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 June 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19118
ABRAXAS PETROLEUM CORPORATION
----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 74-2584033
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification Number)
500 N. Loop 1604, East, Suite 100, San Antonio, Texas 78232
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (210) 490-4788
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the restraint
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X or No __
The number of shares of the issuer's common stock outstanding as of
August 10, 1998, was:
Class Shares Outstanding
Common Stock, $.01 Par Value 6,261,618
1 of 21
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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 - June 30, 1998
and December 31,1997.....................................3
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1998 and 1997........5
Consolidated Statement of Stockholders Equity
June 30, 1998 and December 31, 1997......................6
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997..................7
Notes to Consolidated Financial Statements......................9
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings..................................................20
ITEM 2 - Changes in Securities..............................................20
ITEM 3 - Defaults Upon Senior Securities....................................20
ITEM 4 - Submission of Matters to a Vote of Security Holders................20
ITEM 5 - Other Information..................................................20
ITEM 6 - Exhibits and Reports on Form 8-K...................................20
Signatures ........................................................21
2
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<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30 December 31
1998 1997
(Unaudited)
-------------------------
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash ............................................... $ 1,281 $ 2,836
Accounts receivable, less allowances
for doubtful accounts:
Joint owners ................................... 2,433 2,149
Oil and gas production ......................... 5,574 11,194
Affiliates, Officers, and Stockholders ......... -- 42
Other .......................................... 1,706 1,217
-------- --------
9,713 14,602
Equipment inventory ................................ 482 367
Other current assets ............................... 683 508
-------- --------
Total current assets ................................. 12,159 18,313
Property and equipment ............................... 412,701 385,442
Less accumulated depreciation,
depletion and amortization: ...................... 91,325 74,597
-------- --------
Net property and equipment based on
the full cost method of accounting for
oil and gas properties, of which $11,519
and $12,584 at December 31, 1997
and June 30, 1998, respectively,
were excluded from amortization ................ 321,376 310,845
Deferred financing fees, net of
accumulated amortization of $1,540
and $2,175 at December 31, 1997 and
June 30, 1998, respectively ........................ 8,953 8,072
Restricted cash ...................................... 40 40
Other assets ......................................... 1,254 1,258
-------- --------
Total assets ....................................... $343,782 $338,528
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets (continued)
June 30 December 31
1998 1997
(Unaudited)
-------------------------
(In Thousands)
<S> <C> <C>
Liabilities and Shareholder's Equity
Current liabilities
Accounts payable ............................... $ 6,642 $ 17,120
Oil and gas production payable ................. 2,591 2,819
Accrued interest ............................... 5,458 4,622
Income tax payable ............................. 339 164
Other accrued expenses ......................... 896 2,732
--------- ---------
Total current liabilities ..................... 15,926 27,457
Long-term debt:
Senior notes ................................. 275,000 215,000
Credit facility .............................. 100 31,500
Other ........................................ 2,054 2,117
--------- ---------
277,154 248,617
Premium on Senior Notes .......................... 3,471 --
Deferred income taxes ............................ 25,194 27,751
Minority interest in foreign
subsidiary ...................................... 4,641 4,813
Future site restoration .......................... 3,269 3,077
Shareholders' equity:
Common Stock, par value $.01 per share-
authorized 50,000,000 shares; issued,
6,430,378 and 6,422,540 shares at
June 30, 1998 and December 31, 1997,
respectively ................................. 63 63
Additional paid-in capital ..................... 51,248 51,118
Accumulated deficit ............................ (29,862) (19,185)
Treasury stock, at cost, 73,760 and
53,023 shares at June 30, 1998 and
December 31, 1997, respectively .............. (586) (281)
Accumulated other comprehensive income (loss) .... (6,736) (4,902)
--------- ---------
Total shareholders' equity ....................... 14,127 26,813
--------- ---------
Total liabilities and shareholders' equity ....... $ 343,782 $ 338,528
========= =========
</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 Six Months Ended
June 30 June 30
(In thousands except share and per share data)
==============================================
1998 1997 1998 1997
==============================================
<S> <C> <C> <C> <C>
Revenue:
Oil & gas production sales ............ $ 13,953 $ 14,634 $ 28,608 $ 32,544
Processing revenue .................... 966 841 1,701 1,837
Rig revenues .......................... 122 53 238 106
Other ................................. 430 244 1,663 501
-------- -------- -------- --------
15,471 15,772 32,210 34,988
Operating costs and expenses:
Lease operating and production taxes .. 4,154 3,433 8,518 6,782
Gas processing costs .................. 247 302 522 714
Depreciation, depletion and
amortization ........................ 8,971 6,721 17,223 13,395
General and administrative ............ 1,386 1,146 2,689 2,084
Rig Operations ........................ 136 80 258 132
-------- -------- -------- --------
