UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19118
ABRAXAS PETROLEUM CORPORATION
----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 74-2584033
---------------------------------- --------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification Number)
500 N. Loop 1604, East, Suite 100, San Antonio, Texas 78232
---------------------------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (210) 490-4788
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the restraint
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X or No __
The number of shares of the issuer's common stock outstanding as of May
8, 1998, was:
Class Shares Outstanding
Common Stock, $.01 Par Value 6,356,618
1 of 19
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 1998
and December 31,1997.....................................3
Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and 1997...............5
Consolidated Statement of Stockholders Equity
March 31, 1998 and December 31, 1997.....................6
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1887...............7
Notes to Consolidated Financial Statements.....................10
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings..................................................18
ITEM 2 - Changes in Securities..............................................18
ITEM 3 - Defaults Upon Senior Securities....................................18
ITEM 4 - Submission of Matters to a Vote of Security Holders................18
ITEM 5 - Other Information..................................................18
ITEM 6 - Exhibits and Reports on Form 8-K...................................18
Signatures ........................................................19
2
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31 December 31
1998 1997
(Unaudited)
--------------------------
(In Thousands)
Assets
Current assets:
Cash ........................................... $ 19,177 $ 2,836
Accounts receivable, less allowances
for doubtful accounts:
Joint owners ............................... 1,361 2,149
Oil and gas production ..................... 8,314 11,194
Affiliates ................................. -- 42
Other ...................................... 2,601 1,217
-------- --------
12,276 14,602
Equipment inventory ............................ 411 367
Other current assets ........................... 482 508
-------- --------
Total current assets ............................. 32,346 18,313
Property and equipment ........................... 404,613 385,442
Less accumulated depreciation,
depletion and amortization: ................. 82,895 74,597
-------- --------
Net property and equipment
based on the full cost method of
accounting for oil and gas
properties, of which $12,584
and $11,519 at March 31, 1998
and December 31, 1997,
respectively, were excluded
from amortization ......................... 321,718 310,845
Deferred financing fees, net of
accumulated amortization of $1,867
and $1,540 at March 31, 1998 and
December 31, 1997, respectively ............... 9,142 8,072
Restricted cash .................................. 40 40
Other assets ..................................... 1,261 1,258
-------- --------
Total assets ................................... $364,507 $338,528
======== ========
See accompanying notes to consolidated financial statements
3
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets (continued)
March 31 December 31
1998 1997
(Unaudited)
--------------------------
(In Thousands)
Liabilities and Shareholder's Equity
Current liabilities
Accounts payable ................................... $ 10,581 $ 17,120
Oil and gas production payable ..................... 3,129 2,819
Accrued interest ................................... 11,635 4,622
Income tax payable ................................. 241 164
Other accrued expenses ............................. 1,061 2,732
--------- ---------
Total current liabilities ............................ 26,647 27,457
Long-term debt:
Senior notes ..................................... 275,000 215,000
Credit facility .................................. 100 31,500
Other ............................................ 2,363 2,117
--------- ---------
277,463 248,617
Premium on Senior Notes .............................. 3,471 --
Deferred income taxes ................................ 26,538 27,751
Minority interest in foreign ......................... 4,753 4,813
subsidiary
Future site restoration .............................. 3,090 3,077
Shareholders' equity:
Common Stock, par value $.01 per share-
authorized 50,000,000 shares; issued,
6,430,378 and 6,422,540 shares at
March 31, 1998 and December 31, 1997,
respectively ..................................... 63 63
Additional paid-in capital ......................... 51,206 51,118
Accumulated deficit ................................ (23,757) (19,185)
Treasury stock, at cost, 92,023 and
53,023 shares at March 31, 1998 and
December 31, 1997, respectively .................. (680) (281)
