UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 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
November 10, 2000, was:
Class Shares Outstanding
Common Stock, $.01 Par Value 22,593,939
1 of 27
<PAGE>
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2000
and December 31,1999...........................................3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2000 and 1999........5
Consolidated Statement of Stockholders Equity (Deficit)
September 30, 2000 and December 31, 1999.......................6
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999..................7
Notes to Consolidated Financial Statements........................8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................16
ITEM 3 - Quantitative and Qualitative Disclosures about market risk.........24
PART II
OTHER INFORMATION
ITEM 1 - Legal proceeding...................................................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
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
September 30, December 31,
2000 1999
(Unaudited)
--------------------------------------
(In thousands)
<S> <C> <C>
Current assets:
Cash ................................................... $ 3,633 $ 3,799
Accounts receivable, less allowance for doubtful
accounts............................................ 16,245 14,352
Equipment inventory .................................... 1,461 447
Other current assets ................................... 479 431
------------------ -------------------
Total current assets ................................. 21,818 19,029
Property and equipment..................................... 544,688 514,353
Less accumulated depreciation, depletion, and amortization
244,255 219,687
------------------ -------------------
Net property and equipment based on the full cost
method of accounting for oil and gas properties of
which $17,057 was excluded from amortization ......... 300,433 294,666
Deferred financing fees, net of accumulated amortization
of $4,826 and $6,349 at December 31, 1999 and September
30, 2000, respectively ................................. 6,729 7,711
Other assets .............................................. 5,099 878
------------------ -------------------
Total assets ........................................... $ 334,079 $ 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)
September 30, December 31,
2000 1999
(Unaudited)
--------------------------------------
(In thousands)
<S> <C> <C>
Current liabilities:
Accounts payable .......................................... $ 19,561 $ 19,053
Accrued interest .......................................... 10,025 6,358
Other accrued expenses .................................... 1,879 923
------------------ -----------------
Total current liabilities ............................... 31,465 26,334
Long-term debt................................................ 264,586 273,421
Deferred income taxes ........................................ 24,420 16,935
Minority interest in foreign subsidiary ...................... 11,434 10,496
Future site restoration ..................................... 4,691 4,603
Other ........................................................ 1,490 -
Commitments and contingencies
Stockholders' equity (Deficit):
Common stock, par value $.01 per share - authorized
200,000,000 shares; issued 22,759,852 and 22,747,099
shares at September 30, 2000 and December 31, 1999
respectively............................................. 227 227
Additional paid-in capital ................................ 127,570 127,562
Accumulated deficit ....................................... (129,535) (139,825)
Treasury stock, at cost, 165,883 and 152,083 shares at
September 30, 2000 and December 31, 1999, respectively... (964) (1,071)
Accumulated other comprehensive loss....................... (1,305) 3,602
------------------ -------------------
Total stockholders' equity (deficit)......................... (4,007) (9,505)
------------------ -------------------
Total liabilities and stockholders' equity (deficit).... $ 334,079 $ 322,284
================== ===================
See accompanying notes to consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- ------------------------------------
2000 1999 2000 1999
-------------------- ------------------ ----------------- -----------------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Revenue:
Oil and gas production revenues ................... $ 15,345 $ 15,842 $ 46,472 $ 43,884
Gas processing revenues ........................... 672 818 2,074 2,733
Rig revenues ...................................... 134 129 384 328
Other ............................................ 226 169 451 2,759
-------------------- ------------------ ----------------- -----------------
16,377 16,958 49,381 49,704
Operating costs and expenses:
Lease operating and production taxes .............. 4,577 4,581 13,507 13,986
Depreciation, depletion, and amortization ......... 8,746 7,834 26,212 25,801
Rig operations .................................... 204 156 588 452
General and administrative ........................ 1,680 1,405 4,762 4,187
-------------------- ------------------ ----------------- -----------------
15,207 13,976 45,069 44,426
-------------------- ------------------ ----------------- -----------------
Operating income ..................................... 1,170 2,982 4,312 5,278
Other (income) expense:
Interest income ................................... (155) (226) (482) (493)
Amortization of deferred financing fee ............ 508 382 1,523 1,073
Interest expense .................................. 7,706 10,016 23,371 28,422
Gain of sale of equity investment.................. - - (33,983) -
Other ............................................. 147 - 1,030 -
-------------------- ------------------ ----------------- -----------------
8,206 10,172 (8,541) 29,002
Income (loss) from operations before taxes and