14,894 11,682 29,210 23,107
-------- -------- -------- --------
Operating Income ......................... 577 4,090 3,000 11,881
Other (income) expense
Interest income ....................... (172) (297) (308) (393)
Interest expense ...................... 7,749 6,288 15,265 12,372
Amortization of deferred financing fees 308 296 635 593
Other ................................. -- 94 -- 126
-------- -------- -------- --------
7,885 6,381 15,592 12,698
-------- -------- -------- --------
Income (loss) from operations before taxes (7,308) (2,291) (12,592) (817)
Income tax expense (benefit)
Current .............................. 24 95 84 115
Deferred ............................. (1,133) (503) (1,828) (503)
Minority interest in income (loss)
of consolidated foreign subsidiary ... (94) 127 (171) 127
-------- -------- -------- --------
Net income (loss) ........................ (6,105) (2,010) (10,677) (556)
Less dividend requirement on cumulative
preferred stock ...................... -- 92 -- 183
-------- -------- -------- --------
Net income (loss) applicable to common
stock .................................... $ (6,105) $ (2,102) $(10,677) $ (739)
======== ======== ======== ========
Earnings (loss) per share:
Net income (loss) per common share ... $ (.96) $ (.37) $ (1.68) $ (.13)
======== ======== ======== ========
Net income (loss) per common
share - assuming dilution .......... $ (.96) $ (.37) $ (1.68) $ (.13)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
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<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share amounts)
Accumulated
Common Stock Treasury Stock Additional Other
------------------- ----------------- Paid_In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
---------- -------- --------- --------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 . 6,422,540 $ 63 53,023 $ 281 $ 51,118 $ (19,185) $ (4,902) $ 26,813
Comprehensive income (loss):
Net Loss ................... -- -- -- -- -- (10,677) -- (10,677)
Other comprehensive income:
Foreign currency
translation adjustment -- -- -- -- -- -- (1,834) (1,834)
---------
Comprehensive income (loss) .. -- -- -- -- -- -- -- (12,511)
Issuance of common stock for
compensation ............... 4,838 -- (18,263) (94) 114 -- -- 208
Stock options exercised ...... 3,000 -- -- -- 16 -- -- 16
Purchase of Treasury Stock ... -- -- 39,000 399 -- -- -- (399)
--------- ------ -------- -------- --------- ---------- ----------- ---------
Balance at June 30, 1998 ..... 6,430,378 $ 63 73,760 $ 586 $ 51,248 $ (29,862) $ (6,736) $ 14,127
========= ====== ======== ======== ========= ========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30
=====================
1998 1997
=====================
(In Thousands)
<S> <C> <C>
Operating Activities
Net income (loss) ................................. $(10,677) $ (556)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Minority interest in income of foreign subsidiary (171) 127
Depreciation, depletion, and amortization ....... 17,223 13,395
Amortization of deferred financing fees ......... 635 593
Amortization of premium on Senior Notes ......... (289) --
Deferred income tax benefit ..................... (1,828) (503)
Issuance of common stock for compensation ....... 207 225
Changes in operating assets and liabilities:
Accounts receivable ............................. 4,771 1,501
Equipment inventory ............................ (115) (268)
Other assets .................................... (270) (20)
Accounts payable and accrued expenses ........... (11,465) 393
-------- --------
Net cash provided (used) by operating activities .. (1,979) 14,887
Investing Activities
Capital expenditures, including purchases and
development of properties ..................... (30,622) (24,986)
Proceeds from sale of oil and gas producing
properties .................................... 621 9,655
-------- --------
Net cash used in investing activities ............. $(30,001) $(15,331)
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Six Months Ended
June 30
=====================
1998 1997
=====================
(In Thousands)
<S> <C> <C>
Financing Activities
Issuance of common stock ......................... $ 19 $ --
Purchase of treasury stock ....................... (399) --
Dividends paid on preferred stock ................ -- (183)
Proceeds from long term borrowings ............... 60,230 72
Premium from issuance of Senior Notes ............ 3,616 --
Payments on long-term borrowings ................. (31,426) --
Increase in long term liabilities ................ -- 100
Deferred financing fees .......................... (1,565) (26)
-------- --------
Net cash provided (used) by financing activities . 30,475 (37)
Effect of exchange rate changes on cash .......... (50) --
-------- --------
Decrease in cash ................................. (1,555) (481)
Cash at beginning of period ...................... 2,876 8,380
-------- --------
Cash at end of period, including restricted cash . $ 1,321 $ 7,899
======== ========
Supplemental disclosures of cash flow information:
Interest paid .................................... $ 14,453 $ 11,586
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
8
<PAGE>
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1998
Note 1. Basis of Presentation
The accounting policies followed by Abraxas Petroleum Corporation and
its subsidiaries (the "Company") are set forth in the notes to the Company's
audited financial statements in the Annual Report on Form 10-K filed for the
year ended December 31, 1997 which is incorporated herein by reference. Such
policies have been continued without change. Also, refer to the notes to those
financial statements for additional details of the Company's financial
condition, results of operations, and cash flows. All the material items
included in those notes have not changed except as a result of normal
transactions in the interim, or as disclosed within this report. The
consolidated financial statements have not been audited by independent
accountants, but in the opinion of management, reflect all adjustments necessary
for a fair presentation of the financial position and results of operations. Any
and all adjustments are of a normal and recurring nature.
