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, 1999
( ) 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, 1999, was:
Class Shares Outstanding
----------- -------------------
Common Stock, $.01 Par Value 6,352,672
1 of 23
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999
and December 31,1998....................................3
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1999 and 1998.......5
Consolidated Statement of Stockholders Equity (Deficit)
June 30, 1999 and December 31, 1998.....................6
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998.................7
Notes to Consolidated Financial Statements.......................8
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings 22
ITEM 2 - Changes in Securities................................................22
ITEM 3 - Defaults Upon Senior Securities......................................22
ITEM 4 - Submission of Matters to a Vote of Security Holders..................22
ITEM 5 - Other Information 22
ITEM 6 - Exhibits and Reports on Form 8-K.....................................22
Signatures ...................................................23
2
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
June 30, December 31,
1999 1998
(Unaudited)
----------- ------------
(In thousands)
<S> <C> <C>
Current assets:
Cash .................................................. $ 1,993 $ 61,390
Accounts receivable, less allowance for doubtful
accounts:
Joint owners ...................................... 6,207 3,337
Oil and gas production sales ...................... 4,867 6,098
Other ............................................. 1,866 1,070
-------- --------
12,940 10,505
Equipment inventory ................................... 455 504
Other current assets .................................. 763 844
-------- --------
Total current assets ................................ 16,151 73,243
Property and equipment ................................... 499,252 374,316
Less accumulated depreciation, depletion, and amortization 184,480 165,867
-------- --------
Net property and equipment based on the full cost
method of accounting for oil and gas properties
of which $10,675 at December 31, 1998 and June 30,
1999, was excluded from amortization ................ 314,772 208,449
Deferred financing fees, net of accumulated amortization
of $2,911 and $ 3,602 at December 31, 1998
and June 30,1999, respectively ........................ 10,342 8,059
Other assets ............................................. 1,240 1,747
-------- --------
Total assets .......................................... $342,505 $291,498
======== ========
</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,
1999 1998
(Unaudited)
------------ -------------
(In thousands)
<S> <C> <C>
Current liabilities:
Accounts payable ..................................... $ 6,951 $ 10,499
Oil and gas production payable ....................... 7,070 5,846
Accrued interest ..................................... 7,609 5,522
Income taxes payable ................................. 310 160
Other accrued expenses ............................... 1,067 527
--------- ---------
Total current liabilities .......................... 23,007 22,554
Long-term debt .......................................... 345,538 299,698
Deferred income taxes ................................... 27,963 19,820
Minority interest in foreign subsidiary ................. 10,149 9,672
Future site restoration ................................. 4,265 3,276
Commitments and contingencies
Stockholders' equity (Deficit):
Common stock, par value $.01 per share - authorized
50,000,000 shares; issued 6,504,755 and 6,501,441
shares at June 30, 1999 and December 31, 1998,
respectively ....................................... 65 65
Additional paid-in capital ........................... 51,651 51,695
Accumulated deficit .................................. (116,180) (103,145)
Treasury stock, at cost, 152,083 and 171,015 shares at
June 30, 1999 and December 31, 1998, respectively .. (1,071) (1,167)
Accumulated other comprehensive loss ................. (2,882) (10,970)
--------- ---------
Total stockholders' equity (deficit) .................... (68,417) (63,522)
--------- ---------
Total liabilities and stockholders' equity (deficit) ... $ 342,505 $ 291,498
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- --------- -------- ---------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Revenue:
Oil and gas production revenues ................ $ 14,204 $ 13,953 $ 28,042 $ 28,608
Gas processing revenues ........................ 1,050 966 1,915 1,701
Rig revenues ................................... 109 122 199 238
Other .......................................... 1,413 430 2,590 1,663
-------- -------- -------- --------
16,776 15,471 32,746 32,210
Operating costs and expenses:
Lease operating and production taxes ........... 4,647 4,401 9,405 9,040
Depreciation, depletion, and amortization ...... 8,821 8,971 17,967 17,223
Rig operations ................................. 157 136 296 258
General and administrative ..................... 1,459 1,386 2,782 2,689
-------- -------- -------- --------
15,084 14,894 30,450 29,210
-------- -------- -------- --------
Operating income (loss) ........................... 1,692 577 2,296 3,000
Other (income) expense:
Interest income ................................ (81) (172) (267) (308)
Amortization of deferred financing fee ......... 346 308 691 635
Interest expense ............................... 9,723 7,749 18,406 15,265
-------- -------- -------- --------
9,988 7,885 18,830 15,592
-------- -------- -------- --------
Income (loss) before taxes ........................ (8,296) (7,308) (16,534) (12,592)
Income tax expense (benefit):
Current ........................................ 111 24 213 84
Deferred ....................................... (1,698) (1,133) (3,737) (1,828)
Minority interest in income of
consolidated foreign subsidiary ................ 32 (94) 25 (171)
-------- -------- -------- --------
Net income (loss) applicable to common stock ...... $ (6,741) $ (6,105) $(13,035) $(10,677)
======== ======== ======== ========
Earnings (loss) per common share:
Net Income (loss) per common share ........... $ (1.06) $ (0.96) $ (2.05) $ (1.68)
======== ======== ======== ========
Net income (loss) per common share - assuming
dilution .................................... $ (1.06) $ (0.96) $ (2.05) $ (1.68)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
<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, 1998 . 6,501,441 $ 65 (171,015) $ (1,167) $ 51,695 $(103,145) $ (10,970) $ (63,522)
Comprehensive income
(loss):
Net income .............. -- -- -- -- -- (13,035) -- (13,035)
Other comprehensive
income:
Foreign currency
translation
adjustment .......... -- -- -- -- -- -- 8,088 8,088
---------
Comprehensive income (loss) -- -- -- -- -- -- -- (4,947)
Issuance of common stock
for compensation ........ 3,314 -- 18,932 96 (44) -- -- 52
--------- -------- -------- ---------- --------- ---------- ----------- ----------
Balance at June 30, 1999
(unaudited) ............... 6,504,755 $ 65 (152,083) $ (1,071) $ 51,651 $(116,180) $ (2,882) $ (68,417)
========= ======== ========= ========== ========= ========== ========== ==========
</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,
-------------------------
1999 1998
------------ ----------
(In Thousands)
<S> <C> <C>
Operating Activities
Net income (loss) .................................... $ (13,035) $ (10,677)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Minority interest in income of foreign subsidiary 25 (171)
