UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2006
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 daysYes.[X] or No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one)
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] or No [X]
The number of shares of the issuer's common stock outstanding as of May 5,
2006 was:
Class Shares Outstanding
Common Stock, $.01 Par Value 42,605,577
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 headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations" but may be found in other
locations as well. These forward-looking statements generally relate to our
plans and objectives for future operations and are based upon our management's
reasonable estimates of future results or trends. The factors that may affect
our expectations regarding our operations include, among others, the following:
o our high debt level;
o our 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 prices 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 report.
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, 2005, which is incorporated by reference herein. All
subsequent written and oral forward-looking statements attributable to us, or
persons acting on our behalf, are expressly qualified in their entirety by the
Cautionary Statements.
2
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2006
and December 31, 2005................................................4
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2006 and 2005...........................6
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2006 and 2005...........................7
Notes to Condensed Consolidated Financial Statements..........................8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................12
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk........................24
ITEM 4 - Controls and Procedures..........................................................24
PART II
OTHER INFORMATION
ITEM 1 - Legal Proceedings..................................................................25
ITEM 1A- Risk Factors.......................................................................25
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds........................25
ITEM 3 - Defaults Upon Senior Securities....................................................25
ITEM 4 - Submission of Matters to a Vote of Security Holders................................25
ITEM 5 - Other Information..................................................................25
ITEM 6 - Exhibits...........................................................................25
Signatures.........................................................................26
3
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2006 2005
(Unaudited)
------------------ -------------------
Assets:
Current assets:
Cash ....................................................... $ 43 $ 42
Accounts receivable, net:
Joint owners.......................................... 1,158 540
Oil and gas production................................ 6,727 7,957
Other................................................. 35 100
------------------ -------------------
7,920 8,597
Other current assets.......................................... 1,964 1,638
------------------ -------------------
Total current assets..................................... 9,927 10,277
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved.................................................... 340,481 333,373
Other property and equipment................................. 3,315 3,289
------------------ -------------------
Total................................................ 343,796 336,662
Less accumulated depreciation, depletion, and
amortization............................................ 234,814 231,414
------------------ -------------------
Total property and equipment - net........................ 108,982 105,248
Deferred financing fees, net.................................... 5,639 6,037
Other assets .................................................. 304 304
------------------ -------------------
Total assets.................................................. $ 124,852 $ 121,866
================== ===================
See accompanying notes to condensed consolidated financial statements
4
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets (continued)
(in thousands)
March 31, December 31,
2006 2005
(Unaudited)
------------------- -------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable.............................................. $ 7,355 $ 9,814
Oil and gas production payable................................ 2,649 3,481
Accrued interest.............................................. 5,124 1,368
Other accrued expenses........................................ 861 494
------------------- -------------------
Total current liabilities................................... 15,989 15,157
Long-term debt.................................................. 129,798 129,527
Future site restoration......................................... 907 883
------------------- -------------------
Total liabilities.......................................... 146,694 145,567
Stockholders' deficit:
Common Stock, par value $.01 per share-
authorized 200,000,000 shares; issued, 42,588,327 and,
42,063,167 .................................................. 426 421
Additional paid-in capital................................... 163,328 162,795
Accumulated deficit........................................... (186,973) (188,193)
Treasury stock, at cost, 35,552 and 56,477 shares ............ (285) (408)
Accumulated other comprehensive income........................ 1,662 1,684
------------------- -------------------
Total stockholders' deficit............................... (21,842) (23,701)
------------------- -------------------
Total liabilities and stockholders' deficit..................... $ 124,852 $ 121,866
=================== ===================
See accompanying notes to condensed consolidated financial statements
5
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended
March 31,
-----------------------------------
2006 2005 (1)
-------------- -----------------
Revenue:
Oil and gas production revenues................................... $ 12,926 $ 7,525
Rig revenues...................................................... 376 296
Other............................................................. 3 1
-------------- -----------------
13,305 7,822
Operating costs and expenses:
Lease operating and production taxes.............................. 2,822 2,278
Depreciation, depletion and amortization.......................... 3,399 1,698
Rig operations.................................................... 211 218
General and administrative (including stock-based compensation
of $171 and $25)................................................. 1,286 971
-------------- -----------------
7,718 5,165
-------------- -----------------
Operating income ................................................... 5,587 2,657
Other (income) expense
Interest income................................................... (1) (1)
Interest expense.................................................. 3,971 3,134
Amortization of deferred financing fees........................... 397 451
Other............................................................. - 9
-------------- -----------------
4,367 3,593
-------------- -----------------
Income (loss) from continuing operations ............................ 1,220 (936)
Income from discontinued operations (net of $6,060 income tax
expense in 2005).................................................. - 12,921
-------------- -----------------
Net income .......................................................... $ 1,220 $ 11,985
============== =================
Basic earnings (loss) per common share:
Net earnings (loss) per common from continuing operations......... $ 0.03 $ (0.02)
Discontinued operations .......................................... - 0.35
-------------- -----------------
Net income per common share - basic................................. $ 0.03 $ 0.33
============== =================
Diluted earnings (loss) per common share:
Net earnings (loss) from continuing operations.................... $ 0.03 $ (0.02)
Discontinued operations .......................................... - 0.35
-------------- -----------------
Net income per common share - diluted.............................. $ 0.03 $ 0.33
============== =================
(1) Reflects retrospective adoption of SFAS 123R.