Accumulated other comprehensive income (loss)......... (4,287) (4,902)
--------- ---------
Total shareholders' equity ........................... 22,545 26,813
--------- ---------
Total liabilities and shareholders' equity $ 364,507 $ 338,528
========= =========
See accompanying notes to consolidated financial statements
4
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31
----------------------
1998 1997
-------- --------
(In thousands except
per share data)
Revenue:
Oil & gas production sales ...................... $ 14,655 $ 17,910
Processing revenue .............................. 735 996
Rig revenues .................................... 116 53
Others .......................................... 1,233 257
-------- --------
16,739 19,216
Operating costs and expenses:
Lease operating and production taxes ............ 4,364 3,349
Gas processing costs ............................ 275 412
Depreciation, depletion and
amortization .................................... 8,252 6,674
General and administrative ...................... 1,303 938
Rig Operations .................................. 122 52
-------- --------
14,316 11,425
-------- --------
Operating Income ................................... 2,423 7,791
Other (income) expense
Interest income ................................. (136) (96)
Interest expense ................................ 7,516 6,084
Amortization of deferred financing fees ......... 327 297
Other ........................................... -- 32
-------- --------
7,707 6,317
-------- --------
Income (loss) from operations before taxes ......... (5,284) 1,474
Income tax expense (benefit)
Current ........................................ 60 20
Deferred ....................................... (695) --
Minority interest in income (loss)
of consolidated foreign subsidiary ............. (77) --
-------- --------
Net income (loss) .................................. (4,572) 1,454
Less dividend requirement on cumulative
preferred stock ................................ -- 91
-------- --------
Net income (loss) applicable to common stock ....... $ (4,572) $ 1,363
======== ========
Earnings (loss) per share:
Net income (loss) per common share ............. $ (.72) $ .24
======== ========
Net income (loss) per common
share - assuming dilution .................... $ (.72) $ .22
======== ========
See accompanying notes to consolidated financial statements
5
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share amounts)
Accumulated
Common Stock Treasury Stock Additional Other
------------------- ----------------- Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
---------- -------- -------- --------- ---------- ------------ -------------- ---------
Balance at December 31, 1997 6,422,540 $ 63 53,023 $ 281 $ 51,118 $ (19,185) $ (4,902) $ 26,813
Comprehensive income (loss):
Net Loss - - - - - (4,572) - (4,572)
Other comprehensive income:
Foreign currency
translation adjustment - - - - - - 615 615
Comprehensive income (loss) - - - - - - - (3,957)
Issuance of common stock for
compensation 4,838 - - - 72 - - 72
Stock options exercised 3,000 - - - 16 - - 16
Purchase of Treasury Stock - 39,000 399 - - - (399)
---------- -------- -------- --------- ---------- ------------ -------------- ---------
Balance at March 31, 1998 6,430,378 $ 63 92,023 $ 680 $ 51,206 $ (23,757) $ (4,287) $ 22,545
========== ======== ======== ========= ========== ============ ============== =========
See accompanying notes to consolidated financial statements
6
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31
----------------------
1998 1997
-------- --------
(In thousands)
Operating Activities
Net income ............................................. $ (4,572) $ 1,454
Adjustments to reconcile net income (loss)
to net cash provided by (used) operating activities:
Minority interest in income of foreign subsidiary .... (77) --
Depreciation, depletion, and amortization ............ 8,252 6,674
Amortization of deferred financing fees .............. 327 297
Amortization of premium on Senior Notes .............. (145) --
Deferred income tax benefit .......................... (695) --
Issuance of common stock for compensation ............ 72 139
Changes in operating assets and liabilities:
Accounts receivable .................................. 2,246 2,305
Equipment inventory ................................. (44) (176)
Other assets ......................................... 26 (139)
Accounts payable and accrued expenses ................ (1,330) 3,774
Oil & gas production payable ......................... 310 (188)
-------- --------
Net cash provided by operating activities .............. 4,370 14,140
Investing Activities
Capital expenditures, including purchases and
development of properties .......................... (18,431) (12,284)
Proceeds from sale of oil and gas producing properties . 129 9,008
Increase in other assets ............................... (1) --
-------- --------
Net cash provided (used) in investing activities ....... $(18,303) $ (3,276)