Depreciation, depletion, and amortization ....... 17,967 17,223
Amortization of deferred financing fees ......... 691 635
Amortization of premium on Senior Notes ......... (289) (289)
Deferred income tax benefit ..................... (3,737) (1,828)
Issuance of common stock for compensation ....... 52 207
Changes in operating assets and liabilities:
Accounts receivable ......................... 1,938 4,771
Equipment inventory ......................... 49 (115)
Other assets ................................ 468 (270)
Accounts payable and accrued expenses ....... (3,098) (11,465)
--------- ---------
Net cash provided by operating activities ............ 1,031 (1,979)
Investing Activities
Capital expenditures, including purchases
and development of properties ..................... (105,581) (30,622)
Proceeds from sale of oil and gas properties
and equipment inventory ............................ 1,795 621
--------- ---------
Net cash (used) provided by investing activities ..... (103,786) (30,001)
Financing Activities
Issuance of common stock, net of expenses ............ -- 19
Purchase of treasury stock, net ...................... (5) (399)
Proceeds from long-term borrowings ................... 83,000 60,230
Premium from issuance of Senior Notes ................ -- 3,616
Payments on long-term borrowings ..................... (37,145) (31,426)
Deferred financing fees .............................. (2,680) (1,565)
Other ................................................ -- --
--------- ---------
Net cash provided by financing activities ............ 43,170 30,475
Effect of exchange rate changes on cash .............. 188 (50)
--------- ---------
Increase (decrease) in cash .......................... (59,397) (1,555)
Cash at beginning of period .......................... 61,390 2,876
--------- ---------
Cash at end of period ................................ $ 1,993 $ 1,321
========= =========
Supplemental Disclosures
Supplemental disclosures of cash flow information:
Interest paid ................................... $ 16,656 $ 14,453
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1999
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, 1998 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 Limited.
("Canadian Abraxas"), and its 48% owned foreign subsidiary Grey Wolf Exploration
Inc. ("Grey Wolf") and Canadian Abraxas' wholly owned subsidiary, New Cache
Petroleums Ltd ("New Cache"). Minority interest represents the minority
shareholders' proportionate share of the equity and income of Grey Wolf.
Canadian Abraxas, New Cache 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.
Note 2. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- -----------
(In thousands)
<S> <C> <C>
11.5% Senior Notes due 2004, Series D ....................... $274,000 $274,000
Unamortized premium on Senior Notes ......................... 2,603 3,471
Credit facility due to Bankers Trust Company, ING
Capital and Union Bank of California ...................... -- 15,700
12.875% Senior Secured Notes due 2003 (see below) ........... 63,500
Credit facility due to a Canadian bank,
providing for borrowings to approximately $12,100,000
at the bank's prime rate plus .125%, 6.20%
at June 30, 1999 .......................................... 5,425 6,515
Other ....................................................... 10 12
-------- --------
$345,538 $299,698
======== ========
</TABLE>
In March 1999, the Company consummated the sale of $63.5 million of the
12.875% Senior Secured Notes due 2003 (the "Secured Notes"). Interest on the
Secured Notes is payable semi-annually in cash in arrears on March 15 and
September 15, commencing September 15, 1999. The Secured Notes are redeemable,
in whole or in part, at the option of Abraxas on or after March 15, 2001, at the
redemption prices set forth below, plus accrued and unpaid interest to the date
of redemption, if redeemed during the 12-month period commencing on March 15 of
the years set forth below:
8
<PAGE>
Year Percentage
------ ----------
2001..................................... 103.000%
2002 and thereafter...................... 100.000%
At any time, or from time to time, prior to March 15, 2001, Abraxas may, at
its option, use all or a portion of the net cash proceeds of one or more equity
offerings to redeem up to 35% of the aggregate original principal amount of the
Notes at a redemption price equal to 112.875% of the aggregate principal amount
of the Secured Notes to be redeemed, plus accrued and unpaid interest and
liquidating damages, if any.
The Secured Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The Secured Notes are
unconditionally guaranteed (the "Guarantees") on a senior basis, jointly and
severally, by Canadian Abraxas, New Cache and Sandia Oil & Gas Corporation
("Sandia"), a wholly-owned subsidiary of Abraxas (collectively, the
"Guarantors"). The Guarantees are secured by substantially all of the crude oil
and natural gas properties of the Guarantors and the shares of Grey Wolf owned
by Canadian Abraxas.
Upon a Change of Control, each holder of the Secured Notes will have the
right to require Abraxas to repurchase such holder's Secured Notes at a
redemption price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. In addition, Abraxas will be
obligated to offer to repurchase the Secured Notes at 100% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption in the
event of certain asset sales
The Indenture governing the Secured Notes (the "Secured Notes Indenture")
contains certain covenants that limit the ability of Abraxas and certain of its
subsidiaries, including the Guarantors (the "Restricted Subsidiaries") to, among
other things, incur additional indebtedness, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, incur liens, 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.
The Secured Notes Indenture provides, among other things, that the Company
may not, and may not cause or permit the Restricted Subsidiaries, 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 or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except for such encumbrances or restrictions existing under or by
reason of: (i) applicable law; (ii) the Secured Notes Indenture or the Indenture
governing the Series D Notes; (iii) customary non-assignment provisions of any
contract or any lease governing leasehold interest of such subsidiaries; (iv)
any instrument governing indebtedness assumed by the Company in an acquisition,
which encumbrance or restriction is not applicable to such Restricted Subsidiary
or the properties or assets of such subsidiary other than the entity or the
properties or assets of the entity so acquired; (v) agreements existing on the
Issue Date (as defined in the Secured Notes Indenture) to the extent and in the
manner such agreements were in effect on the Issue Date; (vi) customary
restrictions with respect to subsidiary of the Company pursuant to an agreement
that has been entered into for the sale or disposition of capital stock or
assets of such Restricted Subsidiary to be consummated in accordance with the
terms of the Secured Notes Indenture or any Security Documents (as defined in
the Secured Notes 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 Secured Notes 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), (iv) 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 Secured Notes in any
material respect as determined by the Board of Directors of the Company in their
reasonable and good faith judgment that the provisions relating to such
encumbrance or restriction contained in the applicable agreement referred to in
such clause (ii), (iv) or (v).
