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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-19118
ABRAXAS PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 74-2584033
(State of Incorporation) (I.R.S. Employer Identification No.)
500 N. Loop 1604 East, Suite 100, San Antonio, TX 78232
(Address of principal executive offices) (Zip Code)
210-490-4788
(Registrant's telephone number, including area code)
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares outstanding of each of the issuer's classes of common
stock, as of November 3, 2005.
Class Shares Outstanding
Common Stock $.01 Par Value 42,057,667
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
statements including words like "believe", "expect", "anticipate", "intend",
"plan", "seek", "estimate", "could", "potentially" or similar expressions), you
must remember that these are forward-looking statements and 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 heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" but may be found in other
locations as well. These forward-looking statements generally relate to our
plans and objectives for future operations and are based upon our management's
reasonable estimates of future results or trends. The factors that may affect
our expectations regarding our operations include, among others, the following:
o our high debt level;
o our success in development, exploitation and exploration activities;
o our ability to make planned capital expenditures;
o declines in our production of natural gas and crude oil;
o prices for natural gas and crude oil;
o our ability to raise equity capital or incur additional indebtedness;
o political and economic conditions in oil producing countries,
especially those in the Middle East;
o price and availability of alternative fuels;
o our restrictive debt covenants;
o our acquisition and divestiture activities;
o results of our hedging activities; and
o other factors discussed elsewhere in this document.
In addition to these factors, important factors that could cause actual
results to differ materially from our expectations ("Cautionary Statements") are
disclosed under "Risk Factors" in our Annual Report on Form 10-K for the year
ended December 31, 2004 which are 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.
ABRAXAS PETROLEUM CORPORATION
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheets--September 30, 2005 (unaudited)
and December 31, 2004.........................................................4
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2005 and 2004 (unaudited)...........6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2005 and 2004 (unaudited).....................7
Notes to Condensed Consolidated Financial Statements (unaudited)...................8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................13
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk.............................26
ITEM 4 - Controls and Procedures...............................................................27
PART II
OTHER INFORMATION
ITEM 1 - Legal Proceedings........................................................................28
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds..............................28
ITEM 3 - Defaults Upon Senior Securities..........................................................28
ITEM 4 - Submission of Matters to a Vote of Security Holders......................................28
ITEM 5 - Other Information........................................................................28
ITEM 6 - Exhibits.................................................................................28
Signatures .......................................................................29
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets
(in thousands)
September 30,
2005 December 31,
(Unaudited) 2004
------------------ -------------------
Assets:
Current assets:
Cash ................................................... $ 763 $ 1,284
Accounts receivable, net
Joint owners.......................................... 441 471
Oil and gas production................................ 8,518 4,724
Other................................................. 100 66
------------------ -------------------
9,059 5,261
Equipment inventory........................................... 903 735
Other current assets.......................................... 1,883 752
------------------ -------------------
12,608 8,032
Assets held for sale.......................................... - 52,600
------------------ -------------------
Total current assets..................................... 12,608 60,632
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved.................................................... 325,996 297,647
Other property and equipment................................. 3,184 2,930
------------------ -------------------
Total................................................ 329,180 300,577
Less accumulated depreciation, depletion, and
amortization............................................ 228,122 222,500
------------------ -------------------
Total property and equipment - net........................ 101,058 78,077
Deferred financing fees, net ................................... 6,418 7,618
Deferred tax asset.............................................. - 6,060
Other assets .................................................. 298 298
------------------ -------------------
Total assets.................................................... $ 120,382 $ 152,685
================== ===================
See accompanying notes to condensed consolidated financial statements
4
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets (continued)
(in thousands)
September 30,
2005 December 31,
(Unaudited) 2004
-------------------- -------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable.............................................. $ 6,808 $ 5,622
Oil and gas production payable................................ 3,598 2,443
Accrued interest.............................................. 4,705 2,170
Other accrued expenses........................................ 1,635 1,654
-------------------- -------------------
16,746 11,889
Liabilities related to assets held for sale................... - 66,947
-------------------- -------------------
Total current liabilities................................... 16,746 78,836
Long-term debt.................................................. 129,842 126,425
Future site restoration......................................... 979 888
-------------------- -------------------
Total liabilities...................................... 147,567 206,149
Stockholders' deficit:
Common Stock, par value $.01 per share-
Authorized 200,000,000 shares; issued, 42,047,667 and 36,597,045
at September 30, 2005 and December 31, 2004, respectively..... 420 366
Additional paid-in capital................................... 165,094 146,185
Accumulated deficit........................................... (194,103) (202,534)
Treasury stock, at cost, 56,477 and 105,989 shares at
September 30, 2005 and December 31, 2004 respectively........ (408) (549)
Accumulated other comprehensive loss.......................... 1,812 3,068
-------------------- -------------------
Total stockholders' deficit............................... (27,185) (53,464)
-------------------- -------------------
Total liabilities and stockholders' deficit..................... $ 120,382 $ 152,685
==================== ===================
See accompanying notes to condensed consolidated financial statements
5
Abraxas Petroleum Corporation
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2005 2004 2005 2004
--------------- ------------- ---------------- --------------
(in thousands, except per share data)
Revenue:
Oil and gas production revenues.............. $ 13,829 $ 8,018 $ 30,690 $ 24,174
Rig revenues................................. 330 214 909 518
Other........................................ 5 5 14 9
--------------- -------------- ---------------- --------------
14,164 8,237 31,613 24,701
Operating costs and expenses:
Lease operating and production taxes......... 3,007 2,109 7,807 6,716
Depreciation, depletion, and amortization.... 2,107 1,744 5,622 5,402
Rig operations............................... 176 174 560 442
General and administrative................... 953 998 2,997 3,759
Stock-based compensation..................... 7,053 1,375 7,330 1,122
--------------- -------------- ---------------- --------------
13,296 6,400 24,316 17,441
--------------- -------------- ---------------- --------------
Operating income ............................... 868 1,837 7,297 7,260
Other (income) expense:
Interest income.............................. (11) (2) (12) (7)
Interest expense............................. 3,700 4,285 10,241 13,416
Amortization of deferred financing fees...... 403 468 1,257 1,380
Financing cost............................... - 68 - 1,641
Other expense................................ 30 - 274 11
--------------- -------------- ---------------- --------------
4,122 4,819 11,760 16,441
--------------- -------------- ---------------- --------------
Earnings (loss) from continuing operations ....... (3,254) (2,982) (4,463) (9,181)
Net income from discontinued operations (net of
$6,060 income tax expense in 2005)................ - 1,339 10,704 2,353
--------------- -------------- ---------------- --------------
Net earnings (loss)............................... $ (3,254) $ (1,643) $ 6,241 $ (6,828)
=============== ============== ================ ==============
Basic earnings (loss) per common share:
Net earnings (loss) per common from continuing
operations................................... (0.08) (0.08) (0.12) (0.25)
Discontinued operations........................ - 0.04 0.28 0.07
--------------- -------------- ---------------- --------------
Net earnings (loss) per common share - basic...... $ (0.08) $ (0.04) $ 0.16 $ (0.18)
=============== ============== ================ ==============
Diluted earnings (loss) per common share:
Net earnings (loss) per common from continuing
operations................................... (0.08) (0.08) (0.12) (0.25)
Discontinued operations........................... - 0.04 0.28 0.07
--------------- -------------- ---------------- --------------
Net earnings (loss) per common share - diluted.... $ (0.08) $ (0.04) $ 0.16 $ (0.18)
=============== ============== ================ ==============
See accompanying notes to condensed consolidated financial statements
6
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
------------------------------------------
2005 2004
------------------ ------------------
Operating Activities
Net earnings (loss)........................................... $ 6,241 $ (6,828)
Income from discontinued operations........................... (10,704) (2,353)
---------------- ------------------
