7
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A Number 1
(Mark One)
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______ TO ______
COMMISSION FILE NUMBER: 001-16701
ABRAXAS PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 74-2584033
(State of Incorporation) (I.R.S. Employer Identification No.)
500 N. Loop 1604 East, Suite 100, San Antonio, TX 78232
(Address of principal executive offices) (Zip Code)
210-490-4788
(Registrant's telephone number, including area code)
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act) or a
non-accelerated filer. See definition of "accelerated filer" and " large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One)
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [ X] No
The number of shares of the issuer's common stock outstanding as of May
4, 2007 was:
Class Shares Outstanding
Common Stock, $.01 Par Value 42,878,725
EXPLANATORY NOTE
Abraxas Petroleum Corporation is filing this Amendment Number 1 to its Quarterly
Report on Form 10-Q for the period ended March 31, 2007, initially filed with
the SEC on May 15, 2007, in order to correct the accounting for depletion on oil
and gas properties. Due to an error in the estimating of proved undeveloped
reserves, our total proved reserves as of December 31, 2006 were revised
downward. As a result of the downward adjustment to our proved reserves our
depletion expense was understated by approximately $246,000 for the three months
ended March 31, 2007. This resulted in a restatement of the Condensed Balance
Sheet and the Condensed Statement of Operations for the three months ended March
31, 2007. Cash flow from operations was not impacted by this restatement.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934,the complete
text of Form 10-Q as revised is included in this filing.
Forward-Looking Information
We make forward-looking statements throughout this document. Whenever you
read a statement that is not simply a statement of historical fact (such as
statements including words like "believe", "expect", "anticipate", "intend",
"plan", "seek", "estimate", "could", "potentially" or similar expressions), you
must remember that these are forward-looking statements, and that our
expectations may not be correct, even though we believe they are reasonable. The
forward-looking information contained in this document is generally located in
the material set forth under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations" but may be found in other
locations as well. These forward-looking statements generally relate to our
plans and objectives for future operations and are based upon our management's
reasonable estimates of future results or trends. The factors that may affect
our expectations regarding our operations include, among others, the following:
o our high debt level;
o our success in development, exploitation and exploration activities;
o our ability to make planned capital expenditures;
o declines in our production of natural gas and crude oil;
o prices for natural gas and crude oil;
o our ability to raise equity capital or incur additional indebtedness;
o political and economic conditions in oil producing countries,
especially those in the Middle East;
o prices and availability of alternative fuels;
o our restrictive debt covenants;
o our acquisition and divestiture activities;
o results of our hedging activities; and
o other factors discussed elsewhere in this report.
In addition to these factors, 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 for the year
ended December 31, 2006, which is incorporated by reference herein. 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.
2
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q/A Number 1
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2007
and December 31, 2006.........................................................4
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2007 and 2006....................................6
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2007 and 2006....................................7
Notes to Condensed Consolidated Financial Statements..............................8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................11
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk........................22
ITEM 4 - Controls and Procedures..........................................................22
PART II
OTHER INFORMATION
ITEM 1 - Legal Proceedings................................................................23
ITEM 1A- Risk Factors.....................................................................23
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds......................23
ITEM 3 - Defaults Upon Senior Securities..................................................23
ITEM 4 - Submission of Matters to a Vote of Security Holders..............................23
ITEM 5 - Other Information................................................................23
ITEM 6 - Exhibits ....................................................................23
Signatures ....................................................................24
3
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2007 2006
(Unaudited)
--------------- -----------------
Assets:
Current assets:
Cash .............................................................................. $ 610 $ 43
Accounts receivable, net:
Joint owners................................................................ 949 556
Oil and gas production...................................................... 5,285 5,645
Other....................................................................... 37 39
--------------- -----------------
6,271 6,240
Other current assets................................................................ 315 470
--------------- -----------------
Total current assets........................................................... 7,196 6,753
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved.......................................................................... 351,141 347,245
Other property and equipment....................................................... 3,523 3,519
--------------- -----------------
Total...................................................................... 354,664 350,764
Less accumulated depreciation, depletion, and
amortization............................................................... 250,008 246,353
--------------- -----------------
Total property and equipment - net.............................................. 104,656 104,411
Deferred financing fees, net.......................................................... 4,049 4,446
Other assets ........................................................................ 1,001 1,330
--------------- -----------------
Total assets........................................................................ $ 116,902 $ 116,940
=============== =================
See accompanying notes to condensed consolidated financial statements
4