See accompanying notes to condensed consolidated financial statements
6
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
March 31,
----------------------------------------
2006 2005 (1)
----------------- -----------------
Cash flows from Operating Activities
Net income................................................... $ 1,220 $ 11,985
Income from discontinued operations........................... - (12,921)
----------------- -----------------
Income (loss) from continuing operations...................... 1,220 (936)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization................ 3,399 1,698
Accretion of future site restoration..................... 24 20
Amortization of deferred financing fees.................. 397 451
Stock-based compensation................................. 171 25
Changes in operating assets and liabilities:
Accounts receivable...................................... 677 1,573
Other ................................................... (348) 1,204
Accounts payable and accrued expenses.................... 832 5,454
----------------- -----------------
Net cash provided by continuing operations.................... 6,372 9,489
Net cash used in discontinued operations...................... - (4,132)
----------------- -----------------
Net cash provided by operations............................... 6,372 5,357
Cash flows from Investing Activities
Capital expenditures, including purchases and development
of properties............................................... (7,133) (8,652)
----------------- -----------------
Net cash used in continuing operations........................ (7,133) (8,652)
Net cash provided by discontinued operations.................. - 26,572
----------------- -----------------
Net cash provided by (used in) investing activities........... (7,133) 17,920
Cash flows from Financing Activities
Proceeds from long-term borrowings........................... 4,271 553
Payments on long-term borrowings............................. (4,000) (1,971)
Issuance of common stock for compensation.................... 116 102
Exercise of stock options .................................. 374 205
Deferred financing fees ..................................... 1 (43)
----------------- -----------------
Net cash provided by (used in) financing operations.......... 762 (1,154)
Net cash used in discontinued operations..................... - (23,407)
----------------- -----------------
Net cash (used in) financing activities.......... 762 (24,561)
----------------- -----------------
Increase (decrease) in cash.................................. 1 (1,284)
Cash, at beginning of period................................. 42 1,284
----------------- -----------------
Cash, at end of period....................................... $ 43 $ -
================= =================
Supplemental disclosures of cash flow information:
Interest paid ............................................... $ 191 $ 77
================= =================
Non-cash items:
Future site restoration...................................... $ - $ 17
================= =================
(1) Reflects retrospective adoption of SFAS 123R.
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, 2005. Such policies have been continued without
change. Also, refer to the notes to those financial statements for additional
details of the Company's financial condition, results of operations, and cash
flows. All the material items included in those notes have not changed except as
a result of normal transactions in the interim, or as disclosed within this
report. The accompanying interim consolidated financial statements have not been
audited by independent accountants, but in the opinion of management, reflect
all adjustments necessary for a fair presentation of the financial position and
results of operations. Any and all adjustments are of a normal and recurring
nature. The results of operations for the three months ended March 31, 2006 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") for the 2005 period. On February 28, 2005 Grey Wolf closed an initial
public offering, resulting in our 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
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R is a revision of SFAS No. 123, "Accounting for Stock Based
Compensation", and supersedes APB 25. Among other items, SFAS 123R eliminates
the use of APB 25 and the intrinsic value method of accounting, and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments, based on the grant date fair value of those
awards, in the financial statements.
