... (11)
-------------------
Loss before income taxes ............. $ (5,557)
===================
Identifiable assets at March 31, 2004 ... $ 82,068 $ 37,741 $ 119,809
================== ==================
Corporate assets ........................ 6,232
-------------------
Total assets ......................... $ 126,041
===================
Three Months Ended March 31, 2003
----------------------------------------------------------
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
Revenues ................................ $ 8,799 $ 4,312 $ 13,111
================== ================== ===================
Operating profit ........................ $ 4,736 $ 2,243 $ 6,979
================== ==================
General corporate ....................... (1,333)
Interest expense and amortization of
deferred financing fees .............. (9,132)
Gain on sale of foreign subsidiary ...... 66,960
Cumulative effect of accounting change... (395)
-------------------
Income before income taxes ........... $ 63,079
===================
15
Note 11. Recent Accounting Pronouncements
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
that mineral rights, as defined in EITF Issue No. 04-2, "Whether Mineral Rights
Are Tangible or Intangible Assets," are tangible assets and that they should be
removed as examples of intangible assets in SFAS No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". The FASB has
recently ratified this consensus and directed the FASB staff to amend SFAS Nos.
141 and 142 through the issuance of FASB Staff Position FAS Nos. 141-1 and
142-1. Historically, the Company has included the costs of such mineral rights
as tangible assets, which is consistent with the EITF's consensus. As such, EITF
04-02 has not affected the Company's consolidated financial statements.
Note 12. Accounting Change
The Company adopted SFAS 143 effective January 1, 2003. For the quarter
ended March 31, 2003 the Company recorded an additional liability of $711,732,
and a charge of $395,341 for the cumulative effect of the change in accounting
principal. There was no impact in the first quarter of 2004.
16
ABRAXAS PETROLEUM CORPORATION
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion of our financial condition, results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with our consolidated financial statements and the notes thereto,
included in our Annual Report on Form 10-K filed for the year ended December 31,
2003. The results of operations of Canadian Abraxas and Old Grey Wolf are
included in this report through January 23, 2003, the date of the consummation
of the sale.
Critical Accounting Policies
There have been no changes from the Critical Accounting Polices described
in our Annual Report on Form 10-K for the year ended December 31, 2003.
Forward-Looking Information
We make forward-looking statements throughout this document. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe," "expect" or "anticipate" will occur or what we
"intend" to do, and other similar statements), you must remember that our
expectations may not be correct, even though we believe they are reasonable. The
forward-looking information contained in this document is generally located in
the material set forth under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations" but may be found in other
locations as well. These forward-looking statements generally relate to our
plans and objectives for future operations and are based upon our management's
reasonable estimates of future results or trends. The factors that may affect
our expectations regarding our operations include, among others, the following:
o our high debt level;
o our ability to raise capital;
o our limited liquidity;
o economic and business conditions;
o price and availability of alternative fuels;
o political and economic conditions in oil producing countries, especially
those in the Middle East;
o our success in development, exploitation and exploration activities;
o planned capital expenditures;
o prices for crude oil and natural gas;
o rates of production of crude oil and natural gas;
o our acquisition and divestiture activities;
o results of our hedging activities; and
o Other factors discussed elsewhere in this document.
In addition to these factors, important factors that could cause actual
results to differ materially from our expectations ("Cautionary Statements") are
disclosed under "Risk Factors" in our Annual Report on Form 10-K for the year
ended December 31, 2003 which is incorporated by reference herein. All
subsequent written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their entirety by the
Cautionary Statements.
17
General
We are an independent energy company engaged primarily in the acquisition,
exploration, exploitation and production of crude oil and natural gas. Our
principal means of growth has been through the acquisition and subsequent
development and exploitation of producing properties. As a result of our
historical acquisition activities, we believe that we have a substantial
inventory of low risk exploitation and development opportunities, the successful
completion of which is critical to the maintenance and growth of our current
production levels.
We have incurred net losses in three of the last five years, and there can
be no assurance that operating income and net earnings will be achieved in
future periods. Our financial results depend upon many factors, particularly the
following factors which most significantly affect our results of operations:
o the sales prices of crude oil, natural gas liquids and natural gas;
o the level of total sales volumes of crude oil, natural gas liquids
and natural gas;
o the ability to raise capital resources and provide liquidity to
meet cash flow needs;
o the level of and interest rates on borrowings; and
o the level and success of exploration and development activity.
Commodity Prices and Hedging Activities. Our results of operations are
significantly affected by fluctuations in commodity prices. Price volatility in
the natural gas market has remained prevalent in the last few years. In the
first quarter of 2003, we experienced an increase in energy commodity prices
from the prices that we received in the first quarter of 2002. Beginning in
March 2002, commodity prices began to increase and continued higher through 2003
and have remained strong during the first quarter of 2004.
