UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19118
ABRAXAS PETROLEUM CORPORATION
----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 74-2584033
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification Number)
500 N. Loop 1604, East, Suite 100, San Antonio, Texas 78232
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (210) 490-4788
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the restraint
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X or No __
The number of shares of the issuer's common stock outstanding as of May 10,
2000, was:
Class Shares Outstanding
Common Stock, $.01 Par Value 22,632,769
1 of 27
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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 - March 31, 2000
and December 31,1999....................................3
Consolidated Statements of Operations -
Three Months Ended March 31, 2000 and 1999..............5
Consolidated Statement of Stockholders Equity (Deficit)
March 31, 2000 and December 31, 1999....................6
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999..............7
Notes to Consolidated Financial Statements.......................9
ITEM 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations..................................17
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risks......24
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings...................................................26
ITEM 2 - Changes in Securities...............................................26
ITEM 3 - Defaults Upon Senior Securities.....................................26
ITEM 4 - Submission of Matters to a Vote of Security Holders.................26
ITEM 5 - Other Information 26
ITEM 6 - Exhibits and Reports on Form 8-K....................................26
Signatures ..................................................27
2
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<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, December 31,
2000 1999
(Unaudited)
---------- -------------
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash ................................................... $ 30,459 $ 3,799
Accounts receivable, less allowances for
Doubtful accounts
Joint owners ................................... 4,463 5,140
Oil and gas production ......................... 8,685 7,955
Other .......................................... 4,533 1,257
-------- --------
17,681 14,352
Equipment inventory .................................... 773 447
Other current assets ................................... 666 431
-------- --------
Total current assets ..................................... 49,579 19,029
Property and equipment ................................... 522,298 514,353
Less accumulated depreciation, depletion
and amortization: .................................. 228,168 219,687
-------- --------
Net property and equipment based on
the full cost method of accounting for
oil and gas properties, of which $ 17,253 and
$17,057 at March 31, 2000 and December 31, 1999,
respectively, were excluded from amortization .. 294,130 294,666
Deferred financing fees, net of accumulated
Amortization of $5,334 and $4,826 at March 31,
2000 and December 31, 1999, respectively ....... 7,597 7,711
Other assets ............................................. 3,880 878
-------- --------
Total assets ........................................... $355,186 $ 322,284
======== ========
</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)
March 31, December 31,
2000 1999
(Unaudited)
----------- -----------
(In Thousands)
<S> <C> <C>
Liabilities and Shareholder's Equity (Deficit)
Current liabilities
Accounts payable ..................................... $ 8,439 $ 8,445
Oil and gas production payable ....................... 9,733 10,608
Accrued interest ..................................... 9,899 6,358
Income tax payable ................................... 355 134
Other accrued expenses ............................... 861 789
--------- ---------
Total current liabilities .................. 29,287 26,334
Long-term debt: ...................................... 275,384 273,421
Deferred income taxes .................................. 19,702 16,935
Minority interest in foreign subsidiary ................ 10,428 10,496
Future site restoration ................................ 4,579 4,603
Shareholders' equity (deficit):
Common Stock, par value $.01 per share-
authorized 50,000,000 shares; issued,
22,759,852 and 22,747,099 shares at
March 31, 2000 and December 31, 1999, respectively . 227 227
Additional paid-in capital ........................... 127,423 127,562
Accumulated deficit .................................. (112,669) (139,825)
Treasury stock, at cost, 127,083 and 152,083 shares
at March 31, 2000 and December 31, 1999 respectively (886) (1,071)
Accumulated other comprehensive income (loss) .......... 1,711 3,602
--------- ---------
Total shareholders' equity (deficit) ................... 15,806 (9,505)
--------- ---------
Total liabilities and shareholders' equity (deficit) ... $ 355,186 $ 322,284
========= =========
</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
March 31,
--------------------
2000 1999
-------- ---------
(In thousands except
per share data)
<S> <C> <C>
Revenue:
Oil & gas production sales .............. $ 15,626 $ 13,838
Processing revenue ...................... 757 865
Rig revenues ............................ 131 90
Other ................................... 203 1,177
-------- --------
16,717 15,970
Operating costs and expenses:
Lease operating and production taxes .... 4,629 4,758
Depreciation, depletion and amortization 8,948 9,146
General and administrative .............. 1,439 1,323
Rig operations .......................... 188 139
-------- --------
15,204 15,366
-------- --------
Operating Income ........................... 1,513 604
Other (income) expense
Interest income ......................... (60) (186)
Interest expense ........................ 7,773 8,683
Amortization of deferred financing fees . 507 345
Other ................................... (33,547) --
-------- --------
(25,327) 8,842
-------- --------
Income (loss) from operations before taxes . 26,840 (8,238)
Income tax expense (benefit)
Current ................................ 126 102
Deferred ............................... (453) (2,039)
Minority interest in (income) loss
of consolidated foreign subsidiary ..... (11) 7
-------- --------
Net income (loss) applicable to common stock $ 27,156 $ (6,294)
======== ========
Earnings (loss) per share:
Net income (loss) per common share ..... $ 1.20 $ (.99)
======== ========
Net income (loss) per common
Share - assuming dilution ............ $ .52 $ (.99)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(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, 1999 22,747,099 $ 227 152,083 $ (1,071) $ 127,562 $ (139,825) $ 3,602 $ (9,505)
Comprehensive income (loss):
Net Income 27,156 (1,891) 25,265
Other comprehensive income:
Foreign currency
Translation adjustment
------------ ---------------- ---------
Comprehensive income (loss) 27,156 (1,891) 25,265
Issuance of common stock for
Compensation 12,753 - (25,000) 185 (139) 46
------------- --------- ---------- ----------- ----------- ------------ ---------------- ---------
Balance at March 31, 2000 22,759,852 $ 227 127,083 $ (886) $ 127,423 $ (112,669) $ 1,711 $ 15,806
============= ========= ========== =========== =========== ============ ================ =========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
---------------------
2000 1999
--------- ---------
(In Thousands)
<S> <C> <C>
Operating Activities
Net income (loss) ................................... $ 27,156 $ (6,294)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Minority interest in income of foreign subsidiary .. 11 (7)
Gain on sale of partnership interest ............... (33,983)
Depreciation, depletion, and amortization .......... 8,948 9,146
Amortization of deferred financing fees ............ 507 345
Amortization of premium on Senior Notes ............ -- (145)
Deferred income tax benefit ........................ (453) (2,039)
Issuance of common stock for compensation .......... 46 13
Changes in operating assets and liabilities:
Accounts receivable ................................ (2,404) 2,255
Equipment inventory ................................ (326) 15
Other .............................................. 382 (604)
Accounts payable and accrued expenses .............. 2,881 5,091
-------- --------
Net cash provided by operating activities ............ 2,765 7,776
-------- --------
Investing Activities
Capital expenditures, including purchases and
Development of properties ........................ (11,840) (99,422)
Proceeds from sale of oil and gas producing properties -- 1,497
Proceeds from sale of partnership interest ........... 33,983 --
-------- --------
Net cash used in investing activities ................ $ 22,143 $(97,925)
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Three Months Ended
March 31,
----------------------
2000 1999
--------- ---------
(In Thousands)
<S> <C> <C>
Financing Activities
Proceeds from long term borrowings ............... $ 3,052 $ 83,000
Payments on long-term borrowings ................. (1,024) (37,225)
Deferred financing fees .......................... (376) (2,241)
-------- --------
Net cash provided by financing activities ........ 1,652 43,534
-------- --------
Effect of exchange rate changes on cash .......... (18) (50)
-------- --------
Increase (decrease) in cash ...................... 26,660 (46,665)
Cash at beginning of period ...................... 3,799 61,390
-------- --------
Cash at end of period ............................ $ 30,459 $ 14,725
======== ========
Supplemental disclosures of cash flow information:
Interest paid .................................... $ 4,232 $ 968
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
8
<PAGE>
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
Note 1. Basis of Presentation
The accounting policies followed by Abraxas Petroleum Corporation
("Abraxas") and its subsidiaries are set forth in the notes to the our audited
financial statements in the Annual Report on Form 10-K filed for the year ended
December 31, 1999 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 our 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 our 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 Abraxas and
our wholly owned foreign subsidiary Canadian Abraxas Petroleum Ltd. ("Canadian
Abraxas"), and our 49% 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.
Note 2. Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
March 31, December 31
2000 1999
--------- ------------
(In thousands)
<S> <C> <C>
11.5% Senior Notes due 2004, Series D ("Old Notes") (see below) $ 4,321 $ 4,321
12.875% Senior Secured Notes due 2003 ("First Lien Notes") (see
below) ....................................................... 63,500 63,500
11.5% Senior Secured Notes due 2004, Series A ("Senior Secured
Notes")(see below) .......................................... 193,758 193,769
Credit facility payable to a Canadian bank (due 2001),
providing for borrowings to approximately $15,870,000 at
the bank's prime rate plus .125%, 6.75% at March 31, 2000,
secured by the assets of Grey Wolf ........................... 9,347 8,360
Other ............................................................. 4,458 3,471
-------- --------
275,384 273,421
Less current maturities ........................................... -- --
-------- --------
$275,384 $273,421
======== ========
</TABLE>
9
<PAGE>
Old 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 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 Old Notes in June 1998.
Interest on the Old 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 Old 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%
The Old 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 Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. The Old Notes are, however, effectively subordinated to
the First Lien Notes to the extent of the value of the collateral securing the
First Lien Notes and the Second Lien Notes to the extent of the value of the
collateral securing the Second Lien Notes. The Old Notes are unconditionally
guaranteed, on a senior basis by a wholly-owned Abraxas subsidiary, Sandia Oil &
Gas Corporation. The guarantee is a general unsecured obligation of Sandia and
ranks pari passu in right of payment to all unsubordinated indebtedness of
Sandia and senior in right of payment to all subordinated indebtedness of
Sandia. The guarantee is effectively subordinated to the First Lien Notes and
the Second Lien Notes to the extent of the value of the collateral securing
these obligations.
Upon a change of control, each holder of the Old Notes will have the right
to require Abraxas and Canadian Abraxas to repurchase all or a portion of such
holder's Old 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 Old 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.
First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. The First Lien 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
First Lien Notes at a redemption price equal to 112.875% of the aggregate
principal amount of the First Lien Notes be redeemed, plus accrued and unpaid
interest.
The First Lien Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
10
<PAGE>
and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and one of our wholly-owned subsidiaries, Wamsutter Holdings,
Inc.. 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 First Lien Notes will have the
right to require Abraxas to repurchase such holder's First Lien 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 First Lien 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 First Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the First Lien Notes (the "First Lien 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 Abraxas.