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets (continued)
(in thousands)
March 31, December 31,
2007 2006
(Unaudited)
------------- -------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable................................................................... $ 2,480 $ 5,268
Oil and gas production payable..................................................... 2,547 2,621
Accrued interest................................................................... 5,423 1,427
Other accrued expenses............................................................. 975 1,156
------------- -------------
Total current liabilities........................................................ 11,425 10,472
Long-term debt....................................................................... 127,322 127,614
Future site restoration.............................................................. 1,046 1,019
------------- -------------
Total liabilities............................................................... 139,793 139,105
Stockholders' deficit:
Common Stock, par value $.01 per share-
authorized 200,000,000 shares; issued, 42,878,725 and, 42,762,466................. 429 428
Additional paid-in capital........................................................ 164,224 164,210
Accumulated deficit................................................................ (188,481) (187,493)
Treasury stock, at cost, -0- and 35,552 shares .................................... - (285)
Accumulated other comprehensive income............................................. 937 975
------------- -------------
Total stockholders' deficit.................................................... (22,891) (22,165)
------------- -------------
Total liabilities and stockholders' deficit.......................................... $ 116,902 $ 116,940
============= =============
See accompanying notes to condensed consolidated financial statements
5
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended
March 31,
----------------------------
2007 2006
----------- ------------
Revenue:
Oil and gas production revenues.......................................................... $ 11,322 $ 12,926
Rig revenues............................................................................. 328 376
Other.................................................................................... 1 3
----------- ------------
11,651 13,305
Operating costs and expenses:
Lease operating and production taxes..................................................... 2,962 2,822
Depreciation, depletion and amortization................................................. 3,655 3,399
Rig operations........................................................................... 171 211
General and administrative (including stock-based compensation of $172 and $171)........ 1,316 1,286
----------- ------------
8,104 7,718
----------- ------------
Operating income .......................................................................... 3,547 5,587
Other (income) expense
Interest income.......................................................................... (14) (1)
Interest expense......................................................................... 4,151 3,971
Amortization of deferred financing fees.................................................. 398 397
----------- ------------
4,535 4,367
----------- ------------
Net income (loss)........................................................................... $ (988) $ 1,220
=========== ============
Net income per common share - basic........................................................ $ (0.02) $ 0.03
=========== ============
Net income per common share - diluted..................................................... $ (0.02) $ 0.03
=========== ============
See accompanying notes to condensed consolidated financial statements
6
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended
March 31,
------------------------------------
2007 2006
-------------- --------------
Cash flows from Operating Activities
Net income (loss)............................................................. $ (988) $ 1,220
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization................................. 3,655 3,399
Accretion of future site restoration...................................... 27 24
Amortization of deferred financing fees................................... 398 397
Stock-based compensation.................................................. 172 171
Other non-cash items...................................................... 128 -
Changes in operating assets and liabilities:
Accounts receivable....................................................... (31) 677
Other .................................................................... 446 (348)
Accounts payable and accrued expenses..................................... 953 832
-------------- --------------
Net cash provided by operations................................................ 4,760 6,372
Cash flows from Investing Activities
Capital expenditures, including purchases and development
of properties................................................................ (3,900) (7,133)
-------------- --------------
Net cash used in investing activities.......................................... (3,900) (7,133)
Cash flows from Financing Activities
Proceeds from long-term borrowings............................................. 708 4,271
Payments on long-term borrowings............................................... (1,000) (4,000)
Issuance of common stock for compensation...................................... - 116
Exercise of stock options .................................................... - 374
Deferred financing fees ....................................................... (1) 1
--------------- ----------------
Net cash provided by (used in) financing operations............................ (293) 762
--------------- ----------------
Increase in cash 567 1
Cash, at beginning of period................................................... 43 42
--------------- ----------------
Cash, at end of period......................................................... $ 610 $ 43
=============== ================
Supplemental disclosures of cash flow information:
Interest paid ................................................................. $ 108 $ 191
=============== ================
See accompanying notes to condensed consolidated financial statements
7
>
Abraxas Petroleum Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(tabular amounts in thousands except per share data)
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 consolidated financial statements in the Annual Report on Form
10-K filed for the year ended December 31, 2006. 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 accompanying interim 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 results of operations for the three months
ended March 31, 2007 are not necessarily indicative of results to be expected
for the full year.