The table below illustrates how natural gas prices fluctuated over the
eight quarters prior to and including the quarter ended March 31, 2004. The
table below also contains the last three day average of NYMEX traded contracts
price (Index) and the prices we realized during each quarter presented,
including the impact of our hedging activities.
Natural Gas Prices by Quarter (in $ per Mcf)
----------------------------------------------------------------------------------------------------
Quarter Ended
------------ ----------- ----------- ------------ ----------- ------------- ----------- ------------
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
2002 2002 2002 2003 2003 2003 2003 2004
------------ ----------- ----------- ------------ ----------- ------------- ----------- ------------
Index $ 3.36 $ 3.28 $ 3.99 $ 6.61 $ 5.51 $ 5.10 $ 4.60 $ 5.69
Realized $ 2.44 $ 2.08 $ 3.47 $ 5.13 $ 5.11 $ 4.50 $ 4.30 $ 4.83
The NYMEX natural gas price on May 10, 2004 was $6.18 per Mcf.
The table below illustrates how crude oil prices fluctuated over the eight
quarters prior to and including the quarter ended March 31, 2004. The table
below also contains the last three day average of NYMEX traded contracts price
and the prices we realized during each quarter presented, including the impact
of our hedging activities.
18
Crude Oil Prices by Quarter (in $ per Bbl)
-------------------------------------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
2002 2002 2002 2003 2003 2003 2003 2004
----------- ----------- ------------ -------------- ------------- ----------- ------------ ------------
Index $ 26.40 $ 27.50 $ 28.29 $ 33.71 $ 29.87 $ 30.85 $ 29.64 $ 34.76
Realized $ 23.47 $ 23.47 $ 24.83 $ 33.22 $ 28.53 $ 29.52 $ 29.73 $ 34.19
The NYMEX crude oil price on May 10, 2004 was $38.93 per Bbl.
We seek to reduce our exposure to price volatility by hedging our
production through swaps, floors, options and other commodity derivative
instruments
Under the terms of our senior credit agreement, we are required to maintain
hedging positions with respect to not less than 40% nor more than 75% of our
crude oil and natural gas production, on an equivalent basis, for a rolling six
month period. We currently have the following hedges in place:
Time Period Notional Quantities Price
- --------------------------------------------------------------------- ----------------------
May 2004 500 Bbls of crude oil production per day Floor of $22.00
June 2004 4,500 MMbtu of production per day Floor of $4.25
800 Bbls of crude production per day Floor of $22.00
July 2004 2,000 MMbtu of production per day Floor of $4.00
4,500 MMbtu of production per day Floor of $4.25
500 Bbls of crude oil production per day Floor of $22.00
August 2004 7,100 MMbtu of production per day Floor of $4.25
400 Bbls of crude oil production per day Floor of $24.00
September 2004 7,100 MMbtu of production per day Floor of $4.25
400 Bbls of crude oil production per day Floor of $24.00
October 2004 7,100 MMbtu of production per day Floor of $4.25
400 Bbls of crude oil production per day Floor of $24.00
November 2004 7,100 MMbtu of production per day Floor of $4.25
400 Bbls of crude oil production per day Floor of $24.00
December 2004 7,100 MMbtu of production per day Floor of $4.50
400 Bbls of crude oil production per day Floor of $25.00
Production Volumes. Because our proved reserves will decline as crude oil,
natural gas and natural gas liquids are produced, unless we acquire additional
properties containing proved reserves or conduct successful exploration and
development activities, our reserves and production will decrease. Our ability
to acquire or find additional reserves in the near future will be dependent, in
part, upon the amount of available funds for acquisition, exploitation and
development projects. For more information on the volumes of crude oil, natural
gas liquids and natural gas we produced during the first quarter of 2003 and
2004, please refer to the information under the caption "Results of Operations"
below.
We have budgeted $10 million for drilling expenditures in 2004, of which
$4.2 million was spent during the first quarter of 2004. Under the terms of our
senior credit agreement and our new notes, we are subject to limitations on
capital expenditures. As a result, we will be limited in our ability to replace
existing production with new production and might suffer a decrease in the
volume of crude oil and natural gas we produce. If crude oil and natural gas
prices return to depressed levels or if our production levels continue to
decrease, our revenues, cash flow from operations and financial condition will
be materially adversely affected. For more information, see "Liquidity and
Capital Resources" below.
Availability of Capital. As described more fully under "Liquidity and
Capital Resources" below, our sources of capital are primarily cash on hand,
cash from operating activities, funding under our senior credit agreement and
the sale of properties. At March 31, 2004, we had approximately $14.2 million of
availability under our senior credit agreement. We may also attempt to raise
additional capital through the issuance of debt or equity securities although we
cannot assure you that we will be successful in any such efforts.