See accompanying notes to consolidated financial statements
7
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Three Months Ended
March 31
----------------------
1998 1997
-------- --------
(In thousands)
Financing Activities
Issuance of common stock ............................. $ 16 $ --
Purchase of treasury stock ........................... (399) --
Dividends paid on preferred stock .................... -- (91)
Proceeds from long term borrowings ................... 60,230 168
Premium from issuance of Senior Notes ................ 3,616 --
Payments on long-term borrowings ..................... (31,404) --
Deferred financing fees .............................. (1,387) (119)
Decrease in deferred income tax ...................... -- (424)
-------- --------
Net cash provided (used) by financing activities ..... 30,672 (466)
-------- --------
Effect of exchange rate changes on cash .............. (398) --
-------- --------
Increase in cash ..................................... 16,341 10,398
Cash at beginning of period .......................... 2,876 8,380
-------- --------
Cash at end of period, including restricted cash ..... $ 19,217 $ 18,778
======== ========
Supplemental disclosures of cash flow information:
Interest paid ........................................ $ 503 $ 44
======== ========
See accompanying notes to consolidated financial statements
8
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1998
Note 1. Basis of Presentation
The accounting policies followed by Abraxas Petroleum Corporation and
its subsidiaries (the "Company") 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, 1997 which is incorporated herein by reference. 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
consolidated financial statements have not been audited by independent
accountants, but in the opinion of management, reflect all adjustments necessary
for a fair presentation of the financial position and results of operations. Any
and all adjustments are of a normal and recurring nature.
The consolidated financial statements include the accounts of the
Company and its wholly owned foreign subsidiary Canadian Abraxas Petroleum Ltd.
("Canadian Abraxas"), and its 46% owned foreign subsidiary Cascade Oil and Gas
Ltd. ("Cascade"). Minority interest represents the minority shareholders'
proportionate share of the equity and income of Cascade.
Canadian Abraxas and Cascade assets and liabilities are translated to
U.S. dollars at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders'
equity.
9
Note 2. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31
----------------------
1998 1997
-------- --------
(In thousands except
per share data)
Numerator:
Net income (loss) ............................... $ (4,572) $ 1,454
Preferred stock dividends ....................... -- 91
----------- -----------
Numerator for basic earnings per share - income
(loss) available to common stockholders ....... (4,572) 1,363
Effect of dilutive securities:
Preferred stock dividends ..................... -- 91
----------- -----------
Numerator for diluted earnings per share-income
available to common stockholders after assumed
conversions ................................... (4,572) 1,454
Denominator:
Denominator for basic earnings per share -
weighted-average shares ....................... 6,360,087 5,739,134
Effect of dilutive securities:
Stock options and warrants .................... -- 330,639
Convertible preferred stock ................... -- 508,233
Assumed issuance under the CVR Agreement ...... -- 106,400
----------- -----------
-- 945,272
----------- -----------
Dilutive potential common shares
Denominator for diluted earnings per share
adjusted weighted-average shares and assumed
conversions ................................... 6,360,087 6,684,406
Basic earnings (loss) per share:
Income (loss) ................................. $ (.72) $ .24
=========== ===========
Diluted earnings (loss) per share:
Income (loss) ................................. $ (.72) $ .22
=========== ===========
For the three months ended March 31, 1998, none of the shares issuable
in connection with stock options or warrants are included in diluted shares.
Inclusion of these shares would be antidilutive due to losses incurred in that
period.
10
Note 3. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information of Canadian Abraxas, a
wholly owned subsidiary of the Company at March 31, 1998. Canadian Abraxas is
jointly and severally liable with the Company for the entire balance of the
Company's and Canadian Abraxas' 11.5% Senior Notes due 2004 (the "Notes")
($275,000,000), of which $84,612,000 was utilized by Canadian Abraxas in
connection with the acquisition of CGGS. The Company has not presented separate
financial statements and other disclosures concerning Canadian Abraxas because
management has determined that such information is not material to the holders
of the Notes and the Company's Common Stock.