9
<PAGE>
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) .............................. $ (6,741) $ (6,105) $ (13,035) $ (10,677)
----------- ----------- ----------- -----------
Numerator for basic earnings per share - income (6,741) (6,105) (13,035) (10,677)
(loss) available to common stockholders
Effect of dilutive securities:
Preferred stock dividends .................... -- -- -- --
----------- ----------- ----------- -----------
Numerator for diluted earnings per share-income
available to common stockholders after assumed
Conversions .................................. (6,741) (6,105) (13,035) (10,677)
Denominator:
Denominator for basic earnings per share -
weighted-average shares ...................... 6,340,745 6,356,618 6,337,318 6,356,207
Effect of dilutive securities:
Stock options and warrants ................... -- -- -- --
----------- ----------- ----------- -----------
-- -- -- --
----------- ----------- ----------- -----------
Dilutive potential common shares
Denominator for diluted earnings per share
adjusted weighted-average shares and assumed
conversions .................................. 6,340,745 6,356,618 6,337,318 6,356,207
Basic earnings (loss) per share:
Income (loss) ................................ $ (1.06) $ (.96) $ (2.05) $ (1.68)
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Income (loss) ................................ $ (1.06) $ (.96) $ (2.05) $ (1.68)
=========== =========== =========== ===========
</TABLE>
For the three months and six months ended June 30, 1999 and 1998, none of
the shares issuable in connection with stock options or warrants are included in
diluted shares. Inclusion of these shares would be antidilutive due to losses
incurred in the periods.
10
<PAGE>
Note 4. Summary Financial Information of Canadian Abraxas Petroleum Limited.,
New Cache Petroleums Ltd. and Sandia Oil & Gas Corporation.
The following is summary financial information of Canadian Abraxas and
Sandia, both of which are wholly owned subsidiaries of the Company and New Cache
which is a wholly owned subsidiary of Canadian Abraxas at June 30, 1999.
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,
Series D (the "Series D Notes")($274,000,000).The Series D Notes are
unconditionally guaranteed, on a senior basis, jointly and severally, by New
Cache and Sandia. The Secured Notes are unconditionally guaranteed, on a senior
basis, jointly and severally, by Canadian Abraxas, Sandia and New Cache. The
Company has not presented separate financial statements and other disclosures
concerning Canadian Abraxas, Sandia. or New Cache because management has
determined that such information is not material to the holders of the Series D
Notes, the Secured Notes and the Company's Common Stock.
<TABLE>
<CAPTION>
Summary Balance Sheets
June 30, 1999
(In Thousands)
Canadian New Cache Sandia Oil &
Abraxas Petroleums, Ltd Gas Corp.
------------ --------------- ------------
<S> <C> <C> <C>
Total current assets $ 31,402 $ 5,069 $ 88
Oil and gas properties 92,374 103,440 1,379
Other assets 67,386 - 63
----------- ------------- ------------
$ 191,162 $ 108,509 $ 1,530
=========== ============= ============
Total current liabilities $ 2,483 $ 4,338 $ 79
11.5% Senior Notes due 2004 74,682 -- --
Intercompany payable 25,729 27,574 1,191
Other liabilities 18,598 12,864 --
Shareholder's equity 69,670 63,733 260
----------- ------------- ------------
$ 191,162 $ 108,509 $ 1,530
=========== ============= ============
</TABLE>
<TABLE>
<CAPTION>
Summary Statements of Operations
Six Months ended June 30, 1999
(In Thousands)
Canadian New Cache Sandia Oil &
Abraxas Petroleums, Ltd Gas Corp.
------------ --------------- -------------
<S> <C> <C> <C>
Revenues $ 7,799 $ 8,132 $ 225
Operating costs & expenses (8,199) (8,511) (86)
Interest expense (5,030) (180) ---
Other 56 --- ---
Income tax benefit 3,406 202 ---
----------- ------------- ------------
Net loss $ (1,968) $ (357) $ 139
=========== ============= ============
</TABLE>
<TABLE>
<CAPTION>
Three Months ended June 30, 1999
(In Thousands)
Canadian New Cache Sandia Oil &
Abraxas Petroleums, Ltd Gas Corp.