19
Borrowings and Interest. As a result of the financial restructuring we
completed in January 2003, we reduced our indebtedness from approximately $300.4
million at December 31, 2002 to approximately $184.6 million at December 31,
2003. At March 31, 2004, our indebtedness was $187.0 million. In addition, we
decreased our cash interest expense from $34.2 million during 2002 to $4.3
million during 2003. During the first quarter of 2004, our cash interest expense
was $1.1 million. By decreasing the amount of our indebtedness and required cash
interest payments more of our capital resources could be utilized for drilling
activities and paying other expenses.
Exploitation and Development Activity. During the first quarter of 2004, we
continued exploitation activities on our properties. We invested $4.2 million in
capital spending on these activities during the first quarter of 2004. At March
31, 2004, as a result of these activities, our average daily production was
approximately 23.6 MMcfepd, a 17% increase from the daily production rate at
March 31, 2003 (excluding production from the Canadian properties sold in
January 2003).
Outlook for 2004. As a result of final 2003 financial results and current
market conditions, Abraxas has updated its operating and financial guidance for
year 2004 as follows:
Production:
BCFE (approximately 80% gas)....................... 8-9
Price Differentials (Pre Hedge):
$ Per Bbl.......................................... 0.86
$ Per Mcf.......................................... 0.64
Lifting Costs, $ Per Mcfe............................. 1.29
G&A, $ Per Mcfe....................................... 0.60
Capital Expenditures ($ Millions)..................... 10.00
Actual results could materially differ and will depend on, among other
things, our ability to successfully increase our production of crude oil,
natural gas liquids and natural gas through our drilling activities. We
undertake no duty to update these forward-looking statements.
Results of Operations
The following table sets forth certain of our operating data for the
periods presented.
Three Months Ended
March 31,
----------------------------------
2004 2003 (1)
----------- --------------
Operating Revenue:
Crude Oil Sales................................................... $ 2,187 $ 2,174
Natural Gas Sales ................................................ 8,152 10,087
Natural Gas Liquids Sales......................................... 393 511
Gas processing revenue............................................ - 132
Rig Operations.................................................... 175 181
Other............................................................. 28 26
----------- -------------
$ 10,935 $ 13,111
=========== =============
Operating Income ................................................. $ 983 $ 5,646
Crude Oil Production (MBBLS)...................................... 64.0 65.4
Natural Gas Production (MMCFS).................................... 1,687.4 1,965.3
Natural Gas Liquids Production (MBBLS)............................ 13.3 20.2
Average Crude Oil Sales Price ($/BBL)............................. $ 34.19 $ 33.22
Average Natural Gas Sales Price ($/MCF)........................... $ 4.83 $ 5.13
Average Liquids Sales Price ($/BBL)............................... $ 29.52 $ 25.29
(1) 2003 data includes amounts applicable to Old Grey Wolf and Canadian Abraxas
through January 23, 2003
20
Comparison of Three Months Ended March 31, 2004 to Three Months Ended March 31,
2003
Operating Revenue. During the three months ended March 31, 2004, operating
revenue from crude oil, natural gas and natural gas liquid sales decreased to
$10.7 million from $12.8 for the first quarter of 2003. The decrease in revenue
was primarily due to a decrease in production volumes and a decrease in the
realized price for natural gas. The decrease in production volumes was due to
the sale of our Canadian properties on January 23, 2003. A decline in our
realized price for natural gas had a negative impact on revenue of approximately
$508,000 which was partially offset by slightly higher realized prices for crude
oil and natural gas liquids.
Average sales prices net of hedging cost for the quarter ended March 31,
2004 were:
o $34.19 per Bbl of crude oil,
o $29.52 per Bbl of natural gas liquid, and
o $ 4.83 per Mcf of natural gas
Average sales prices net of hedging cost for the quarter ended March 31,
2003 were:
o $33.22 per Bbl of crude oil,
o $25.29 per Bbl of natural gas liquid, and
o $ 5.13 per Mcf of natural gas
Crude oil production volumes declined from 65.4 MBbls during the quarter ended
March 31, 2003 to 64.0 MBbls for the same period of 2004. The decline in crude
oil production was due to the sale of our Canadian subsidiaries on January 23,
2003. These properties contributed 2.4 MBbbls of crude oil in the first quarter
of 2003 (through January 23, 2003). Excluding production related to the
properties sold, crude oil production increased by approximately 919 Bbls.