extraordinary item ................................ (7,036) (7,190) 12,853 (23,724)
Income tax expense (benefit):
Current ........................................... (112) 92 71 305
Deferred .......................................... 4,147 (510) 3,248 (4,247)
Minority interest in income of consolidated foreign
subsidiary ........................................ 382 147 597 172
-------------------- ------------------ ----------------- -----------------
Net income (loss) before extraordinary item ....... (11,453) (6,919) 8,937 (19,954)
$
Extraordinary item:
Debt extinguishment - net of tax ............. - - 1,353 -
-------------------- ------------------ ----------------- -----------------
Net Income (loss) ................................. $ (11,453) $ (6,919) $ 10,290 $ (19,954)
==================== ================== ================= =================
Earnings (loss) per common share:
Net Income (loss) before extraordinary item... $ (0.51) $ (1.09) $ 0.40 $ (3.15)
Extraordinary item ........................... - - 0.06 -
-------------------- ------------------ ----------------- -----------------
Net income (loss) per common share ................ $ (0.51) $ (1.09) $ 0.46 $ (3.15)
==================== ================== ================= =================
Earnings (loss) per common share assuming dilution:
Net Income (loss) before extraordinary item... $ (0.51) $ (1.09) $ 0.27 $ (3.15)
Extraordinary item ........................... - - 0.04 -
-------------------- ------------------ ----------------- -----------------
Net income (loss) per common share ................ $ (0.51) $ (1.09) $ 0.31 $ (3.15)
==================== ================== ================= =================
See accompanying notes to consolidated financial statements
</TABLE>
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, 1999.............. 22,747,099 $ 227 152,083 $ (1,071) $ 127,562 $(139,825) $ 3,602 (9,505)
Comprehensive income (loss):
Net income .......................... - - - - - 10,290 - 10,290
Other comprehensive income:
Foreign currency translation
adjustment....................... - - - - - - (4,907) (4,907)
--------- -------- -------
Comprehensive income (loss) ........... - - - - - 10,290 (4,907) 5,383
Purchase of treasury stock ............ - - 38,800 (78) - - - (78)
Issuance of stock warrants ............ 147 147
Issuance of common stock for
compensation ........................ 12,753 - (25,000) 185 (139) - - 46
----------- ------ -------- -------- ---------- --------- --------- -------
Balance at September 30, 2000 (unaudited). 22,759,852 $ 227 165,883 $ (964) $127,570 $ (129,535) $(1,305) $ (4,007)
=========== ====== ======== ======== ========== ========= ========= =======
See accompanying notes to consolidated financial statements
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2000 1999
---------- ----------
(In Thousands)
<S> <C> <C>
Operating Activities
Net income (loss) .................................... $ 10,290 $ (19,954)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Minority interest in income of foreign subsidiary 597 172
Gain on sale of equity investment ............... (33,983) --
Extraordinary gain on extinguishment of debt .... (1,353) --
Depreciation, depletion, and amortization ....... 26,212 25,801
Amortization of deferred financing fees ......... 1,523 1,073
Amortization of premium on Senior Notes ......... -- (434)
Deferred income taxes ........................... 3,248 (4,247)
Issuance of common stock for compensation ....... 46 52
Issuance of warrants for compensation ........... 147 --
Changes in operating assets and liabilities:
Accounts receivable ......................... (2,408) (1,556)
Equipment inventory and other ............... (741) 502
Accounts payable and accrued expenses ....... 5,205 7,969
--------- ---------
Net cash provided by operating activities ............ 8,783 9,378
Investing Activities
Capital expenditures, including purchases and
development of properties .......................... (44,271) (115,250)
Proceeds from sale of oil and gas properties
and equipment inventory ............................ 8,451 14,844
Proceeds from sale of equity investment .............. 34,482 --
--------- ----------
Net cash used by investing activities ................ (1,338) (100,406)
Financing Activities
Issuance of common stock, net of expenses ............ 2 --
Purchase of treasury stock, net ...................... (79) (12)
Proceeds from long-term borrowings ................... 2,900 83,000
Payments on long-term borrowings ..................... (9,644) (36,298)
Deferred financing fees .............................. (582) (2,834)
--------- ----------
Net cash provided (used) by financing activities ..... (7,403) 43,856
Effect of exchange rate changes on cash .............. (208) 203
--------- ----------
Increase (decrease) in cash .......................... (166) (46,969)
Cash at beginning of period .......................... 3,799 61,390
--------- ----------
Cash at end of period ................................ $ 3,633 $ 14,421
========= ==========
Supplemental Disclosures
Supplemental disclosures of cash flow information:
Interest paid ................................... $ 19,704 $ 20,788
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2000
Note 1. Basis of Presentation
The accounting policies followed by Abraxas Petroleum Corporation and
its subsidiaries (the "Company"or "Abraxas") are set forth in the notes to the
Company's audited financial statements in the Annual Report on Form 10-K filed
for the year ended December 31, 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 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, its wholly-owned foreign subsidiary Canadian Abraxas Petroleum Limited
("Canadian Abraxas") and its 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's assets and liabilities are translated
to U.S. dollars at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders'
equity.