Stock-based Compensation
The Company currently utilizes a standard option pricing model (i.e.,
Black-Scholes) to measure the fair value of stock options granted to employees.
The Company uses the Black-Scholes model for option valuation as of the current
time.
The following table summarizes the stock option activities for the three
months ended March 31, 2007 (in thousands except per share data):
Weighted Weighted
Average Option Average Grant
Exercise Price Date Fair Aggregate
Shares Per Share Value Per Share Intrinsic Value
-------------------- ------------------- ------------------- -------------------
Outstanding December 31, 2006....... 2,457 $ 2.29 $ 1.63 $ 3,250
Granted............................. - $ - $ - -
Exercised........................... (165) $ 1.08 $ 0.77 (127)
Expired or canceled................. (2) $ 6.05 $ 3.35 (7)
-------------------- -------------------
Outstanding March 31, 2007.......... 2,290 $ 2.37 $ 1.36 $ 3,116
==================== ===================
Additional information related to options at March 31, 2007 and December
31, 2006 is as follows:
March 31, December 31,
2007 2006
------------------------------ ---------------------------
Options exercisable.................................... 1,743,116 1,884,366
============================== ===========================
As of March 31, 2007, there was approximately $1.2 million of unamortized
compensation expense related to outstanding options that will be recognized
through September 2010.
8
Note 2. Income Taxes
The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
For the period ended March 31, 2007, there is no current or deferred income
tax expense or benefit due to losses and/or loss carryforwards and valuation
allowance which has been recorded against such benefits.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 is an interpretation of SFAS
109, "Accounting for Income Taxes", and it seeks to reduce the diversity in
practice associated with certain aspects of measurement and accounting for
income taxes and requires expanded disclosure with respect to the uncertainty in
income taxes. FIN 48 is effective for fiscal years beginning after December 15,
2006. Accordingly, the Company adopted FIN 48 on January 1, 2007. The adoption
of FIN 48 did not have any effect on the Company's financial position or results
of operations for the quarter ended March 31, 2007. The Company recognizes
interest and penalties related to uncertain tax positions in income tax expense.
As of March 31, 2007, the Company did not have any accrued interest or penalties
related to uncertain tax positions. The tax years from 1999 through 2006 remain
open to examination by the tax jurisdictions to which the Company is subject.
Note 3. Long-Term Debt
Long-term debt consisted of the following:
March 31, December 31,
2007 2006
--------------------- -----------------------
Floating rate senior secured notes due 2009............................ $ 125,000 $ 125,000
Senior secured revolving credit facility............................... 2,322 2,614
--------------------- -----------------------
127,322 127,614
Less current maturities ............................................... - -
--------------------- -----------------------
$ 127,322 $ 127,614
===================== =======================
Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in aggregate principal
amount of floating rate senior secured notes due 2009. The notes will mature on
December 1, 2009. Interest is payable at a per annum floating rate of six-month
LIBOR plus 7.50%. The interest rate was 12.85% per annum as of March 31, 2007.
The interest rate is reset semi-annually on each June 1 and December 1. Interest
is payable semi-annually in arrears on June 1 and December 1 of each year.
Senior Secured Revolving Credit Facility. On October 28, 2004, Abraxas
entered into an agreement for a revolving credit facility having a maximum
commitment of $15 million, which includes a $2.5 million subfacility for letters
of credit. Availability under the revolving credit facility is subject to a
borrowing base consistent with normal and customary natural gas and crude oil
lending transactions.
Outstanding amounts under the revolving credit facility bear interest at
the prime rate announced by Wells Fargo Bank, National Association plus 1.00%.
The interest rate was 9.25% per annum as of March 31, 2007
Subject to earlier termination rights and events of default, the stated
maturity date under the revolving credit facility is October 28, 2008.