The First Lien Notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the First Lien 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 First Lien
Restricted Subsidiary, guarantee any indebtedness of Abraxas or any other First
Lien Restricted Subsidiary or transfer any of its assets to Abraxas or any other
First Lien Restricted Subsidiary except for such encumbrances or restrictions
existing under or by reason of:
(1) applicable law;
(2) the First Lien Notes indenture;
(3) customary non-assignment provisions of any contract or any lease
governing leasehold interest of such subsidiaries;
(4) any instrument governing indebtedness assumed by us in an
acquisition, which encumbrance or restriction is not applicable to such First
Lien Restricted Subsidiary or the properties or assets of such subsidiary other
than the entity or the properties or assets of the entity so acquired;
(5) agreements existing on the Issue Date (as defined in the First Lien
Notes indenture) to the extent and in the manner such agreements were in effect
on the Issue Date;
(6) customary restrictions with respect to subsidiaries of Abraxas
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 First Lien Notes indenture or any Security
Documents (as defined in the First Lien Notes indenture) solely in respect of
the assets or capital stock to be sold or disposed of;
(7) any instrument governing certain liens permitted by the First Lien
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
(8) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (4) or (5) 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 First Lien Notes in any material
respect as determined by the Board of Directors of Abraxas 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
(2), (4) or (5) and do not extend to or cover any new or additional property or
assets and, with respect to newly created liens, (A) such liens are expressly
11
<PAGE>
junior to the liens securing the First Lien Notes, (B) the refinancing results
in an improvement on a pro forma basis in Abraxas' Consolidated EBITDA Coverage
Ratio (as defined in the First Lien Notes indenture) and (C) the instruments
creating such liens expressly subject the foreclosure rights of the holders of
the refinanced indebtedness to a stand-still of not less than 179 days.
Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas
consummated an exchange offer whereby $188,778,000 of the Second Lien Notes were
exchanged for $269,699,000 of the Old Notes. An additional $5,000,000 of the
Second Lien Notes were issued in payment of fees and expenses. Interest on the
Second Lien Notes is payable semi-annually in arrears on May 1 and November 1,
commencing May 1, 2000. The Second Lien Notes are redeemable, in whole or in
part, at the option of Abraxas and Canadian Abraxas on or after December 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
December 1 of the years set forth below:
Year Percentage
2000................................ 105.750%
2001................................ 102.875%
2002 and thereafter................. 100.000%
Prior to December 1, 2000, Abraxas and Canadian Abraxas may use all or a
portion of the net cash proceeds of one or more equity offerings to redeem up to
50% of the aggregate original principal amount of the Second Lien Notes at a
redemption price equal to 111.50% of the principal amount of the second lien
notes be redeemed, plus accrued and unpaid interest.
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the Second Lien Notes and
related guarantees and the First Lien Notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.
Upon a change of control, each holder of the Second Lien Notes will have
the right to require Abraxas and Canadian Abraxas to repurchase such holder's
Second Lien 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 second
lien 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 covering the Second Lien Notes contains certain covenants
that limit the ability of Abraxas and Canadian Abraxas and certain of their
subsidiaries, including the guarantors of the Second Lien Notes (the "Second
Lien 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 Abraxas or Canadian Abraxas.
The Second Lien Notes indenture provides, among other things, that Abraxas
and Canadian Abraxas may not, and may not cause or permit the Second Line
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, Canadian Abraxas or any other Second Lien Restricted Subsidiary,
guarantee any indebtedness of Abraxas, Canadian Abraxas or any other Second Lien
Restricted Subsidiary or transfer any of its assets to Abraxas, Canadian Abraxas
or any other Restricted Subsidiary except for such encumbrances or restrictions
existing under or by reason of:
12
<PAGE>
(1) applicable law;
(2) the Old Notes indenture, the First Lien Notes indenture, or the
Second Lien Notes indenture;
(3) customary non-assignment provisions of any contract or any lease
governing leasehold interest of such subsidiaries;
(4) any instrument governing indebtedness assumed by us in an
acquisition, which encumbrance or restriction is not applicable to such Second
Lien Restricted Subsidiary or the properties or assets of such subsidiary other
than the entity or the properties or assets of the entity so acquired;
(5) agreements existing on the Issue Date (as defined in the second
lien notes indenture) to the extent and in the manner such agreements were in
effect on the Issue Date;
(6) customary restrictions with respect to subsidiaries of Abraxas and
Canadian Abraxas pursuant to an agreement that has been entered into for the
sale or disposition of capital stock or assets of such Second Lien Restricted
Subsidiary to be consummated in accordance with the terms of the Second Lien
Notes solely in respect of the assets or capital stock to be sold or disposed
of;
(7) any instrument governing certain liens permitted by the Second Lien
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
(8) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (4) or (5) 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 Second Lien Notes in any material
respect as determined by the Board of Directors of Abraxas 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
(2), (4) or (5).