The consolidated financial statements include the accounts of the
Company and its wholly owned foreign subsidiary Canadian Abraxas Petroleum Ltd.
("Canadian Abraxas"), and its 48% owned foreign subsidiary Grey Wolf
Exploration, Inc. ("Grey Wolf"). Minority interest represents the minority
shareholders' proportionate share of the equity and income of Grey Wolf.
Canadian Abraxas and Grey Wolf assets and liabilities are translated to
U.S. dollars at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders'
equity.
9
<PAGE>
Note 2. Earnings Per Share
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) .......................... $ (6,105) $ (2,010) $ (10,677) $ (566)
Preferred stock dividends .................. -- 92 -- 183
----------- ----------- ----------- -----------
Numerator for basic earnings per share -
income (loss) available to common
stockholders ............................... (6,105) (2,102) (10,677) (739)
Effect of dilutive securities:
Preferred stock dividends ................ -- -- -- --
----------- ----------- ----------- -----------
Numerator for diluted earnings per
share-income available to common
stockholders after assumed conversions .... (6,105) (2,102) (10,677) (739)
Denominator:
Denominator for basic earnings per share -
weighted-average shares .................. 6,356,618 5,754,584 6,356,207 5,746,899
Effect of dilutive securities:
Stock options and warrants ............... -- -- -- --
Convertible preferred stock .............. -- -- -- --
Assumed issuance under the CVR
Agreement .............................. -- -- -- --
----------- ----------- ----------- -----------
-- -- -- --
----------- ----------- ----------- -----------
Dilutive potential common shares
Denominator for diluted earnings per
share - adjusted weighted-average shares and
assumed conversions ........................ 6,356,618 5,754,584 6,356,207 5,746,899
Basic earnings (loss) per share:
Income (loss) ............................ $ (.96) $ (.37) $ (1.68) $ (.13)
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Income (loss) ............................ $ (.96) $ (.37) $ (1.68) $ (.13)
=========== =========== =========== ===========
</TABLE>
For the three months and six months ended June 30, 1998, none of the
shares issuable in connection with stock options or warrants are included in
diluted shares. For the three months and six months ended June 30, 1997, none of
shares issuable in connection with stock options, warrants, conversion of
preferred stock or assumed issuance under the CVR Agreement are included in
diluted shares. Inclusion of these shares would be antidilutive due to losses
incurred in that period.
10
<PAGE>
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 June 30, 1998. Canadian Abraxas is
jointly and severally liable with the Company for the entire balance of the
Company's and Canadian Abraxas' 11.5% Senior Notes due 2004 (the "Notes")
($275,000,000), of which $84,612,000 was utilized by Canadian Abraxas in
connection with the acquisition of Canadian Gas Gathering Systems, Inc ("CGGS").
The Company has not presented separate financial statements and other
disclosures concerning Canadian Abraxas because management has determined that
such information is not material to the holders of the Notes and the Company's
Common Stock.
Assets Liabilities and Shareholders Equity
- --------------------------------------- ----------------------------------------
(In Thousands)
Total current assets $ 3,629 Total current liabilities $ 2,867
Oil and gas properties 109,947 11.5% Senior Notes due 2004 74,682
Other assets 3,481 Note payable to Abraxas
----------- Petroleum Corporation 25,650
$ 117,057 Other liabilities 28,073
=========== Shareholder's equity (14,215)
----------
$ 117,057
==========
Three Months Six Months
June 30, 1998 June 30, 1998
Revenues $ 5,436 $ 10,410
Operating costs & expenses (5,338) (10,258)
Interest expense (2,844) (5,199)
Income tax benefit 1,040 1,641
------------ ----------
Net Loss $ (1,706) $ (3,406)
============ ==========
Note 4. Contingencies
In May 1995, certain plaintiffs filed a lawsuit against the Company
alleging negligence and gross negligence, tortuous interference with contract,
conversion and waste. In May 1998, a jury found against the Company in the
amount of $1,332,000 plus attorney's fees and pre-judgment interest. On May 22,
1998 final judgment in the amount of $890,270 was entered. The Company has filed
various post-judgment motions including a motion for judgment notwithstanding
the verdict and a motion for new trial. On July 31, 1998 a hearing was held on
the Company motion for a new trial. The motion was taken under advisement by the
judge. No ruling has been made as of August 10, 1998. If necessary, the Company
will also file an appeal. Management believes, based on the advice of legal
counsel, that the plaintiffs' claims are without merit and that damages should
not be recoverable under this action; however, the ultimate effect on the
Company's financial position and results of operations cannot be determined at
this time. The Company has not established a reserve for this matter at June 30,
1998.
Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At June 30, 1998, the Company was not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company.
Note 5. Subsequent Event
On August 6, 1998, the Company's 48% owned and publicly traded Canadian
subsidiary, Grey Wolf Exploration, Inc., completed a 50 million common share
offering at $0.32 CDN per share raising 16 million CDN. The Company subscribed
for 50% of the issue in order to maintain its common stock ownership position in
Grey Wolf.
11
<PAGE>
Proceeds from the offering combined with funds from Grey Wolf's existing bank
lines of credit were utilized to complete the acquisition of certain oil and
natural gas properties from the Company's 100% owned Canadian subsidiary,
Canadian Abraxas Petroleum Limited, for $21.75 million CDN.
Upon completion of the offering and after all intercompany transactions, the
Company netted approximately $10 million US which will be used to partially fund
budgeted capital expenditures for the balance of 1998.
Note 6. Reclassifications
Certain balances for 1997 have been reclassified for comparative purposes.
12
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion of the Company's financial condition, results
of operations, liquidity and capital resources. This discussion should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto, included in the Company's Annual report on Form 10-K filed for
the year ended December 31, 1997, which is incorporated herein by reference.
Results of Operations
The factors which most significantly affect the Company's results of
operations are (1) the sales prices of crude oil and natural gas, (2) the level
of total sales volumes of crude oil and natural gas, (3) the level of and
interest rates on borrowings and (4) the level and success of exploration and
development activity.
Selected operating data. The following table sets forth certain operating
data of the Company for the periods presented.
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------
1998 1997 1998 1997
-------------------------------------
Operating Revenue (in thousands):
Crude Oil Sales ....................... $ 2,514 $ 4,602 $ 5,394 $ 9,101
Natural Gas Sales ..................... 9,832 7,516 19,618 17,848
Natural Gas Liquids Sales ............. 1,607 2,516 3,596 5,595
Processing Revenue .................... 965 841 1,701 1,837
Rig Operations ........................ 122 53 238 106
Other ................................. 431 244 1,663 501
------- ------- ------- -------
$15,471 $15,772 $32,210 $34,988
======= ======= ======= =======
Operating Income (in thousands) ....... $ 577 $ 4,090 $ 3,000 $11,881
Crude Oil Production (MBBLS) .......... 188 252 387 470
Natural Gas Production (MMCFS) ........ 6,340 5,088 12,479 10,026
Natural Gas Liquids Production (MBBLS) 236 268 477 506
Average Crude Oil Sales Price ($/BBL) . $ 13.39 $ 18.26 $ 13.95 $ 19.36
Average Natural Gas Sales Price ($/MCF) $ 1.55 $ 1.48 $ 1.57 $ 1.78
Average Liquids Sales Price ($/BBL) ... $ 6.82 $ 9.40 $ 7.54 $ 11.06
Comparison of Three Months Ended June 30, 1998 to Three Months Ended June 30,
1997
Operating Revenue. During the three months ended June 30, 1998, operating
revenue from crude oil, natural gas and natural gas liquid sales decreased by
4.11% from $14.6 million in the three months ended June 30, 1997 to $14.0
million for the same period in 1998. Revenue for the three months was negatively
impacted by $1.8 million due to lower crude oil and natural gas liquids prices.
Average sales prices were $13.39 per Bbl of crude oil and $6.82 per Bbl of
natural gas liquid for the quarter ended June 30, 1998 compared with $18.26 per
Bbl of crude oil, $9.40 per Bbl of natural gas liquid in the same period of
1997. The impact of lower commodity prices was partially offset by increased
natural gas production. Increased natural gas production contributed $1.2
million for the three months ended June 30, 1998. Natural gas volumes increased
24.6% from 5,088 MMCFs for the period ended June 30,1997 to 6,340 MMCFs for the
same period in 1998. The increase in natural gas volumes was primarily
attributable to the Company's ongoing development program. Crude oil and natural
gas liquids volumes declined 18.5% for the three month period ended June 30,
1998 compared to the same period of 1997. The decline in crude oil volumes from
252 MBBLs in 1997 to 188 MBBLs in 1998 is primarily as the result of the
emphasis of the Company's development program away from crude oil projects, due
to the dramatic decline in crude oil prices during 1998. Natural gas liquid
volumes declined 11.9% from 268 MBBLs for the three months ended June 30, 1997
13
<PAGE>
to 236 MBBLs for the same period of 1998. This decrease is due to declines in
natural gas volumes in operating areas in which the Company's natural gas is
processed.
Other operating revenue increased from $244,000 for the three months ended
June 30, 1997 to $431,000 for the same period of 1998. The increase was due
primarily to a refund of prior year ad valorem taxes.