Certain balances for 1999 and year to date 2000 have been reclassified
for comparative purposes.
Note 2. Sale of equity investment
On March 31, 2000, we sold our interest in certain crude oil and
natural gas properties in Wyoming. In addition, we sold our equity investment in
Abraxas Wamsutter, L.P., a limited partnership of which one of our subsidiaries
was the general partner, which owned an interest in crude oil and natural gas
properties in the same area. Our investment Abraxas Wamsutter, L.P. was
accounted for by the equity method since inception in 1998. Prior to the sale of
the partnership in March 2000, our equity investee share of oil and gas property
cost, results of operations and amortization were not material to our
consolidated operations. As a result of the sale, we received approximately $34
million, which represented a proportional interest in the partnership's proved
properties. Our equity investee interest in such properties as of December 31,
1999, the effective date of the sale, were 2.8 MBbls of crude oil and natural
gas liquids and 25.8 MMcf of natural gas. These equity investment reserves were
not included in consolidated DD&A computations during 1999 or 2000. Our share of
the equity investee standardized measure of discounted future net cash flows at
December 31, 1999 was $12.3 million. The following table illustrates the impact
of our interest in the equity method investment as of December 31, 1999.
<TABLE>
<CAPTION>
Total United States Canada
-------------------------------- -------------------------------- --------------------------------
Liquid Natural Liquid Natural Liquid Natural
Hydrocarbons Gas Hydrocarbons Gas Hydrocarbons Gas
------------------- ------------ ------------------- ------------ ------------------- ------------
(Barrels) (Mcf) (Barrels) (Mcf) (Barrels) (Mcf)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Proved developed and
undeveloped reserves
Balance December 31,1999 .. 9,849 164,305 6,421 80,417 3,428 83,888
Equity investee ........ 2,793 25,810 2,793 25,810 - -
------------------- ------------ ------------------- ------------ ------------------- ------------
Consolidated .............. 12,642 190,115 9,214 106,227 3,428 83,888
=================== ============ =================== ============ =================== ============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Total U.S. Canada
--------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Standardized Measure of
discounted net cash flow
related to proved reserves
at December 31, 1999 ...... $ 238,451 $ 123,283 $ 115,168
Equity investee ............. 12,334 12,334 -
---------------- ------------- --------------
Consolidated ................ $ 250,785 $ 135,617 $ 115,168
=============== ============== ==============
</TABLE>
Note 3. Extraordinary Item and Unusual Item
In June 2000, we retired $7.1 million of our 11.5% Senior Notes, due
2004 at a discount of $1.7 million before tax. The transaction was consummated
at the current market value of the notes.
During the second quarter of 2000, we incurred approximately $400,000
in non-recurring costs in our Canadian operations, relating to the acquisition
of New Cache Petroleums, L.T.D. in early 1999. These costs are included in other
expenses in the accompanying financial statements.
Note 4. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
11.5% Senior Notes due 2004, Series D ("Old Notes") (see below).... $ 801 $ 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 ("Second Lien Notes")
(see below) .................................................. 190,178 193,769
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%, 7.50% at June 30, 2000,
secured by the assets of Grey Wolf ........................... 7,948 8,360
Other ............................................................. 2,159 3,471
-------- --------
264,586 273,421
Less current maturities ........................................... -- --
-------- --------
$264,586 $273,421
======== ========
</TABLE>
In June 2000, we retired $7.1 million of our 11.5% Senior Notes, ($3.5
million of the Old Notes and $3.6 million of the Second Lien Notes). These notes
were retired at current market value resulting in an extraordinary gain of $1.7
million before income taxes.
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
their 11.5% senior notes due 2004, Series C. 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%
9
<PAGE>
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 ("Sandia"). 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 indenture governing the First Lien Notes (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
10
<PAGE>
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 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
11
<PAGE>
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 governing the Second Lien Notes (the "Second Lien Notes
Indenture") 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 Second Lien
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
(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 issued the CVRs the terms of
which provide that the holders thereof could receive up to a total of
12
<PAGE>
104,365,326 shares of Abraxas common stock. Subsequent to the issuance of the
CVRs, Abraxas' common stock traded at an average price per share of $3.73 or
higher for 30 days during the 45-day trading period beginning on August 16,
2000, and ending on October 19, 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 8.5 million shares of Abraxas common stock. In
addition, in the event Abraxas common stock trades at an average price per share
higher than $3.73 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 8.5 million.
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.