Contingent Value Rights ("CVRs")
As part of the exchange offer Abraxas has issued contingent value rights or
CVRs the terms of which provide that the holders thereof could receive up to a
total of 104,365,326 shares of Abraxas common stock. Subsequent to the issuance
of the CVRs, Abraxas' common stock traded at a price per share of $2.01 or
higher for 30 days during the 45-day trading period beginning on February 8,
2000, and ending on April 10, 2000. As a result, under the terms of the CVRs,
the maximum number of shares which holders of the CVRs could be entitled to
receive has been reduced to 26,400,000 shares of Abraxas common stock. In
addition, in the event Abraxas common stock trades at a price per share higher
than $2.01 for 30 days during any future 45-day trading period, the number of
shares issuable under the CVRs would decrease correspondingly to a number below
26,400,000.
On December 21, 2000, or at the election of Abraxas, on May 21, 2001,
Abraxas may be required to issue additional shares of common stock to the
holders of the contingent value rights. The actual number of shares issued will
depend on the market price of Abraxas common stock. The CVRs will terminate if
the market price of Abraxas common stock exceeds certain target prices for a
period of 30 trading days during any 45 consecutive trading day period prior to
the expiration date. The target price on any given date will equal $5.03 plus
daily interest at an annual rate of 11.5%. On December 21, 2000, the target
price will be $5.68 and on May 21, 2001, the target price will be $5.97.
13
<PAGE>
Note 3. Earnings Per Share
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Ended
March 31,
--------------------------
2000 1999
----------- -------------
<S> <C> <C>
Numerator:
Numerator for basic earnings per share - income (loss)
available to common stockholders (in thousands) .... $ 27,156 $ (6,294)
Effect of dilutive securities: ....................... -- --
----------- -----------
Numerator for diluted earnings per share-income
available to common stockholders after assumed
Conversions (in thousands) ......................... 27,156 (6,294)
Denominator:
Denominator for basic earnings per share -
weighted-average shares ............................ 22,627,136 6,333,498
Effect of dilutive securities:
Stock options,Warrants and CVR's ..................... 29,945,081 --
----------- -----------
Dilutive potential common shares
Denominator for diluted earnings per share
adjusted weighted-average shares and assumed
Conversions ........................................ 52,572,217 6,333,498
Basic earnings (loss) per share:
Income (loss) ...................................... $ 1.20 $ (0.99)
=========== ===========
Diluted earnings (loss) per share:
Income (loss) ...................................... $ 0.52 $ (0.99)
=========== ===========
</TABLE>
For the three months ended March 31, 2000 and 1999, none of the shares
issuable in connection with stock options or warrants are included in dilutive
shares. Inclusion of these shares would be antidilutive due to losses incurred
in these periods.
Note 4. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information of Canadian Abraxas, a
wholly owned subsidiary of Abraxas March 31, 2000. Canadian Abraxas is jointly
and severally liable with Abraxas for the entire balance of Abraxas' and
Canadian Abraxas' 11.5% Senior Notes due 2004.
BALANCE SHEET
Assets Liabilities and Shareholders Equity
(In Thousands)
Total current assets $ 6,478 Total current liabilities $ 5,131
Oil and gas properties 159,809 11.5% Notes due 2004 52,629
Other assets 2,681 Note payable to Abraxas
========= Petroleum Corporation 31,111
$ 168,968 Other liabilities 23,091
========= Shareholder's equity 57,006
----------
$ 168,968
==========
14
<PAGE>
STATEMENT OF OPERATIONS
Revenues $ 8,058
Operating costs & expenses (7,355)
Interest expense (2,167)
Other income 21
Income tax benefit 404
============
Net loss $ (1,039)
============
Note 5. Business Segments
<TABLE>
<CAPTION>
Business segment information about our first quarter operations in
different geographic areas is as follows:
Three Months Ended March 31, 2000
----------------------------------------------------------
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ................................... $ 6,153 $ 10,564 $ 16,717
================== ================== ===================
Operating profit (loss)..................... $ 1,414 $ 945 $ 2,359
================== ==================
General corporate .......................... (846)
Interest expense and amortization of
deferred financing fees ................. (8,221)
Other income................................ 33,548
-------------------
Income before income taxes .............. $ 26,840
===================
Identifiable assets at March 31, 2000 ...... $ 140,400 $ 204,751 $ 345,151
================== ==================
Corporate assets ........................... 10,035
-------------------
Total assets ............................ $ 355,186
===================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
----------------------------------------------------------
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ................................... $ 6,548 $ 9,422 $ 15,970
================== ================== ===================
Operating profit (loss)..................... $ (614) $ 2,044 $ 1,430
================== ==================
General corporate .......................... (826)
Interest expense and amortization of
deferred financing fees ................. (8,841)
===================
Income before income taxes .............. $ (8,237)
===================
Year Ended December 31, 1999
----------------------------------------------------------
U.S. Canada Total
------------------ ------------------ -------------------
Identifiable assets at December 31, 1999 ... $ 107,336 $ 206,474 $ 313,810
================== ==================
Corporate assets ........................... 8,474
-------------------
Total assets ............................ $ 322,284
===================
</TABLE>
15
<PAGE>
Note 6. Contingencies
In May 1995, certain plaintiffs filed a lawsuit against us alleging
negligence and gross negligence, tortious interference with contract, conversion
and waste. In March 1998, a jury found against us, on May 22, 1998, final
judgement in the amount of approximately $1.3 million was entered. We filed an
appeal and in March 2000, the Court of Appeals reduced the plantiff's award to
$362,495 plus post judgement interest of $68,915. We settled the suit on April
26, 2000, for $435,781, which was charged to earnings and included in other
expense, in the accompanying financial statement.