Loss from continuing operations............................... (4,463) (9,181)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization.................... 5,622 5,402
Amortization of deferred financing fees...................... 1,257 1,380
Accretion of future site restoration......................... 71 102
Non-cash interest and financing cost......................... - 9,114
Stock-based compensation 7,330 1,122
Changes in operating assets and liabilities:
Accounts receivable...................................... (2,774) 3,598
Equipment inventory...................................... (168) 88
Other ................................................... 3,017 42
Accounts payable and accrued expenses.................... 4,877 (2,696)
---------------- ------------------
Net cash provided by continuing operations.................... 14,769 8,971
Net cash (used in) provided by discontinued operations........ (4,132) 6,196
---------------- ------------------
Net cash provided by operations 10,637 15,167
Investing Activities
Capital expenditures, including purchases and development of
properties ................................................ (28,604) (4,789)
---------------- ------------------
Net cash used in continuing operations........................ (28,604) (4,789)
Net cash provided by (used in) discontinued operations........ 25,719 (6,196)
---------------- ------------------
Net cash used in investing activities......................... (2,885) (10,985)
Financing Activities
Proceeds from long-term borrowings............................ 17,688 6,500
Payments on long-term borrowings.............................. (14,271) (6,600)
Proceeds from stock sale receivable........................... - 98
Proceeds from issuance of common stock (net).................. 11,275
Issuance of stock for compensation............................ 102 328
Deferred financing fees ...................................... (57) (1,823)
Exercise of stock options ................................... 397 209
---------------- ------------------
Net cash provided by (used in) continuing operations.......... 15,134 (1,288)
Net cash used in discontinued operations...................... (23,407) -
---------------- ------------------
Net cash used in financing activities......................... (8,273) (1,288)
---------------- ------------------
Increase (decrease) increase in cash.......................... (521) 2,894
Cash, at beginning of period.................................. 1,284 -
---------------- ------------------
Cash, at end of period........................................ $ 763 $ 2,894
================ ==================
Supplemental disclosure of cash flow information:
Interest paid................................................. $ 7,635 $ 4,185
================ ==================
Non-cash items:
Future site restoration....................................... $ 29 $ -
================ ==================
See accompanying notes to condensed consolidated financial statements
7
Abraxas Petroleum Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(tabular amounts in thousands, except per share data)
Note 1. Basis of Presentation
The accounting policies followed by Abraxas Petroleum Corporation and
its subsidiaries (the "Company" or "Abraxas") are set forth in the notes to the
Company's audited financial statements in the Annual Report on Form 10-K filed
for the year ended December 31, 2004. Such policies have been continued without
change. Also, refer to the notes to those financial statements for additional
details of the Company's financial condition, results of operations, and cash
flows. All the material items included in those notes have not changed except as
a result of normal transactions in the interim, or as disclosed within this
report. The accompanying interim consolidated financial statements have not been
audited by independent accountants, but in the opinion of management, reflect
all adjustments necessary for a fair presentation of the financial position and
results of operations. Any and all adjustments are of a normal and recurring
nature. The results of operations for the three and nine months ended September
30, 2005 are not necessarily indicative of results to be expected for the full
year.
The consolidated financial statements include the accounts of the
Company and its wholly-owned foreign subsidiary, Grey Wolf Exploration Inc.
("Grey Wolf"). On February 28, 2005 Grey Wolf closed an initial public offering,
resulting in the substantial divestiture of our capital stock and operations in
Grey Wolf. As a result of the disposal of Grey Wolf, the results of operations
of Grey Wolf through February 28, 2005 are reflected in our Financial Statements
as discontinued operations.
Stock-based Compensation.
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Effective July 1, 2000, the Financial Accounting Standards Board
("FASB") issued FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and were not exercised prior to July 1, 2000, require that
the awards be accounted for as variable until they are exercised, forfeited, or
expired. In January 2003, the Company amended the exercise price to $0.66 on
certain options with an existing exercise price greater than $0.66. The Company
recognized expense of approximately $7.1 million and $7.3 million during the
three and nine months ended September 30, 2005, respectively, as stock-based
compensation expense in the accompanying consolidated financial statements. For
the three and nine months ended September 30, 2004, the Company recognized an
expense of approximately $1.4 million and $1.1 million, respectively.
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
three and nine months ended September 30, 2005 and 2004, risk-free interest
rates of 2.9% and 1.5%, respectively; dividend yields of -0-%; volatility factor
of the expected market price of the Company's common stock of .185 and .35
respectively; and a weighted-average expected life of the option of eight and
ten years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
8
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In October 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure" (SFAS No. 148), providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirement of SFAS 123 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 and nine months ended September 30, 2005
and September 30, 2004 would have been:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2005 2004 2005 2004
(In Thousands, except per share data)
----------------------------------------------------------
Net income (loss) as reported $ (3,254) $ (1,643) $ 6,241 $ (6,828)
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects
7,053 1,375 7,330 1,122
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (16) (30) (57) (101)
------------- ------------ --------- ------------
Pro forma net income (loss) $ 3,783 $ (298) $ 13,514 $ (5,807)
============= ============ ========== ============
Earnings (loss) per share:
Basic - as reported $ (0.08) $ (0.04) $ 0.16 $ (0.18)
============= ============ ========== ============
Basic - pro forma $ 0.09 $ (0.01) $ 0.35 $ (0.16)
============= ============ ========== ============
Diluted - as reported $ (0.08) $ (0.04) $ 0.16 $ (0.18)
============= ============ ========== ============
Diluted - pro forma $ 0.08 $ (0.01) $ 0.34 $ (0.16)
============= ============ ========== ============
Certain prior year balances have been reclassified for comparative
purposes.
Note 2. Discontinued operations
On February 28, 2005, Grey Wolf completed an IPO resulting in Abraxas
substantially divesting itself of its investment in Grey Wolf. Pursuant to an
Underwriting Agreement, the underwriters purchased 17.8 million common shares of
Grey Wolf capital stock from Grey Wolf ("Treasury Shares"), and 9.1 million
shares of Grey Wolf common stock owned by Abraxas from Abraxas ("Secondary
Shares") at a purchase price of CDN $2.80 per share.
Grey Wolf utilized the proceeds from the sale of the Treasury Shares to
re-pay and terminate its $35 million term loan and re-pay $1 million in
inter-company debt to Abraxas. Abraxas utilized the $1 million received from
Grey Wolf and the proceeds received from the sale of the Secondary Shares to
re-pay outstanding debt under its $25 million second lien increasing rate bridge
loan.
Abraxas also granted an over-allotment option to the underwriters to
purchase from Abraxas, at the underwriters' election, up to an additional
3,902,360 shares of Grey Wolf common stock held by Abraxas (the "Option
Shares"). On March 24, 2005, Abraxas was advised of the underwriter's intent to
exercise 3.5 million of the over-allotment option shares. Closing occurred on
March 31, 2005 and provided approximately $7.6 million that Abraxas utilized to
9
re-pay the remaining balance of its bridge loan and reduce the outstanding
balance under its senior secured revolving credit facility.
The operations of Grey Wolf, previously reported as a business segment,
are reported as discontinued operations for all periods presented in the
accompanying financial statements and the operating results are reflected
separately from the results of continuing operations.
Income from discontinued operations for the nine months ended September
30, 2005 includes a gain on the disposal of Grey Wolf of $19.6 million, less
non-cash income tax of $6.1 million, and a loss from operations, including debt
retirement costs, of $2.8 million.
Note 3. Income Taxes
The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
For the period ended September 30, 2005, there is no current or
deferred income tax expense or benefit due to losses and/or loss carryforwards
and valuation allowance which has been recorded against such benefits.
Note 4. Long-Term Debt
Long-term debt consisted of the following:
September 30, December 31,
-----------------------------------
2005 2004
---------------- -----------------
Floating rate senior secured notes due 2009............................ $ 125,000 $ 125,000
Senior secured revolving credit facility............................... 4,842 1,425
---------------- -----------------
129,842 126,425
Less current maturities ............................................... - -
---------------- -----------------
$ 129,842 $ 126,425
================ =================
Floating Rate Senior Secured Notes due 2009. In connection with its
October 2004 financial restructuring, Abraxas issued $125 million in aggregate
principal amount of floating rate senior secured notes due 2009. The notes will
mature on December 1, 2009 and began accruing interest from the date of
issuance, October 28, 2004, at a per annum floating rate of six-month LIBOR plus
7.50%. The initial interest rate on the notes was 9.72% per annum. The interest
is reset semi-annually on each June 1 and December 1, commencing on June 1,
2005. The current interest rate, effective June 1, 2005, is 11.03% per annum.
Interest is payable semi-annually in arrears on June 1 and December 1 of each
year, commencing on June 1, 2005.