Assets Liabilities and Shareholders Equity
- ---------------------------------------- ---------------------------------------
(In Thousands)
Total current assets $ 2,546 Total current liabilities $ 7,011
Oil and gas properties 113,542 11.5% Senior Notes due 2004 74,682
Other assets 3,660 Note payable to Abraxas
==========
$ 119,748 Petroleum Corporation 18,700
==========
Other liabilities 29,202
Shareholder's equity (9,847)
---------
$ 119,748
=========
Revenues $ 4,974
Operating costs & expenses (4,920)
Interest expense (2,355)
Income tax benefit 601
==========
Net loss $ (1,700)
==========
Note 4. Contingencies
In May 1995, certain plaintiffs filed a lawsuit against the Company
alleging negligence and gross negligence, tortious interference with contract,
conversion and waste. In March 1998, a jury found against the Company in the
amount of $1,332,000 plus attorney's fees and pre-judgment interest. As of May
13, 1998, no judgment had been entered. The Company has filed various
post-judgment motions including a motion for judgment notwithstanding the
verdict and a motion for new trial. If necessary, the Company will also file an
appeal. Management believes, based on the advice of legal counsel, that the
plaintiffs' claims are without merit and that damages should not be recoverable
under this action; however, the ultimate effect on the Company's financial
position and results of operations cannot be determined at this time. The
Company has not established a reserve for this matter at March 31, 1998.
Additionally, 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 March 31, 1998, the Company was not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company.
Note 5. Reclassifications
Certain balances for 1996 have been reclassified for comparative purposes.
11
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion of the Company's financial condition, results
of operations, liquidity and capital resources. This discussion should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto, included in the Company's Annual report on Form 10-K filed for
the year ended December 31, 1997, which is incorporated herein by reference.
Results of Operations
The factors which most significantly affect the Company's results of
operations are (1) the sales prices of crude oil and natural gas, (2) the level
of total sales volumes of crude oil and natural gas, (3) the level of and
interest rates on borrowings and (4) the level and success of exploration and
development activity.
Selected operating data. The following table sets forth certain operating
data of the Company for the periods presented.
Three Months Ended
March 31,
---------------------------
1998 1997
----------- ----------
Operating Revenue (in thousands):
Crude Oil Sales $ 2,880 $ 4.500
Natural Gas Sales 9,786 10,332
Natural Gas Liquids Sales 1,989 3,078
Processing Revenue 736 996
Rig Operations 116 53
Other 1,232 257
----------- ----------
$ 16,739 $ 19,216
=========== ==========
Operating Income (in thousands) $ 2,423 $ 7,791
Crude Oil Production (MBBLS) 199.0 218.0
Natural Gas Production (MMCFS) 6,139.2 4,938.0
Natural Gas Liquids Production (MBBLS) 241.5 238.1
Average Crude Oil Sales Price ($/BBL) $ 14.47 $ 20.64
Average Natural Gas Sales Price ($/MCF) $ 1.59 $ 2.09
Average Liquids Sales Price ($/BBL) $ 8.24 $ 12.93
OPERATING REVENUE. During the three months ended March 31, 1998, operating
revenue from crude oil, natural gas and natural gas liquid sales decreased
18.18% to $14.7 million compared to $17.9 million in the three months ended
March 31, 1997. The decrease in revenue was due to a decrease in crude oil,
natural gas and natural gas liquids prices during the period. Average sales
prices were $14.47 per Bbl of crude oil, $8.24 per Bbl of natural gas liquid and
$1.59 per Mcf of natural gas for the quarter ended March 31, 1998 compared with
$20.64 per Bbl of crude oil, $12.93 per Bbl of natural gas liquid and $2.09 per
Mcf of natural gas in the same period of 1997. The significant decline in prices
contributed $5.8 million of the decrease in revenue which was partially offset
by $3.2 million attributable to increased volumes. Natural gas volumes increased
24% from 4,938 MMCFs for the period ended March 31,1997 to 6,139 MMCFs for the
same period in 1998. The increase in natural gas volumes was primarily
attributable to the Company's ongoing development program. Crude oil and natural
gas liquids volumes declined .5% for the period ended March 31, 1998 compared to
the same period of 1997.