Additionally, from time to time, we are involved in litigation relating to
claims arising out of our operations in the normal course of business. At March
31, 2000, we were not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on us.
Note 7. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. In June 1999,
SFAS No. 137 was issued, which delays the required adoption of SFAS No. 133 by
one year. The statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Statement will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, of firm commitments
through earnings or recognized in other comprehensive income until the hedge
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined the effect of SFAS No. 133 will be on the earnings and financial
position of the Company.
16
<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 our financial condition, results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with our consolidated financial statements and the notes thereto,
included in our Annual Report on Form 10-K filed for the year ended December 31,
1999, which is incorporated herein by reference.
Results of Operations
The factors which most significantly affect our 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, and (3) the level and success of
exploration and development activity.
Selected operating data. The following table sets forth certain of our
operating data for the periods presented.
Three Months Ended
March 31,
-------------------
2000 1999
--------- ---------
Operating Revenue (in thousands):
Crude Oil Sales ....................... $ 2,651 $ 2,731
Natural Gas Sales ..................... 11,201 10,555
Natural Gas Liquids Sales ............. 1,774 552
Processing Revenue .................... 757 865
Rig Operations ........................ 131 90
Other ................................. 203 1,177
======= =======
$16,717 $15,970
======= =======
Operating Income (in thousands) ....... $ 1,403 $ 604
Crude Oil Production (MBBLS) .......... 168.5 225.0
Natural Gas Production (MMCFS) ........ 5,439.9 7,149.5
Natural Gas Liquids Production (MBBLS) 82.5 73.3
Average Crude Oil Sales Price ($/BBL) . $ 15.73 $ 12.14
Average Natural Gas Sales Price ($/MCF) $ 2.06 $ 1.48
Average Liquids Sales Price ($/BBL) ... $ 21.51 $ 7.53
Operating Revenue. During the three months ended March 31, 2000, operating
revenue from crude oil, natural gas and natural gas liquid sales increased 12.9%
to $15.6 million compared to $13.8 million in the three months ended March 31,
1999. The increase in revenue was primarily due to increased prices realized
during the period, offset by a decline in production volumes. Increased prices
contributed $4.9 million in revenue after deducting losses from hedging
activities of $2.03 million, while reduced production volumes had a $3.1 million
negative impact on revenue.
Average sales prices for the quarter ended March 31, 2000 were:
o $15.73 per Bbl of crude oil,
o $21.51 per Bbl of natural gas liquid, and
o $ 2.06 per Mcf of natural gas
17
<PAGE>
Average sales prices for the quarter ended March 31, 1999 were:
o $12.14 per Bbl of crude oil,
o $7.53 per Bbl of natural gas liquid, and
o $1.48 per Mcf of natural gas
Crude oil production volumes declined from 225.0 MBbls during the first
quarter of 1999 to 168.5 MBbls for the same period of 2000, primarily das a
result of the de-emphasis of crude oil drilling during 1999 and a natural
decline in production. Natural gas production volumes declined to 5,439.9 MMcf
for the first quarter of 2000 from 7,149.1 MMcf for the same period of 1999.
During 1999 and the first quarter of 2000 a significant portion of our drilling
activity was in the Edwards Trend in south Texas. Production volumes in this
area increased from 789 MMcf in the first quarter of 1999 to 1,115.3 MMcf during
the first quarter of 2000. Production in our other areas declined due to
decreased drilling activity property sales and the fields' natural decline in
production. Natural gas liquids volumes increased from 73.3 MBbls during the
first quarter of 1999 to 82.5 MBbls during the first quarter of 2000. During the
first quarter of 1999, we elected not to process liquids in some areas due to
depressed prices. We resumed production of liquids in the second quarter of 1999
and continued to process liquids during the first quarter of 2000.
Lease Operating Expenses. Lease operating expenses and natural gas
processing costs ("LOE") for the three months ended March 31, 2000 decreased
slightly to $4.6 million from $4.7 million for the same period in 1999. Our LOE
on a per MCFE basis for the three months ended March 31, 2000 was $0.67 per MCFE
compared to $0.53 for the same period of 1999. The increase in the per MCFE
expense was due to a decline in production volumes in the first quarter of 2000
compared to the same period in 1999.
G&A Expenses. G&A expenses increased from $1.3 million for the first three
months of 1999 to $1.4 million for the first three months of 2000. G&A expense
on a per MCFE basis was $0.21 for the first quarter of 2000 compared to $0.15
for the same period of 1999. The increase in the per MCFE G&A cost is due to the
decline in production volumes during the first quarter of 2000 compared to the
same period in 1999.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense declined by $198,000 to $8.9 million for the
three months ended March 31, 2000, from $9.1 million in the same period of 1999.
The decline is primarily due to decreased production during the first three
months of 2000 and a reduction on the full cost pool relating to the write down
of Canadian reserves at December 31, 1999. Our DD&A on a per MCFE basis for the
three months ended March 31, 2000 was $1.29 per MCFE compared to $1.02 in 1999.
The per BOE increase is due to higher finding costs added to the full cost pool
in 1999 and the first quarter of 2000 primarily relating to Canadian operations.