Natural gas production volumes declined from 1,965.3 MMcf for the three months
ended March 31, 2003 to 1,687.4 MMcf for the same period of 2004. This decline
was due to the sale of Canadian properties in January 2003. The Canadian
properties contributed 558.9 MMcf in the first quarter of 2003 (through January
23, 2003). Excluding production related to these properties, we had an increase
in natural gas production of 281.0 MMcf for the quarter ended March 31, 2004 as
compared to 2003.
Lease Operating Expenses. Lease operating expenses ("LOE") for the three
months ended March 31, 2004 increased to $3.4 million from $2.7 million for the
same period in 2003. The increase in LOE was primarily due to pipeline charges
in Canada related to startup costs associated with previously stranded gas. LOE
on a per Mcfe basis for the three months ended March 31, 2004 was $1.57 per Mcfe
compared to $1.10 for the same period of 2003.
General and Administrative ("G&A") Expenses. G&A expenses decreased
slightly to $1.3 million during the quarter ended March 31, 2004 from $1.4
million for the first three months of 2003. G&A expense on a per Mcfe basis was
$0.62 for the first quarter of 2004 compared to $0.56 for the same period of
2003. The increase in G&A expense on a per Mcfe basis was due to a decline in
production volumes during the first quarter of 2004 compared to the same period
in 2003.
Stock-based Compensation. Effective July 1, 2000, the Financial Accounting
Standards Board ("FASB") issued FIN 44, "Accounting for Certain Transactions
Involving Stock Compensation", an interpretation of Accounting Principles Board
Opinion No. ("APB") 25. Under the interpretation, certain modifications to fixed
stock option awards which were made subsequent to December 15, 1998, and not
exercised prior to July 1, 2000, require that the awards be accounted for as
variable until they are exercised, forfeited, or expired. In January 2003, we
amended the exercise price to $0.66 per share on certain options with an
existing exercise price greater than $0.66 per share. The price of our common
stock increased during the quarter ended March 31, 2004 resulting in the
recognition of approximately $2.1 million as stock-based compensation expense
for the quarter then ended. We recognized approximately $36,000 as stock-based
compensation expense during the quarter ended March 31, 2003 related to these
repricings.
21
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense decreased to $3.0 million for the three months
ended March 31, 2004 from $3.1 million for the same period of 2003. The decline
in DD&A was primarily due to the sale of Canadian properties in January 2003.
Our DD&A on a per Mcfe basis for the three months ended March 31, 2004 was $1.41
per Mcfe compared to $1.27 per Mcfe in 2003.
Interest Expense. Interest expense decreased from $5.2 million for the
first three months of 2003 to $5.1 million in 2004. The decrease in interest
expense was due to the restructuring of our long-term debt in January 2003,
resulting in a reduction of the overall interest rate.
Liquidity and Capital Resources
General. The crude oil and natural gas industry is a highly capital
intensive and cyclical business. Our capital requirements are driven principally
by our obligations to service debt and to fund the following costs:
o the development of existing properties, including drilling and
completion costs of wells;
o acquisition of interests in crude oil and natural gas properties;
and
o production and transportation facilities.
The amount of capital available to us will affect our ability to service our
existing debt obligations and to continue to grow the business through the
development of existing properties and the acquisition of new properties.
Our sources of capital are primarily cash on hand, cash from operating
activities, funding under the senior credit agreement and the sale of
properties. Our overall liquidity depends heavily on the prevailing prices of
crude oil and natural gas and our production volumes of crude oil and natural
gas. Significant downturns in commodity prices, such as that experienced in the
last nine months of 2001 and the first quarter of 2002, can reduce our cash from
operating activities. Although we have hedged a portion of our natural gas and
crude oil production and will continue this practice as required pursuant to the
senior credit agreement, future crude oil and natural gas price declines would
have a material adverse effect on our overall results, and therefore, our
liquidity. Low crude oil and natural gas prices could also negatively affect our
ability to raise capital on terms favorable to us.
If the volume of crude oil and natural gas we produce decreases, our cash
flow from operations will decrease. Our production volumes will decline as
reserves are produced. In addition, due to sales of properties in 2002 and
January 2003, we now have reduced reserves and production levels. In the future
we may sell additional properties, which could further reduce our production
volumes. To offset the loss in production volumes resulting from natural field
declines and sales of producing properties, we must conduct successful
exploration, exploitation and development activities, acquire additional
producing properties or identify additional behind-pipe zones or secondary
recovery reserves. While we have had some success in pursuing these activities
historically, we have not been able to fully replace the production volumes lost
from natural field declines and property sales.
Working Capital. At March 31, 2004, our current liabilities of
approximately $13.3 million exceeded our current assets of $7.9 million
resulting in a working capital deficit of $5.4 million. This compares to a
working capital deficit of approximately $2.4 million at December 31, 2003.