Lease Operating Expenses. Lease operating expenses and natural gas processing
costs ("LOE") for the three months ended June 30, 1998 increased to $4.4 million
compared to $3.7 million for the same period in 1997. The increase in LOE was
primarily due to the greater number of wells owned by the Company during the
period ended June 30, 1998 compared to the same period of 1997. The Company's
LOE on a per MCFE basis for the three months ended June 30, 1998 was $0.47
compared to $0.42 for the same period of 1997. The increase on a MCFE basis was
due to a general increase in the cost of services from 1997 to 1998.
G&A Expenses. G&A expenses increased from $1.1 million for the three months
ended June 30, 1997 to $1.4 million for the same period of 1998. The increase
was primarily due to the hiring of additional staff to manage and develop the
Company's properties. G&A expense on a per MCFE basis increased from $0.14 for
the quarter ended June 30, 1997 to $0.16 for the same period of 1998.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense increased by $2.3 million to $9.0 million for
the three months ended June 30, 1998, from $6.7 million in the same period of
1997. The Company's DD&A on a per MCFE basis for the three months ended June 30,
1998 was $1.01 per MCFE compared to $0.82 in 1997. The per MCFE increase was due
to higher finding costs added to the full cost pool in 1997 and the loss of
liquids reserves at June 30, 1998 resulting from low commodity prices forcing
some of the Company's oil properties to their economic limits much sooner.
Interest Expense and Preferred Dividends. Interest expense and preferred
dividends ("Interest and Dividends") increased to $7.7 million for the first
three months of 1998 from $6.4 million for the same period of 1997. This
increase is attributable to increased borrowings by the Company during the first
quarter of 1998. Long-term debt increased from $215.2 million at June 30, 1997
to $277.2 million at June 30, 1998, as a result of the Company's issuing an
additional $60.0 million of its 11.5% Senior Notes due 2004, Series C ("Series C
Notes") in January 1998. Preferred dividends were eliminated on July 1, 1997 as
the result of the conversion of all outstanding preferred stock into Abraxas
Common Stock.
Comparison of Six Months Ended June 30, 1998 to Six Months Ended June 30, 1997
Operating Revenue. During the six months ended June 30, 1998, operating
revenue from crude oil, natural gas and natural gas liquid sales decreased $3.9
million from $32.5 million in the six months ended June 30, 1997 to $28.6
million for the same period in 1998. Revenue for the six months was negatively
imparted by $7.6 million due to lower commodity prices. Average sales prices
were $13.95 per Bbl of crude oil, $1.57 per MCF of natural gas and $13.95 per
Bbl of natural gas liquids for the six months ended June 30, 1998 compared with
$19.36 per Bbl of crude oil, $1.78 per MCF of natural gas and $11.06 per Bbl of
natural gas liquids in the same period of 1997. The impact of lower commodity
prices was partially offset by increased natural gas production. Increased
natural gas production contributed $4.4 million for the first six months of
1998. Declines in volumes of crude oil and natural gas liquids had a negative
impact of $1.9 million for the six months ended June 30, 1998. Crude oil volumes
declined by 17.7% for the first six months of 1998 to 386.7 MBBLs from 470.1
MBBLs during the same period of 1997. The decline in crude oil production was
primarily the result of a shift in the emphasis of the Company's development
program away from crude oil projects due to the drastic decline in crude oil
prices.
Lease Operating Expenses. LOE and natural gas processing expenses were $9.0
million for six months ended June 30, 1998 compared to $7.5 million for the same
period in 1997. The increase of $1.5 million was due to an increase in the
number of wells the Company owned as of June 30, 1998 compared to the same
period of the prior year. LOE on a per MCFE basis increased to $0.48 per MCFE
for the six months ended June 30, 1998 from $0..43 for the same period of 1997.
The increase per MCFE was due to a general increase in the cost of services from
1997 to 1998.
G&A Expenses. G&A expenses increased from $2.1 million for the six months
ended June 30, 1997 to $2.7 million for the same period of 1998. The increase is
primarily due to the hiring of additional staff to manage and develop the
Company's properties. G&A expense on a per MCFE basis increased to $0.15 per
MCFE from $0.13 for the same period of 1997.
14
<PAGE>
Depreciation, Depletion and Amortization Expenses. Due to the increase in
sales volumes of crude oil and natural gas, DD&A expense increased $3.8 million
to $17.2 million for the six months ended June 30, 1998, from $13.4 million for
the same period of 1997. DD&A expense on a per MCFE basis was $0.98 per MCFE for
the six months ended June 30, 1998 compared to $0.84 per MCFE for the six months
ended June 30, 1997. The increase on a per MCFE basis was due to higher finding
cost during 1997 and and the loss of liquids reserves at June 30, 1998 resulting
from low commodity prices forcing some of the Company's oil properties to their
economic limits much sooner
Interest Expense and Preferred Dividends. Interest and Dividends increased to
$15.3 million for the six months ended June 30, 1998 from $12.6 million for the
six months ended June 30, 1997. The increase was due to increased levels of
borrowings by the Company during the first six months of 1998. Long-term debt
increased from $215.1 million as June 30, 1997 to $248.6 million at June 30,
1998, as a result of the company's issuing the Series C Notes. Preferred
dividends were eliminated on July 1, 1997 as the result of the conversion of all
outstanding preferred stock into Abraxas Common Stock.