12
Other operating revenue increased from $257,000 for the first three months
of 1997 to $1.2 million for the same period of 1998. This increase is due to the
Company's receipt of a break up fee in connection with the termination of a
proposed merger with Vessels Energy, Inc. The fee was $933,000 net of related
expenses.
LEASE OPERATING EXPENSES. Lease operating expenses and natural gas processing
costs ("LOE") for the three months ended March 31, 1998 increased to $4.6
million compared to $3.8 million for the same period in 1997. The increase in
LOE was primarily due to the greater number of wells owned by the Company during
the period ended March 31, 1998 compared to the same period of 1997. The
Company's LOE on a per BOE basis for the three months ended March 31, 1998 was
$2.98 compared to $2.62 for the same period of 1997. The increase on a BOE basis
is due to a general increase in the cost of services from 1997 to 1998.
G&A EXPENSES. G&A expenses increased from $938,000 for the first three months
of 1997 to $1.3 million for the same period of 1998. The increase is primarily
due to the hiring of additional staff to manage and develop the Company's
properties. G&A expense on a per BOE basis increased from $0.73 for the quarter
ended March 31, 1997 to $0.89 for the same period of 1998.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES. Depreciation, depletion
and amortization ("DD&A") expense increased by $1.6 million to $8.3 million for
the three months ended March 31, 1998, from $6.7 million in the same period of
1997. The Company's DD&A on a per BOE basis for the three months ended March 31,
1998 was $5.64 per BOE compared to $5.22 in 1997. The per BOE increase is due to
higher finding costs added to the full cost pool in 1997 and the first quarter
of 1998.
INTEREST EXPENSE AND PREFERRED DIVIDENDS. Interest expense and preferred
dividends ("Interest and Dividends") increased to $7.5 million for the first
three months of 1998 from $6.1 million for the same period of 1997. This
increase is attributable to increased borrowings by the Company during the first
quarter of 1998. Long-term debt increased from $215.2 million at March 31, 1997
to $277.4 million at March 31, 1998, as a result of the Company's issuing an
additional $60.0 million of its 11.5% Senior Notes due 2004, Series C ("Series C
Notes") in January 1998. Preferred dividends were eliminated on July 1, 1997 as
the result of the conversion of all outstanding preferred stock into Abraxas
Common Stock.
GENERAL. The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas and
the volumes of crude oil, natural gas and natural gas liquids produced by the
Company. The prices of natural gas, crude oil and natural gas liquids received
by the Company declined during the first quarter of 1998. The average natural
gas price realized by the Company declined to $1.59 per MCF during the first
three months of 1998 compared with $2.09 per MCF during the same period of 1997.
Crude oil prices declined from $20.64 per BBL during the first three months of
1997, to $14.47 per BBL for the same period of 1998. Natural gas liquids prices
declined to $8.24 per BBL compared to $12.93 per BBL in the first quarter of
1997. In addition, the Company's proved reserves will decline as crude oil,
natural gas and natural gas liquids are produced unless the Company is
successful in acquiring properties containing proved reserves or conducts
successful exploration and development activities. In the event crude oil,
natural gas and natural gas liquids prices remain at depressed levels or if the
Company's production levels decrease, the Company's revenues, cash flow from
operations and profitability will be materially adversely affected.
Liquidity and Capital Resources
GENERAL. Capital expenditures including property divestitures during the
first three months of 1998 were $18.3 million compared to $3.3 million during
the same period of 1997. The table below sets forth the components of these
capital expenditures on a historical basis for the three months ended March 31,
1998 and 1997.