Senior Secured Revolving Credit Facility. On October 28, 2004, Abraxas
entered into an agreement for a new revolving credit facility having a maximum
commitment of $15 million, which includes a $2.5 million subfacility for letters
of credit. Availability under the revolving credit facility is subject to a
borrowing base consistent with normal and customary natural gas and crude oil
lending transactions. Outstanding amounts under the revolving credit facility
bear interest at the prime rate announced by Wells Fargo Bank, National
Association plus 1.00%. Subject to earlier termination rights and events of
default, the stated maturity date under the revolving credit facility is October
28, 2008.
10
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,
------------------------------- -------------------------------
2005 2004 2005 2004
------------- ------------- -------------- -------------
Numerator:
Net income (loss) before effect of
discontinued operations.................... $ (3,254) $ (2,982) $ (4,463) $ (9,181)
Discontinued operations....................... - 1,339 10,704 2,353
------------- ------------- -------------- -------------
Net earnings (loss) available to common
stockholders.................................. (3,254) (1,643) 6,241 (6,828)
============= ============= ============== =============
Denominator:
Denominator for basic earnings per share -
Weighted-average shares..................... 40,962,427 36,251,323 38,478,355 36,164,268
Effect of dilutive securities:
Stock options and warrants - - - -
------------- ------------- -------------- -------------
Dilutive potential common shares
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed
Conversions................................. 40,962,427 36,251,323 38,478,355 36,164,268
Basic earnings (loss) per share:
Net income (loss) from continuing
operations ................................. $ (0.08) $ (0.08) $ (0.12) $ (0.25)
Discontinued operations..................... - 0.04 0.28 0.07
------------- ------------- -------------- -------------
Net earnings (loss) per common share - basic.... $ (0.08) $ (0.04) $ 0.16 $ (0.18)
============= ============= ============== =============
Diluted earnings (loss) per share:
Net income (loss) from continuing
operations ................................ $ (0.08) $ (0.08) $ (0.12) $ (0.25)
Discontinued operations..................... - 0.04 0.28 0.07
------------- ------------- -------------- -------------
Net earnings (loss) per common share - basic.... $ (0.08) $ (0.04) $ 0.16 $ (0.18)
============= ============= ============== =============
For the three months ended September 30, 2005 and 2004 and nine months
ended September 30, 2005 and 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 from continuing operations
incurred in the periods. Had there not been losses from continuing operations in
these periods, dilutive shares would have been 1,420,879 and 1,689,884 for the
three and nine months ended September 30, 2004, respectively and 1,870,121 and
1,662,562 for the three months and nine months ended September 30, 2005,
respectively.
Note 6. Hedging Program and Derivatives
On January 1, 2001, the Company adopted SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) as amended by SFAS 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB 133" and SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". 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. As of September 30, 2005, the derivatives that
the Company had in place were not designated as hedges and, accordingly, changes
in the fair value of the derivatives are recorded in current period oil and gas
revenue.
Under the terms of our revolving credit facility, we are required to
maintain hedging positions on not less than 25% nor more than 75% of our
projected natural gas and crude oil production for a rolling six month period.
11
The following table sets forth the Company's current hedge position:
Time Period Notional Quantities Price
- --------------------------- ------------------------------------ ---------------
October - December 2005 9,500 MMbtu of production per day Floor of $5.00
January 2006 10,000 MMbtu of production per day Floor of $5.00
February 2006 10,000 MMbtu of production per day Floor of $5.00
March 2006 10,000 MMbtu of production per day Floor of $5.00
April 2006 10,000 MMbtu of production per day Floor of $7.00
May 2006 10,000 MMbtu of production per day Floor of $8.00
Note 7. Contingencies - Litigation
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. At
September 30, 2005, the Company was not engaged in any legal proceedings that
are expected, individually or in the aggregate, to have a material adverse
effect on its operations.
Note 8. 2005 Non-Employee Directors Long-Term Equity Incentive Plan
On June 1, 2005, Abraxas Petroleum Corporation held its 2005 Annual
Meeting of Stockholders at which the stockholders approved the 2005 Non-Employee
Directors Long-Term Equity Incentive Plan (the "2005 Directors Plan"). The
following is a summary of the 2005 Directors Plan.
Purpose. The purpose of the 2005 Directors Plan is to attract and
retain members of the Board of Directors and to promote the growth and success
of Abraxas by aligning the long-term interests of the Board of Directors with
those of Abraxas' stockholders by providing an opportunity to acquire an
interest in Abraxas and by providing both rewards for exceptional performance
and long term incentives for future contributions to the success of Abraxas.
Administration and Eligibility. The 2005 Directors Plan will be
administered by the Compensation Committee (the "Committee") of the Board of
Directors and authorizes the Board to grant non-qualified stock options or issue
restricted stock to those persons who are non-employee directors of Abraxas,
including advisory directors of Abraxas, which currently amounts to a total of
ten people.
Shares Reserved and Awards. The 2005 Directors Plan reserves 900,000
shares of Abraxas common stock, subject to adjustment following certain events,
as discussed below. The 2005 Directors Plan provides that each year, at the
first regular meeting of the Board of Directors immediately following Abraxas'
annual stockholder's meeting, each non-employee director shall be granted or
issued awards of 10,000 shares of Abraxas common stock, for participation in
Board and Committee meetings during the previous calendar year. The maximum
annual award for any one person is 10,000 shares of Abraxas common stock or
options for common stock. If options, as opposed to shares, are awarded, the
exercise share price shall be no less than 100% of the fair market value on the
date of the award while the option terms and vesting schedules are at the
discretion of the Committee.
12
ABRAXAS PETROLEUM CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Prior to February 2005, Grey Wolf Exploration Inc. was a wholly-owned
Canadian subsidiary of Abraxas. In February 2005, Grey Wolf, completed an
initial public offering resulting in the substantial divestiture of our capital
stock in Grey Wolf. As a result of the Grey Wolf IPO and the significant
divestiture of our interest in Grey Wolf, the results of operations of Grey Wolf
are reflected in our Financial Statements and in this document as "Discontinued
Operations" and our remaining operations are referred to in our Financial
Statements and in this document as "Continuing Operations" or "Continued
Operations". Unless otherwise noted, all disclosures are for continuing
operations.
The following is a discussion of our financial condition, results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with our consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K filed for the year ended December 31,
2004.
Critical Accounting Policies
There have been no changes from the Critical Accounting Policies
described in our Annual Report on Form 10-K for the year ended December 31,
2004.
General
We are an independent energy company primarily engaged in the
development and production of natural gas and crude oil. Historically, we have
grown through the acquisition and subsequent development and exploitation of
producing properties, principally through the redevelopment of old fields
utilizing new technologies such as modern log analysis and reservoir modeling
techniques as well as 3-D seismic surveys and horizontal drilling. As a result
of these activities, we believe that we have a substantial inventory of low risk
development opportunities, which provide a basis for significant production and
reserve increases. In addition, we intend to expand upon our exploitation and
development activities with complementary exploration projects in our core areas
of operation.
Our financial results depend upon many factors which significantly
affect our results of operations including the following:
o the sales prices of natural gas, natural gas liquids and crude oil;
o the level of total sales volumes of natural gas, natural gas liquids
and crude oil;
o the availability of, and our ability to raise additional capital
resources and provide liquidity to meet cash flow needs;
o our ability to use our cash flow from operations for capital
expenditures to increase production and reserves;
o the level of and interest rates on borrowings; and
o the level and success of exploitation, exploration and development
activity.
Commodity Prices and Hedging Activities. Our results of operations are
significantly affected by fluctuations in commodity prices. Price volatility in
the natural gas market has remained prevalent in the last few years with prices
generally being strong since the first quarter of 2004. The table below
illustrates how natural gas prices have fluctuated over the eight quarters prior
to and including the quarter ended September 30, 2005 and contains the last
three day average of NYMEX traded contracts price and the prices we realized
during each quarter presented, including the impact of our hedging activities.