General . The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for crude oil and natural gas and
the volumes of crude oil, natural gas and natural gas liquids produced by the
Company. The prices of natural gas, crude oil and natural gas liquids received
by the Company declined during the first half of 1998. The average natural gas
price realized by the Company declined to $1.57 per MCF during the first six
months of 1998 compared with $1.78 per MCF during the same period of 1997. Crude
oil prices declined from $19.36 per BBL during the first six months of 1997, to
$13.95 per BBL for the same period of 1998. Natural gas liquids prices declined
to $7.54 per BBL compared to $11.06 per BBL in the first half of 1997. In
addition, the Company's proved reserves will decline as crude oil, natural gas
and natural gas liquids are produced unless the Company is successful in
acquiring properties containing proved reserves or conducts successful
exploration and development activities. In the event crude oil, natural gas and
natural gas liquids prices remain at depressed levels or if the Company's
production levels decrease, the Company's revenues, cash flow from operations
and profitability will be materially adversely affected.
Liquidity and Capital Resources
General: Capital expenditures excluding property divestitures during the six
months ended June 30, 1998 were $30.6 million compared to $24.9 million during
the same period of 1997. The table below sets forth the components of these
capital expenditures on a historical basis for the six months ended June 30,
1998 and 1997.
Six Months Ended
June 30
------------------
1998 1997
------------------
Expenditure category (in thousands):
Acquisitions ..................... $ 2,400 $ --
Development ...................... 28,000 24,600
Facilities and other ............. 200 300
------- -------
Total .............................. $30,600 $24,900
======= =======
At June 30, 1998, the Company had current assets of $12.2 million and current
liabilities of $15.9 million resulting in a working capital deficit of $3.7
million. This compares to a working capital deficit of $9.2 million at December
31, 1997 and working capital of $4.5 million at June 30, 1997. The material
components of the Company's current liabilities at June 30, 1998 include trade
accounts payable of $6.6 million, revenues due third parties of $2.6 million and
accrued interest of $5.5 million.
Operating activities during the six months ended June 30, 1998 used $2.0
million cash to the Company compared to providing $14.9 million in the same
period in 1997. Net income plus non-cash expense items during 1998 and net
changes in operating assets and liabilities accounted for most of these funds.
Investing activities required $30.0 million net during the first six months of
1998, $28.0 million was utilized for the development of crude oil and natural
gas properties and other facilities, and $2.4 million for acquisition of oil and
gas properties. This compares to $24.9 million required during the same period
of 1997. $24.6 million was utilized for the development of crude oil and natural
gas properties and other facilities. Financing activities provided $30.5 million
for the first six months of 1998 compared to requiring $370,000 for the same
period of 1997. Financing activities include $60 million proceeds from the sale
15
<PAGE>
of the Series C Notes in January 1998, and the corresponding premium associated
with the Series C Notes, the net proceeds from the sale of the Series C Notes
were used in part to repay the outstanding indebtedness under the Company's
Credit Facility ("Credit Facility"), except for $100,000 that remains
outstanding.
In August 1998, the Company's 48% owned Canadian subsidiary, Grey Wolf,
completed a 50 million common share private placement offering raising $16
million CDN. The Company subscribed to 50% of the issue in order to maintain its
ownership position in Grey Wolf. Proceeds from the offering, combined with Grey
Wolf's existing bank line of credit were used to complete the acquisition of
certain oil and gas properties from the Company's 100% owned Canadian
subsidiary, Canadian Abraxas, for $21.75 million CDN. Upon completion of the
offering and after all intercompany transactions the Company netted
approximately $10 million US which will be used to partially fund budgeted
capital expenditures for the balance of 1998.
The Company's current budget for capital expenditures for the last six months
of 1998 other than acquisition expenditures is approximately $28.0 million. Such
expenditures will be made primarily for the development of existing properties.
Additional capital expenditures may be made for acquisitions of producing
properties if such opportunities arise, but the Company currently has no
agreements, arrangements or undertakings regarding any material acquisitions.
The Company has no material long-term capital commitments and is consequently
able to adjust the level of its expenditures as circumstances dictate.
Additionally, the level of capital expenditures will vary during future periods
depending on market conditions and other related economic factors. Should
commodity prices remain at depressed levels or decline further, reductions in
the capital expenditure budget may be required.
The Company will have three principal sources of liquidity during the next
six months: (i) cash on hand, (ii) borrowing capacity under the Company's
revolving credit facility and (iii) cash flow from operations. While the
availability of capital resources cannot be predicted with certainty and is
dependent upon a number of factors including factors outside of management's
control, management believes that the net cash flow from operations plus
availability under the Credit Facility will be adequate to fund operations and
planned capital expenditures. The Company may also sell additional equity or
debt securities in order to fund operations and planned capital expenditures as
well as to finance future acquisitions.