Current liabilities at March 31, 2004 consisted of trade payables of $4.1
million, revenues due third parties of $2.4 million accrued interest of $5.3
related to our new notes, of which $4.9 million is non-cash and other accrued
liabilities of $1.4 million. Under our senior credit agreement we will have cash
interest expense of approximately $4.5 million for 2004. We do not expect to
make cash interest payments with respect to the outstanding new notes, and the
issuance of additional new notes in lieu of cash interest payments thereon will
not affect our working capital balance.
22
Capital expenditures. Capital expenditures during the first three months of
2004, were $4.2 million compared to $4.6 million during the same period of 2003.
The table below sets forth the components of these capital expenditures on a
historical basis for the three months ended March 31, 2004 and 2003.
Three Months Ended
March 31
--------------------------------------------
2004 2003
----------------------- --------------------
Expenditure category (in thousands):
Development................................................. $ 3,549 $ 4,423
Facilities and other........................................ 681 166
--------------- ---------------
Total................................................... $ 4,230 $ 4,589
=============== ===============
During the three months ended March 31, 2004 and 2003, capital expenditures
were primarily for the development of existing properties. For 2004, our capital
expenditures are subject to limitations imposed under the new senior credit
facility and new notes, including a maximum annual capital expenditure budget of
$10 million for 2004, which is subject to reduction in the event of a reduction
in our net assets. Our capital expenditures could include expenditures for
acquisition of producing properties if such opportunities arise, but we
currently have no agreements, arrangements or undertakings regarding any
material acquisitions. We have no material long-term capital commitments and are
consequently able to adjust the level of our expenditures as circumstances
dictate. Additionally, the level of capital expenditures will vary during future
periods depending on market conditions and other related economic factors.
Should the prices of crude oil and natural gas decline from current levels, our
cash flows will decrease which may result in a reduction of the capital
expenditures budget. If we decrease our capital expenditures budget, we may not
be able to offset crude oil and natural gas production volumes decreases caused
by natural field declines and sales of producing properties.
Sources of Capital. The net funds provided by and/or used in each of the
operating, investing and financing activities are summarized in the following
table and discussed in further detail below:
Three Months Ended
March 31,
----------------------------------------------
2004 2003
------------------- ----------------------
Net cash provided by operating activities $ 7,038 $ 2,745
Net cash used in financing activities (1,899) (86,587)
Net cash provided by (used in) investing activities (4,230) 81,235
------------------- ----------------------
Total $ 909 $ (2,607)
=================== ======================
Operating activities during the three months ended March 31, 2004 provided
us $7.0 million cash compared to providing $2.7 million in the same period in
2003. Net income plus non-cash expense items during 2004 and net changes in
operating assets and liabilities accounted for most of these funds. Financing
activities used $1.9 million for the first three months of 2004 compared to
using $86.6 million for the same period of 2003. Most of these funds were used
to reduce our long-term debt and for financing fees. In 2003 funds were used to
reduce our long-term debt and were generated by the sale of our Canadian
subsidiaries and the exchange offer completed in January 2003. Investing
activities used $4.2 million during the three months ended March 31, 2004
compared to providing $81.2 million for the quarter ended March 31, 2003.
Expenditures during the quarter ended March 31, 2004 were primarily for the
development of existing properties. The sale of our Canadian subsidiaries
contributed $85.8 million in 2003 reduced by $4.6 million in exploration and
development expenditures.
Future Capital Resources. We will have four principal sources of liquidity
going forward: (i) cash on hand, (ii) cash from operating activities, (iii)
funding under the senior credit agreement , and (iv) sales of producing
properties. However, covenants under the indenture for the outstanding new notes
and the senior credit agreement restrict our use of cash on hand, cash from
operating activities and any proceeds from asset sales. We may attempt to raise
additional capital through the issuance of additional debt or equity securities,
23
though the terms of the new note indenture and the senior credit agreement
substantially restrict our ability to:
o incur additional indebtedness;
o incur liens;
o pay dividends or make certain other restricted payments;
o consummate certain asset sales;
o enter into certain transactions with affiliates;
o merge or consolidate with any other entity, or
o sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of our assets.
Contractual Obligations
We are committed to making cash payments in the future on the following
types of agreements:
o Long-term debt
o Operating leases for office facilities
We have no off-balance sheet debt or unrecorded obligations and we have not
guaranteed the debt of any other party. Below is a schedule of the future
payments that we are obligated to make based on agreements in place as of March
31, 2004:
Payments due in:
Contractual Obligations
(dollars in thousands)
- ----------------------------- --------------------------------------------------------------------------
Total Less than More than 5
one year 1-3 years 3-5 years years
- ----------------------------- ------------- -------------- ------------- ------------- -------------- --
Long-Term Debt (1) $ 233,957 $ - $ 49,713 $ 184,244 $ -
Operating Leases (2) 1,269 415 734 120 -
(1) These amounts represent the balances outstanding under the term loan
facility, the revolving credit facility and the new notes. These
repayments assume that interest will be capitalized under the term loan
facility and that periodic interest on the revolving credit facility
will be paid on a monthly basis and that we will not draw down
additional funds there under.