13
Natural Gas Prices by Quarter (in $ per Mcf)
Quarter Ended
----------------------------------------------------------------------------------------------------------------
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
2003 2004 2004 2004 2004 2005 2005 2005
---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
Index $4.60 $5.69 $5.97 $5.85 $6.77 $6.30 $ 6.80 $ 8.21
Realized $4.29 $4.98 $5.52 $5.24 $6.14 $5.26 $ 6.33 $ 8.15
The NYMEX natural gas price November 3, 2005 was $11.69 per Mcf.
The table below illustrates how crude oil prices have fluctuated over
the eight quarters prior to and including the quarter ended September 30, 2005
and contains the last three day average of NYMEX traded contracts price and the
prices we realized during each quarter presented, including the impact of our
hedging activities.
Crude Oil Prices by Quarter (in $ per Bbl)
Quarter Ended
----------------------------------------------------------------------------------------------------------------
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
2003 2004 2004 2004 2004 2005 2005 2005
---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
Index $29.64 $34.76 $38.48 $42.32 $49.46 $47.33 $ 51.76 $ 60.26
Realized $29.99 $34.18 $37.29 $42.43 $46.81 $47.13 $ 49.43 $ 60.24
The NYMEX crude oil price on November 3, 2005 was $61.78 per Bbl.
Under the terms of our revolving credit facility, we are required to
maintain hedging positions on not less than 25% nor more than 75% of our
projected natural gas and crude oil production for a rolling six month period.
We currently have the following hedges in place:
Time Period Notional Quantities Price
- --------------------------- ----------------------------------- --------------
October - December 2005 9,500 MMbtu of production per day Floor of $5.00
January 2006 10,000 MMbtu of production per day Floor of $5.00
February 2006 10,000 MMbtu of production per day Floor of $5.00
March 2006 10,000 MMbtu of production per day Floor of $5.00
April 2006 10,000 MMbtu of production per day Floor of $7.00
May 2006 10,000 MMbtu of production per day Floor of $8.00
Production Volumes. Because our proved reserves will decline as natural
gas, natural gas liquids and crude oil are produced, unless we acquire
additional properties containing proved reserves or conduct successful
exploitation, exploration and development activities, our reserves and
production will decrease. Our ability to acquire or find additional reserves in
the near future will be dependent, in part, upon the amount of available funds
for acquisition, exploitation and development projects.
We had capital expenditures of $4.8 million and $28.6 million during
the first nine months of 2004 and 2005, respectively. As a result of the capital
spending limitations included in our previous credit agreement (which was
terminated in October 2004) and our 11 1/2 % secured notes due 2007 (which were
redeemed in October 2004), we were limited for most of 2004 in our ability to
replace existing production and, consequently, our production volumes decreased
during 2004 and continued to decrease in the first three months of 2005. We
experienced an increase in our production volumes during the three months ended
September 30, 2005. If natural gas and crude oil prices return to depressed
levels or if our production levels decrease, our revenues, cash flow from
operations and financial condition will be materially adversely affected.
Availability of Capital. As described more fully under "Liquidity and
Capital Resources" below, our sources of capital going forward will primarily be
cash from operating activities, funding under our revolving credit facility,
cash on hand, and if an appropriate opportunity presents itself, proceeds from
the sale of properties. As of September 30, 2005, we had approximately $10.2
million of availability under our revolving credit facility.
14
Exploitation and Development Activity. We believe that our high quality
asset base, high degree of operational control and large inventory of drilling
projects position us for future growth. Our properties are concentrated in
locations that facilitate substantial economies of scale in drilling and
production operations and efficient reservoir management practices. We currently
operate 94% of our properties accounting for approximately 90% of our PV-10,
giving us substantial control over the timing and incurrence of operating and
capital expenditures. In addition, at December 31, 2004 we had 47 proved
undeveloped locations and had identified over 100 drilling and recompletion
opportunities on our existing U.S. acreage, the successful development of which
we believe could significantly increase our daily production and proved
reserves. During the three months ended September 30, 2005, we continued
exploitation activities on our properties. We invested $28.4 million in capital
spending during the nine months ended September 30, 2005 on nine wells in South
Texas, West Texas and Wyoming. We are currently completing and/or testing one
vertical well in West Texas and re-entering a vertical well in West Texas. Three
horizontal wells in South Texas and one horizontal well in West Texas (started
in 2004) have been brought on line during the nine-month period. Our drilling
activities resulted in increased natural gas production during the three and
nine months ended September 30, 2005. In the latter part of the third quarter we
drilled and are currently completing four vertical crude oil wells in Wyoming.
Our future natural gas and crude oil production, and therefore our success, is
highly dependent upon our ability to find, acquire and develop additional
reserves that are profitable to produce. The rate of production from our natural
gas and crude oil properties and our proved reserves will decline as our
reserves are produced unless we acquire additional properties containing proved
reserves, conduct successful development and exploitation activities or, through
engineering studies, identify additional behind-pipe zones or secondary recovery
reserves. We cannot assure you that our exploitation and development activities
will result in increases in our proved reserves. In addition, approximately 49%
of our total estimated proved reserves at December 31, 2004 were undeveloped. By
their nature, estimates of undeveloped reserves are less certain. Recovery of
such reserves will require significant capital expenditures and successful
drilling operations.
Borrowings and Interest. At September 30, 2005, we had indebtedness of
approximately $125.0 million under the notes and $4.8 million under the
revolving credit facility and availability of $10.2 million. Unlike the 11 1/2%
secured notes due 2007 (which were redeemed in October 2004), interest on the
notes is payable in cash, which will require us to increase our production and
cash flow from operations in order to meet our debt service requirements, as
well as to fund the development of our numerous drilling opportunities.
Recent events. In July 2005, we acquired an average 44% of the mineral
rights, all executive rights and certain surface rights under approximately
12,000 contiguous acres in the Oates Southwest Field area of West Texas, plus a
3-year lease on a large portion of the remaining mineral interests, for
approximately $2.9 million.
On July 20, 2005, we completed a $12.0 million private placement
pursuant to which we issued 4.0 million shares of common stock to accredited
investors at a price of $3.00 per share. Net proceeds of approximately $11.3
million from the private placement were used to re-pay indebtedness under our
revolving credit facility, for development in Texas and Wyoming, and for working
capital and general corporate purposes.
Outlook for 2005. The Company has previously provided guidance for the
calendar year 2005 which was updated on August 10, 2005. As a result of industry
conditions, namely delays in obtaining various stimulation and completion
services, several of the Company's newly drilled wells have taken longer to get
on production than originally estimated. A general increase in field operating
costs experienced by the entire industry has also had an impact on the Company's
direct operating costs and will affect our per unit costs for 2005. The
Company's G&A costs have been adversely impacted due to Sarbanes-Oxley related
costs during the year and will continue to be so impacted for the remainder of
2005. The G&A expense amounts shown below include only regularly occuring G&A
expenses and do not take into account any potential bonuses that might be earned
for 2005 or non-recurring expenses. In August 2005 we also revised our total
capital spending amount for 2005 to $32.0 million as a result of the successful
completion of the recent private placement transaction and the Company's
improved liquidity position. Our updated guidance for 2005 remains as follows:
15
Production:
Bcfe(approximately 80% gas)................... 6.5 - 7.5
Exit Rate (Mmcfe/d).............................. 19-21
Price Differentials (Pre Hedge):
$ Per Bbl..................................... 0.55
$ Per Mcf..................................... 0.75
Direct Lifting Costs, $ Per Mcfe................. 1.10
Production taxes................................. 10% of Revenue
G&A, $ Per Mcfe.................................. 0.75
Results of Operations
The following table sets forth certain of our operating data for the
periods presented.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2005 2004 2005 2004
--------- --------- ---------- ----------
Operating Revenue (in thousands):
Crude Oil Sales.................................. $ 2,699 $ 2,289 $ 7,543 $ 6,279
Natural Gas Sales................................ 11,130 5,670 23,147 17,730
Natural Gas Liquids Sales........................ - 59 - 165
Rig Operations................................... 330 214 909 518
Other............................................ 5 5 14 9
--------- --------- ---------- ----------
$ 14,164 $ 8,237 $ 31,613 $ 24,701
========= ========= ========== ==========
Operating Income (in thousands) (1).............. $ 868 $ 1,837 $ 7,297 $ 7,260
Crude Oil Production (MBbls)..................... 45 54 145 166
Natural Gas Production (MMcfs)................... 1,366 1,083 3,427 3,382
Natural Gas Liquids Production (MBbls)........... - 2 - 7
Average Crude Oil Sales Price ($/Bbl)............ $ 60.24 $ 42.43 $ 51.95 $ 37.91
Average Natural Gas Sales Price ($/Mcf).......... $ 8.15 $ 5.24 $ 6.75 $ 5.24
Average Liquids Sales Price ($/Bbl).............. $ - $ 27.55 $ - $ 24.71
(1) Includes $7.1 million and $7.3 million in non-cash, stock-based
compensation expense for the three and nine months ended September 30,
2005, respectively, and $1.4 million and $1.1 million in non-cash
stock-based compensation expense for the three and nine months ended
September 30, 2004, respectively.