Long-Term Indebtedness: The Credit Facility has an availability of $39.2
million. As of June 30, 1998 there was $100,000 outstanding under the Credit
Facility. The Credit Facility contains a number of covenants that, among other
things, restricts the ability of the Company to (I) incur certain indebtedness
or guarantee obligations, (ii) prepay other indebtedness including the Notes,
(iii) make investments, loans or advances, (iv) create certain liens, (v) make
certain payments, dividends and distributions, (vi) merge with or sell assets to
another person or liquidate, (vii) sell or discount receivables, (viii) engage
in certain intercompany transactions and transactions with affiliates, (ix)
change its business, (x) experience a change of control and (xi) make amendments
to its charter, by-laws and other debt instruments. In addition, under the
Credit Facility, the Company is required to comply with specified financial
ratios and tests, including interest coverage ratios, maximum funded debt to
EBITDA tests, minimum net worth tests and minimum working capital tests. As of
June 30, 1998, the Company was not in compliance with the minimum net worth or
the interest coverage ratio tests. The Company has received a waiver of these
requirements.
The Credit Facility contains customary events of default, including
nonpayment of principal, interest or fees, violation of covenants, inaccuracy of
representations or warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, material judgments and
liabilities and change of control. The Indenture (as defined below) also
contains a number of covenants and events of default including covenants
restricting, among other things, the Company's and Canadian Abraxas' ability to
incur additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company and events of default including
nonpayment of principal or interest on the Notes, violation of covenants, cross
default on other indebtedness, bankruptcy and material judgments.
16
<PAGE>
Commitments available under the Credit Facility are subject to borrowing
base redeterminations to be performed semi-annually and, at the option of each
of the Company and the lenders under the Credit Facility (the "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 the
sole discretion of Bankers Trust Company ("BT"), subject to the approval of the
Banks, based on the value of the Company's reserves as set forth in the reserve
report of the Company's independent petroleum engineers, with consideration
given to other assets and liabilities. The Credit Facility has an initial
revolving term of two years (which expires in November 1998) and a reducing
period of three years from the end of the initial two-year period. The
commitment under the Credit Facility will be reduced during such reducing period
by eleven equal quarterly reductions. Quarterly reductions will equal 8.2% per
quarter with the remainder due at the end of the three-year reducing period.
The applicable interest rate charged on the outstanding balance of the Credit
Facility is based on a facility usage grid. If the borrowings under the Credit
Facility represent an amount less than or equal to 33.3% of the available
borrowing base, then the applicable interest rate charged on the outstanding
balance will be either (a) an adjusted rate of the London Inter-Bank Offered
Rate ("LIBOR") plus 1.25% or (b) the prime rate of BT (which is based on BT's
published prime rate) plus 0.50%. If the borrowings under the Credit Facility
represent an amount greater than or equal to 33.3% but less than 66.7% of the
available borrowing base, then the applicable interest rate on the outstanding
principal will be either (a) LIBOR plus 1.75% or (b) the prime rate of BT plus
0.50%. If the borrowings under the Credit Facility represent an amount greater
than or equal to 66.7% of the available borrowing base, then the applicable
interest rate on the outstanding principal will be either (a) LIBOR plus 2.00%
or (b) the prime rate of BT plus 0.50%. LIBOR elections can be made for periods
of one, three or six months.
On November 14, 1996, the Company and Canadian Abraxas completed the sale of
$215.0 million aggregate principal amount of Senior Notes due November 1, 2004,
Series A which were exchanged for the Company's and Canadian Abraxas' 11.5%
Senior Notes due 2004 Series B, (the "Series B Notes") in February 1997. In
January 1998, the Company and Canadian Abraxas completed the sale of $60 million
aggregate principal amount of Series C Notes. The Series B notes and the Series
C Notes were exchanged for the Series D Notes ("the Notes") in June 1998. The
Series D Notes are joint and several obligations of Abraxas and Canadian
Abraxas. The indenture governing the Notes (the "Indenture") 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 in to for the sale or
disposition of capital stock or assets of such subsidiaries to be consummated in
accordance with the terms of the Indenture solely in respect of the assets or
capital stock to be sold or disposed of; (vii) any instrument governing certain
liens permitted by the Indenture, to the extent and only to the extent such
instrument restricts the transfer or other disposition of assets subject to such
lien; or (viii) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (ii), (iii) or (v) above; provided, however, that the provisions relating
to such encumbrance or restriction contained in any such refinancing
indebtedness are no less favorable to the holders of the Notes in any material
respect as determined by the Board of Directors of the Company in their
reasonable and good faith judgment than the provisions relating to such
encumbrance or restriction contained in the applicable agreement referred to in
such clause (ii), (iii) or (v).