The Company adopted SFAS 123R in the fourth quarter of 2005 using the
"modified prospective method".Under the "modified retrospective" method entities
are permitted to restate financial statements of previous periods based on
proforma disclosures made in accordance with SFAS 123. This standard requires
the cost of all share-based payments, including stock options, to be measured at
fair value on the grant date and recognized in the statement of operations. In
accordance with this standard, all periods prior to January 1, 2005 were
restated to reflect the impact of the standard as if it had been adopted on
January 1, 1995, the original effective date of SFAS No. 123, "Accounting for
Stock-Based Compensation". Also in accordance with the standard, the amounts
that are reported in the statement of operations for the restated periods are
the pro forma amounts previously disclosed under SFAS No. 123. The Company
currently utilizes a standard option pricing model (i.e., Black-Scholes) to
measure the fair value of stock options granted to Employees. While SFAS 123R
permits entities to continue to use such a model, the standard also permits the
use of a more complex binomial, or "lattice" model. Based upon research done by
the Company on the alternative models available to value option grants, and in
conjunction with the type and number of stock options expected to be issued in
the future, the Company has determined that it will continue to use the
Black-Scholes model for option valuation as of the current time.
SFAS 123R includes several modifications to the way that income taxes are
recorded in the financial statements. The expense for certain types of option
grants is only deductible for tax purposes at the time that the taxable event
takes place, which could cause variability in the Company's effective tax rates
recorded throughout the year. SFAS 123R does not allow companies to "predict"
when these taxable events will take place. Furthermore, it requires that the
benefits associated with the tax deductions in excess of recognized compensation
cost be reported as a financing cash flow, rather than as an operating cash flow
8
as required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after the effective
date. These future amounts cannot be estimated, because they depend on, among
other things, when employees exercise stock options.
The following table summarizes the stock option activities for the three
months ended March 31, 2006 (in thousands except per share data):
Weighted Weighted
Average Average
Option Grant
Exercise Date Fair Aggregate
Price Per Value Per Intrinsic
Shares Share Share Value
--------------- -------------- -------------- --------------
Outstanding December 31, 2005....... 3,016 $ 1.75 $ 1.27 $ 3,837
Granted............................ 98 $ 6.05 $ 4.35 426
Exercised.......................... (525) $ 0.71 $ 0.37 (193)
Expired or canceled................. - $ - $ - -
--------------- --------------
Outstanding March 31, 2006.......... 2,589 $ 2.12 $ 1.57 $ 4,070
=============== ==============
Additional information related to options at March 31, 2006 and December
31, 2005 is as follows:
March 31, December 31,
2006 2005
---------------------- --------------------
Options exercisable.................................... 1,704,838 2,224,998
====================== ====================
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.
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 period ended March 31, 2005
includes a gain on the disposal of Grey Wolf of $21.8 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 March 31, 2006, 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:
March 31 December 31
2006 2005
---------------- -----------------
Floating rate senior secured notes due 2009............................ $ 125,000 $ 125,000
9
Senior secured revolving credit facility............................... 4,798 4,527
---------------- -----------------
129,798 129,527
Less current maturities ............................................... - -
---------------- -----------------
$ 129,798 $ 129,527
================ =================
Floating Rate Senior Secured Notes due 2009. In connection with the 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 interest is payable at a per annum floating rate of six-month
LIBOR plus 7.50%. The interest rate was 12.08% per annum as of March 31, 2006.
The interest rate is reset semi-annually on each June 1 and December 1. Interest
is payable semi-annually in arrears on June 1 and December 1 of each year.
Senior Secured Revolving Credit Facility. On October 28, 2004, Abraxas
entered into an agreement for a 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%.
The interest rate was 8.75% per annum as of March 31, 2006.
Subject to earlier termination rights and events of default, the stated
maturity date under the revolving credit facility is October 28, 2008.
Note 5. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended March 31,
----------------------------------
2006 2005
-------------- ---------------
Numerator:
Net income (loss) before effect of discontinued operations........ $ 1,220 $ (936)
Discontinued operations........................................... - 12,921
-------------- ---------------
Net earnings available to common stockholders .................... $ 1,220 $ 11,985
============== ===============
Denominator:
Denominator for basic earnings per share - weighted-average shares. 42,470,802 36,603,592
Effect of dilutive securities:
Stock options and warrants...................................... 1,681,042 -
-------------- ---------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed Conversions................. 44,151,844 36,603,592
============== ===============
Basic earnings (loss) per share:
Net earnings (loss) - continuing operations ....................... $ 0.03 $ (0.02)
Discontinued operations............................................. - 0.35
-------------- ---------------
Net earnings per common share - basic $ 0.03 $ 0.33
============== ===============
Diluted earnings (loss) per share:
Net earnings (loss) - continuing operations......................... $ 0.03 $ (0.02)
Discontinued operations ............................................ - 0.35
-------------- ---------------
Net earnings per common share - diluted................................. $ 0.03 $ 0.33
============== ===============
For the three months ended March 31, 2005 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
10
operations incurred in the periods. Had there not been a loss in this period,
dilutive shares would have been 1,660,480 shares for the three months ended
March 31, 2005.