------------ --------------- -------------
<S> <C> <C> <C>
Revenues $ 4,145 $ 4,264 $ 126
Operating costs & expenses (4,022) (4,456) (53)
Interest expense (2,467) -- --
Other 3 10 --
Income tax benefit 1,558 100 --
----------- ------------- ------------
Net loss $ (783) $ (82) $ 73
=========== ============= ============
</TABLE>
11
<PAGE>
Note 5. Business Segments
Business segment information about the Company's second quarter operations
in different geographic areas is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- ------------------
(In thousands)
<S> <C> <C> <C>
Revenues ............................... $ 6,210 $ 10,566 $ 16,776
================== ================= ==================
Operating profit (loss)................. $ 2,273 $ 176 $ 2,449
================== =================
General corporate ...................... (757)
Interest expense and amortization of
deferred financing fees ............. (9,988)
==================
Income before income taxes .......... $ (8,296)
==================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- ------------------
<S> <C> <C> <C>
(In thousands)
Revenues ............................... $ 9,280 $ 6,191 $ 15,471
================== ================= ===================
Operating profit (loss)................. $ 781 $ (114) $ 667
================== =================
General corporate....................... (90)
Interest expense and amortization of
deferred financing fees ............. (7,885)
===================
Income before income taxes .......... $ (7,308)
===================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
<S> <C> <C> <C>
(In thousands)
Revenues ............................... $ 12,757 $ 19,989 $ 32,746
================== ================= ===================
Operating profit (loss)................. $ 4,226 $ (437) $ 3,789
================== =================
General corporate ...................... (1,493)
Interest expense and amortization of
deferred financing fees ............. (18,830)
===================
Income before income taxes .......... $ (16,534)
===================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
<S> <C> <C> <C>
(In thousands)
Revenues ............................... $ 21,431 $ 11,779 $ 32,210
================== ================= ===================
Operating profit (loss)................. $ 5,155 $ (203) $ 4,952
================== =================
General corporate ...................... (1,952)
Interest expense and amortization of
deferred financing fees ............. (15,592)
===================
Income before income taxes .......... $ (12,592)
===================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In Thousands)
<S> <C> <C> <C>
Identifiable assets at June 30, 1999 .. $ 97,192 $ 233,766 $ 330,958
================== =================
Corporate assets ....................... 11,547
-------------------
Total assets ........................ $ 342,505
===================
</TABLE>
<TABLE>
<CAPTION>
December, 31, 1998
------------------ -----------------
U.S. Canada Total
------------------ ----------------- -------------------
(In Thousands)
<S> <C> <C> <C>
Identifiable assets at December 31,
1998 ................................ $ 153,030 $ 129,301 $ 282,331
================== =================
Corporate assets ....................... 9,167
-------------------
Total assets ........................ $ 291,498
===================
</TABLE>
Note 6. 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 March 1998, a jury found against the Company and on May
22, 1998 final judgment in the amount of $1.3 million was entered. The Company
has filed an appeal. Management believes 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, 1999.
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, 1999, 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 7. Subsequent Event
On August 11, 1999, the Company closed a transaction with a major Canadian
independent to sell non-core assets owned by Canadian Abraxas. The assets were
sold for $14.6 CDN ($9.8 million U.S.,)
Note 8. Reclassifications
Certain balances for 1998 have been reclassified for comparative purposes.
13
<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, 1998, 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -------------------------
1999 1998 1999 1998
------------ ------------- ------------ --------
<S> <C> <C> <C> <C>
Operating Revenue (in thousands):
Crude Oil Sales $ 2,532 $ 2,514 $ 5,264 $ 5,394
Natural Gas Sales 10,383 9,832 20,938 19,618
Natural Gas Liquids Sales 1,289 1,607 1,840 3,596
Processing Revenue 1,050 966 1,915 1,701
Rig Operations 109 122 199 238
Other 1,413 430 2,590 1,663
--------- --------- -------- --------
$ 16,776 $ 15,471 $ 32,746 $ 32,210
========= ========= ======== ========
Operating Income (in thousands) $ 1,692 $ 577 $ 2,296 $ 3,000
Crude Oil Production (MBBLS) 192 188 417 387
Natural Gas Production (MMCFS) 6,732 6,340 13,882 12,479
Natural Gas Liquids Production (MBBLS) 111 236 184 477
Average Crude Oil Sales Price ($/BBL) $ 13.22 $ 13.39 $ 12.64 $ 13.95
Average Natural Gas Sales Price ($/MCF) $ 1.54 $ 1.55 $ 1.51 $ 1.57
Average Liquids Sales Price ($/BBL) $ 11.65 $ 6.82 $ 10.01 $ 7.54
</TABLE>
Comparison of Three Months Ended June 30, 1999 to Three Months Ended June 30,
1998
Operating Revenue. During the three months ended June 30, 1999, operating
revenue from crude oil, natural gas and natural gas liquid sales increased by
1.8% to $14.2 million in the three months ended June 30, 1999 from $14.0 million
for the same period in 1998. Increased oil and natural gas production
contributed $654,000 in additional revenue that was partially offset by slightly
lower commodity prices. The average sales price for crude oil was $13.22 per
barrel for the three months ended June 30, 1999 compared to $13.39 for the same
period of 1998and natural gas sales prices averaged $1.54 for the three months
ended June 30, 1999 compared to $1.55 for the same period of 1998. Increased
production volumes were primarily attributable to the acquisition of New Cache
in January 1999. New Cache crude oil production was 66.7 MBbls and gas
production was 1,756 MMcf for the three months ended June 30, 1999. New Cache
production replaced production from the Wamsutter area of Wyoming (the "Wyoming
Properties") which were sold during the fourth quarter of 1998. During the
second quarter of 1998, the Wyoming Properties had crude oil production of 23.7
MBbls and natural gas production of 1,394 MMcf. Natural gas liquid revenue
decreased by $320,000 for the three months ended June 30, 1999 from $1.61
million in 1998 to $1.29 million in 1999. The decrease in natural gas liquid
revenue is primarily due to decreased production volumes attributable to the
sale of the Wyoming Properties. For the quarter ended June 30, 1998, the Wyoming
Properties contributed 121.5 Mbbls of natural gas liquids which was only
partially offset by natural gas liquids production of 26.4 Mbbls attributable to
New Cache. Also contributing to the decline in natural gas liquid production was
14
<PAGE>
the closing of two gas processing plants. The Company shut down it's East White
Point plant during the fourth quarter of 1998 and its Portilla plant in January
1999. During the second quarter of 1998, the Portilla plant contributed 14.0
MBbls of natural gas liquids. In April 1999 the Company began processing the gas
produced from its East White Point properties through a third party processing
plant. Natural gas liquid production from this plant more than replaced
production from the East White Point Plant. During the second quarter of 1998,
the East White Point Plant produced 15.3 MBbls of natural gas liquids, compared
to 16.0 MBbls of natural gas liquids produced from the East White Point gas
during the quarter ended June 30, 1999. The decline in natural gas liquids
revenue attributable to production volume declines was offset to a large extent
by increased average prices received for natural gas liquids during the quarter.
Average sales prices for natural gas liquids were $11.65 per Bbl for the three
months ended June 30, 1999 compared to $6.82 for the same period of 1998.
Other operating revenue increased from $431,000 for the three months ended
June 30, 1998 to $1.4 million for the same period of 1999. This increase was
primarily due to the sale to a third party of tax credits associated with the
Wyoming Properties for $1.1 million.