Comparison of Three Months Ended September 30, 2005 to Three Months Ended
September 30, 2004
Operating Revenue. During the three months ended September 30, 2005,
operating revenue from natural gas, natural gas liquids and crude oil sales
increased by $5.8 million to $13.8 million compared to $8.0 million during three
months ended September 30, 2004. The increase in revenue was primarily due to
increased natural gas production volumes and higher commodity prices during the
period. Higher commodity prices contributed $4.1 million to crude oil and
natural gas production revenues, while increased production volumes contributed
$1.7 million.
Average sales prices net of hedging cost for the quarter ended
September 30, 2005 were:
o $60.24 per Bbl of crude oil, and
o $8.15 per Mcf of natural gas
16
Average sales prices net of hedging cost for the quarter ended
September 30, 2004 were:
o $42.43 per Bbl of crude oil,
o $27.55 per Bbl of natural gas liquids, and
o $5.24 per Mcf of natural gas
Crude oil production volumes decreased from 54.0 MBbls during the
quarter ended September 30, 2004 to 44.8 MBbls for the same period of 2005. The
decrease in crude oil production volumes was primarily due to natural field
declines. Natural gas production volumes increased 283 MMcf to 1,366 MMcf for
the three months ended September 30, 2005 from 1,083 MMcf for the same period of
2004. The increase in natural gas production volumes was attributable to new
production during the quarter ended September 30, 2005 as a result of drilling
activities undertaken since the beginning of 2005. New production added 376 MMcf
for the quarter ended September 30, 2005, which was partially offset by natural
field declines.
Lease Operating Expenses ("LOE"). LOE for the three months ended
September 30, 2005 increased to $3.0 million from $2.1 for the same period of
2004. The increase was primarily due to increased production taxes related to
higher commodity prices, increased natural gas production and generally
increasing industry cost of services. Our LOE on a per Mcfe basis for the three
months ended September 30, 2005 increased to $1.84 compared to $1.49 for the
same period of 2004. The increase in the per Mcfe rate was primarily due to
increased production taxes related to higher commodity prices.
General and Administrative ("G&A") Expenses. G&A expenses decreased
slightly to $953,000 for the quarter ended September 30, 2005 from $998,000 for
the same period of 2004. The decrease was primarily due to a decrease in
professional fees in the third quarter of 2005 as compared to the same period of
2004. G&A expense on a per Mcfe basis was $0.58 for the third quarter of 2005
compared to $0.70 for the same period of 2004 due to higher production volumes
in 2005.
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 expenses 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 which resulted in variable accounting. We recognized an expense of
$7.1 million during the quarter ended September 30, 2005 compared to $1.4
million during the same period of 2004 related to these repricings. The increase
in stock-based compensation expense was the result of the increase in the price
of our common stock during the quarter ended September 30, 2005 compared to the
price at June 30, 2005.
Depreciation, Depletion and Amortization("DD&A") Expenses. DD&A expense
increased to $2.1 million for the three months ended September 30, 2005 from
$1.7 million for the same period of 2004. The increase in DD&A was primarily due
to increased production volumes during the quarter ended September 30, 2005 and
increased capital expenditures during 2005 as compared to the same period of
2004. Our DD&A on a per Mcfe basis for the quarter ended September 30, 2005 was
$1.29 per Mcfe as compared to $1.23 in 2004.
Interest Expense. Interest expense decreased to $3.7 million for the
third quarter of 2005 compared to $4.3 million ($1.2 million of which was cash
interest expense) for the same period of 2004. The decrease in interest expense
(and increase in cash interest expense) was due to the refinancing of our
long-term debt in October 2004. Our long-term debt was $190.5 million at
September 30, 2004 compared to $129.8 million at September 30, 2005.
Income taxes. There is no current or deferred income tax expense or
benefit due to losses or loss carryforwards and valuation allowance which has
been recorded against such benefits.
17
Comparison of Nine Months Ended September 30, 2005 to Nine Months Ended
September 30, 2004
Operating Revenue. During the nine months ended September 30, 2005,
operating revenue from natural gas, natural gas liquids and crude oil sales
increased to $30.7 million as compared to $24.2 million in the nine months ended
September 30, 2004. The increase in revenue was primarily due to higher
commodity prices during 2005 as compared to the same period of 2004. Higher
commodity prices contributed $7.2 million to crude oil and natural gas revenue
during the nine months ended September 30, 2005. The increase in revenue
resulting from higher commodity prices was partially offset by a decline in
production volumes for the nine months ended September 30, 2005 as compared to
the same period of 2004. Decreased production volumes had a negative impact on
revenue of approximately $702,000.
Average sales prices net of hedging cost for the nine months ended
September 30, 2005 were:
o $51.95 per Bbl of crude oil, and
o $6.75 per Mcf of natural gas
Average sales prices net of hedging cost for the nine months ended
September 30, 2004 were:
o $37.91 per Bbl of crude oil,
o $24.71 per Bbl of natural gas liquids, and
o $5.24 per Mcf of natural gas
Crude oil production volumes decreased to 145.2 MBbls during the nine
months ended September 30, 2005 from 165.6 MBbls for the same period of 2004.
The decrease in crude oil production was primarily due to natural field
declines. Natural gas production volumes increased slightly to 3,427 MMcf for
the nine months ended September 30, 2005 from 3,382 MMcf for the same period of
2004. New production during the nine months ended September 30, 2005 contributed
485 MMcf which was offset by natural field declines.
Lease Operating Expenses. LOE for the nine months ended September 30,
2005 increased to $7.8 million from $6.7 million for the same period of 2004.
The increase was primarily due to increased production taxes related to higher
commodity prices, increased natural gas production and generally increasing
industry cost of services. Our LOE on a per Mcfe basis for the nine months ended
September 30, 2005 increased to $1.82 compared to $1.52 for the same period of
2004. The increase in the per Mcfe rate was primarily due to increased
production taxes related to higher commodity prices.
G&A Expenses. G&A expenses decreased to $3.0 million for the first nine
months of 2005 from $3.8 million for the first nine months of 2004. The decrease
was primarily due to lower performance bonuses paid during the third quarter of
2005 as compared to the same period in 2004. G&A expense on a per Mcfe basis was
$0.70 for the first nine months of 2005 compared to $0.85 for the same period of
2004 due to higher production volumes in 2005.
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 expenses 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 which resulted in variable accounting. We recognized an expense of
$7.3 million during the nine months ended September 30, 2005 and $1.1 million
during the same period of 2004 related to these repricings. The increase in
stock-based compensation expense was the result of the increase in the price of
our common stock from December 31, 2004 to September 30, 2005.
DD&A Expenses. DD&A expense increased to $5.6 million for the nine
months ended September 30, 2005 from $5.4 million for the same period of 2004.
The increase was primarily due to increased capital expenditures during the nine
months ended September 30, 2005 as compared to the same period of 2004. Our DD&A
on a per Mcfe basis for the nine months ended September 30, 2005 was $1.31 per
Mcfe as compared to $1.22 in 2004.
18
Interest Expense. Interest expense decreased to $10.2 million for the
first nine months of 2005 compared to $13.4 million (of which approximately $4.2
million was cash interest expense) for the same periods of 2004. The decrease in
interest expense (and increase in cash interest expense) was due to the
refinancing of our long-term debt in October 2004. Our long-term debt was $129.8
million at September 30, 2005 compared to $190.5 million at September 30, 2004.
Income taxes. There is no current or deferred income tax expense or
benefit due to losses or loss carryforwards and valuation allowance which has
been recorded against such benefits.