13
Three Months Ended
March 31
-------------------------
1998 1997
--------- ---------
Expenditure category (in thousands):
Acquisitions ................................. $ 2,359 $ --
Development .................................. 15,945 11,851
Divestitures ................................. (129) (9,008)
Facilities and other ......................... 128 433
======== ========
Total .......................................... $ 18,303 $ 3,276
======== ========
At March 31, 1998, the Company had current assets of $32.3 million and
current liabilities of $26.6 million resulting in working capital of $5.7
million. This compares to a working capital deficit of $9.2 million at December
31, 1997 and working capital of $11.2 million at March 31, 1997. The material
components of the Company's current liabilities at March 31, 1998 include trade
accounts payable of $10.6 million, revenues due third parties of $3.1 million
and accrued interest of $11.6 million.
Operating activities during the three months ended March 31, 1998 provided
$4.4 million cash to the Company compared to $14.1 million in the same period in
1997. Net income plus non-cash expense items during 1998 and net changes in
operating assets and liabilities accounted for most of these funds. Investing
activities required $18.3 million net during the first three months of 1998,
$15.9 million was utilized for the development of crude oil and natural gas
properties and other facilities, and $2.4 million for acquisition of oil and gas
properties. This compares to $3.3 million required during the same period of
1997. $12.3 million was utilized for the development of crude oil and natural
gas properties and other facilities, divestiture of gas processing facilities
providing $9.0 million. Financing activities provided $30.7 million for the
first three months of 1998 compared to requiring $166,000 for the same period of
1997. Financing activities include the proceeds of the $60 million Senior Notes
sold in January 1998, and the corresponding premium associated with the Series C
Notes which were offset by the repayment of the existing Credit Facility, except
for $100,000 that remains outstanding.
The Company's current budget for capital expenditures for the last nine
months of 1998 other than acquisition expenditures is approximately $50.1
million. Such expenditures will be made primarily for the development of
existing properties. Additional capital expenditures may be made for
acquisitions of producing properties if such opportunities arise, but the
Company currently has no agreements, arrangements or undertakings regarding any
material acquisitions. The Company has no material long-term capital commitments
and is consequently able to adjust the level of its expenditures as
circumstances dictate. Additionally, the level of capital expenditures will vary
during future periods depending on market conditions and other related economic
factors. Should commodity prices remain at depressed levels or decline further,
reductions in the capital expenditure budget may be required.
The Company will have three principal sources of liquidity during the next
nine months: (i) cash on hand, (ii) borrowing capacity under the Company's
revolving credit facility and (iii) cash flow from operations. While the
availability of capital resources cannot be predicted with certainty and is
dependent upon a number of factors including factors outside of management's
control, management believes that the net proceeds of the offering of the Series
C Notes, the Company's cash flow from operations plus availability under the
Credit Facility will be adequate to fund operations and planned capital
expenditures. The Company may also sell additional equity or debt securities in
order to fund operations and planned capital expenditures as well as to finance
future acquisitions.
LONG-TERM INDEBTEDNESS. The Credit Facility has an availability of $40.0
million. As of March 31, 1998 there was $100,000 outstanding under the Credit
Facility. The Credit Facility contains a number of covenants that, among other
things, restricts the ability of the Company to (I) incur certain indebtedness
or guarantee obligations, (ii) prepay other indebtedness including the Notes,
(iii) make investments, loans or advances, (iv) create certain liens, (v) make
certain payments, dividends and distributions, (vi) merge with or sell assets to
another person or liquidate, (vii) sell or discount receivables, (viii) engage
in certain intercompany transactions and transactions with affiliates, (ix)
change its business, (x) experience a change of control and (xi) make amendments
to its charter, by-laws and other debt instruments. In addition, under the
Credit Facility, the Company is required to comply with specified financial
14
ratios and tests, including minimum debt service coverage ratios, maximum funded
debt to EBITDA tests, minimum net worth tests and minimum working capital tests.
As of March 31, 1998, the Company was not in compliance with the minimum net
worth test. The Company has received a waver of this requirement.
The Credit Facility contains customary events of default, including
nonpayment of principal, interest or fees, violation of covenants, inaccuracy of
representations or warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, material judgments and
liabilities and change of control. The Indentures (as defined below) also
contain a number of covenants and events of default including covenants
restricting, among other things, the Company's and Canadian Abraxas' ability to
incur additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company and events of default including
nonpayment of principal or interest on the Notes, violation of covenants, cross
default on other indebtedness, bankruptcy and material judgments.
