ATTORNEYS & COUNSELORS
112 East Pecan Street, Suite 2100 Steven R. Jacobs
San Antonio, TX 78205 (210) 978-7727 (Direct Dial)
(210) 978-7700, Fax (210) 978-7790 (210) 242-4560 (Direct Fax)
www.jw.com sjacoba@jw.com
Jackson Walker L.L.P.
April 11, 2006
United States Securities and Exchange Commission
100 F. Street, NE
Washington, DC 20549-7010
Attention: Jill S. Davis
Jennifer Goeken
Re: Abraxas Petroleum Corporation
Item 4.02 Form 8-K; Filed March 22, 2006; File No. 0-19118
Dear Ms. Davis and Ms. Goeken:
We are writing on behalf of our client, Abraxas Petroleum Corporation, in
response to the Staff's comment letter dated March 23, 2006. We appreciate the
Staff's timely review of Abraxas' Form 8-K Report filed March 22, 2006 and early
expression of its concerns in respect of such filing. For purposes of
convenience, we have repeated the Staff's comments and set forth Abraxas'
responses below the comment to which they relate:
Staff Comment #1. We note your statement that the "error related to the
other comprehensive income account of Grey Wolf related to foreign currency
transaction at the time of the disposition in February 2005." Please expand your
disclosure to more clearly explain the nature and cause of the error and confirm
that you will provide like disclosure in the filings that you have indicated you
will amend.
Abraxas Response: During the first quarter of 2005, the Company
disposed of its wholly-owned Canadian subsidiary, Grey Wolf Exploration
Inc. ("GW"), through a public offering in Canada of GW shares. Prior to the
sale, the retained earnings and other comprehensive income ("OCI") equity
accounts of GW were included in Abraxas consolidated stockholders' equity
under "Accumulated Deficit."
As originally reported in Abraxas' Form 10-Q for the quarter ended
March 31, 2005, OCI was credited directly to retained earnings and was not
included in income from discontinued operations as a component of the gain.
As a result, Abraxas' income from discontinued operations for the quarter
was reported as $10.7 million and its consolidated net income as $9.2
million. In addition, at March 31, 2005, stockholders' equity (deficit) was
($43.4 million). As a result of the restatement referenced in the subject
Form 8-K Report, income from discontinued operations for the quarter ended
March 31, 2005 increased to $12.9 million and net income increased to $11.4
million. Stockholders' equity was unchanged.
United States Securities
and Exchange Commission
April 11, 2006
Page 2
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The error was due to a mistake resulting from the complex nature of
accounting for the sale of a foreign subsidiary and recognition of
accumulated OCI on both Abraxas' and GW's books. Abraxas did not make any
disclosure regarding this error because it was corrected immediately in
connection with the preparation of Abraxas' audited financial statements
for the year ended December 31, 2005 and all adjustments were recorded.
Abraxas will amend Item 4.02 of the above-referenced Form 8-K Report to
disclose the nature of the error as described in this response. Abraxas
believes that no further disclosure is necessary in the amendments it filed
on March 30, 2006 to its Form 10-Q Reports for the quarters ended March 31,
June 30 and September 30, 2005.
Staff Comment #2. Please explain what you mean by your statement under Item
2.02 that "The change in accounting treatment resulted in an increase of $2.2
million in income from discontinued operations."
Abraxas Response: As described in Note 10 of Notes to Consolidated
Financial Statements for the year ended December 31, 2005 in the Company's
annual report on Form 10-K filed on March 22, 2006, the change in
accounting treatment was a correction of an error related to the
calculation of the gain on the sale of GW. This correction resulted in an
increase of $2.2 million in income from discontinued operations, but no
change in stockholders' equity, as explained in Response #1 above.
Staff Comment #3. Please tell us how and when you plan to file restated
quarterly financial statements.
Abraxas Response: On March 30, 2006, Abraxas filed amended Form 10-Q
Reports for the quarters ended March 31, June 30 and September 30, 2005
containing restated quarterly financial statements for the subject periods.
Staff Comment #4. Please tell us if your certifying officers have
reconsidered the effect on the adequacy of your disclosure controls and
procedures as of the end of the periods covered by your Forms 10-Q for the
quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 in light of
the error you have disclosed. Additionally, tell us what effect the error had on
your current evaluation of disclosure controls and procedures as of your fiscal
year ended December 31, 2005.
Abraxas Response: Disclosure controls are defined in Rules 13a-15 and
15d-15 promulgated under the Securities Exchange Act of 1934 as controls
and other procedures that are designed to ensure that the information
required to be disclosed in periodic filings is recorded, processed,
summarized and reported within the time periods specified in the
United States Securities
and Exchange Commission
April 11, 2006
Page 3
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Commissions' forms and rules. These rules also state that disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed is
accumulated and communicated to management, including the principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.
Abraxas' certifying officers have reconsidered the effect on the
adequacy of its disclosure controls and procedures for the periods
indicated and continue to believe that such controls and procedures were
adequate. As stated in response #1, the error was the result of crediting
OCI directly to retained earnings and not as the result of an inability to
record, process, summarize and report information. In Release No. 33-8238
dated June 5, 2003, the Staff stated that disclosure controls and
procedures include those components of internal control over financial
reporting that provide reasonable assurances that transactions are recorded
as necessary to permit preparation of financial statements in accordance
with GAAP. The Staff also stated in that Release that internal controls
include those policies and procedures which provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP. It is important to note that
Abraxas' auditors, BDO Seidman, have not reported any material control
weaknesses to Abraxas and delivered their Attestation Report on Internal
Control Over Financial Reporting (the "404 Report") stating that
management's assessment that Abraxas maintained an effective internal
control over financial reporting as of December 31, 2005 is fairly stated.
Given that the sale of GW was recorded as necessary to permit the
preparation of financial statements (albeit with an error), that Abraxas'
independent auditors issued a 404 Report without material weakness and that
this particular item was an "internal controls" item which controls are, in
turn, a subset of "disclosure controls," the CEO and CFO have determined
that, notwithstanding this error, as of the end of each of the quarters
ended March 31, 2005, June 30, 2005 and September 30, 2005 and as of the
end of fiscal 2005, that Abraxas' disclosure controls were adequate.
Abraxas has acknowledged to us, and has authorized us to communicate to
the Staff, Abraxas' acknowledgement, that:
o the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
United States Securities
and Exchange Commission
April 11, 2006
Page 4
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o the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Please feel free to contact the undersigned at (210) 978-7727 or Chris
Williford, Abraxas' CFO, at (210) 757-9860, should you have any questions or
wish to request additional information regarding this matter.
Very truly yours,
Steven R. Jacobs
SRJ:mdw
cc: Chris E. Williford