Interest Expense . Interest expense decreased to $7.8 million for the first
three months of 2000 from $8.7 million for the same period of 1999. This
decrease is due to reduced debt levels during the first quarter of 2000 compared
to the same period of 1999. The reduced debt level is the result of the exchange
of approximately $269.70 million principal amount of the Old Notes for
approximately $188.8 million principal amount of the Second Lien Notes and
shares of our common stock and CVRs. The interest savings related to this
exchange was partially offset by interest on our First Lien Notes which were
issued on March 27, 1999. Long-term debt declined from $344.9 million at March
31, 1999 to $275.4 million at March 31, 2000.
General . Our 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 we produce. The
prices of natural gas, crude oil and natural gas liquids we received have
increased from the severely depressed levels of the first quarter of 1999. The
average natural gas price that we realized during the first quarter of 2000
increased by 39% from the $1.48 per MCF during the first three months of 1999 to
$2.06 during the first three months of 2000. Crude oil prices increased to
$15.73 per BBL during the first three months of 2000, including the impact of a
loss from hedging of $1.9 million from $12.14 per BBL during the first three
months of 1999. Natural gas liquids prices increased to $21.51 per BBL in the
18
<PAGE>
first quarter of 2000 compared to $7.53 per BBL in the first quarter of 1999. In
addition, our proved reserves will decline as crude oil, natural gas and natural
gas liquids are produced unless we are 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 decline
from their current levels or if our production levels decrease, our revenues,
cash flow from operations and profitability will be materially adversely
affected.
Liquidity and Capital Resources
General. Capital expenditures excluding property divestitures during the
first three months of 2000 were $11.8 million compared to $99.4 million during
the same period of 1999. The table below sets forth the components of these
capital expenditures on a historical basis for the three months ended March 31,
2000 and 1999.
Three Months Ended
March 31
-------------------------------
2000 1999
-------------------------------
Expenditure category (in thousands):
Acquisitions $ 22 $ 86,103
Development 11,451 13,319
Facilities and other 367 -
============ ===========
Total $ 11,840 $ 99,422
============ ===========
At March 31, 2000, we had current assets of $49.6 million and current
liabilities of $29.3 million resulting in working capital of $20.3 million. This
compares to a working capital deficit of $7.3 million at December 31, 1999 and a
working capital deficit of $6.1 million at March 31, 1999. The material
components of our current liabilities at March 31, 2000 include trade accounts
payable of $8.4 million, revenues due third parties of $9.7 million and accrued
interest of $9.9 million.
Operating activities during the three months ended March 31, 2000 provided
us $2.8 million cash compared to $7.8 million in the same period in 1999. Net
income plus non-cash expense items during 2000 and net changes in operating
assets and liabilities accounted for most of these funds. Investing activities
provided $22.1 million net during the first three months of 2000, $34.0 million
of which were proceeds from the sale of a partnership interest in Abraxas
Wamsutter, L.P., a limited partnership of which one of our subsidiaries is the
general partner, and certain contiguous assets we owned, and $11.8 million of
which was utilized for the development of crude oil and natural gas properties
and other facilities. This compares to $97.9 million required during the same
period of 1999, $86.1 million of which was used for the purchase of New Cache
Petroleums, Ltd., $13.3 million of which was utilized for the development of
crude oil and natural gas properties and other facilities. Financing activities
provided $1.7 million for the first three months of 2000 compared to providing
$43.5 million for the same period of 1999. Financing activities in 1999 include
the proceeds of the $63.5 million from the issuance of the First Lien Notes in
March 1999 and borrowings under the credit facility of $19.5 million, which were
offset by the repayment of a credit facility in the amount of $35.2 million.
Our current budget for capital expenditures for the last nine months of
2000 other than acquisition expenditures is approximately $37.8 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 we currently have no agreements,
arrangements or undertakings regarding any material acquisitions. We have no
material long-term capital commitments and are consequently able to adjust the
level of our expenditures as circumstances dictate. Additionally, the level of
capital expenditures will vary during future periods depending on market
conditions and other related economic factors. Should commodity prices remain at
depressed levels or decline further, reductions in the capital expenditure
budget may be required.
Current Liquidity Needs. Since January 1999, we have sought to improve our
liquidity in order to allow us to meet our debt service requirements and to
19
<PAGE>
maintain and increase existing production.
Our sale in March 1999 of our First Lien Notes allowed us to refinance our
bank debt, meet our near-term debt service requirements and make limited crude
oil and natural gas capital expenditures.
In October 1999, we sold a dollar denominated production payment for $4.0
million relating to existing natural gas wells in the Edwards Trend in South
Texas to a unit of Southern Energy, Inc. and in January 2000, we sold an
additional production payment for $2.0 million relating to additional natural
gas wells in the Edwards Trend to Southern. We have the ability to sell up to
$50 million to Southern for drilling opportunities in the Edwards Trend.
In December 1999, Abraxas and Canadian Abraxas, completed an exchange offer
whereby we exchanged the Second Lien Notes, common stock, and contingent value
rights for approximately 98.43% of our outstanding Old Notes. The exchange offer
reduced our long term debt by $76 million net of fees and expenses.
In March 2000, we sold our interest in certain crude oil and natural gas
properties that we owned and operated in Wyoming. Simultaneously, a limited
partnership of which one of our subsidiaries was the general partner sold its
interest in crude oil and natural gas properties in the same area. Our net
proceeds from these transactions were approximately $34.0 million.
We are continuing to rationalize our significant non-core Canadian assets
to allow us to continue to grow while reducing our debt. We may sell non-core
assets or seek partners to fund a portion of the exploration costs of
undeveloped acreage and are considering other potential strategic alternatives.