Commitments available under the Credit Facility are subject to borrowing
base redeterminations to be performed semi-annually and, at the option of each
of the Company and the lenders under the Credit Facility (the "Bank"), one
additional time per year. Any outstanding principal balance in excess of the
borrowing base will be due and payable in three equal monthly payments after a
borrowing base redetermination. The borrowing base will be determined in the
sole discretion of Bankers Trust Company ("BT"), subject to the approval of the
Banks, based on the value of the Company's reserves as set forth in the reserve
report of the Company's independent petroleum engineers, with consideration
given to other assets and liabilities. The Credit Facility has an initial
revolving term of two years (which expires in November 1998) and a reducing
period of three years from the end of the initial two-year period. The
commitment under the Credit Facility will be reduced during such reducing period
by eleven equal quarterly reductions. Quarterly reductions will equal 8.2% per
quarter with the remainder due at the end of the three-year reducing period.
The applicable interest rate charged on the outstanding balance of the Credit
Facility is based on a facility usage grid. If the borrowings under the Credit
Facility represent an amount less than or equal to 33.3% of the available
borrowing base, then the applicable interest rate charged on the outstanding
balance will be either (a) an adjusted rate of the London Inter-Bank Offered
Rate ("LIBOR") plus 1.25% or (b) the prime rate of BT (which is based on BT's
published prime rate) plus 0.50%. If the borrowings under the Credit Facility
represent an amount greater than or equal to 33.3% but less than 66.7% of the
available borrowing base, then the applicable interest rate on the outstanding
principal will be either (a) LIBOR plus 1.75% or (b) the prime rate of BT plus
0.50%. If the borrowings under the Credit Facility represent an amount greater
than or equal to 66.7% of the available borrowing base, then the applicable
interest rate on the outstanding principal will be either (a) LIBOR plus 2.00%
or (b) the prime rate of BT plus 0.50%. LIBOR elections can be made for periods
of one, three or six months.
On November 14, 1996, the Company and Canadian Abraxas completed the sale of
$215.0 million aggregate principal amount of Senior Notes due November 1, 2004,
Series A which were exchanged for the Company's and Canadian Abraxas' 11.5%
Senior Notes due 2004 Series B, (the "Series B Notes") in February 1997. In
January 1998, the Company and Canadian Abraxas completed the sale of $60 million
aggregate principal amount of Series C Notes. The Series C Notes have
substantially the same terms as the Notes. The Series B Notes and Series C Notes
(together the "Notes") are joint and several obligations of Abraxas and Canadian
Abraxas. The indentures governing the Notes (the "Indenture") provide, among
other things, that the Company may not, and may not cause or permit certain of
its subsidiaries, including Canadian Abraxas, to, directly or indirectly, create
or otherwise cause to permit to exist or become effective any encumbrance or
restriction on the ability of such subsidiary to pay dividends or make
distributions on or in respect of its capital stock, make loans or advances or
pay debts owed to Abraxas, guarantee any indebtedness of Abraxas or transfer any
of its assets to Abraxas except for such encumbrances or restrictions existing
under or by reason of: (i) applicable law; (ii) the Indentures; (iii) the Credit
Facility; (iv) customary non-assignment provisions of any contract or any lease
governing leasehold interests of such subsidiaries; (v) any instrument governing
indebtedness assumed by the Company in an acquisition, which encumbrance or
restriction is not applicable to such subsidiaries or the properties or assets
of such subsidiaries other than the entity or the properties or assets of the
15
entity so acquired; (vi) customary restrictions with respect to subsidiaries of
the Company pursuant to an agreement that has been entered in to for the sale or
disposition of capital stock or assets of such subsidiaries to be consummated in
accordance with the terms of the Indenture solely in respect of the assets or
capital stock to be sold or disposed of; (vii) any instrument governing certain
liens permitted by the Indenture, to the extent and only to the extent such
instrument restricts the transfer or other disposition of assets subject to such
lien; or (viii) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (ii), (iii) or (v) above; provided, however, that the provisions relating
to such encumbrance or restriction contained in any such refinancing
indebtedness are no less favorable to the holders of the Notes in any material
respect as determined by the Board of Directors of the Company in their
reasonable and good faith judgment than the provisions relating to such
encumbrance or restriction contained in the applicable agreement referred to in
such clause (ii), (iii) or (v).