Liquidity and Capital Resources
General. The natural gas and crude oil industry is a highly capital
intensive and cyclical business. Our capital requirements are driven principally
by our obligations to service debt and to fund the following costs:
o the development of existing properties, including drilling and
completion costs of wells;
o acquisition of interests in natural gas and crude oil properties;
and
o production and transportation facilities.
The amount of capital expenditures we are able to make has a direct impact on
our ability to increase cash flow from operations, and, thereby, will directly
affect our ability to service our debt obligations and to continue to grow the
business through the development of existing properties and the acquisition of
new properties.
Our sources of capital going forward will primarily be cash from
operating activities, funding under our revolving credit facility, cash on hand,
and if an appropriate opportunity presents itself, proceeds from the sale of
properties. However, under the terms of the notes, proceeds of optional sales of
our assets that are not timely reinvested in new natural gas and crude oil
assets will be required to be used to reduce indebtedness and proceeds of
mandatory sales must be used to repay or redeem indebtedness.
Working Capital (Deficit). At September 30, 2005, we had current assets
of $12.6 million and current liabilities of $16.7 million resulting in a working
capital deficit of approximately $4.1 million. This compares to a working
capital deficit of $3.9 million at December 31, 2004 related to continuing
operations. Current liabilities at September 30, 2005 consisted of trade
payables of $6.8 million, revenues due third parties of $3.6 million, accrued
interest of $4.7 million and other accrued liabilities of $1.6 million.
Capital expenditures. The table below sets forth the components of our
capital expenditures on a historical basis for the nine months ended September
30, 2005 and 2004.
Nine Months Ended
September 30,
------------------------------------------
2005 2004
--------------- ----------------
Expenditure category (in thousands):
Development................................................. $ 28,350 $ 4,720
Facilities and other........................................ 254 69
--------------- ----------------
Total................................................... $ 28,604 $ 4,789
=============== ================
During the nine months ended September 30, 2005 and 2004, capital
expenditures were primarily for the development of existing properties. During
2004, our capital expenditures were subject to limitations imposed under our
previously existing credit facility and 11 1/2% secured notes due 2007. These
limitations were removed in connection with the refinancing that was completed
in October 2004. We increased our previously stated capital expenditure budget
of $22.0 million for 2005, as a result of the increased liquidity provided by
our recently completed private placement of common stock, to $32.0 million in
early September. During the first nine months of 2005, we undertook nine
projects expending approximately $28.4 million. Our capital expenditures could
include expenditures for acquisition of producing properties if such
opportunities arise, but we currently have no agreements, arrangements or
undertakings regarding any material acquisitions. We have no material long-term
19
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 natural gas and crude oil
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 natural gas and crude oil
production volumes decreases caused by natural field declines and sales of
producing properties, if any.
Sources of Capital. The net funds provided by and/or used in each of
the operating, investing and financing activities relating to continuing
operations are summarized in the following table:
Nine Months Ended
September 30,
---------------------------------------
2005 2004
------------------ ---------------
Net cash provided by operating activities $ 14,769 $ 8,971
Net cash used in investing activities (28,604) (4,789)
Net cash provided by financing activities 15,134 (1,288)
------------------ ---------------
Total $ 1,299 $ 2,894
================== ===============
Operating activities during the nine months ended September 30, 2005
provided $14.8 million in cash compared to providing $9.0 million in the same
period in 2004. Net income plus non-cash expense items and net changes in
operating assets and liabilities accounted for most of these funds. Financing
activities provided approximately $15.1 million for the first nine months of
2005 compared to using $1.3 million for the same period of 2004. Proceeds from
long-term borrowings provided $17.7 million in 2005 while payments on long-term
borrowings used $14.3 million in 2005. Proceeds from an equity offering in July
2005 provided $11.3 million for the nine months ended September 30, 2005.
Investing activities used $28.6 million for the nine months ended September 30,
2005 compared to using $4.8 million for the same period of 2004. Expenditures
during the nine months ended September 30, 2005 and 2004 were primarily for the
development of existing properties and the acquisition of mineral rights, all
executive rights and certain surface rights and a three year lease in the Oates
Southwest Field area of West Texas for approximately $2.9 million in July 2005.
Future Capital Resources. We currently have four principal sources of
liquidity going forward: (i) cash from operating activities, (ii) funding under
our revolving credit facility, (iii) cash on hand, and (iv) if an appropriate
opportunity presents itself, the sale of producing properties. While we are no
longer subject to limitations on capital expenditures under our 11 1/2% secured
notes due 2007, covenants under the indenture for the notes and the revolving
credit facility restrict our use of cash from operating activities, cash on hand
and any proceeds from asset sales. Under the terms of the notes, proceeds of
optional sales of our assets that are not timely reinvested in new natural gas
and crude oil assets will be required to be used to reduce indebtedness and
proceeds of mandatory sales must be used to redeem indebtedness. The terms of
the notes and the revolving credit facility also substantially restrict our
ability to:
o incur additional indebtedness;
o grant liens;
o pay dividends or make certain other restricted payments;
o merge or consolidate with any other person; or
o sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
Our cash flow from operations depends heavily on the prevailing prices
of natural gas and crude oil and our production volumes of natural gas and crude
oil. Although we have hedged a portion of our natural gas and crude oil
production and will continue this practice as required pursuant to the revolving
credit facility, future natural gas and crude oil price declines would have a
material adverse effect on our overall results, and therefore, our liquidity.
Low natural gas and crude oil prices could also negatively affect our ability to
raise capital on terms favorable to us or at all.
20
Our cash flow from operations will also depend upon the volume of
natural gas and crude oil that we produce. Unless we otherwise expand reserves,
our production volumes may decline as reserves are produced. Due to sales of
properties in 2002 and 2003 and the divestiture of Grey Wolf during the first
quarter of 2005, and restrictions on capital expenditures under the terms of our
11 1/2% secured notes due 2007 (which were refinanced in October 2004), we now
have significantly reduced reserves and production as compared with pre-2003
levels. In the future, if an appropriate opportunity presents itself, we may
sell additional properties, which could further reduce our production volumes.
To offset the loss in production volumes resulting from natural field declines
and sales of producing properties, we must conduct successful, exploitation,
exploration and development activities, acquire additional producing properties
or identify additional behind-pipe zones or secondary recovery reserves. While
we have had some success in pursuing these activities since January 1, 2003, we
have not been able to fully replace the production volumes lost from natural
field declines and property sales. We believe our numerous drilling
opportunities will allow us to increase our production volumes; however, our
drilling activities are subject to numerous risks, including the risk that no
commercially productive natural gas or crude oil reservoirs will be found. The
risk of not finding commercially productive reservoirs will be compounded by the
fact that 49% of our total estimated proved reserves at December 31, 2004 were
undeveloped. During the first nine months of 2005, we expended approximately
$28.4 million for nine wells in South Texas, West Texas and Wyoming. We are
currently completing and/or testing one vertical wells in West Texas and
re-entering a vertical well in West Texas. Three horizontal wells in South Texas
and one horizontal well in West Texas (started in 2004) have been brought on
line which have thus far resulted in 485 MMcf of new natural gas production for
the nine-month period. In the latter part of the third quarter we drilled and
are currently completing four vertical wells in Wyoming. If the volume of
natural gas and crude oil we produce decreases, our cash flow from operations
may decrease.
Our total indebtedness and cash interest expense as a result of issuing
the notes and entering into the revolving credit facility require us to increase
our production and cash flow from operations in order to meet our debt service
requirements, as well as to fund the development of our numerous drilling
opportunities. The ability to satisfy these new obligations will depend upon our
drilling success as well as prevailing commodity prices.
Contractual Obligations. We are committed to making cash payments in
the future on the following types of agreements:
o Long-term debt
o Interest on 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
September 30, 2005:
Payments due in:
- ---------------------------------- ----------------------------------------------------------------------
Contractual Obligations Total Less than More than
(dollars in thousands) one year 1-3 years 3-5 years 5 years
- ---------------------------------- --------------- ------------- ------------ -------------- ------------
Long-Term Debt (1) $ 129,842 $ - $ - $ 129,842 $ -
Interest on long-term debt (2) 58,606 14,163 28,326 16,117 -
Operating Leases (3) 823 264 537 22 -
--------------- ------------- ------------ -------------- ------------
Total $ 189,320 $ 14,414 $ 28,863 $ 146,043 $ -
=============== ============= ============ ============== ============
(1) These amounts represent the balances outstanding under the
revolving credit facility and the new notes. These repayments
assume that we will not draw down additional funds.