We will have three principal sources of liquidity going forward: (i) cash
on hand, including the proceeds from the sale of the Wyoming properties, (ii)
cash flow from operations, and (iii) the production payment with Southern. We
also intend to sell certain non-core properties, although the terms of the First
Lien Notes Indenture, the Second Lien Notes Indenture and the Old Notes
Indenture substantially limit our use of proceeds from such sales. 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, cash available under the production payment and the proceeds from the sale
of certain non-core properties will be adequate to fund operations and planned
capital expenditures
Long-Term Indebtedness
Old 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 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 Old Notes in June 1998.
Interest on the Old 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 Old 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%
The Old 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 Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
20
<PAGE>
and Canadian Abraxas. The Old Notes are, however, effectively subordinated to
the First Lien Notes to the extent of the value of the collateral securing the
First Lien Notes and the Second Lien Notes to the extent of the value of the
collateral securing the Second Lien Notes. The Old Notes are unconditionally
guaranteed, on a senior basis by a wholly-owned Abraxas subsidiary, Sandia Oil &
Gas Corporation. The guarantee is a general unsecured obligation of Sandia and
ranks pari passu in right of payment to all unsubordinated indebtedness of
Sandia and senior in right of payment to all subordinated indebtedness of
Sandia. The guarantee is effectively subordinated to the First Lien Notes and
the Second Lien Notes to the extent of the value of the collateral securing
these obligations.
Upon a change of control, each holder of the Old Notes will have the right
to require Abraxas and Canadian Abraxas to repurchase all or a portion of such
holder's Old 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 Old 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.
First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. The First Lien 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
First Lien Notes at a redemption price equal to 112.875% of the aggregate
principal amount of the First Lien Notes be redeemed, plus accrued and unpaid
interest.
The First Lien 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 First Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and one of our wholly-owned subsidiaries, Wamsutter Holdings,
Inc.. 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 First Lien Notes will have the
right to require Abraxas to repurchase such holder's First Lien 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 First Lien 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 First Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the First Lien Notes (the "First Lien 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 Abraxas.
The First Lien Notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the First Lien Restricted Subsidiaries, to,
21
<PAGE>
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 First Lien
Restricted Subsidiary, guarantee any indebtedness of Abraxas or any other First
Lien Restricted Subsidiary or transfer any of its assets to Abraxas or any other
First Lien Restricted Subsidiary except for such encumbrances or restrictions
existing under or by reason of:
(1) applicable law;
(2) the First Lien Notes indenture;
(3) customary non-assignment provisions of any contract or any lease
governing leasehold interest of such subsidiaries;
(4) any instrument governing indebtedness assumed by us in an
acquisition, which encumbrance or restriction is not applicable to such First
Lien Restricted Subsidiary or the properties or assets of such subsidiary other
than the entity or the properties or assets of the entity so acquired;
(5) agreements existing on the Issue Date (as defined in the First Lien
Notes indenture) to the extent and in the manner such agreements were in effect
on the Issue Date;
(6) customary restrictions with respect to subsidiaries of Abraxas
pursuant to an agreement that has been entered into for the sale or disposition
of capital stock or assets of such First Lien Restricted Subsidiary to be
consummated in accordance with the terms of the First Lien Notes indenture or
any Security Documents (as defined in the First Lien Notes indenture) solely in
respect of the assets or capital stock to be sold or disposed of;
(7) any instrument governing certain liens permitted by the first lien
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
(8) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (4) or (5) 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 First Lien Notes in any material
respect as determined by the Board of Directors of Abraxas 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
(2), (4) or (5) and do not extend to or cover any new or additional property or
assets and, with respect to newly created liens, (A) such liens are expressly
junior to the liens securing the First Lien Notes, (B) the refinancing results
in an improvement on a pro forma basis in Abraxas' Consolidated EBITDA Coverage
Ratio (as defined in the First Lien Notes indenture) and (C) the instruments
creating such liens expressly subject the foreclosure rights of the holders of
the refinanced indebtedness to a stand-still of not less than 179 days.
Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas
consummated an exchange offer whereby $188,778,000 of the Second Lien Notes were
exchanged for $269,699,000 of the Old Notes. An additional $5,000,000 of the
Second Lien Notes were issued in payment of fees and expenses. Interest on the
Second Lien Notes is payable semi-annually in arrears on May 1 and November 1,
commencing May 1, 2000. The Second Lien Notes are redeemable, in whole or in
part, at the option of Abraxas and Canadian Abraxas on or after December 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
December 1 of the years set forth below:
Year Percentage
2000.................................. 105.750%
2001.................................. 102.875%
2002 and thereafter................... 100.000%
Prior to December 1, 2000, Abraxas and Canadian Abraxas may use all or a
portion of the net cash proceeds of one or more equity offerings to redeem up to
22
<PAGE>
50% of the aggregate original principal amount of the Second Lien Notes at a
redemption price equal to 111.50% of the principal amount of the second lien
notes be redeemed, plus accrued and unpaid interest.
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The second lien notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The second lien notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the second lien notes and
related guarantees and the first lien notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.
Upon a change of control, each holder of the Second Lien Notes will have
the right to require Abraxas and Canadian Abraxas to repurchase such holder's
Second Lien 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 second
lien 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 covering the Second Lien Notes contains certain covenants
that limit the ability of Abraxas and Canadian Abraxas and certain of their
subsidiaries, including the guarantors of the Second Lien Notes (the "Second
Lien 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 Abraxas or Canadian Abraxas.