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 SFAS 133" and SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities. In 2003, the Company elected out of
hedge accounting as prescribed by SFAS 133. Accordingly, instruments are
recorded on the balance sheet at their fair value with adjustments to the
carrying value of the instruments being recognized in oil and gas income in the
current period.
Under the terms of our revolving credit facility, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our crude oil and natural gas production for a rolling six month period.
The following table sets forth the Company's current hedge position:
Time Period Notional Quantities Price
---------------------------------- -------------------------------------------- ----------------------
May 2006 10,000 MMbtu of production per day Floor of $8.00
June 2006 10,000 MMbtu of production per day Floor of $7.00
July 2006 10,000 MMbtu of production per day Floor of $7.00
August 2006 10,000 MMbtu of production per day Floor of $6.00
September 2006 10,000 MMbtu of production per day Floor of $5.00
October 2006 10,000 MMbtu of production per day Floor of $5.00
November 2006 10,000 MMbtu of production per day Floor of $6.00
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 March 31,
2006, 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.
11
ABRAXAS PETROLEUM CORPORATION
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Prior to February 2005, Grey Wolf Exploration Inc. was a wholly-owned
Canadian subsidiary of Abraxas. In February 2005, Grey Wolf, closed 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,
2005.
Critical Accounting Policies
There have been no changes from the Critical Accounting Polices described
in our Annual Report on Form 10-K for the year ended December 31, 2005.
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 low risk 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 and crude oil;
o the level of total sales volumes of natural gas and crude oil;
o the availability of, and our ability to raise additional capital
resources and provide liquidity to meet cash flow needs;
o the level of and interest rates on borrowings; and
o the level and success of 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. In January
2001, our realized price for natural gas and crude oil were at high levels.
However, over the course of 2001 and the beginning of the first quarter of 2002,
prices again became depressed, primarily due to the economic downturn. Beginning
in March 2002, commodity prices began to increase and continued higher through
December 2005. Prices have continued to remain strong during the first quarter
of 2006 compared to historical levels, but have weakened from levels during the
12
latter part of 2005 and early 2006. If prices continue to weaken, our cash flow
from operations will be adversely affected.
The table below illustrates how natural gas prices have fluctuated over the
eight quarters prior to and including the quarter ended March 31, 2006 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.
Natural Gas Prices by Quarter (in $ per Mcf)
Quarter Ended
----------------------------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
2004 2004 2004 2005 2005 2005 2005 2006
---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
Index $5.97 $5.85 $6.77 $6.30 $ 6.80 $ 8.21 $ 12.85 $ 9.18
Realized $5.52 $5.24 $6.14 $5.26 $ 6.33 $ 8.15 $ 9.12 $ 6.52
The NYMEX natural gas price on May 5, 2006 was $6.78 per Mcf.
The table below illustrates how crude oil prices have fluctuated over the
eight quarters prior to and including the quarter ended March 31, 2006 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
----------------------------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
2004 2004 2004 2005 2005 2005 2005 2006
---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
Index $38.48 $42.32 $49.46 $47.33 $ 51.76 $ 60.26 $ 61.51 $ 61.53
Realized $37.29 $42.43 $46.81 $47.13 $ 49.43 $ 60.24 $ 57.18 $ 59.57
The NYMEX crude oil price on May 5, 2006 was $70.19 per Bbl.
We seek to reduce our exposure to price volatility by hedging our
production through price floors.
Under the terms of our revolving credit facility, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our crude oil and natural gas production, on an equivalent basis, for a
rolling six-month period. We currently have the following hedges in place:
Time Period Notional Quantities Price
---------------------------------- -------------------------------------------- ----------------------
May 2006 10,000 MMbtu of production per day Floor of $8.00
June 2006 10,000 MMbtu of production per day Floor of $7.00
July 2006 10,000 MMbtu of production per day Floor of $7.00
August 2006 10,000 MMbtu of production per day Floor of $6.00
September 2006 10,000 MMbtu of production per day Floor of $5.00
October 2006 10,000 MMbtu of production per day Floor of $5.00
November 2006 10,000 MMbtu of production per day Floor of $6.00
At March 31, 2006, the aggregate fair market value of our hedges was
approximately $385,000.
PRODUCTION VOLUMES. Because our proved reserves will decline as natural gas
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.
13
We had capital expenditures of $7.1 million in the first quarter of 2006.
As a result of the capital spending limitations included in our previous credit
agreement and our 11 1/2 notes due 2007 which were eliminated in connection with
our October 2004 refinancing, 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 quarter of 2005. Beginning in
the second quarter of 2005, our production volumes began to increase. If crude
oil and natural gas 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. We currently have approximately $10.2 million of
availability under our revolving credit facility.