(2) Interest expense assumes the balances of long-term debt at the end
of the period and current effective interest rates.
(3) Office lease obligations. The lease for office space expires in
January 2009.
Other obligations. We make and will continue to make substantial
capital expenditures for the acquisition, exploitation, development, exploration
and production of natural gas and crude oil. In the past, we have funded our
21
operations and capital expenditures primarily through cash flow from operations,
sales of properties, sales of production payments and borrowings under our bank
credit facilities and other sources. Given our high degree of operating control,
the timing and incurrence of operating and capital expenditures is largely
within our discretion.
Long-Term Indebtedness
September 30, December 31,
-----------------------------------
2005 2004
---------------- -----------------
(In thousands)
Floating rate senior secured notes due 2009......... $ 125,000 $ 125,000
Senior secured revolving credit facility............ 4,842 1,425
---------------- -----------------
129,842 126,425
Less current maturities ............................ - -
---------------- -----------------
$ 129,842 $ 126,425
================ =================
Floating Rate Senior Secured Notes due 2009. In connection with our
October 2004 refinancing, Abraxas issued $125 million in principal aggregate
amount of Floating Rate Senior Secured Notes due 2009. The notes will mature on
December 1, 2009 and began accruing interest from the date of issuance, October
28, 2004 at a per annum floating rate of six-month LIBOR plus 7.50%. The initial
interest rate on the notes was 9.72% per annum. The interest will be reset
semi-annually on each June 1 and December 1, commencing on June 1, 2005. The
current interest rate, effective June 1, 2005, is 11.03% per annum. Interest is
payable semi-annually in arrears on June 1 and December 1 of each year,
commencing on June 1, 2005.
The notes rank equally among themselves and with all of our
unsubordinated and unsecured indebtedness, including our credit facility and
senior in right of payment to our existing and future subordinated indebtedness.
Each of our subsidiaries, Eastside Coal Company, Inc., Sandia Oil & Gas
Corporation, Sandia Operating Corp., Wamsutter Holdings, Inc. and Western
Associated Energy Corporation (collectively, the "Subsidiary Guarantors"), has
unconditionally guaranteed, jointly and severally, the payment of the principal,
premium and interest on the notes on a senior secured basis. In addition, any
other subsidiary or affiliate of ours, that in the future guarantees any other
indebtedness with us, or our restricted subsidiaries, will also be required to
guarantee the notes.
The notes and the Subsidiary Guarantors' guarantees thereof, together
with our credit facility and the Subsidiary Guarantors' guarantees thereof, are
secured by shared first priority perfected security interests, subject to
certain permitted encumbrances, in all of our and each of our restricted
subsidiaries' material property and assets, including substantially all of our
and their natural gas and crude oil properties and all of the capital stock (or
in the case of an unrestricted subsidiary that is a controlled foreign
corporation, up to 65% of the outstanding capital stock) of any entity, owned by
us and our restricted subsidiaries (collectively, the "Collateral").
The Notes may be redeemed, at the election of the Company, as a whole
or from time to time in part, at any time after April 28, 2007, upon not less
than 30 nor more that 60 days' notice to each holder of notes to be redeemed,
subject to the conditions and at the redemption prices (expressed as percentages
of principal amount) set forth below, together with accrued and unpaid interest
and Liquidating Damages, if any, to the applicable redemption date.
Year Percentage
------------------------------------------ -------------------------
From April 29, 2007 to April 28, 2008 104.00%
From April 29, 2008 to April 28, 2009 102.00%
After April 28, 2009 100.00%
Prior to April 28, 2007, we may redeem up to 35% of the aggregate
original principal amount of the notes using the net proceeds of one or more
equity offerings, in each case at the redemption price equal to the product of
22
(i) the principal amount of the notes being so redeemed and (ii) a redemption
price factor of 1.00 plus the per annum interest rate on the notes (expressed as
a decimal) on the applicable redemption date plus accrued and unpaid interest to
the applicable redemption date, provided certain conditions are also met.
If we experience specific kinds of change of control events, each
holder of notes may require us to repurchase all or any portion of such holder's
notes at a purchase price equal to 101% of the principal amount of the notes,
plus accrued and unpaid interest to the date of repurchase.
The indenture governing the notes contains covenants that, among other
things, limit our ability to:
o incur or guarantee additional indebtedness and issue certain types
of preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make
other restricted payments, including repurchasing, redeeming or
retiring capital stock or subordinated debt or making certain
investments or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o permit restrictions on the ability of our subsidiaries to distribute
or lend money to us;
o cause a restricted subsidiary to issue or sell its capital stock;
and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of our and our restricted subsidiaries.
The indenture also contains customary events of default, including
nonpayment of principal or interest, violations of covenants, cross default and
cross acceleration to certain other indebtedness, including our credit facility,
bankruptcy, and material judgments and liabilities.
Senior Secured Revolving Credit Facility. On October 28, 2004, we
entered into an agreement for a new revolving credit facility having a maximum
commitment of $15 million, which includes a $2.5 million subfacility for letters
of credit. Availability under the revolving credit facility is subject to a
borrowing base consistent with normal and customary natural gas and crude oil
lending transactions.
Outstanding amounts under the revolving credit facility bear interest
at the prime rate announced by Wells Fargo Bank, National Association plus
1.00%. Subject to earlier termination rights and events of default, the stated
maturity date under the revolving credit facility is October 28, 2008.
We are permitted to terminate the revolving credit facility, and under
certain circumstances, may be required, from time to time, to permanently reduce
the lenders' aggregate commitment under the revolving credit facility. Such
termination and each such reduction is subject to a premium equal to the
percentage listed below multiplied by the lenders' aggregate commitment under
the revolving credit facility, or, in the case of partial reduction, the amount
of such reduction.
Year % Premium
-------------- --------------------
1 1.5
2 1.0
3 0.5
4 0.0
23
Each of our current subsidiaries has guaranteed, and each of our future
restricted subsidiaries will guarantee, our obligations under the revolving
credit facility on a senior secured basis. In addition, any other subsidiary or
affiliate of ours, that in the future guarantees any of our other indebtedness
or of our restricted subsidiaries will be required to guarantee our obligations
under the revolving credit facility. Obligations under the revolving credit
facility are secured, together with the notes, by a shared first priority
perfected security interest, subject to certain permitted encumbrances, in all
of our and each of our restricted subsidiaries' material property and assets,
including substantially all of our and their natural gas and crude oil
properties and all of the capital stock (or in the case of an unrestricted
subsidiary that is a controlled foreign corporation, up to 65% of the
outstanding capital stock) in any entity, owned by us and our restricted
subsidiaries.
Under the revolving credit facility, we are subject to customary
covenants, including certain financial covenants and reporting requirements. The
revolving credit facility requires us to maintain a minimum net cash interest
coverage and also requires us to enter into hedging agreements on not less than
25% or more than 75% of our projected natural gas and crude oil production for a
rolling six month period.
In addition to the foregoing and other customary covenants, the
revolving credit facility contains a number of covenants that, among other
things, restrict Abraxas' ability to:
o incur or guarantee additional indebtedness and issue certain types
of preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make
other restricted payments, including repurchasing, redeeming or
retiring capital stock or subordinated debt or making certain
investments or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o make any change in the principal nature of our business;
o prepay, redeem, purchase or otherwise acquire any of our or our
restricted subsidiaries' indebtedness;
o permit a change of control;
o directly or indirectly make or acquire any investment;
o cause a restricted subsidiary to issue or sell our capital stock;
and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of Abraxas and our restricted subsidiaries.
The revolving credit facility also contains customary events of
default, including nonpayment of principal or interest, violations of covenants,
cross default and cross acceleration to certain other indebtedness, bankruptcy
and material judgments and liabilities, and is subject to an Intercreditor,
Security and Collateral Agency Agreement, which specifies the rights of the
parties thereto to the proceeds from the Collateral.