(2) Office lease obligations. Leases for office space for Abraxas and New
Grey Wolf expire in April 2006 and December 2008, respectively.
Other obligations. We make and will continue to make substantial capital
expenditures for the acquisition, exploitation, development, exploration and
production of crude oil and natural gas. In the past, we have funded our
operations and capital expenditures primarily through cash flow from operations,
sales of properties, sales of production payments and borrowings under our bank
credit facilities and other sources. Given our high degree of operating control,
the timing and incurrence of operating and capital expenditures is largely
within our discretion.
24
Long-Term Indebtedness
March 31 December 31
-----------------------------------
2004 2003
---------------- -----------------
(In thousands)
11.5% Secured Notes due 2007 ("new notes")............. $ 137,258 137,258
Senior Secured Credit Agreement........................ 49,713 47,391
---------------- -----------------
186,971 184,649
Less current maturities ............................... - -
---------------- -----------------
$ 186,971 $ 184,649
================ =================
For financial reporting purposes, the new notes are reflected at the
carrying value of our 11 1/2% Senior Notes due 2004 of $191.0 million, net of
the cash offered in the exchange of $47.5 million and net of the fair market
value related to equity of $3.8 million offered in January 2003. The face amount
of the new notes was $120.5 million at March 31, 2004 including $10.8 million in
new notes issued for interest.
The new notes accrue interest from the date of issuance, at a fixed annual
rate of 11 1/2%, payable in cash semi-annually on each May 1 and November 1,
commencing May 1, 2003. We will pay such unpaid interest in kind by the issuance
of additional new notes with a principal amount equal to the amount of accrued
and unpaid cash interest on the new notes plus an additional 1% accrued interest
for the applicable period. Upon an event of default, the New Notes accrue
interest at an annual rate of 16.5%.
The new notes are secured by a second lien or charge on all of our current
and future assets, including, but not limited to, all of our crude oil and
natural gas properties. All of Abraxas' current subsidiaries, Sandia Oil & Gas,
Sandia Operating, Wamsutter, New Grey Wolf, Western Associated Energy and
Eastside Coal, are guarantors of the new notes, and all of Abraxas' future
subsidiaries will guarantee the new notes. If Abraxas cannot make payments on
the new notes when they are due, the guarantors must make them instead.
The new notes and related guarantees
o are subordinated to the indebtedness under the senior secured
credit agreement;
o rank equally with all of Abraxas' current and future senior
indebtedness; and
o rank senior to all of Abraxas' current and future subordinated
indebtedness, in each case, if any.
The new notes are subordinated to amounts outstanding under the senior
secured credit agreement both in right of payment and with respect to lien
priority and are subject to an intercreditor agreement.
Abraxas may redeem the new notes, at its option, in whole at any time or in
part from time to time, at redemption prices expressed as percentages of the
principal amount set forth below. If Abraxas redeems all or any new notes, it
must also pay all interest accrued and unpaid to the applicable redemption date.
The redemption prices for the new notes during the indicated time periods are as
follows:
Period Percentage
From January 24, 2004 to June 23, 2004..............................97.1674%
From June 24, 2004 to January 23, 2005..............................98.5837%
Thereafter.........................................................100.0000%
Under the indenture, we are subject to customary covenants which, among
other things, restrict our ability to:
25
o borrow money or issue preferred stock;
o pay dividends on stock or purchase stock;
o make other asset transfers;
o transact business with affiliates;
o sell stock of subsidiaries;
o engage in any new line of business;
o impair the security interest in any collateral for the notes;
o use assets as security in other transactions; and
o sell certain assets or merge with or into other companies.
In addition, we are subject to certain financial covenants including
covenants limiting our selling, general and administrative expenses and capital
expenditures, a covenant requiring Abraxas to maintain a specified ratio of
consolidated EBITDA, as defined in the agreements, to cash interest and a
covenant requiring Abraxas to permanently, to the extent permitted, pay down
debt under the new senior secured credit agreement and, to the extent permitted
by the new senior secured credit agreement, the new notes or, if not permitted,
paying indebtedness under the new senior secured credit agreement.
The indenture contains customary events of default, including nonpayment of
principal or interest, violations of covenants, inaccuracy of representations or
warranties in any material respect, cross default and cross acceleration to
certain other indebtedness, bankruptcy, material judgments and liabilities,
change of control and any material adverse change in our financial condition.