EXPLOITATION, EXPLORATION 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 more efficient reservoir management
practices. We operate 95% of the properties accounting for approximately 94% of
our PV-10, giving us substantial control over the timing and incurrence of
operating and capital expenditures. In addition, we have 53 proved undeveloped
locations and have identified over 184 drilling and recompletion opportunities
on our existing acreage, the successful development of which we believe could
significantly increase our daily production and proved reserves. During the
first quarter of 2006, we made capital expenditures of approximately $7.1
million for wells in south Texas, west Texas and Wyoming. We are currently
completing and/or testing Woodford, Atoka and Wolfcamp wells in west Texas and
continue to recomplete various wells in south Texas. We have one horizontal well
and one vertical well drilling in west Texas. In the latter part of 2005, we
drilled and are currently completing and testing four vertical 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, exploitation and exploration
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 52% of our total estimated proved reserves at December
31, 2005 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. We currently have indebtedness of approximately
$129.8 million and availability of $10.2 million under our revolving credit
facility. Our cash interest expense will require us to increase our production
and cash flow from operations in order to meet our debt service requirements, as
well as to fund the development of our numerous drilling opportunities.
OUTLOOK FOR 2006. As a result of final 2005 financial results and current
market conditions, we have updated our operating and financial guidance for 2006
as follows:
Production:
BCFE (approximately 80% gas)....................... 7.5 - 8.5
Exit Rate (Mmcfe/d)................................... 22 - 24
Price Differentials (Pre Hedge):
Gas (% Mcf)........................................ 15%
Oil ($/Bbl)........................................ 2.00
Production taxes (% of Revenue)....................... 10%
Direct Lease Operating Expenses ($/ Mcfe)............. 1.10
G&A ($/ Mcfe)......................................... 0.55
Interest ($/Mcfe)..................................... 2.00
DD&A ($/Mcfe)......................................... 1.80
Capital Expenditures ($ Millions)..................... 40.0
14
RESULTS OF OPERATIONS
The following table sets forth certain of our operating data for the
periods presented. All data is for continuing operations.
Three Months Ended
March 31,
---------------------------------
2006 2005
----------- ------------
Operating Revenue: (1)
Crude oil sales................................................... $ 2,783 $ 2,437
Natural gas sales ................................................ 10,143 5,088
Rig operations.................................................... 376 296
Other............................................................. 3 1
----------- ------------
$ 13,305 $ 7,822
=========== ============
Operating Income ................................................. $ 5,587 $ 2,657
Crude oil production (MBbl)....................................... 46.7 51.7
Natural gas production (MMcf)..................................... 1,555.6 967.0
Average crude oil sales price ($/Bbl)............................. $ 59.57 $ 47.13
Average natural gas sales price ($/Mcf)........................... $ 6.52 $ 5.26
(1) Revenue and average sales prices are net of hedging activities.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2006 TO THREE MONTHS ENDED MARCH 31,
2005
OPERATING REVENUE. During the three months ended March 31, 2006, operating
revenue from crude oil, natural gas and natural gas liquid sales increased to
$12.9 million from $7.5 millon for the first quarter of 2005. The increase in
revenue was primarily due to an increase in production volumes as well as
increased realized prices for natural gas and crude oil. The increase in
production volumes was primarily due to new production from wells drilled in
2005 offset by natural field declines. Increased production contributed $3.5
million while increased realized prices contributed $1.9 million to revenue
during the first quarter of 2006 as compared to the first quarter of 2005.
Average sales prices net of hedging cost for the quarter ended March 31, 2006
were:
o $59.57 per Bbl of crude oil,
o $ 6.52 per Mcf of natural gas
Average sales prices net of hedging cost for the quarter ended March 31, 2005
were:
o $47.13 per Bbl of crude oil,
o $ 5.26 per Mcf of natural gas
Crude oil production volumes decreased from 51.7 MBbls during the quarter
ended March 31, 2005 to 46.7 MBbls for the same period of 2006. Natural gas
production volumes increased from 967.0 MMcf for the three months ended March
31, 2005 to 1,555.6 MMcf for the same period of 2006. There was no significant
crude oil brought on production during 2005 or the first quarter of 2006. The
decrease in crude oil production was primarily due to natural field declines.
The increase in natural gas production was primarily due to new production
brought on line in 2005. New production contributed 691.1 MMcf during the first
quarter of 2006. The increase in production attributable to new wells was
partially offset by natural field declines. A single well in west Texas
contributed 514.6 MMcf of the new production for the quarter.