Hedging Activities: In August 1995, the Company entered into a rate swap
agreement with a previous lender relating to $25.0 million of principal amount
of outstanding indebtedness. This agreement was assumed by the Banks in
connection with a Bridge Facility that was subsequently paid off. Under the
agreement, the Company pays a fixed rate of 6.15% while the Banks will pay a
floating rate equal to the USD-LIBOR-BBA rate for one month maturities, quoted
on the eighteenth day of each month, to the Company. Settlements are due
monthly. The agreement terminates in August 1998.
Net Operating Loss Carryforwards. At December 31, 1997, the Company had,
subject to the limitations discussed below, $25.1 million of net operating loss
carryforwards for U.S. tax purposes, of which approximately $22.4 million may be
utilized before it expires. These loss carryforwards will expire from 2002
through 2010 if not utilized. At December 31, 1997, the company had
approximately $2.9 million of net operating loss carryforwards for Canadian tax
purposes which expire in 2003 and 2004. As a result of the acquisition of
certain partnership interests and crude oil and natural gas properties in 1990
and 1991, an ownership change under Section 382 of the Internal Revenue Code
1986, as amended (Section 382), occurred in December 1991. Accordingly, it is
expected that the use of net operating loss carryforwards generated prior to
December 31, 1991 of $4.9 million will be limited to approximately $235,000 per
year. as a result of the issuance of additional shares of Common Stock for
acquisitions and sales of stock, an additional ownership change under Section
382 occurred in October 1993. Accordingly, it is expected that the use of all
U.S. net operating loss carryforwards generated through October 1993 or $8.2
million will be limited to approximately $1 million per year subject to the
lower limitations described above. Of the $8.2 million net operating loss
carryforwards, it is anticipated that the maximum net operating loss that may be
utilized before it expires is $5.7 million. Future changes in ownership may
further limit the use of the Company's carryforwards. In addition to the Section
382 limitations, uncertainties exist as to the future utilization of the
operating loss carryforwards under the criteria set forth under FASB Statement
No. 109. Therefore, the Company has established a valuation allowance of $5.7
million and $5.9 million for deferred tax assets at December 31, 1996 and 1997,
respectively.
Based upon the current level of operations, the Company believes that cash on
hand, cash flow from operations and the Company's credit facility, will be
adequate to meet its anticipated requirements for working capital, capital
expenditures and scheduled interest payments through 1998. Continued depressed
prices for natural gas, crude oil or natural gas liquids will have a material
adverse effect on the Company's cash flow from operations and anticipated levels
of working capital, and could force the Company to revise its planned capital
expenditures.
16
Disclosure Regarding Forward-Looking Information
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this report
regarding the Company's financial position, business strategy, budgets and plans
and objectives of management for future operations are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed under "Risk Factors" in the Company's
Annual Report on Form 10-K which is incorporated by reference herein and this
report. All subsequent written and oral forward-looking statements attributable
to the Company, or persons acting on its behalf, are expressly qualified in
their entirety by the Cautionary Statements Cautionary
17
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 11 Statement Re: Computation of earnings per share
Exhibit 27 Financial data schedule
(b) Reports on Form 8-K:
January, 27, 1998 - Pricing $60 million principal amount of the
Series C Notes.
February 5, 1998 - Consummation of offering of $60 million
principal amount of the Series C Notes. March 20, 1998 -
Termination of Vessels merger.
18
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABRAXAS PETROLEUM CORPORATION
(Registrant)
Date: May 15,1998 By:/s/
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: May 15, 1998 By:/s/
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer