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 September 30, 1997
or
( ) 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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
500 N. Loop 1604 E, Suite 100, San Antonio, Texas 78232
-------------------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (210)490-4788
-------------
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X or No __
The number of shares of the issuer's common stock outstanding as of
November 1, 1997, was:
Class Shares Outstanding
--------------------------- ---------------------
Common Stock, $.01 Par Value 6,271,707
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ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements(Unaudited)
Consolidated Balance Sheets - September 30, 1997
and December 31,1996 ..........................................3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1997 and 1996.........5
Consolidated Statements of Cash Flow-
Nine Months Ended September 30, 1997 and 1996...................6
Notes to Consolidated Financial Statements........................8
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................10
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings..................................................15
ITEM 2 - Changes in Securities..............................................15
ITEM 3 - Defaults Upon Senior Securities....................................15
ITEM 4 - Submission of Matters to a Vote of Security Holders................15
ITEM 5 - Other Information..................................................16
ITEM 6 - Exhibits and Reports on Form 8-K...................................16
Signatures.........................................................17
2
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<TABLE>
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Abraxas Petroleum Corporation and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30 December 31
1997 1996
(Unaudited)
--------------------------
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash ................................................ $ 7,559 $ 8,290
Accounts receivable, less allowance for doubtful
accounts:
Joint owners ................................... 2,067 1,601
Oil and gas production sales ................... 8,164 11,400
Affiliates ..................................... -- 94
Other .......................................... 749 1,289
-------- --------
10,980 14,384
Equipment inventory ................................. 430 451
Other current assets ................................ 205 187
-------- --------
Total current assets .................................. 19,174 23,312
Property and equipment: ............................... 346,459 310,043
Less accumulated depreciation, depletion and
amortization ........................................ 58,250 38,653
-------- --------
Net property and equipment based on the full cost
method of accounting for oil and gas properties of
which $37,268 was excluded from amortization .... 288,209 271,390
Deferred financing fees, net of accumulated
amortization of $280 and $1,213 at December 31,
1996, and September 30, 1997, respectively ........ 8,432 9,335
Restricted cash ....................................... 90 90
Other assets .......................................... 1,277 715
-------- --------
Total Assets ........................................ $317,182 $304,842
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
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<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets (continued)
September 30 December 31
1997 1996
(Unaudited)
--------------------------
(In Thousands)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ................................... $ 14,246 $ 9,960
Oil and gas production payable ..................... 2,410 2,378
Accrued interest ................................... 10,392 3,206
Income tax payable ................................. 145 145
Other accrued expenses ............................. 1,638 1,132
Payable to affiliates .............................. -- 58
-------- --------
Total current liabilities .................... 28,831 16,879
Long-term debt:
Senior notes ....................................... 215,000 215,000
Other .............................................. 2,330 32
-------- --------
217,330 215,032
Other long term obligations .......................... 243 87
Deferred income taxes ................................ 32,024 32,928
Minority interest in foreign subsidiary .............. 4,380 2,157
Future site restoration .............................. 2,248 2,103
Shareholders' equity:
Preferred stock 8% authorized, 1,000,000 shares;
issued and outstanding -0- shares at September 30,
1997 and 45,741 shares at December 31, 1996 ...... -- --
Common stock, par value $.01 per share - authorized
50,000,000 shares; issued 6,324,730 shares at
September 30, 1997 and 5,806,812 shares at
December 31, 1996, respectively 63 58
Additional paid-in capital ......................... 51,119 50,926
Accumulated deficit ................................ (15,298) (12,517)
Treasury stock, at cost, 53,023 and 74,711 at
September 30, 1997 and December 31, 1996,
respectively ................................... (281) (405)
Foreign currency translation ....................... (3,477) (2,406)
-------- --------
Total shareholders' equity ........................... 32,126 35,656
-------- --------
Total liabilities and shareholders' equity ........... $317,182 $304,842
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
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<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------------------------------------------------------------
(In thousands except share and per share data)
<S> <C> <C> <C> <C>
Revenue:
Oil & gas production sales ............................... $ 14,376 $ 3,572 $ 46,920 $ 11,275
Processing revenue ....................................... 956 -- 2,793 --
Rig revenues ............................................. 144 29 250 106
Other .................................................... 227 14 728 17
--------- ----------- ----------- ----------
15,703 3,615 50,691 11,398
Operating costs and expenses:
Lease operating and production taxes .................... 3,822 1,114 10,604 3,295
Gas processing costs .................................... 477 -- 1,191 --
Depreciation, depletion and amortization ................ 6,385 1,274 19,780 4,145
General and administrative .............................. 1,035 441 3,119 1,250
Rig operations .......................................... 82 43 214 113
--------- ----------- ----------- ----------
11,801 2,872 34,908 8,803
--------- ----------- ----------- ----------
Operating Income ........................................... 3,902 743 15,783 2,595
Other (income) expense:
Interest income ......................................... (45) (40) (438) (155)
Interest expense ........................................ 6,385 698 18,757 2,142
Amortization of deferred financing fees ................. 340 64 933 192
Other ................................................... (11) 235 115 235
--------- ----------- ----------- ----------
6,669 957 19,367 2,414
--------- ----------- ----------- ----------
Income (loss) from operations before taxes ................. (2,767) (214) (3,584) 181
Income tax expense
Current ................................................. 41 -- 156 --
Deferred benefit ........................................ (724) -- (1,227) --
Minority interest in income (loss)
of consolidated foreign subsidiary ...................... (42) 22 85 58
--------- ----------- ----------- ----------
Income (loss) before extraordinary item .................... (2,042) (236) (2,598) 123
Extraordinary item--debt extinguishment cost ............... -- 369 -- 369
--------- ------------ ----------- ----------
Net income (loss) .......................................... (2,042) (605) (2,598) (246)
Less dividend requirement on cumulative
preferred stock ......................................... -- (91) (183) (274)
--------- ------------ ------------ ----------
Net income (loss) applicable to common stock................ $ (2,042) $ (696) $ (2,781) $ (520)
========= ============ ============ ==========
Net income (loss) per share: Income (loss) per common share:
Income (loss) before extraordinary item................ $ (.33) $ (.06) $ (.47) $ (.03)
Extraordinary item .................................... -- (.06) -- (.06)
--------- ------------ ------------ ----------
Net income (loss) ..................................... $ (.33) $ (.12) $ (.47) $ (.09)
========== ============ =========== ==========
Weighted average shares outstanding ........................ 6,271,707 5,804,812 5,920,135 5,804,145
=========== =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
5
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<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30
1997 1996
-----------------------
(In Thousands)
<S> <C> <C>
Operating Activities
Net income (loss) ...................................... $ (2,598) $ (246)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interest in income of foreign subsidiary 85 58
Depreciation, depletion, and amortization ........ 19,780 4,145
Amortization of deferred financing fees .......... 933 561
Issuance of common stock for compensation ........ 310 --
Decrease in deferred tax ......................... (1,227) --
Changes in operating assets and liabilities:
Accounts receivable ......................... 3,404 103
Equipment inventory ......................... 21 (62)
Other assets ................................ (18) (14)
Accounts payable and accrued expenses ....... 11,920 713
Oil and gas production payable .............. 32 (373)
-------- --------
Net cash provided by operating activities ........ 32,642 4,885
Investing Activities
Capital expenditures, including purchases and
development of properties ............................. (44,604) (55,489)
Proceeds from sale of oil and gas producing properties . 8,978 16,794
Purchase of interest partnership ....................... -- (2,425)
-------- --------
Net cash provided (used) in investing activities ....... (35,626) (41,120)
</TABLE>
See accompanying notes to consolidated financial statements
6
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<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Nine Months Ended
September 30
1997 1996
-----------------------
(In Thousands)
<S> <C> <C>
Financing Activities
Issuance of common stock ............................ 11 30
Offering issuance costs ............................. -- (192)
Purchase of treasury stock .......................... -- (372)
Dividends paid on preferred stock ................... (182) (274)
Proceeds from long term borrowings .................. 2,298 90,400
Payments on long term borrowings .................... -- (46,957)
Increase in other long term liabilities ............. 156 79
Deferred financing fees ............................. (30) (779)
-------- --------
Net cash provided by financing activities ........... 2,253 41,935
-------- --------
Increase (Decrease) in cash ......................... (731) 5,700
Cash at beginning of period ......................... 8,380 4,384
-------- --------
Cash at end of period, including restricted cash .... $ 7,649 $ 10,084
======== ========
Supplemental disclosures of cash flow information:
Interest paid ....................................... $ 12,594 $ 2,142
======== ========
Supplemental schedule of non-cash investing and
financing activity:
Accrual of preferred dividends ...................... $ -- $ 91
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
7
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Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1997
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 for the year ended
December 31, 1996 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 interim 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. Operating results for the three-month and
nine-month period ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
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 78% owned foreign subsidiary Grey Wolf
Exploration, Ltd., ("Grey Wolf"). Grey Wolf has consolidated its 58% owned
interest in Cascade Oil and Gas, Ltd. ("Cascade"). Minority interest represents
the minority shareholders' proportionate share of the equity and income of both
Grey Wolf and Cascade.
Canadian Abraxas' , Grey Wolf's and Cascade's assets and liabilities are
translated to U.S. dollars at period- end exchange rates. Income and expense
items are translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders'
equity.
NOTE 2. NET INCOME PER SHARE
Net income per common share is computed by dividing net income (adjusted for
dividends on preferred stock) by the weighted average number of shares of common
stock outstanding during the period, options and warrants that are dilutive.
Income per common and common equivalent share assuming full dilution was
determined on the assumption that the preferred stock was converted into common
stock at the beginning of the period if dilutive. Common stock equivalents are
not considered in the computation of net income per common share for periods
with a loss, as their effect is anti-dilutive.
During the second quarter of 1997, the Contingent Value Rights terminated;
accordingly, earnings per share for the first six months of 1997 have been
retroactively restated. Subsequent to June 30, 1997, the holder of the Company's
preferred stock converted its holdings into 508,183 shares of common stock. If
the conversion had occurred at the beginning of the periods presented, earnings
per share would have been $(.10) for the three months ended September 30, 1996,
and $(.41) and $.04 for the nine months ended September 30, 1997 and 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings per Share", which is required to be adopted on December 31,
1997. Under the statement, primary earnings per share will be replaced with
basic earnings per share and fully diluted earnings per share will be replaced
with diluted earnings per share. The new requirements for calculating basic
earnings per share exclude the dilutive effect of stock options, warrants and
Contingent Value Rights. The implementation of the new requirements would not
have had any impact on basic or fully diluted earnings per share for the period
ended September 30, 1997.
8
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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 September 30, 1997, and for the three
and nine months ended September 30, 1997. 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 (the "Notes") ($215,000,000), of which
$74,682,000 was utilized by Canadian Abraxas in connection with the acquisition
of Canadian Gas Gathering Systems, Inc. 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 $ 9,034 Total current liabilities $ 5,474
Oil and gas properties 97,556 11.5% Senior Notes due 2004 74,682
Other assets 3,998 Other liabilities 33,523
------------
$ 110,588 Shareholder's equity (3,091)
========== ---------
$ 110,588
=========
Three Months Ended Nine Months Ended
Sept.30,1997 Sept.30,1997
-------------------------------------------
Revenues $ 3,555 $ 13,382
Operating costs & expenses (3,889) (11,544)
Interest expense (2,107) (6,999)
Other income (expense) (48) (242)
Income tax - benefit 896 1,289
----------- -----------
Net loss $ (1,593) $ (4,114)
=========== ===========
NOTE 4. SUBSEQUENT EVENT
The Company has entered into a merger agreement to purchase Vessels Energy,
Inc., a privately held Denver-based company for Abraxas common stock. The merger
is dependent on board and shareholder approval of both companies with closing
expected in early 1998.
NOTE 5. RECLASSIFICATIONS
Certain balances for 1996 have been reclassified for comparative purposes.