LEASE OPERATING EXPENSES. Lease operating expenses ("LOE") for the three
months ended March 31, 2006 increased to $2.8 million compared to $2.3 million
in 2005. The increase in LOE was primarily due to higher production taxes
associated with increased production volumes and higher commodity prices for the
quarter ended March 31, 2006 as compared to the same period of 2005 as well as a
general increase in the cost of field services and the amount of services
required by us as we increased our drilling activity during 2006 as compared to
15
2005. LOE on a per Mcfe basis for the three months ended March 31, 2006 was
$1.54 per Mcfe compared to $1.78 for the same period of 2005. The decrease in
per Mcfe cost was attributable to the increase in production volumes during the
first quarter of 2006 as compared to 2005.
GENERAL AND ADMINISTRATIVE ("G&A") Expenses. G&A expenses increased to $1.3
million during the quarter ended March 31, 2006 from $971,000 for the first
three months of 2005. The increase in G&A expense was due to increased cost
relating to Sarbanes Oxley compliance, including increased audit fees. G&A
expense on a per Mcfe basis was $0.61 for the first quarter of 2006 compared to
$0.74 for the same period of 2005. The decrease in G&A expense on a per Mcfe
basis was primarily due to increased production volumes during the first quarter
of 2006 compared to the same period in 2005.
STOCK-BASED COMPENSATION. In December 2004, the FASB issued SFAS No. 123R,
"Share-Based Payment". SFAS No. 123R is a revision of SFAS No. 123, "Accounting
for Stock Based Compensation", and supersedes APB 25. Among other items, SFAS
123R eliminates the use of APB 25 and the intrinsic value method of accounting,
and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements.
The Company adopted SFAS 123R in the fourth quarter of 2005 using the
"modified prospective method".Under the "modified retrospective" entities are
permitted to restate financial statements of previous periods based on proforma
disclosures made in accordance with SFAS 123. This standard requires the cost of
all share-based payments, including stock options, to be measured at fair value
on the grant date and recognized in the statement of operations. In accordance
with this standard, all periods prior to January 1, 2005 were restated to
reflect the impact of the standard as if it had been adopted on January 1, 1995,
the original effective date of SFAS No. 123, "Accounting for Stock-Based
Compensation". Also in accordance with the standard, the amounts that are
reported in the statement of operations for the restated periods are the pro
forma amounts previously disclosed under SFAS No. 123.
As a result of the retrospective adoption of SFAS 123R, the expenses
previously recognized under the rules of variable accounting were reversed and a
compensation expense measured according to SFAS 123R was recorded. As a result,
we recognized stock-based compensation expense of $171,000 during the first
quarter of 2006 as a result of the adoption of this accounting change compared
to $25,000 in 2005, as adjusted. Stock-based compensation expense is included as
a component of G&A expense in the accompanying financial statements.
We currently utilize a standard option pricing model (i.e., Black-Scholes)
to measure the fair value of stock options granted to employees. While SFAS 123R
permits entities to continue to use such a model, the standard also permits the
use of a more complex binomial, or "lattice" model. Based upon research done by
us on the alternative models available to value option grants, and in
conjunction with the type and number of stock options expected to be issued in
the future, we have determined that we will continue to use the Black-Scholes
model for option valuation as of the current time.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES. Depreciation, depletion
and amortization ("DD&A") expense increased to $3.4 million for the three months
ended March 31, 2006 from $1.7 million for the same period of 2005. The increase
in DD&A was primarily due to increased production volumes in the first quarter
of 2006 as compared to the same period of 2005 as well as an increase in future
development cost in 2006 as compared to 2005. Our DD&A on a per Mcfe basis for
the three months ended March 31, 2006 was $1.85 per Mcfe compared to $1.33 per
Mcfe in 2005.
INTEREST EXPENSE. Interest expense increased to $4.0 million for the first
three months of 2006 from $3.1 million for the same period of 2005. The increase
in interest expense was due to an increase in our long-term debt from $125.0
million at March 31, 2005 to $129.8 million at March 31, 2006 as well as an
increase in the interest rate on our floating rate senior secured notes.
DISCONTINUED OPERATIONS. Income from discontinued operations was $12.9
million in the first quarter of 2005. Income in 2005 includes a loss from
operations, including debt retirement costs, of $2.8 million and the gain from
the disposal of Grey Wolf of $21.8 million offset by $6.1 million of non-cash
income tax expense. There was no income from discontinued operations during the
quarter ended March 31, 2006.