Senior Credit Agreement. In connection with the financial restructuring,
Abraxas entered into a new senior credit agreement providing a term loan
facility and a revolving credit facility as described below. Subsequently, on
February 23, 2004, Abraxas entered into an amendment to its existing senior
credit agreement providing for two revolving credit facilities and a new
non-revolving credit facility as described below. Subject to earlier termination
on the occurrence of events of default or other events, the stated maturity date
for these credit facilities is February 1, 2007. In the event of an early
termination, we will be required to pay a prepayment premium, except in the
limited circumstances described in the amended senior credit agreement.
First Revolving Credit Facility. Lenders under the amended senior credit
agreement have provided a revolving credit facility to Abraxas with a maximum
borrowing base of up to $20.0 million. Our current borrowing base under this
revolving credit facility is the full $20.0 million, subject to adjustments
based on periodic calculations. We have borrowed $6.6 million under this
revolving credit facility, which was used to refinance principal and interest on
advances under our preexisting revolving credit facility under the senior credit
agreement, and to pay certain fees and expenses relating to the transaction.
Outstanding amounts under this revolving credit facility bear interest at the
prime rate announced by Wells Fargo Bank, N.A. plus 1.125%. The balance of this
revolving credit facility was $4.7 million as of March 31, 2004.
Second Revolving Credit Facility. Lenders under the amended senior credit
agreement have provided a second revolving credit facility to Abraxas, with a
maximum borrowing of up to $30.0 million. This revolving credit facility is not
subject to a borrowing base. We have borrowed $30.0 million under this revolving
credit facility, which was used to refinance principal and interest on advances
under our preexisting revolving credit facility, and to pay certain transaction
fees and expenses. Outstanding amounts under this revolving credit facility bear
interest at the prime rate announced by Wells Fargo Bank, N.A. plus 3.00%.
Non-Revolving Credit Facility. Abraxas has borrowed $15.0 million pursuant
to a non-revolving credit facility, which was used to repay the preexisting term
loan under our senior credit agreement, to refinance principal and interest on
advances under the preexisting revolving credit facility, and to pay certain
transaction fees and expenses. This non-revolving credit facility is not subject
26
to a borrowing base. Outstanding amounts under this credit facility bear
interest at the prime rate announced by Wells Fargo Bank, N.A. plus 8.00%.
Covenants. Under the amended senior credit agreement, Abraxas is subject to
customary covenants and reporting requirements. Certain financial covenants
require Abraxas to maintain minimum ratios of consolidated EBITDA (as defined in
the amended senior credit agreement) to adjusted fixed charges (which includes
certain capital expenditures), minimum ratios of consolidated EBITDA to cash
interest expense, a minimum level of unrestricted cash and revolving credit
availability, minimum hydrocarbon production volumes and minimum proved
developed hydrocarbon reserves. In addition, if on the day before the end of
each fiscal quarter the aggregate amount of our cash and cash equivalents
exceeds $2.0 million, we are required to repay the loans under the amended
senior credit agreement in an amount equal to such excess. The amended senior
credit agreement also requires us to enter into hedging agreements on not less
than 40% or more than 75% of our projected oil and gas production. We are also
required to establish deposit accounts at financial institutions acceptable to
the lenders and we are required to direct our customers to make all payments
into these accounts. The amounts in these accounts will be transferred to the
lenders upon the occurrence and during the continuance of an event of default
under the amended senior credit agreement.
In addition to the foregoing and other customary covenants, the amended
senior credit agreement contains a number of covenants that, among other things,
restrict our ability to:
o incur additional indebtedness;
o create or permit to be created liens on any of our properties;
o enter into change of control transactions;
o dispose of our assets;
o change our name or the nature of our business;
o make guarantees with respect to the obligations of third parties;
o enter into forward sales contracts;
o make payments in connection with distributions, dividends or
redemptions relating to our outstanding securities, or
o make investments or incur liabilities.
Security. The obligations of Abraxas under the amended senior credit
agreement continue to be secured by a first lien security interest in
substantially all of Abraxas' assets, including all crude oil and natural gas
properties.
Guarantees. The obligations of Abraxas under the amended senior credit
agreement continue to be guaranteed by Abraxas' subsidiaries, Sandia Oil & Gas,
Sandia Operating, Wamsutter, New Grey Wolf, Western Associated Energy and
Eastside Coal. The guarantees under the amended senior credit agreement continue
to be secured by a first lien security interest in substantially all of the
guarantors' assets, including all crude oil and natural gas properties.
Events of Default. The amended senior credit agreement contains customary
events of default, including nonpayment of principal or interest, violations of
covenants, inaccuracy of representations or warranties in any material respect,
cross default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in our financial condition.
27
Hedging Activities.