Intercreditor Agreement. The holders of the notes, together with the
lenders under our credit facility, are subject to an Intercreditor, Security and
Collateral Agency Agreement, which specifies the rights of the parties thereto
to the proceeds from the Collateral. The Intercreditor Agreement, among other
things, (i) creates security interests in the Collateral in favor of a
collateral agent for the benefit of the holders of the notes and the credit
facility lenders and (ii) governs the priority of payments among such parties
upon notice of an event of default under the Indenture or the credit facility.
So long as no such event of default exists, the collateral agent will
not collect payments under the credit facility documents or the indenture
governing the notes and other note documents (collectively, the "Secured
24
Documents"), and all payments will be made directly to the respective creditor
under the applicable Secured Document. Upon notice of an event of default and
for so long as an event of default exists, payments to each credit facility
lender and holder of the notes from us and our current subsidiaries and proceeds
from any disposition of any collateral, will, subject to limited exceptions, be
collected by the collateral agent for deposit into a collateral account and then
distributed as provided in the following paragraph.
Upon notice of any such event of default and so long as an event of
default exists, funds in the collateral account will be distributed by the
collateral agent generally in the following order of priority:
first, to reimburse the collateral agent for expenses incurred in
protecting and realizing upon the value of the Collateral;
second, to reimburse the credit facility administrative agent and
the trustee, on a pro rata basis, for expenses incurred in protecting
and realizing upon the value of the Collateral while any of these
parties was acting on behalf of the Control Party (as defined below);
third, to reimburse the credit facility administrative agent and the
trustee, on a pro rata basis, for expenses incurred in protecting and
realizing upon the value of the Collateral while any of these parties
was not acting on behalf of the Control Party;
fourth, to pay all accrued and unpaid interest (and then any unpaid
commitment fees) under the credit facility;
fifth, if, the collateral coverage value of three times the
outstanding obligations under the credit facility would be met after
giving effect to any payment under this clause "fifth," to pay all
accrued and unpaid interest on the notes;
sixth, to pay all outstanding principal of (and then any other
unpaid amounts, including, without limitation, any fees, expenses,
premiums and reimbursement obligations) the credit facility;
seventh, to pay all accrued and unpaid interest on the notes (if not
paid under clause "fifth");
eighth, to pay all outstanding principal of (and then any other
unpaid amounts, including, without limitation, any premium with respect
to) the notes; and
ninth, to pay each credit facility lender, holder of the notes, and
other secured party, on a pro rata basis, all other amounts outstanding
under the credit facility and the notes.
To the extent there exists any excess monies or property in the
collateral account after all of our and our subsidiaries' obligations under the
credit facility, the indenture and the notes are paid in full, the collateral
agent will be required to return such excess to us.
The collateral agent will act in accordance with the Intercreditor
Agreement and as directed by the "Control Party" which for purposes of the
Intercreditor is the holders of the notes and the credit facility lenders,
acting as a single class, by vote of the holders of a majority of the aggregate
principal amount of outstanding obligations under the notes and the credit
facility.
The Intercreditor Agreement provides that the lien on the assets
constituting part of the Collateral that is sold or otherwise disposed of in
accordance with the terms of each Secured Document may be released if (i) no
default or event of default exists under any of the Secured Documents, (ii) we
have delivered an officers' certificate to each of the collateral agent, the
trustee, the credit facility administrative agent certifying that the proposed
sale or other disposition of assets is either permitted or required by, and is
in accordance with the provisions of, the applicable Secured Documents and (iii)
the collateral agent has acknowledged such certificate.
25
The Intercreditor Agreement provides for the termination of security
interests on the date that all obligations under the Secured Documents are paid
in full.
Hedging Activities.
Our results of operations are significantly affected by fluctuations in
commodity prices and we seek to reduce our exposure to price volatility by
hedging our production through commodity derivative instruments. Under the
revolving credit facility, we are required to maintain hedge positions on not
less than 25% nor more than 75% of our projected oil and gas production for a
rolling six month period.
Net Operating Loss Carryforwards.
At December 31, 2004, we had $184.9 million of net operating loss
carryforwards for U.S. tax purposes. These loss carryforwards will expire
through 2022 if not utilized.
Uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, we have established a valuation allowance of $73.0 million for
deferred tax assets at December 31, 2004 and September 30, 2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Commodity Price Risk
As an independent natural gas and crude oil 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 natural gas, natural gas liquids and crude oil. 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 natural gas and crude oil 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 natural gas and crude oil
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 nine months ended September 30, 2005, a 10% decline in
natural gas, natural gas liquids and crude oil prices would have reduced our
operating revenue, cash flow and net income by approximately $3.1 million for
the period.
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 September 30, 2005 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 revolving credit facility, we are required to
maintain hedging positions on not less than 25% nor more than 75% of our natural
gas and crude oil production for a rolling six month period.
See "General - Commodity Prices and Hedging Activities" for a summary
of our current hedge positions.
26
Interest Rate Risk
At September 30, 2005, as a result of the refinancing that occurred in
October 2004, we had $125.0 million in outstanding indebtedness under the
floating rate senior secured notes due 2009. The notes bear interest at a per
annum rate of six-month LIBOR plus 7.5%. The rate is redetermined on June 1 and
December 1 of each year, beginning June 1, 2005. The current rate on the notes
is 11.03%. For every percentage point that the LIBOR rate rises, our interest
expense would increase by approximately $1.3 million on an annual basis. At
September 30, 2005 we had $4.8 million of outstanding indebtedness under our
revolving credit facility. Interest on this facility accrues at the prime rate
announced by Wells Fargo Bank plus 1.00%. For every percentage point increase in
the announced prime rate, our interest expense would increase by approximately
$48,000 on an annual basis.
Item 4. Controls and Procedures.
- --------------------------------
As of the end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of Abraxas' "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e)and 15d-15(e)) and concluded
that the disclosure controls and procedures were effective and designed to
ensure that material information relating to Abraxas and our consolidated
subsidiaries which is required to be included in our periodic Securities and
Exchange Commission filings would be made known to them by others within those
entities. There were no changes in our internal controls that could materially
affect, or are reasonably likely to materially affect, our financial reporting
during the third quarter of 2005.
27
ABRAXAS PETROLEUM CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
- ----------------------------
There have been no changes in legal proceedings from that described in
the Company's Annual Report of Form 10-K for the year ended December 31, 2004,
and in Note 7 in the Notes to Condensed Consolidated Financial Statements
contained in Part I of this report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
- ----------------------------------------------------------------------
On July 20, 2005, we entered into a Common Stock Purchase Agreement
with certain accredited investors, pursuant to which we issued 4.0 million
shares of our common stock, par value $.01 per share, to the accredited
investors at a price of $3.00 per share, or an aggregate of $12.0 million in
cash before transaction expenses. The sale of common stock was not registered
under the Securities Act of 1933, as amended, or any applicable state securities
laws in reliance on the exemption provided by ss. 4(2) of the Securities Act and
Rule 506 of the regulations promulgated thereunder. There was no general
solicitation involved in the offer and the common stock was sold exclusively to
accredited investors as defined under Regulation D. We paid a 5% cash commission
out of such proceeds to Energy Capital Solutions LLC which acted as our
financial advisor. Net proceeds of approximately $11.3 million from the private
placement were used to re-pay indebtedness under our revolving credit facility,
for development in Texas and Wyoming, and for working capital and general
corporate purposes. We subsequently filed a registration statement on Form S-3
to enable the investors to resell the common stock which was declared effective
on September 29, 2005.
Item 3. Defaults Upon Senior Securities.
- ------------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
- --------------------------------------------------------------
None
Item 5. Other Information.
- ----------------------------
None
Item 6. Exhibits.
- -------------------
(a) Exhibits
Exhibit 31.1 Certification - Robert L.G. Watson, CEO
Exhibit 31.2 Certification - Chris E. Williford, CFO
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 - Robert
L.G. Watson, CEO
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 - Chris
E. Williford, CFO
28
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: November 7, 2005 By:/s/ Robert L.G. Watson
--------------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: November 7, 2005 By:/s/ Chris E. Williford
--------------------------
CHRIS E. WILLIFORD,
Executive Vice President and
Principal Accounting Officer