16
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 additional 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 March 31, 2006, our current liabilities of
approximately $16.0 million exceeded our current assets of $9.9 million
resulting in a working capital deficit of $6.1 million. This compares to a
working capital deficit of approximately $4.9 million at December 31, 2005.
Current liabilities at March 31, 2006 consisted of trade payables of $7.4
million, revenues due third parties of $2.6 million, accrued interest of $5.1
million and other accrued liabilities of $0.9 million.
CAPITAL EXPENDITURES. Capital expenditures during the first three months of
2006 were $7.1 million compared to $8.7 million during the same period of 2005.
The table below sets forth the components of these capital expenditures on a
historical basis for the three months ended March 31, 2006 and 2005.
Three Months Ended
March 31,
--------------------------------------------
2006 2005
------------------- -----------------
Expenditure category (in thousands):
Development................................................. $ 7,108 $ 8,560
Facilities and other........................................ 25 92
--------------- -----------------
Total................................................... $ 7,133 $ 8,652
=============== =================
During the three months ended March 31, 2006 and 2005, capital expenditures
were primarily for the development of existing properties. We anticipate making
capital expenditures for 2006 of approximately $40.0 million which will be used
primarily for the development of our current properties. These anticipated
expenditures are subject to adequate cash flow from operations and availability
under our revolving credit facility. If these sources of funding do not prove to
be sufficient, we may also issue additional shares of equity securities although
we may not be able to complete equity financings on terms acceptable to us, if
at all. Our ability to make all of our budgeted capital expenditures will also
be subject to availability of drilling rigs and other field equipment and
services. Our capital expenditures could also include expenditures for
acquisition of producing properties if such opportunities arise, but we
currently have no agreements, arrangements or undertakings regarding any
material acquisitions. We have no material long-term capital commitments and are
consequently able to adjust the level of our expenditures as circumstances
dictate. Additionally, the level of capital expenditures will vary during future
periods depending on market conditions and other related economic factors.
Should the prices of natural gas and crude oil continue to decline and if our
costs of operations continue to increase as a result of the scarcity of drilling
rigs or if our production volumes decrease, 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.
17
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 and discussed in further detail below:
Three Months Ended
March 31,
----------------------------------------------
2006 2005
------------------- ----------------------
Net cash provided by operating activities $ 6,372 $ 9,489
Net cash used in investing activities (7,133) (8,652)
Net cash provided by (used in) financing activities 762 (1,154)
------------------- ----------------------
Total $ 1 $ (317)
=================== ======================
Operating activities during the three months ended March 31, 2006 provided
us $6.4 million of cash compared to providing $9.5 million in the same period in
2005. Net income plus non-cash expense items during 2005 and 2006 and net
changes in operating assets and liabilities accounted for most of these funds.
Financing activities provided $762,000 for the first three months of 2006
compared to using $1.2 million for the same period of 2005. Most of the funds
provided in 2006 were net proceeds from our revolving line of credit and
proceeds from the exercise of employee stock options. In 2005, most of the funds
were used to reduce our long-term debt and for financing fees. Investing
activities used $7.1 million during the three months ended March 31, 2006
compared to using $8.7 million for the quarter ended March 31, 2005.
Expenditures during the quarter ended March 31, 2006 and March 31, 2005 were
primarily for the development of existing properties.
FUTURE CAPITAL RESOURCES. We currently have three principal sources of
liquidity going forward: (i) cash from operating activities, (ii) funding under
our revolving credit facility, and (iii) if an appropriate opportunity presents
itself, the sale of producing properties. If these sources of liquidity do not
prove to be sufficient, we may also issue additional shares of equity securities
although we may not be able to complete equity financings on terms acceptable to
us, if at all. 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.