Lease Operating Expenses. Lease operating expenses and natural gas
processing costs ("LOE") for the three months ended June 30, 1999 increased to
$4.6 million compared to $4.4 million for the same period in 1998. The increase
in LOE was primarily due to the greater number of wells owned by the Company
during the period ended June 30, 1999 compared to the same period of 1998. The
Company's LOE on a per MCFE basis for the three months ended June 30, 1999 was
$0.54 compared to $0.51 for the same period of 1998. The increase on a MCFE
basis was due to a general increase in the cost of services from 1998 to 1999
and from the sale of the Wyoming properties which was a low cost operating area
with LOE per MCFE of $0.23.
G&A Expenses. G&A expenses increased from $1.4 million for the three months
ended June 30, 1998 to $1.5 million for the same period of 1999. The increase
was due to the hiring of additional staff to manage and develop the Company's
properties including the addition of several staff members associated with the
New Cache acquisition. G&A expense on a per MCFE basis increased from $0.16 for
the quarter ended June 30, 1998 to $0.17 for the same period of 1999.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense decreased from $9.0 million for the three
months ended June 30, 1998, to $8.8 million in the same period of 1999. The
Company's DD&A on a per MCFE basis for the three months ended June 30, 1999 was
$1.03 per MCFE compared to $1.01 in 1998. The per MCFE increase was due to a
slightly higher basis in the New Cache assets as compared to the Wyoming
Properties on an MCFE basis. The decrease in total DD&A is due to write downs in
the full cost pool at December 31, 1998 as a result of depressed commodity
prices at that time forcing some of the Company's oil properties to their
economic limits much sooner.
Interest Expense. Interest expense increased to $9.7 million for the three
months ended June 30, 1999 from $7.7 million for the same period of 1998. This
increase is attributable to increased borrowings by the Company during the first
quarter of 1999. Long-term debt increased from $277.2 million at June 30, 1998
to $345.5 million at June 30, 1999, as a result of the Company's issuing $63.5
million of its 12.875% Senior Secured Notes due 2003 in late March 1999.
Comparison of Six Months Ended June 30, 1999 to Six Months Ended June 30, 1998
Operating Revenue. During the six months ended June 30, 1998, operating
revenue from crude oil, natural gas and natural gas liquid sales decreased from
$28.6 million in the six months ended June 30, 1998 to $28.0 million for the
same period in 1999. Increased production of oil and natural gas contributed
$2.5 million in additional revenue, which was offset by lower prices. Crude oil
production increased from 386.7 MBbls for the first six months of 1998 to 416.5
MBbls for the same period of 1999. Production from the New Cache properties
(acquired in January 1999) contributed 115.8 MBbls in 1999 which was offset by
declines in the production from the Company's existing properties and from the
divestiture of the Wyoming Properties. The decline in the production from
existing properties was due to the de-emphasis of the Company's crude oil
exploration and development program in 1999 due to depressed crude oil prices
during the period. Natural gas production increased by approximately 11% for the
first six months of 1999 to 13,882 MMcf from 12,479 MMcf for the same period of
1998. The acquisition of New Cache contributed 3,533 MMcf during the six months
ended June 30, 1999 which offset the loss of production from the Wyoming
Properties, which were sold in the forth quarter of 1998. For the six months
ended June 30, 1998 the Wyoming Properties contributed 2,761 MMcf. Increases in
revenue resulting from increased crude oil and natural gas production were
partially offset by lower average sales prices during the first six months of
1999. Average crude oil prices were $12.64 per Bbl during the first six months
15
<PAGE>
of 1999 compared to $13.95 for the same period of 1998. Natural gas prices for
the first six months of 1999 averaged $1.51 compared to $1.57 for the same
period of 1998 Revenue for the six months was negatively impacted by $7.6
million due to lower commodity prices. Natural gas liquids volumes declined
61.5% for the six months ended June 30, 1999 to 183.8 MBBLs compared to 477.2
MBBLs for the same period of 1998. The decline in natural gas liquids volumes
was due to the divestiture of the Wyoming Properties in the fourth quarter of
1998 and the Company's decision to shut down the East White Point and Portilla
plants in South Texas. The Wyoming Properties contributed 246.8 MBBLs of natural
gas liquids during the first six months of 1998 which was partially offset by
47.4 MBBLS from the New Cache properties. The Company shut down its East White
Point processing plant during the fourth quarter of 1998 and shut down its
Portilla Plant in January 1999. The East White Point plant produced 28.3 MBBLs
of natural gas liquids during the first six months of 1998and the Portilla Plant
contributed 25.4 MBBLs of natural gas liquids during the first six months of
1998 compared to 2.1 MBBLs in 1999. The Company began processing the East White
Point gas through a third party plant in April 1999.Total East White Point
production through this facility was 16.0 Mbbls during the period ended June 30,
1999.. The Company also elected not to process its West Texas gas during the
first quarter of 1999 due to the depressed prices of natural gas liquids.
Processing of the West Texas gas resumed in April 1999 contributing 22.1 Mbbls
during the period ended June 30, 1999. The decline in natural gas liquids
revenue from lower production volumes was partially offset by stronger liquid
prices for the period. Average natural gas liquids sales prices for the six
months ended June 30, 1999 were $10.01 per Bbl compared to $7.54 for the same
period of 1998.
Lease Operating Expenses. LOE and natural gas processing expenses were $9.4
million for six months ended June 30, 1999 compared to $9.0 million for the same
period in 1998. The increase of $1.4 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 $0.54 per MCFE
for the six months ended June 30, 1998 from $0.51 for the same period of 1998.
The increase per MCFE was due to a general increase in the cost of services from
1998 to 1999 as well as from the divestiture of the Wyoming Properties which was
a low cost operating area with LOE of $0.27 per MCFE.
G&A Expenses. G&A expenses increased from $2.7 million for the six months
ended June 30, 1998 to $2.8 million for the same period of 1999. The increase is
primarily due to the hiring of additional staff to manage and develop the
Company's properties and a general increase in the cost of doing business from
1998 to 1999. G&A expense on a per MCFE basis increased to $0.16 per MCFE from
$0.15 for the same period of 1998.