17
<PAGE>
Hedging Activities: In August 1995, the Company entered into a rate swap
agreement with a previous lender relating to $25.0 million of principal amount
of outstanding indebtedness. This agreement was assumed by the Banks in
connection with a Bridge Facility that was subsequently paid off. Under the
agreement, the Company pays a fixed rate of 6.15% while the Banks will pay a
floating rate equal to the USD-LIBOR-BBA rate for one month maturities, quoted
on the eighteenth day of each month, to the Company. Settlements are due
monthly. The agreement terminates in August 1998.
In March 1998 the Company entered into a costless collar relating to 2,000
barrels a day of oil sales for the period April 1, 1998 through March 31, 1999.
The agreement is tied to NYMEX prices. The Company is paid the difference
between the average NYMEX price and $14.00 per barrel, when the average NYMEX
price for the month is less than $14.00 per barrel. The Company must remit to
the counterparty to the agreement the difference in the average NYMEX price
during the month and $22.30 per barrel when the average NYMEX price exceeds
$22.30 per barrel.
Net Operating Loss Carryforwards. At December 31, 1997, the Company had,
subject to the limitations discussed below, $25.1 million of net operating loss
carryforwards for U.S. tax purposes, of which approximately $22.4 million may be
utilized before it expires. These loss carryforwards will expire from 2002
through 2010 if not utilized. At December 31, 1997, the company had
approximately $2.9 million of net operating loss carryforwards for Canadian tax
purposes which expire in 2003 and 2004. As a result of the acquisition of
certain partnership interests and crude oil and natural gas properties in 1990
and 1991, an ownership change under Section 382 of the Internal Revenue Code
1986, as amended (Section 382), occurred in December 1991. Accordingly, it is
expected that the use of net operating loss carryforwards generated prior to
December 31, 1991 of $4.9 million will be limited to approximately $235,000 per
year. as a result of the issuance of additional shares of Common Stock for
acquisitions and sales of stock, an additional ownership change under Section
382 occurred in October 1993. Accordingly, it is expected that the use of all
U.S. net operating loss carryforwards generated through October 1993 or $8.2
million will be limited to approximately $1 million per year subject to the
lower limitations described above. Of the $8.2 million net operating loss
carryforwards, it is anticipated that the maximum net operating loss that may be
utilized before it expires is $5.7 million. Future changes in ownership may
further limit the use of the Company's carryforwards. In addition to the Section
382 limitations, uncertainties exist as to the future utilization of the
operating loss carryforwards under the criteria set forth under FASB Statement
No. 109. Therefore, the Company has established a valuation allowance of $5.7
million and $5.9 million for deferred tax assets at December 31, 1996 and 1997,
respectively.
Based upon the current level of operations, the Company believes that cash on
hand, cash flow from operations and the Company's credit facility, will be
adequate to meet its anticipated requirements for working capital, capital
expenditures and scheduled interest payments through 1998. Continued depressed
prices for natural gas, crude oil or natural gas liquids will have a material
adverse effect on the Company's cash flow from operations and anticipated levels
of working capital, and could force the Company to revise its planned capital
expenditures.
Year 2000. The Company is assessing the impact of the Year 2000 issue on its
operations, including the development and implementation of project plans and
cost estimates required to make its information system infrastructure Year 2000
compliant. Based on existing information, the Company believes that anticipated
spending necessary to become Year 2000 compliant will not have a material effect
on the financial position, cash flows or results of operations of the Company,
nor will the Year 2000 issues cause any material adverse effect on the future
business operations of the Company. There can be no assurance, however, as to
the ultimate effect of the Year 2000 issue on the Company.
18
<PAGE>
Disclosure Regarding Forward-Looking Information
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this report
regarding the Company's financial position, business strategy, budgets and plans
and objectives of management for future operations are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed under "Risk Factors" in the Company's
Annual Report on Form 10-K which is incorporated by reference herein and this
report. All subsequent written and oral forward-looking statements attributable
to the Company, or persons acting on its behalf, are expressly qualified in
their entirety by the Cautionary Statements Cautionary
19
<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 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on May 22, 1998 the
following proposals were adopted by the margins indicated:
1. Election of three directors for terms of these years, each
to hold office until the expiration of his term in 2001 or
until a successor shall have been elected & qualified.
Number of Shares
For Withheld
James C. Phelps 4,491,835 19,327
Robert L.G. Watson 4,492,254 18,908
Chris E. Williford 4,491,254 19,908
Directors whose term continued after the meeting
Franklin A. Burke
Harold D. Carter
Robert D. Gershen
Richard M. Kleberg III
Paul A. Powell, Jr.
Richard M. Riggs
2. Approval of the appointment of Ernst & Young LLP as the
Company's auditors.
Number of Shares
For Against Abstain
4,401,781 108,123 1,258
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
20
<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: August 14, 1998 By:/s/____________________
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: August 14, 1998 By:/s/____________________
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
21
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