Note 5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) from continuing operations $ (11,453) $ (6,919) $ 8,937 $ (19,954)
-------------- -------------- ------------ -----------
Numerator for basic and diluted earnings per share
- income (loss) from continuing operations (11,453) (6,919) 8,937 (19,954)
Extraordinary item - - 1,353 -
------------- -------------- ------------ -----------
Numerator for basic earnings per share - income
(loss) applicable to common stock (11,453) (6,919) 10,290 (19,954)
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 22,628,599 6,352,672 22,641,993 6,342,437
Effect of dilutive securities:
Stock options, warrants and CVR's - - 9,979,975 -
------------- -------------- ------------ -----------
Dilutive potential common shares Denominator
for diluted earnings per share -
Adjusted weighted-average shares and assumed
Conversions 22,628,599 6,352,672 32,621,968 6,342,437
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.51) $ (1.09) $ 0.40 $ (3.15)
Extraordinary item - - 0.06 -
------------- -------------- ------------ -----------
$ (0.51) $ (1.09) $ 0.46 $ (3.15)
============= ============== ============ ===========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.51) $ (1.09) $ 0.27 $ (3.15)
Extraordinary item - - 0.04 -
------------- -------------- ------------ -----------
$ (0.51) $ (1.09) $ 0.31 $ (3.15)
============= ============== ============ ===========
</TABLE>
For the three months ended September 30, 2000 and 1999, and for the
nine months ended September 30, 1999, none of the shares issuable in connection
with stock options, warrants or CVR's are included in diluted shares. Inclusion
of these shares would be antidilutive due to losses incurred in the periods.
13
<PAGE>
Note 6. Summary Financial Information of Canadian Abraxas Petroleum Ltd.
The following is summary financial information of Canadian Abraxas, a
wholly owned subsidiary of Abraxas at September 30, 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 $ 8,734 Total current liabilities $ 4,635
Oil and gas properties 148,294 11.5% Notes due 2004 52,629
Other assets 7,099 Note payable to Abraxas 27,085
Other liabilities 28,502
Equity 51,276
---------- ---------
$ 164,127 $ 164,127
========== =========
Note 7. Business Segments
Business segment information about the Company's third quarter
operations in different geographic areas is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ............................... $ 4,750 $ 11,627 $ 16,377
================== ================= ===================
Operating profit (loss)................. $ (516) $ 2,944 $ 2,428
================== =================
General corporate ...................... (1,258)
Interest expense and amortization of
deferred financing fees ............. (8,206)
-------------------
Income (loss) before income taxes ... $ (7,036)
===================
Three Months Ended September 30, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 5,920 $ 11,038 $ 16,958
================== ================= ===================
Operating profit (loss)................. $ 1,720 $ 1,993 $ 3,713
================== =================
General corporate ...................... (731)
Interest expense and amortization of
deferred financing fees ............. (10,172)
-------------------
Income (loss) before income taxes ... $ (7,190)
===================
Nine Months Ended September 30, 2000
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 16,033 $ 33,348 $ 49,381
================== ================= ===================
Operating profit (loss)................. $ 1,208 $ 6,171 $ 7,379
================== =================
General corporate....................... (3,067)
Interest expense and amortization of
deferred financing fees ............. (24,412)
Other ............................. 32,953
-------------------
Income before income taxes and
extraordinary item ................ $ 12,853
===================
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
<S> <C> <C> <C>
Revenues ............................... $ 18,677 $ 31,027 $ 49,704
================== ================= ===================
Operating profit (loss)................. $ 5,946 $ 1,556 $ 7,502
================== =================
General corporate ...................... (2,224)
Interest expense and amortization of
deferred financing fees ............. (29,002)
-------------------
Income before income taxes .......... $ (23,724)
===================
September 30, 2000
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Identifiable assets at September 30,
2000................................. $ 128,844 $ 199,200 $ 328,044
================== =================
Corporate assets ....................... 6,035
-------------------
Total assets ........................ $ 334,079
===================
December, 31, 1999
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Identifiable assets at December 31,
1999 ................................ $ 107,336 $ 206,474 $ 313,810
================== =================
Corporate assets ....................... 8,474
-------------------
Total assets ........................ $ 322,284
===================
</TABLE>
Note 8. Contingencies
In May 1995, certain plaintiffs filed a lawsuit against us alleging
negligence and gross negligence, tortuous interference with contract, conversion
and waste. In March 1998, a jury found against us, and 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 plaintiff'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 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
September 30, 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.
See note 4 regarding potential issuance of additional common stock
related to CVR's
Note 9. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (as amended
by SFAS No. 138), which is required to be adopted in years beginning after June
15, 1999. In June 1999, SFAS No. 138 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. Based on a
preliminary review, had the Company implemented SFAS No. 133 as of September 30,
2000, an estimated $24.0 million liability would have been recorded. The offset
at the future date of implementation would be reflected as a cumulative effect
adjustment to income and other comprehensive income in stockholder's equity. The
Company will adopt this statement on January 1, 2001.