Depreciation, Depletion and Amortization Expenses. DD&A expense increased
to $18.0 million for the six months ended June 30, 1999, from $17.2 million for
the same period of 1998. DD&A expense on a per MCFE basis was $1.03 per MCFE for
the six months ended June 30, 1999 compared to $0.98 per MCFE for the six months
ended June 30, 1998. The increase on a per MCFE basis was due to higher finding
cost during 1999 including the acquisition of New Cache, in the Company's
Canadian operations and the loss of reserves resulting from low commodity prices
forcing some of the Company's oil properties to their economic limits much
sooner. The increases were partially offset by lower DD&A per MCFE from the U.S.
operations as a result of the ceiling test write down of the U.S. full cost pool
as of December 31, 1998.
Interest Expense. Interest increased to $18.4 million for the six months
ended June 30, 1999 from $15.3 million for the six months ended June 30, 1998.
The increase was due to increased levels of borrowings by the Company during the
first six months of 1999. Long-term debt increased from $248.6 million as June
30, 1998 to $345.5 million at June 30, 1999, as a result of the Company's
issuing $63.5 million of its 12.875% Senior Secured Notes due 2003 in late March
1999.
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 and, crude oil and natural gas liquids
received by the Company declined during the first six months of 1999. The
average natural gas price realized by the Company declined to $1.51 per MCF
during the first six months of 1999 compared with $1.57 per MCF during the same
period of 1998. Crude oil prices declined from $13.95 per BBL during the six
three months of 1999, to $12.64 per BBL for the same period of 1999. Natural gas
liquids prices increased to $10.01 per BBL compared to $7.54 per BBL in the
first quarter of 1998. The prices of crude oil and natural gas have strengthened
in the latter part of the second quarter and continued to strengthen in the
third quarter. 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 liquid prices return to 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.
16
<PAGE>
Delisting of Common Stock on The Nasdaq National Market
The Company's common stock has been delisted from The Nasdaq National
Market ("NMS") due to the Company's inability to meet the minimum net tangible
assets and "inside bid" price requirements for NMS listed companies. The
Company's stock is quoted and traded on the OTC Bulletin Board under the symbol,
AXAS.
Liquidity and Capital Resources
General: Capital expenditures excluding property divestitures during the six
months ended June 30, 1999 were $105.6 million compared to $30.6 million during
the same period of 1998. The table below sets forth the components of these
capital expenditures on a historical basis for the six months ended June 30,
1999 and 1998.
Six Months Ended
June 30
------------------------------------
1999 1998
------------------------------------
Expenditure category (in thousands):
Acquisitions $ 90,291 $ 2,400
Development 14,040 28,000
Facilities and other 1,250 200
------------- -------------
Total $ 105,581 $ 30,600
============= =============
At June 30, 1999, the Company had current assets of $16.1 million and
current liabilities of $23.0 million resulting in a working capital deficit of
$6.9 million. This compares to working capital of $50.7 million at December 31,
1998 and a working capital deficit of $3.7 million at June 30, 1998. The
material components of the Company's current liabilities at June 30, 1999
include trade accounts payable of $7.0 million, revenues due third parties of
$7.1 million and accrued interest of $7.6 million.
Operating activities during the six months ended June 30, 1999 provided
$1.0 million cash to the Company compared to using $2.0 million in the same
period in 1998. Net income plus non-cash expense items during 1999 and net
changes in operating assets and liabilities accounted for most of these funds.
Investing activities required $103.8 million net during the first six months of
1999, $90.3 million of which was utilized for the acquisition of oil and gas
properties, $14.0 million of which was utilized for the development of crude oil
and natural gas properties and other facilities, and $1.3 million of which was
utilized for facilities and other. This compares to $30.0 million required
during the same period of 1998, $28.0 million of which was utilized for the
development of crude oil and natural gas properties and other facilities, and
$2.4 million for the acquisition of oil and gas properties.. Financing
activities provided $43.2 million for the first six months of 1999 compared to
providing $30.5 million for the same period of 1998. Financing activities
include the proceeds of $63.5 million from the issuance of the Secured Notes in
March 1999 and borrowings under the Credit Facility of $19.5 million, which were
offset by the repayment of the Credit Facility in the amount of $35.2 million in
March 1999.
The Company's current budget for capital expenditures for the last six
months of 1999 other than acquisition expenditures is approximately $11.5
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.
Current Liquidity Needs. The Company has historically funded its operations
and acquisitions primarily through its cash flow from operations and borrowings
under the Credit Facility and other credit sources. In March 1999, the Company
issued $63.5 million principal amount of the Secured Notes and repaid all
amounts outstanding under the Credit Facility and approximately $10.0 million of
debt assumed in connection with the acquisition of New Cache. Due to severely
depressed prices for crude oil and natural gas, the Company's cash flow from
operations has been substantially reduced.
The Company will have three principal sources of liquidity during the next
six months: (i) cash on hand, (ii) cash flow from operations and (iii) proceeds
from the sale of non-core assets. 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 cash on hand and the proceeds from the sale
of certain non-core properties will be adequate to fund operations and planned
capital expenditures. The Company is in the process of selling a portion of New
Cache's undeveloped acreage, acquired in January 1999, to Grey Wolf for $3.4
17
<PAGE>
million CDN ($2.3 million U.S.). In August 1999, Canadian Abraxas closed the
sale of certain non-core assets to a major Canadian independent. The properties
were sold for $14.6 million CDN ($9.8 million U.S.).
The Company's ability to obtain additional financing will be substantially
limited under the terms of the Series D Notes and the Secured
Notes.Substiantially all of the Company's crude oil and natural gas properties
and natural gas processing facilities are subject to a first lien or charge for
the benefit of the holders of the Secured Notes. Thus, the Company will be
required to rely on its cash flow from operations to fund its operations and
service its debt. The Company may also choose to issue equity securities or sell
additional assets to fund its operations, although the Indentures governing the
Company's outstanding Secured Notes and Series D Notes substantially limit the
Company's use of the proceeds of any such asset sales. Due to the Company's
diminished cash flow from operations and the resulting depressed prices for its
common stock, there can be no assurance that the Company would be able to obtain
equity financing on terms satisfactory to the Company.