9
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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, 1996 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 Nine Months Ended
Sept. 30 Sept. 30
------------------ ------------------
1997 1996 1997 1996
Operating Revenue (in thousands):
Crude Oil Sales .................... $ 4,282 $ 1,583 $13,383 $ 5,306
Natural Gas Sales .................. 7,709 1,511 25,557 4,619
Natural Gas Liquids Sales .......... 2,385 479 7,980 1,350
Processing revenue ................. 956 -- 2,793 --
Rig Operations ..................... 144 28 250 106
Other ................................ 227 14 728 17
------- ------- ------- -------
Total Operating Revenue .......... $15,703 $ 3,615 $50,691 $11,398
======= ======= ======= =======
Operating Income (in thousands): ....... $ 3,902 $ 743 $15,783 $ 2,595
Crude Oil Production (MBBLS) ........... 242 74 712 266
Natural Gas Production (MMCF) .......... 4,959 867 14,985 2,625
Natural Gas Liquids Production (MBBLS) . 245 36 751 106
Average Crude Oil Sales Price ($/BBL)... $ 17.69 $ 21.24 $ 18.79 $ 19.94
Average Natural Gas Sales Price ($/MCF). $ 1.55 $ 1.97 $ 1.71 $ 1.95
Average Liquids Sale Price ($/BBL) ..... $ 9.73 $ 13.40 $ 10.63 $ 12.73
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
OPERATING REVENUE. During the three months ended September 30, 1997 operating
revenue from crude oil, natural gas and natural gas liquid sales increased to
$14.4 million compared to $3.6 million in the three months ended September 30,
1996. The $10.8 million increase in revenue was primarily attributable to
increased volumes which was partially offset by a decline in the average sales
price per BOE. Volume increases from 254,792 BOE to 1,314 MBOE (thousand barrels
of oil equivalent "MBOE") contributed $14.8 million, which was offset by $(4.0)
million from lower commodity prices. Volume increases were due primarily to
increased production from acquisitions of producing properties acquired during
the fourth quarter of 1996, as well as increased production attributable to the
Company's ongoing development program on existing and acquired properties. Oil
and natural gas liquids volumes increased by 342% to 487 MBbls from 110 MBbls
for the same period of 1996. Acquisitions and subsequent development of acquired
properties contributed 286.0 MBbls while ongoing development of existing
properties contributed 91 MBbls of the increase. Natural gas volumes increased
from 867 MMcf to 4,959 MMcf for the three months ended September 30, 1997.
Acquisitions and subsequent development of acquired properties contributed 1,900
10
<PAGE>
MMcf while existing properties contributed 3,059 MMcf. Average sales prices were
$17.69 per Bbl of crude oil, $1.55 per Mcf of natural gas and $9.73 per Bbl of
natural gas liquids in the three months ended September 30, 1997 compared with
$21.24 per Bbl of crude oil, $1.97 per Mcf of natural gas and $13.40 per Bbl of
natural gas liquids in the same period of 1996.
LEASE OPERATING EXPENSES. Lease operating expenses and production taxes
("LOE") and natural gas processing expenses were $4.3 million for three months
ended September 30, 1997 compared to $1.1 million for the same period of 1996.
The increase of $3.2 million was due to an increase in the number of wells the
Company owned as of September 30, 1997 compared to the same period of the prior
year. LOE on a per barrel basis decreased to $2.91 per BOE for the three months
ended September 30, 1997 from $4.37 for the same period of 1996.
G&A EXPENSES. General and administrative ("G&A") expenses increased from
$441,000 for the three months ended September 30, 1996 to $1.0 million for the
same period of 1997. The increase is primarily attributable to the hiring of
additional staff, including an increase in the personnel at the Company's
Canadian administrative office to manage and develop properties acquired in the
fourth quarter of 1996. G&A expense on a per BOE basis decreased to $.79 per BOE
from $1.73 for same period of 1996.
DEPRECIATION, DEPLETION AND AMORTIZATION. Due to the increase in sales volumes
of crude oil and natural gas, depreciation, depletion and amortization ("DD&A")
expenses increased by $5.1 million to $6.4 million for the three months ended
September 30, 1997 from $1.3 million for the same period of 1996. DD&A expenses
on a per BOE basis was $4.86 per BOE for the three months ended September 30,
1997 compared to $5.00 per BOE for the three months ended September 30, 1996.
INTEREST EXPENSE AND PREFERRED DIVIDENDS. Interest expense and preferred
dividends ("Interest and Dividends") increased to $6.4 million for the three
months ended September 30, 1997 from $790,000 for the three months ended
September 30, 1996. The increase is due to increased levels of borrowings by the
Company to finance the acquisitions consummated in 1996, partially offset by the
elimination of dividends on preferred stock due to the conversion of such stock
into common stock for the three months ended September 30, 1997. Long-term debt
increased from $85 million as of September 30, 1996 to $217.3 million at
September 30, 1997.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
OPERATING REVENUE. During the nine months ended September 30, 1997 operating
revenue from crude oil, natural gas and natural gas liquid sales increased to
$46.9 million compared to $11.3 million in the nine months ended September 30,
1996. The $35.6 million increase in revenue was primarily attributable to
increased volumes which was partially offset by a decline in the average sales
price per BOE. Volume increases from 809,670 BOE to 3,961 MBOE contributed $43.8
million which was offset by $(8.2) million from lower commodity prices. Volume
increases were due primarily to increased production from acquisitions of
producing properties acquired in the fourth quarter of 1996, as well as
increased production attributable to the Company's ongoing development program
on existing and acquired properties. Oil and natural gas liquids volumes
increased by 293% to 1,463 Mbbls from 372 Mbbls for the same period of 1996.
Acquisitions and subsequent development of acquired properties contributed 777
Mbbls while ongoing development of existing properties contributed 314 Mbbls of
the increase. Natural gas volumes increased from 2,625 MMcf to 14,985 MMcf for
the nine months ended September 30, 1997. Acquisitions and subsequent
development of acquired properties contributed 9,287 MMcf while existing
properties contributed 3,073 MMcf. Average sales prices were $18.79 per Bbl of
crude oil, $1.71 per Mcf of natural gas and $10.63 per Bbl of natural gas
liquids for the nine months ended September 30, 1997, compared with $19.94 per
Bbl of crude oil, $1.95 per Mcf of natural gas and $12.73 per Bbl of natural gas
liquids in the same period of 1996.
LEASE OPERATING EXPENSES. LOE and natural gas processing expenses were $11.8
million for the nine months ended September 30, 1997, compared to $3.3 million
for the same period of 1996. The increase of $8.5 million was due to an increase
in the number of wells the Company owned as of September 30, 1997, compared to
the same period of the prior year. LOE on a per barrel basis decreased to $2.68
per BOE for the nine months ended September 30, 1997, from $4.07 for the same
period of 1996.
11
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G&A EXPENSES. G&A expenses increased from $1.2 million for the nine months
ended September 30, 1996, to $3.1 million for the same period of 1997. The
increase is primarily attributable to the hiring of additional staff, including
an increase in the personnel at the Company's Canadian administrative office to
manage and develop properties acquired in the fourth quarter of 1996. G&A
expense on a per BOE basis decreased to $.79 per BOE from $1.54 for same period
of 1996.
DEPRECIATION, DEPLETION AND AMORTIZATION. Due to the increase in sales volumes
of crude oil and natural gas, DD&A expenses increased by $15.6 million to $19.8
million for the nine months ended September 30, 1997, from $4.2 million for the
same period of 1996. DD&A expense on a per BOE basis was $5.00 per BOE for the
nine months ended September 30, 1997, compared to $5.27 per BOE for the nine
months ended September 30, 1996.
INTEREST EXPENSE AND PREFERRED DIVIDENDS. Interest expense and preferred
dividends increased to $18.9 million for the nine months ended September 30,
1997 from $2.4 million for the six months ended September 30, 1996. The increase
was due to increased levels of borrowings by the Company to finance acquisitions
consummated in 1996. Long-term debt increased from $85 million as of September
30, 1996, to $217.3 million at September 30, 1997. Preferred dividends were
eliminated July 1, 1997 as a result of the conversion of all outstanding
preferred stock into common shares.
GENERAL
The Company has incurred operating losses and net losses for a number of
years. 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 price of natural gas and crude oil received by the Company
decreased during the first nine months of 1997. There can be no assurance that
operating income and net earnings will be achieved in future periods. 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 and natural gas
prices continue to decrease, 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
Capital expenditures excluding property divestitures during the first nine
months of 1997 amounted to $44.6 million compared to $58.0 million during the
same period of 1996. The table below sets forth the components of these capital
expenditures on a historical basis for the nine months ended September 30, 1996
and 1997.
Nine Months Ended
Sept. 30
--------------------------------
1997 1996
Expenditure category (in thousands):
Property acquisitions $ 2,067 $ 47,655
Development 41,980 10,016
Facilities and other 557 369
--------- ----------
Total $ 44,604 $ 58,040
========= ==========
At September 30, 1997, the Company had current assets of $19.2 million and
current liabilities of $28.8 million resulting in working capital deficit of
$9.6 million. This compares to working capital of $6.4 million at December 31,
1996, and $7.6 million at September 30, 1996. The material components of the
Company's current liabilities at September 30, 1997, include trade accounts
payable of $14.2 million, revenues due third parties of $2.4 million and accrued
interest of $10.4 million.