15
<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:
o the sales prices of crude oil and natural gas
o the level of total sales volumes of crude oil and natural gas, and
o the level and success of exploration and development activity.
Selected operating data. The following table sets forth certain operating
data of the Company for the periods presented.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- ------- -------
Operating Revenue (in thousands):
Crude Oil Sales ....................... $ 2,454 $ 3,242 $ 7,681 $ 8,506
Natural Gas Sales ..................... 11,044 11,074 33,555 32,012
Natural Gas Liquids Sales ............. 1,847 1,526 5,236 3,366
Processing Revenue .................... 672 818 2,074 2,733
Rig Operations ........................ 134 129 384 328
Other ................................. 226 169 451 2,759
------- ------- ------- -------
$16,377 $16,958 $49,381 $49,704
======= ======= ======= =======
Operating Income (in thousands) ....... $ 1,170 $ 2,982 $ 4,312 $ 5,278
Crude Oil Production (MBBLS) .......... 144 192 474 609
Natural Gas Production (MMCFS) ........ 4,764 6,273 15,312 20,155
Natural Gas Liquids Production (MBBLS) 79 98 243 282
Average Crude Oil Sales Price ($/BBL) . $ 16.99 $ 16.88 $ 16.20 $ 13.98
Average Natural Gas Sales Price ($/MCF) $ 2.32 $ 1.77 $ 2.19 $ 1.59
Average Liquids Sales Price ($/BBL) ... $ 23.35 $ 15.62 $ 21.50 $ 11.96
Comparison of Three Months Ended September 30, 2000 to Three Months Ended
September 30, 1999
Operating Revenue. During the three months ended September 30, 2000,
operating revenue from crude oil, natural gas and natural gas liquid sales
decreased to $15.3 million from $15.8 million for the same period in 1999. The
decrease in revenue from crude oil, natural gas and natural gas liquids was
primarily due to decreased production volumes during the three months ended
September 30, 2000 as compared to the same period of 1999. The decrease in
production volumes had a $3.8 million impact on revenue, which was largely
offset by increased prices received in 2000 as compared to 1999. Increased
prices contributed $3.3 million to revenue.
The average sales price, net of hedging activities, for the quarter ended
September 30, 2000 were:
o $16.99 per Bbl of crude oil,
o $23.35 per Bbl of natural gas liquid, and
o $ 2.32 per Mcf of natural gas
16
<PAGE>
The average sales price, net of hedging activities, for the quarter ended
September 30, 1999 were:
o $16.88 per Bbl of crude oil,
o $15.62 per Bbl of natural gas liquid, and
o $1.77 per Mcf of natural gas
Crude oil production declined from 192.0 Mbbls for the three months ended
September 30, 1999 to 144.4 Mbbls for the same period of 2000. This decline is
primarily due to natural field depletion. Crude oil revenue was also negatively
impacted by $1.9 million from hedging activities during the three months ended
September 30, 2000. Revenue from natural gas production was consistent at $11.0
million for the quarter ended September 30, 2000 compared to $11.1 million for
the same period of 1999. Natural gas production volumes declined approximately
32% from 6,273 Mmcf for the three months ended September 30, 1999 to 4,764 Mmcf
for the same period of 2000. The decline in natural gas production volumes was
the result of the sale of various non-core properties, primarily in our Canadian
operations. The decrease in natural gas production volume impacted revenue by
$2.7 million, which was offset by increased prices contributing $2.6 million to
natural gas revenue. Natural gas revenue was also negatively impacted by $5.5
million from hedging activities in the third quarter of 2000. Natural gas
liquids revenue increased to $1.8 million for the quarter ended September 30,
2000 compared to $1.5 million for the same period of 1999. Increased prices
received for natural gas liquids during the third quarter of 2000 contributed
$0.6 million to revenue. Production volume declines had a $300,000 negative
impact on revenue during the three months ended September 30, 2000. Production
decreased by 18.5 MBbls to 79.1 MBbls for the three months ended September 30,
2000 from 97.7 MBbls for the same period of 1999. The decline in natural gas
liquids volumes was due primarily the decline in natural gas production volumes
in the areas in which we process liquids.
Lease Operating Expenses. Lease operating expenses and natural gas
processing costs ("LOE") for the three months ended September 30, 2000 were
constant at $4.6 million for the three months ended September 30, 2000 and 1999.