Long-Term Indebtedness
Series D Notes. On November 14, 1996, Abraxas and Canadian Abraxas
consummated the offering of $215.0 million of their 11.5% Senior Notes due 2004,
Series A, which were exchanged for the Series B Notes in February 1997. On
January 27, 1998, Abraxas and Canadian Abraxas completed the sale of $60.0
million of the Series C Notes. The Series B Notes and the Series C Notes were
subsequently exchanged for $275.0 million in principal amount of the Series D
Notes in June 1998.
Interest on the Series D Notes is payable semi-annually in arrears on May 1
and November 1 of each year at the rate of 11.5% per annum. The Series D Notes
are redeemable, in whole or in part, at the option of Abraxas and Canadian
Abraxas, on or after November 1, 2000, at the redemption prices set forth below,
plus accrued and unpaid interest to the date of redemption, if redeemed during
the 12-month period commencing on November 1 of the years set forth below:
Year Percentage
------ ------------
2000.................................... 105.750%
2001.................................... 102.875%
2002 and thereafter..................... 100.000%
In addition, at any time on or prior to November 1, 1999, Abraxas and
Canadian Abraxas may, at their option, redeem up to 35% of the aggregate
principal amount of the Series D Notes originally issued with the net cash
proceeds of one or more equity offerings, at a redemption price equal to 111.5%
of the aggregate principal amount of the Series D Notes to be redeemed, plus
accrued and unpaid interest to the date of redemption; provided, however, that
after giving effect to any such redemption, at least 65% of the aggregate
principal amount of the Series D Notes remains outstanding.
The Series D Notes are joint and several obligations of Abraxas and
Canadian Abraxas, and rank pari passu in right of payment to all existing and
future unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Series D
Notes rank senior in right of payment to all future subordinated indebtedness of
Abraxas and Canadian Abraxas. The Series D Notes are, however, effectively
subordinated to the Secured Notes to the extent of the value of the collateral
securing the Secured Notes (the "Collateral"). The Series D Notes are
unconditionally guaranteed, on a senior basis, jointly and severally, by the New
Cache and Sandia. The guarantees are general unsecured obligations of New Cache
and Sandia and rank pari passu in right of payment to all unsubordinated
indebtedness of New Cache and Sandia and senior in right of payment to all
subordinated indebtedness of New Cache and Sandia. These guarantees are
effectively subordinated to the Secured Notes to the extent of the value of the
Collateral.
Upon a Change of Control (as defined in the Series D Indenture), each
holder of the Series D Notes will have the right to require Abraxas and Canadian
Abraxas to repurchase all or a portion of such holder's Series D Notes at a
redemption price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase. In addition, Abraxas and Canadian
Abraxas will be obligated to offer to repurchase the Series D Notes at 100% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase in the event of certain asset sales.
The Series D 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 Series D Indenture; (iii) the Credit Facility (as defined in the
Series D Indenture); (iv) customary non-assignment provisions of any contract or
any lease governing leasehold interest of such subsidiaries; (v) any instrument
governing indebtedness assumed by the Company in an acquisition, which
18
<PAGE>
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 Series D
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 Series D Notes in any material respect as
determined by the Board of Directors of the Company in their reasonable and good
faith judgment that the provisions relating to such encumbrance or restriction
contained in the applicable agreement referred to in such clause (ii), (iii) or
(v).
Secured Notes: In March 1999 the Company consummated the sale of $63.5 million
of the Secured Notes due 2003. Interest on the Secured Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. The Secured Notes are redeemable, in whole or in part, at the option of
Abraxas on or after March 15, 2001, at the redemption prices set forth below,
plus accrued and unpaid interest to the date of redemption, if redeemed during
the 12-month period commencing on March 15 of the years set forth below:
Year Percentage
------ -----------
2001................................................ 103.000%
2002 and thereafter................................. 100.000%
At any time, or from time to time, prior to March 15, 2001, Abraxas may, at
its option, use all or a portion of the net cash proceeds of one or more equity
offerings to redeem up to 35% of the aggregate original principal amount of the
Notes at a redemption price equal to 112.875% of the aggregate principal amount
of the Notes to be redeemed, plus accrued and unpaid interest and liquidating
damages, if any.
The Secured Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The Secured Notes are
unconditionally guaranteed (the "Guarantees") on a senior basis, jointly and
severally, by Canadian Abraxas, New Cache and Sandia (collectively, the
"Guarantors"). The Guarantees are secured by substantially all of the crude oil
and natural gas properties of the Guarantors and the shares of Grey Wolf owned
by Canadian Abraxas.
Upon a Change of Control, each holder of the Secured Notes will have the
right to require Abraxas to repurchase such holder's Secured Notes at a
redemption price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. In addition, the Issuers will be
obligated to offer to repurchase the Secured Notes at 100% of the principal
amount thereof plus accrued and unpaid interest to the date of redemption in the
event of certain asset sales.
The Secured Notes Indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the Guarantors
(the "Restricted Subsidiaries") to, among other things, incur additional
indebtedness, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with affiliates,
incur liens, 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.
The Secured Notes Indenture provides, among other things, that the Company
may not, and may not cause or permit the Restricted Subsidiaries, 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 or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except for such encumbrances or restrictions existing under or by
reason of: (i) applicable law; (ii) the Indentures; (iii) customary
non-assignment provisions of any contract or any lease governing leasehold
interest of such subsidiaries; (iv) any instrument governing indebtedness
assumed by the Company in an acquisition, which encumbrance or restriction is
not applicable to such Restricted Subsidiary or the properties or assets of such
subsidiary other than the entity or the properties or assets of the entity so
acquired; (v) agreements existing on the Issue Date (as defined in the Secured
Notes Indenture) to the extent and in the manner such agreements were in effect
on the Issue Date; (vi) customary restrictions with respect to subsidiary of the
Company pursuant to an agreement that has been entered into for the sale or
disposition of capital stock or assets of such Restricted Subsidiary to be
consummated in accordance with the terms of the Secured Notes Indenture or any
Security Documents (as defined in the Secured Notes 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 Secured Notes 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
19
<PAGE>
indebtedness incurred to refinance the indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (ii), (iv) 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 Secured Notes in any material respect as determined by the
Board of Directors of the Company in their reasonable and good faith judgment
that the provisions relating to such encumbrance or restriction contained in the
applicable agreement referred to in such clause (ii), (iv) or (v).