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, 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. We
believe our numerous drilling opportunities will allow us to increase our
18
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 52% of our total estimated proved
reserves at December 31, 2005 were undeveloped. During the first quarter of
2006, we expended approximately $7.1 million for wells in south Texas, west
Texas and Wyoming. We are currently completing and/or testing Woodford, Atoka
and Wolfcamp wells in west Texas and continue to recomplete various wells in
south Texas. We have one horizontal well and one vertical well drilling in west
Texas. In the latter part of 2005, we drilled and are currently completing and
testing four vertical wells in Wyoming. In addition, approximately 30% of our
production at March 31, 2006 was from a single well in west Texas. If production
from this well decreases, the volume of our production would also decrease
which, in turn, would likely cause our cash flow from operations to 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 Operating leases for office facilities
We have no off-balance sheet debt or unrecorded obligations and we have not
guaranteed the debt of any other party. Below is a schedule of the future
payments that we are obligated to make based on agreements in place as of March
31, 2006:
Payments due in twelve month periods ended:
-------------------------------------------------------------------------
Contractual Obligations (dollars March 31, March 31, March 31,
(dollars in thousands) Total 2007 2008-2009 2010-2011 Thereafter
---------------------------------- --------------- ------------- ------------- -------------- -------------
Long-Term Debt (1) $ 129,798 $ - $ 4,798 $ 125,000 $ -
Interest on long-term debt (2) 56,452 15,520 30,865 10,067 -
Operating Leases (3) 716 254 462 - -
--------------- ------------- ------------- -------------- -------------
Total $ 186,966 $ 15,774 $ 36,125 $ 135,067 $ -
=============== ============= ============= ============== =============
(1) These amounts represent the balances outstanding under the
revolving credit facility and the 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 for Abraxas
expires in 2009
OTHER OBLIGATIONS. We make and will continue to make substantial capital
expenditures for the acquisition, exploitation, development, exploration and
production of crude oil and natural gas. In the past, we have funded our
9perations 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.
March 31, December 31,
2006 2005
---------------- -----------------
(In thousands)
Floating rate senior secured notes due 2009............................ $ 125,000 $ 125,000
19
Senior secured revolving credit facility............................... 4,798 4,527
---------------- -----------------
129,798 129,527
Less current maturities ............................................... - -
---------------- -----------------
$ 129,798 $ 129,527
================ =================
Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, 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 current
interest rate is 12.08% per annum. The interest rate is reset semi-annually on
each June 1 and December 1. Interest is payable semi-annually in arrears on June
1 and December 1 of each year.
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 our election, 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 (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:
20
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 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%.
The current interest rate is 8.75% per annum. 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
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.
21
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.
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 new credit facility documents or the indenture
governing the notes and other note documents (collectively, the "Secured
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;
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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 ours 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 Agreement 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.
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
senior credit agreement, we are required to maintain hedge positions on not less
than 25% or more than 75% of our projected oil and gas production for a six
month rolling period.
NET OPERATING LOSS CARRYFORWARDS.
At December 31, 2005, we had $190.0 million of net operating loss
carryforwards for U.S. tax purposes. These loss carryforwards will expire
through 2025 if not utilized.
23
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 $67.0 million for
deferred tax assets at March 31, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
As an independent crude oil and natural gas producer, our revenue, cash
flow from operations, other income and profitability, reserve values, access to
capital and future rate of growth are substantially dependent upon the
prevailing prices of crude oil and natural gas. Declines in commodity prices
will materially adversely affect our financial condition, liquidity, ability to
obtain financing and operating results. Lower commodity prices may reduce the
amount of crude oil and natural gas that we can produce economically. Prevailing
prices for such commodities are subject to wide fluctuation in response to
relatively minor changes in supply and demand and a variety of additional
factors beyond our control, such as global political and economic conditions.
Historically, prices received for crude oil and natural gas production have been
volatile and unpredictable, and such volatility is expected to continue. Most of
our production is sold at market prices. Generally, if the commodity indexes
fall, the price that we receive for our production will also decline. Therefore,
the amount of revenue that we realize is partially determined by factors beyond
our control. Assuming the production levels we attained during the quarter ended
March 31, 2006, a 10% decline in crude oil and natural gas prices would have
reduced our operating revenue, cash flow and net income by approximately $1.3
million for the quarter.
HEDGING SENSITIVITY
On January 1, 2001, we adopted SFAS 133 as amended by SFAS 137 and SFAS
138. Under SFAS 133, all derivative instruments are recorded on the balance
sheet at fair value. In 2003 we elected not to designate derivative instruments
as hedges. Accordingly the instruments are recorded on the balance sheet at fair
value with changes in the market value of the derivatives being recorded in
current oil and gas revenue.
Under the terms of our revolving credit facility, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our natural gas and crude oil production for a rolling six month period.
INTEREST RATE RISK
At March 31, 2006 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 12.08%. For every percentage point that the LIBOR rate rises, our
interest expense would increase by approximately $1.3 million on an annual
basis. At March 31, 2006, 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.
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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, 2005, and
in Note 7 in the Notes to Condensed Consolidated Financial Statements contained
in Part I of this report on Form 10-Q.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing
Abraxas. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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
(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
25
ABRAXAS PETROLEUM CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: May 10, 2006 By: /s/Robert L.G. Watson
-------------- -------------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: May 10, 2006 By: /s/Chris E. Williford
-------------- -------------------------
CHRIS E. WILLIFORD,
Executive Vice President and
Principal Accounting Officer
26