The Company's LOE on a per MCFE basis for the three months ended September 30,
2000 was $0.75 compared to $0.57 for the same period of 1999. The increase on a
per MCFE basis was due to a general increase in the cost of services from 1999
to 2000 and higher production taxes as a result of higher commodity prices in
2000 as compared to 1999.
G&A Expenses. General and administrative ("G&A") expenses increased from
$1.4 million for the three months ended September 30, 1999 to $1.6 million for
the same period of 2000. The increase was primarily due to the loss of overhead
reimbursement of approximately $160,000 received from Abraxas Wamsutter L.P., a
limited partnership of which one of our subsidiaries was the general partner,
which sold its properties in March 2000. G&A expense on a per MCFE basis
increased from $0.18 for the quarter ended September 30, 1999 to $0.28 for the
same period of 2000.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense increased from $7.8 million for the three
months ended September 30, 1999, to $8.7 million in the same period of 2000. The
Company's DD&A on a per MCFE basis for the three months ended September 30, 2000
was $1.44 per MCFE compared to $0.98 in 1999. The decrease in total DD&A was due
to decreased production during the third quarter of 2000 and a reduction of the
full cost pool relating to the write down of Canadian reserves in 1999. The per
MCFE increase is due to higher finding cost in the later part of 1999 and the
first nine months of 2000.
Interest Expense. Interest expense decreased to $7.7 million for the three
months ended September 30, 2000 from $10.0 million for the same period of 1999.
This decrease resulted from reduced debt levels during the first nine months of
2000 compared to the same period of 1999. The reduced debt level is the result
of the exchange of approximately $269.7 million principal amount of our 11.5%
Senior Notes due 2004, Series D (the "Old Notes") for approximately $188.8
million principal amount of our 11.5% Senior Secured Notes due 2004, Series A
(the "Second Lien Notes"), shares of our common stock and contingent value
rights. The interest savings related to this exchange was partially offset by
interest on our 12.875% Senior Secured Notes due 2003 (the "First Lien Notes")
which were issued on March 27, 1999. Long-term debt declined from $346.2 million
at September 30, 1999 to $264.6 million at September 30, 2000. . Other Expense.
Other expense for the three months ended September was $147,000. This represents
a non-cash expense connected with the issuance of warrants in August 2000 to a
third party company to provide financial advisory services.
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 and, crude oil and natural gas liquids we receive
increased during the quarter ended September 30, 2000. The average natural gas
17
<PAGE>
price we realized increased by to $2.32 per MCF during the third quarter of
2000, including the impact of a loss from hedging activities of $5.5 million,
compared with $1.77 per MCF during the same period of 1999. Crude oil prices
increased from $16.88 per BBL during the third quarter of 1999, to $16.99 for
same period ended September 30, 2000, including the impact of a loss from
hedging activities of $1.9 million. Natural gas liquids prices increased to
$23.35 per BBL for the three months ended September 30, 2000 compared to $15.62
per BBL in the same period 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 liquid prices return to depressed levels or if our
production levels decrease, our revenues, cash flow from operations and
profitability will be materially adversely affected.
Comparison of Nine Months Ended September 30, 2000 to Nine Months Ended
September 30, 1999
Operating Revenue. During the nine months ended September 30, 2000,
operating revenue from crude oil, natural gas and natural gas liquid sales
increased from $43.9 million in the nine months ended September 30, 1999 to
$46.5 million for the same period in 2000. The increase in revenue was primarily
attributable to higher prices realized during the nine months ended September
30, 2000 as compared to the same period of 1999. After deducting losses from
hedging activities of $14.7 million, increased prices contributed $12.7 million
in additional revenue. Reduced production voulmes had a $10.1 million negative
impact on revenue.
The average sales price, net of hedging activities, for the nine months ended
September 30, 2000 were:
o $16.20 per Bbl of crude oil,
o $21.50 per Bbl of natural gas liquid, and
o $ 2.19 per Mcf of natural gas
The average sales price, net of hedging activities, for the nine months ended
September 30, 1999 were:
o $13.98 per Bbl of crude oil,
o $11.96 per Bbl of natural gas liquid, and
o $ 1.59 per Mcf of natural gas
Crude oil production decreased from 608.6 MBbls for the first nine months
of 1999 to 474.3 MBbls for the same period of 2000. The decline in crude oil
production is due to natural field depletion, a de-emphasis on crude oil
drilling during 1999 and the disposition of non core properties in 2000,
primarily in our Canadian operations. Natural gas production decreased to 15,312
MMcf for the first nine months of 2000 from 20,155 MMcf for the same period of
1999. The decline in natural gas production is due primarily to the sale of non
core properties during 2000 and natural field depletion. During 1999 and the
first nine months of 2000 a significant portion of our drilling activity has
been in the Edwards Trend in south Texas. Natural gas production volumes in this
area increased by 952.1 MMcf from 2,123.0 MMcf for the nine months ended
September 30, 1999 to 3,075.0 MMcf for the same period of 2000. Production in
our other areas declined due to decreased drilling activity and the fields'
natural decline. Natural gas liquids volumes declined from 281.5 MBbls for the
nine months ended September 30, 1999 to 243.5 MBbls for the same period of 2000.