Our results of operations are significantly affected by fluctuations in
commodity prices and we seek to reduce our exposure to price volatility by
hedging our production through commodity derivative instruments. Under the
senior credit agreement, we are required to maintain hedge positions on not less
than 40% or more than 75% of our projected oil and gas production for a six
month rolling period. See "General - Commodity Prices and Hedging Activities"
and "Item 3--Quantitative and Qualitative Disclosures about Market Risk--Hedging
Sensitivity" for further information.
Net Operating Loss Carryforwards.
At December 31, 2003, the Company had, subject to the limitation discussed
below, $100.6 million of net operating loss carryforwards for U.S. tax purposes.
These loss carryforwards will expire through 2022 if not utilized. In connection
with January 2003 transactions described in Note 2 in Notes to Consolidated
Financial Statements, certain of the loss carryforwards were utilized.
Uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, the Company has established a valuation allowance of $76.1 million as
of
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Commodity Price Risk
As an independent crude oil and natural gas producer, our revenue, cash
flow from operations, other income and profitability, reserve values, access to
capital and future rate of growth are substantially dependent upon the
prevailing prices of crude oil, natural gas and natural gas liquids. Declines in
commodity prices will materially adversely affect our financial condition,
liquidity, ability to obtain financing and operating results. Lower commodity
prices may reduce the amount of crude oil and natural gas that we can produce
economically. Prevailing prices for such commodities are subject to wide
fluctuation in response to relatively minor changes in supply and demand and a
variety of additional factors beyond our control, such as global political and
economic conditions. Historically, prices received for crude oil and natural gas
production have been volatile and unpredictable, and such volatility is expected
to continue. Most of our production is sold at market prices. Generally, if the
commodity indexes fall, the price that we receive for our production will also
decline. Therefore, the amount of revenue that we realize is partially
determined by factors beyond our control. Assuming the production levels we
attained during the quarter ended March 31, 2004, a 10% decline in crude oil,
natural gas and natural gas liquids prices would have reduced our operating
revenue, cash flow and net income by approximately $1.1 million for the quarter.
Hedging Sensitivity
On January 1, 2001, we adopted SFAS 133 as amended by SFAS 137 and SFAS
138. Under SFAS 133, all derivative instruments are recorded on the balance
sheet at fair value. 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.
None of the derivatives in place as of March 31, 2004 are designated as hedges,
accordingly, the change in the market value of the instrument is reflected in
current oil and gas revenue.
Under the terms of the amended senior credit agreement, we are required to
maintain hedging positions with respect to not less than 40% nor more than 75%
of our crude oil and natural gas production for a rolling six month period.
See "General - Commodity Prices and Hedging Activities" for a summary of
our current hedge positions.
28
Interest rate risk
As a result of the financial restructuring that occurred in January 2003,
and the amendment to the Senior Credit Agreement in February 2004, the debt
under the Senior Credit Agreement bears interest at the bank prime plus various
points. As of March 31, 2004 we had $49.7 million in outstanding indebtedness
under the new agreement. For every percentage point that the prime rate rises,
our interest expense would increase by approximately $497,000 on an annual
basis. Our new notes accrue interest at fixed rates and are accordingly 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 are affected by changes in foreign currency
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported a pre-tax income of $198,000 for the quarter ended March 31,
2004. It is estimated that a 5% change in the value of the U.S. dollar to the
Canadian dollar would have changed our net income by approximately $10,000. 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.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of Abraxas' "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e)and 15d-15(e)) and concluded
that the disclosure controls and procedures were adequate and designed to ensure
that material information relating to Abraxas and our consolidated subsidiaries
which is required to be included in our periodic Securities and Exchange
Commission filings would be made known to them by others within those entities.
There were no changes in our internal controls that could materially affect, or
are reasonably likely to materially affect our financial reporting.
29
ABRAXAS PETROLEUM CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no changes in legal proceedings from that described in the
Company's Annual Report of Form 10-K for the year ended December 31, 2003, and
in Note 8 in the Notes to Condensed Consolidated Financial Statements contained
in Part I of this report on Form 10-Q.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities.
None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 31.1 Certification - Robert L.G. Watson, CEO
Exhibit 31.1 Certification - Chris E.Williford, CFO
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 -
Robert L.G. Watson, CEO
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 -
Chris E. Williford, CFO
(b) Reports on Form 8-K:
1. Current Report on Form 8-K filed on April 20, 2004, Regulation FD
disclosure of slide presentation presented at the IPAA's 10h Annual
Oil and Gas Investment Symposium on April 20, 2004
30
ABRAXAS PETROLEUM CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended the Registrant has
duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: May 13, 2004 By:/s/ROBERT L.G. WATSON
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: May 13, 2004 By:/s/CHRIS WILLIFORD
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
31