The Company's current budget for capital expenditures for the fourth quarter
of 1997 is $5.0 million. Such expenditures will be made primarily for the
development of existing properties. Additional capital expenditures may be made
for acquisitions of producing properties as such opportunities arise. The
Company currently has no agreements, arrangements of undertaking regarding any
material acquisitions other than the previously disclosed merger agreement with
12
<PAGE>
Vessels Energy, Inc. 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.
The Company's Credit Facility with Bankers Trust Company ("BT") and other
lenders thereunder (the "Banks") provides for a revolving line of credit with an
availability of $40 million, subject to certain customary conditions including a
borrowing base condition. 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 Banks 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 BT's sole discretion,
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 Company currently has $16 million available on the Credit Facility.
The Credit Facility has an initial revolving term of two years and a reducing
period of three years form the end of the initial two-year period. The
commitment under the Credit Facility will be reduced during such reducing period
by 11 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% of (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% of (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.
The Company's Credit Facility contains a number of covenants that, among
other things, restrict 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 ratios and tests, including minimum debt service coverage
ratios, maximum funded debt to EBITDA tests, minimum net worth tests and minimum
working capital tests.
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.
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
(the "Notes"). The notes are joint and several obligations of Abraxas and
Canadian Abraxas and were issued under the terms of an Indenture dated November
14, 1996 (the "Indenture"). The Indenture contains a number of covenants and
events of default including covenants restricting, among other things, the
Company's 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,
13
<PAGE>
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, violations of covenants, cross default on other indebtedness,
bankruptcy and material judgments. The Indenture also provides, 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 Indenture; (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
entity so acquired; (vi) customary restrictions with respect to subsidiaries of
the Company pursuant to an agreement that has been entered into 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 judgement than the provisions relating to such
encumbrance or restriction contained in the applicable agreement referred to in
such clause (ii), (iii) or (v).
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 Company's current lender 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. At September 30, 1997, the
fair value of this swap, as determined by BT CO was approximately $78,000.
Operating activities during the nine months ended September 30, 1997 provided
$32.6 million cash to the Company compared to $4.8 million in the same period in
1996. Net operating income plus non-cash expense items during 1997 and net
changes in operating assets and liabilities accounted for most of these funds.
Investing activities used $36.1 million during the first nine months of 1997
primarily for development of oil and gas properties. This compares to $41.1
million provided during the same period of 1996. Financing activities provided
$2.3 million for the first nine months of 1997 compared to requiring $41.9
million for the same period of 1996.
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 of 1986, as amended (Section 382), occurred in
December 1991. Accordingly, it is expected that the use of net operating loss
carry forwards generated prior to December 31, 1991 of $4.9 million will be
limited to approximately $235,000 per year. During 1992, the Company acquired
100% of the common stock of an unrelated corporation. The use of net operating
loss carry forwards of $1.1 million acquired in the acquisition are limited to
approximately $115,000 per year. As a result of the issuance of additional
shares of Common Stock for acquisitions and sales of Common Stock, an additional
ownership change under Section 382 occurred in October 1993. Accordingly, it is
expected that the use of all net operating loss carry forwards generated through
October 1993 of $8.2 million will be limited to approximately $1.0 million per
year subject to the lower limitations described above. Of the $8.2 million net
operating loss carry forwards existing at October 1993, 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
carry forwards. In addition to Section 382 limitations, uncertainties exist as
to the future utilization of the operating loss carry forwards under the
criteria set forth under FASB Statement No. 109. Therefore, the Company has
established a valuation allowance of $5.6 million and for deferred tax assets at
December 31, 1996 and 1995, respectively.
14
<PAGE>
Based upon the current level of operations, the Company believes that 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 1997. A depressed price for natural gas or
crude oil 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.
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.
15
<PAGE>
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 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11. Statement Re: Computation of earnings per share
27. Financial data schedule
(b) Reports on Form 8-K
none
16
<PAGE>
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: November 14,1997 By:/s/Robert L.G. Watson
------------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: November 14, 1997 By:/s/Chris Williford
----------------------
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
17
<PAGE>
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