The decline in natural gas liquids is primarily due to a decline in natural gas
volumes in the areas that we process liquids.
Lease Operating Expenses. LOE and natural gas processing expenses were
$13.5 million for the nine months ended September 30, 2000 compared to $14.0
million for the same period in 1999. The Company's LOE on a per MCFE basis for
the nine months ended September 30, 2000 was $0.69 compared to $0.55 for the
same period of 1999. The increase on a per MCFE basis was due to a general
increase in the cost of services from 1999 to 2000 and higher production taxes
as a result of higher commodity prices in 2000 as compared to 1999.
G&A Expenses. G&A expenses increased from $4.2 million for the nine months
ended September 30, 1999 to $4.8 million for the same period of 2000. The
increase was primarily to the loss of overhead reimbursement of approximately
$300,000 received from Abraxas Wamsutter, which sold it's properties in March
2000, and increased insurance cost. G&A expense on a per MCFE basis increased
from $0.17 for the nine months ended September 30, 1999 to $0.24 for the same
period of 2000.
Depreciation, Depletion and Amortization Expenses. DD&A expense increased
to $26.2 million for the nine months ended September 30, 2000, from $25.8
million for the same period of 1999. The Company's DD&A on a per MCFE basis for
the nine months ended September 30, 2000 was $1.34 per MCFE compared to $1.01 in
1999. The decrease in total DD&A was due to decreased production during the
18
<PAGE>
first nine months of 2000 and a reduction of the full cost pool relating to the
write down of Canadian reserves in 1999. The per MCFE increase is due to higher
finding cost in the later part of 1999 and the first nine months of 2000.
Interest Expense. Interest decreased to $23.4 million for the nine months
ended September 30, 2000 from $28.4 million for the nine months ended September
30, 1999. This decrease resulted from reduced debt levels during the first nine
months of 2000 compared to the same period of 1999. The reduced debt level is
the result of the exchange of approximately $269.7 million principal amount of
our 11.5% Senior Notes due 2004, Series D (the "Old Notes") for approximately
$188.8 million principal amount of our 11.5% Senior Secured Notes due 2004,
Series A (the "Second Lien Notes"), shares of our common stock and contingent
value rights. The interest savings related to this exchange was partially offset
by interest on our 12.875% Senior Secured Notes due 2003 (the "First Lien
Notes") which were issued on March 27, 1999. Long-term debt declined from $346.2
million at September 30, 1999 to $264.6 million at September 30, 2000
Other Expense. Other expense was $1.0 million of the nine months ended
September 30, 2000. Included in this amount is $147,000 of non-cash expense in
connection with the issuance of warrants in August, 2000 to a third party
financial advisor, approximately $400,000 in non-recurring costs incurred in our
Canadian operations in connection with the acquisition of New Cache Petroleums,
L.T.D. in 1999 and approximately $436,000 in connection with the settlement of a
lawsuit in April 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 and, crude oil and natural gas liquids we receive
increased during the first nine months of 2000. The average natural gas price we
realized increased by 27% to $2.19 per MCF during the first nine months of 2000,
including the impact of a loss from hedging activities of $8.4 million, compared
with $1.59 per MCF during the same period of 1999. Crude oil prices increased
from $13.98 per BBL during the nine months of 1999, to $16.20 for the nine
months ended September 30, 2000, including the impact of a loss from hedging
activities of $5.7 million. Natural gas liquids prices increased to $21.50 per
BBL for the nine months ended September 30, 2000 compared to $11.96 per BBL in
the same period 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 liquid prices return to depressed 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
nine months ended September 30, 2000 were $44.3 million compared to $115.3
million during the same period of 1999. The table below sets forth the
components of these capital expenditures on a historical basis for the nine
months ended September 30, 2000 and 1999.
Nine Months Ended
September 30
-------------------
2000 1999
-------------------
Expenditure category (in thousands):
Acquisitions ................................ $ 301 $ 92,586
Development ................................. 42,829 21,006
Facilities and other ........................ 1,141 1,658
-------- --------
Total ......................................... $ 44,271 $115,250
======== ========
At September 30, 2000, we had current assets of $21.8 million and current
liabilities of $31.5 million resulting in a working capital deficit of $9.7
million. This compares to working capital deficit of $7.3 million at December
31, 1999 and a working capital deficit of $1.8 million at September 30, 1999.