Hedging Activities. In November 1996, the Company assumed hedge agreements
extending through October 2001 with a counterparty involving various quantities
and fixed prices. These hedge agreements provided for the Company to make
payments to the counterparty to the extent the market prices, determined based
on the price for crude oil on the NYMEX and the Inside FERC, Tennessee Gas
Pipeline Co. Texas (Zone O) price for natural gas exceeded certain fixed prices
and for the counterparty to make payments to the Company to the extent the
market prices were less than such fixed prices. The Company accounted for the
related gains or losses (a gain of $204,600 during the first quarter of 1999) in
crude oil and natural gas revenue in the period of the hedged production. The
Company terminated these hedge agreements in January 1999 and was paid $750,000
by the counterparty for such termination. This amount is included in other
income in the accompanying financial statements.
In March 1998, the Company entered into a costless collar hedge agreement
with Enron Capital and Trade Resources Corp. for 2,000 Bbls of crude oil per day
with a floor price of $14.00 per Bbl and a ceiling price of $22.30 per Bbl for
crude oil on the NYMEX. The agreement was effective April 1, 1998 and extended
through March 31, 1999. Under the terms of the agreement the Company was paid
when the average monthly price for crude oil on the NYMEX is below the floor
price and will pay the counterparty when the average monthly price exceeds the
ceiling price. During the six months ended June 30, 1999 the Company realized a
gain of $204,000 on this agreement, which is accounted for in crude oil and
natural gas revenue. The Company has also entered into a hedge agreement with
Barrett Resources Corporation ("Barrett") covering 2,000 Bbls per day of crude
oil calling for the Company to realize an average NYMEX price of $14.23 per Bbl
over the period April 1, 1999 to October 31, 1999. In May 1999, the Company and
Barrett amended this hedge agreement resulting in the Company being paid an
average NYMEX price of $17.00 per Bbl from June through October 1999. A new
agreement was entered into in May of 1999 for the period November 1999 through
October 2000. This agreement is for 1,000 Bbls per day with the Company being
paid $17.02 per Bbl. Additionally, Barrett has a call on either 1,000 Bbls of
crude oil or 20,000 MMBtu of natural gas per day at Barrett's option over the
term of the agreement at fixed prices. The Company realized a loss of $452,000
on this agreement which is accounted for in crude oil and natural gas revenue.
As of March 1, 1999, the Company had 37.0 MMBTUpd hedged at an average
NYMEX price of approximately $1.93 per MMBTU from April 1, 1999 to October 31,
1999 and 2.4 MMBTUpd at an average NYMEX price of approximately $1.10 per MMBTU
from November 1, 1998 to October 31, 2000. Of the 37.0 MMBTUpd hedged at $1.93
per MMBTU, 20.0 MMBTUpd is hedged with Barrett Resources Corporation, 11.0
MMBTUpd is hedged with Engage Energy Capital Canada LP, and 6.0 MMBTUpd is
hedged with Amoco. The 2.4 MMBTUpd hedged at $1.10 per MMBTU is hedged with
Barrett and was assumed by the Company in connection with the acquisition of New
Cache. In connection with the 20.0 MMBTU Barrett hedge, the Company realized a
loss $757,000 for the quarter ended June 30, 1999, which is accounted for in
crude oil and natural gas revenue.
Net Operating Loss Carryforwards. At December 31, 1998, the Company had,
subject to the limitations discussed below, $46.6 million of net operating loss
carryforwards for U.S. tax purposes, of which approximately $43.8 million are
available for utilization without limitation. These loss carryforwards will
expire from 2002 through 2010 if not utilized. At December 31, 1998, the Company
had approximately $11.9 million of net operating loss carryforwards for Canadian
tax purposes which expire in varying amounts in 2002-2005. 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, occurred in
December 1991. Accordingly, it is expected that the use of $4.9 million in net
operating loss carryforwards generated prior to December 31, 1991 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 $8.9 million, will be limited
to approximately $1 million per year subject to the lower limitations described
above. Of the $8.9 million net operating loss carryforwards, it is anticipated
that the maximum net operating loss that may be utilized before it expires is
$6.1 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 $5.9 million and
$32.8 million for deferred tax assets at December 31, 1997 and 1998,
respectively.
Based upon the current level of operations, the Company believes that cash
on hand,cash flow from operations and proceeds from the sale of non-core assets
will be adequate to meet its anticipated requirements for working capital,
capital expenditures and scheduled interest payments through 1999. 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.
20
<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
21
<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 28, 1999 the
following proposals were adopted by the margins indicated:
1. Election of four directors for terms of these years,
each to hold office until the expiration of his term
in 2002 or until a successor shall have been elected
& qualified.
Number of Shares
For Withheld
Franklin A. Burke 5,094,034 38,474
Harold D. Carter 5,094,034 38,474
Robert D. Gershen 5,094,034 38,474
Robert W. Carington 5,094,034 38,474
Directors whose term continued after the meeting
Robert L.G. Watson
Chris E. Williford
James C. Phelps
Richard M. Kleberg III
Paul A. Powell, Jr.
Richard M. Riggs
2. Proposal to approve Abraxas Petroleum Corporation Second
Amended and Restated Director Stock Option Plan.
Number of Shares
For Against Abstain
4,602,799 512,011 17,698
3. Approval of the appointment of Ernst & Young LLP as the
Company's auditors.
Number of Shares
For Against Abstain
5,124,545 6,649 1,314
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
22
<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 16, 1999 By:/s/
----------------- -------------------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: August 16, 1999 By:/s/
----------------- --------------------------------
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
23
<PAGE>
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