The Second Lien Notes indenture provides, among other things, that Abraxas
and Canadian Abraxas may not, and may not cause or permit the Second Lien
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, Canadian Abraxas or any other Second Lien Restricted Subsidiary,
guarantee any indebtedness of Abraxas, Canadian Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas, Canadian Abraxas or any
other Second Lien Restricted Subsidiary except for such encumbrances or
restrictions existing under or by reason of:
(1) applicable law;
(2) the Old Notes indenture, the First Lien Notes indenture, or the
Second Lien Notes indenture;
(3) customary non-assignment provisions of any contract or any lease
governing leasehold interest of such subsidiaries;
(4) any instrument governing indebtedness assumed by us in an
acquisition, which encumbrance or restriction is not applicable to such Second
Lien Restricted Subsidiary or the properties or assets of such subsidiary other
than the entity or the properties or assets of the entity so acquired;
(5) agreements existing on the Issue Date (as defined in the Second
Lien Notes Indenture) to the extent and in the manner such agreements were in
effect on the Issue Date;
(6) customary restrictions with respect to subsidiaries of Abraxas and
Canadian Abraxas pursuant to an agreement that has been entered into for the
sale or disposition of capital stock or assets of such Second Lien Restricted
Subsidiary to be consummated in accordance with the terms of the Second Lien
Notes solely in respect of the assets or capital stock to be sold or disposed
of;
(7) any instrument governing certain liens permitted by the second lien
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
23
<PAGE>
(8) an agreement governing indebtedness incurred to refinance the
indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2), (4) or (5) 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 Second Lien Notes in any material
respect as determined by the Board of Directors of Abraxas 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
(2), (4) or (5).
Hedging Activities. In October of 1999 we entered into a hedge agreement
with Barrett Resources Corporation ("Barrett") for the period November 1999
through October 2000. This agreement is for 1,000 Bbls per day with us being
paid $20.30 per Bbl and 1,000 Bbls per day with a floor of $18.00 and a ceiling
of $22.00 per Bbl. Additionally, Barrett's has a call on either 1,000 Bbls of
crude oil or 20,000 MMBtu of natural gas per day at Barrets option over the term
of the agreement at fixed prices through October 31, 2002. We realized a loss of
$1.9 million on this agreement during the first quarter of 2000, which is
accounted for in crude oil and natural gas revenue.
As of March 31, 2000, we had 22.5 MMBtupd hedged through October 31, 2000
of which 2.5 MMBtupd is hedged at an average NYMEX price less $0.83
(approximately $2.13 per MMBtu as of March 31, 2000) and 20.0 MMBtupd with a
ceiling of $2.39 and a floor of $2.07 based on an AECO index. Both of these
hedges are with Barrett. In connection with the 20.0 MMBtupd Barrett hedge, we
realized a loss of $118,596 for the quarter ended March 31, 2000, which is
accounted for in crude oil and natural gas revenue.
As of March 31, 2000 the fair market value of the Barrett hedge is $(7.9)
million.
Net Operating Loss Carryforwards At December 31, 1999, we had, subject to
the limitation discussed below, $94,573,000 of net operating loss carryforwards
for U.S. tax purposes, of which it is estimated a maximum of $7,260,000 may be
utilized before it expires, absent the application of Section 382(h) which
allows built-in gains to offset carryforwards otherwise limited by Section 382
of the Internal Revenue Code of 1986, as amended, (Section 382). These loss
carryforwards will expire from 2002 through 2018 if not utilized. At December
31, 1999, we had approximately $10,262,000 of net operating loss carryforwards
for Canadian tax purposes of which $274,000 will expire in 2000, $3,542,000 will
expire in 2001, $151,000 will expire in 2002 and $6,295,000 will expire in
2003-2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Commodity Price Risk
Our exposure to market risks rest primarily with the volatile nature of
crude oil, natural gas and natural gas liquids prices. We manages crude oil and
natural gas prices through the periodic use of commodity price hedging
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources". Assuming the production
levels we attained during the three months ended March 31, 2000, a 10% decline
in crude oil, natural gas and natural gas liquids prices would have reduced our
operating revenue, cash flow and net income (loss) by approximately $1.6 million
for the three months ended March 31, 2000. . Interest rate risk
At March 31, 2000, substantially all of our long-term debt is at fixed
interest rates and not subject to fluctuations in market rates.
Foreign currency
Our Canadian operations are measured in the local currency of Canada. As a
result, our financial results could be affected by changes in foreign currency
24
<PAGE>
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported a pre-tax loss of $1.3 million for the three months ended
March 31, 2000. It is estimated that a 5% change in the value of the U.S. dollar
to the Canadian dollar would have changed the our net income by approximately
$65,000. We do not maintain any derivative instruments to mitigate the exposure
to translation risk. However, this does not preclude the adoption of specific
hedging strategies in the future.
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 our financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from our expectations ("Cautionary Statements") are disclosed
under "Risk Factors" in our Annual Report on Form 10-K which is incorporated by
reference herein and this report. All subsequent written and oral
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by the Cautionary Statements.
25
<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
None
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
26
<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: May 15, 2000 By:/s/
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: May 15, 2000 By:/s/
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
27
<PAGE>
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