The material components of our current liabilities at September 30, 2000 include
trade accounts payable and revenues due third parties of $19.6 million and
accrued interest of $10.0 million.
Operating activities during the nine months ended September 30, 2000
provided $8.8 million in cash compared to $9.3 million in the same period in
1999. 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 $1.3 million net during the first nine months of 2000,
$300,000 of which was utilized for the acquisition of oil and gas properties,
19
<PAGE>
$42.3 million of which was utilized for the development of crude oil and natural
gas properties, and $1.1 million of which was utilized for facilities and other.
Divestitures of oil and gas properties, including equity investment, provided
$34.5 million. This compares to $100.4 million required during the same period
of 1999, $92.6 million of which was utilized for the acquisition of oil and gas
properties, $21.0 million of which was utilized for the development of crude oil
and natural gas properties, and $1.7 million of which was utilized for
facilities and other. Financing activities used $7.4 million for the first nine
months of 2000 compared to providing $43.9 million for the same period of 1999.
The Company's current budget for capital expenditures for the last three
months of 2000 other than acquisition expenditures is approximately $10.0
million. Such expenditures will be made primarily for the development of
existing properties. Additional capital expenditures may be made for
acquisitions of producing properties if such opportunities arise, but the
Company currently has no agreements, arrangements or undertakings regarding any
material acquisitions. The Company has no material long-term capital commitments
and is consequently able to adjust the level of its expenditures as
circumstances dictate. Additionally, the level of capital expenditures will vary
during future periods depending on market conditions and other related economic
factors. Should commodity prices remain at depressed levels or decline further,
reductions in the capital expenditure budget may be required.
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
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 and July 2000, we
sold additional production payments for $2.0 million and $900,000, respectively,
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. In addition, we sold our
equity investment in Abraxas Wamsutter L.P., a limited partnership of which one
of our subsidiaries was the general partner, which owned an 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. As of September 30,
2000 we have received proceeds from sale of non-core Canadian assets of
approximately $6.0 million. As of September 30, 2000 there are agreements to
sell other non-core Canadian assets for approximately $2.5 million. All such
sales are expected to close by the end of the year. We may sell other non-core
assets or seek partners to fund a portion of the exploration costs of
undeveloped acreage and are considering other potential strategic alternatives.
In September 2000, we entered into a farm-out agreement with EOG Resources,
Inc. ("EOG") to develop our Montoya prospect in west Texas. EOG paid Abraxas
$2.5 million and will earn 75% of Abraxas' working interest in the Montoya
formation covering approximately 11,000 net acres in Ward and Reeves Counties.
EOG will operate and pay 100% of the costs of up to five horizontal wells in the
Montoya formation. We retained a carried 25% working interest in four of the
wells and will have an override and a 30% working interest after payout of the
fifth well. The two companies entered into an area of mutual interest covering
the Montoya formation in this area. The wells will offset several wells drilled
by ExxonMobil and BP Amoco that have tested at rates of 8 to 17 MMcfpd per well.
In addition, EOG has acquired 709,400 shares of Abraxas common stock in the open
market. All of such shares were acquired for investment purposes only and EOG
has no current intent to buy additional shares.
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
20
<PAGE>
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 their 11.5%
Senior Notes due 2004, Series C. 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
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.
21
<PAGE>
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 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,
22
<PAGE>
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 governing 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 Second Lien
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;
23
<PAGE>
(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).
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 has a call on an either 1,000 Bbls of crude oil
or 20,000 MMBtu of natural gas per day at Barret's option over the term of the
agreement at fixed prices through October 31, 2002.
As of September 30, 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 $4.36 per MMBtu as of September 30, 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. We realized a loss of $14.1 million on hedging
activities agreement during the first nine months of 2000, which is accounted
for in crude oil and natural gas revenue.
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 risk rests primarily with the volatile nature of
crude oil, natural gas and natural gas liquids prices. We manage 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
24
<PAGE>
Results of Operations--Liquidity and Capital Resources". Assuming the production
levels we attained during the nine months ended September 30, 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
$4.6 million for the nine months ended September 30, 2000. .
Interest rate risk
At September 30, 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
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported a pre tax loss of $107,563 for the nine months ended
September 30, 2000. It is estimated that a 5% change in the value of the U.S.
dollar to the Canadian dollar would have changed our net income by approximately
$5,378. 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
Form 8-K August 3, 2000 - Engagement of financial advisor Form
Form 8-K August 23, 2000 - Change in Certifying Accountants
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: November 14, 2000 By:/s/
------------------- -------------------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: November 14, 2000 By:/s/
-------------------- -------------------------------
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
27
<PAGE>