Note 4. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
9
Three Months Ended March 31,
-----------------------------------
2007 2006
Numerator:
Net earnings (loss) available to common stockholders ............. $ (988) $ 1,220
=============== =================
Denominator:
Denominator for basic earnings per share - weighted-average shares. 42,681,278 42,470,802
Effect of dilutive securities:
Stock options and warrants...................................... - 1,681,042
--------------- -----------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed Conversions............... 42,681,278 44,151,844
=============== =================
Net earnings per common share - basic................................... $ (0.02) $ 0.03
=============== =================
Net earnings per common share - diluted................................. $ (0.02) $ 0.03
=============== =================
For the three months ended March 31, 2007 none of the shares issuable in
connection with stock options or warrants are included in diluted shares.
Inclusion of these shares would be antidilutive due to losses incurred in the
period. Had there not been a loss in this period, dilutive shares would have
been 613,811 shares for the three months ended March 31, 2007.
Note 5. Hedging Program and Derivatives
The Company has elected out of hedge accounting as prescribed by SFAS 133.
Accordingly, instruments are recorded on the balance sheet at their fair value
with adjustments to the carrying value of the instruments being recognized in
oil and gas income in the current period.
Under the terms of our revolving credit facility, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our crude oil and natural gas production.
The following table sets forth the Company's current hedge position:
Time Period Notional Quantities Price
--------------------------------------------------------------------------------
June 2007 10,000 MMbtu of production per day Floor of $5.00
July 2007 10,000 MMbtu of production per day Floor of $4.25
August 2007 10,000 MMbtu of production per day Floor of $5.00
September 2007 10,000 MMbtu of production per day Floor of $5.50
Note 6. Contingencies - Litigation
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. At March 31,
2007, the Company was not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on its
operations.
10
ABRAXAS PETROLEUM CORPORATION
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,
2006.
Critical Accounting Policies
There have been no changes from the Critical Accounting Polices described
in our Annual Report on Form 10-K for the year ended December 31, 2006.
General
We are an independent energy company primarily engaged in the development
and production of natural gas and crude oil. Historically we have grown through
the acquisition and subsequent development and exploitation of producing
properties, principally through the redevelopment of old fields utilizing new
technologies such as modern log analysis and reservoir modeling techniques as
well as 3-D seismic surveys and horizontal drilling. As a result of these
activities, we believe that we have a substantial inventory of development
opportunities, which provide a basis for significant production and reserve
increases. In addition, we intend to expand upon our development activities with
complementary exploration projects in our core areas of operation.
Our financial results depend upon many factors which significantly affect
our results of operations including the following:
o the sales prices of natural gas and crude oil;
o the level of total sales volumes of natural gas and crude oil;
o the availability of, and our ability to raise additional capital
resources and provide liquidity to meet cash flow needs;
o the level of and interest rates on borrowings; and
o the level and success of exploration and development activity.
Commodity Prices and Hedging Activities. The results of our operations are
highly dependent upon the prices received for our natural gas and crude oil
production. Substantially all of our sales of natural gas and crude oil are made
in the spot market, or pursuant to contracts based on spot market prices, and
not pursuant to long-term, fixed-price contracts. Accordingly, the prices
received for our natural gas and crude oil production are dependent upon
numerous factors beyond our control. Significant declines in prices for natural
gas and crude oil could have a material adverse effect on our financial
condition, results of operations and quantities of reserves recoverable on an
economic basis. Recently, the prices of natural gas and crude oil have been
volatile. During the first half of 2006, prices for natural gas and crude oil
were sustained at record or near-record levels. Supply and geopolitical
uncertainties resulted in significant price volatility during the remainder of
2006 with both natural gas and crude oil prices weakening. During the first
three months of 2007, prices have remained relatively strong although not at
levels attained during the first three months of 2006. New York Mercantile
Exchange (NYMEX) futures prices for West Texas Intermediate (WTI) crude oil
averaged $58.39 per barrel for the first three months of 2007. NYMEX Henry Hub
futures prices averaged $7.16 per million British thermal units (MMBtu) during
the first three months of 2007. The natural gas market continues to be driven by
high natural gas storage inventories and mild early winter conditions for much
of the country. NYMEX natural gas prices ended the first quarter of 2007 at
11
about $7.56 per MMBtu. The outlook for the commodity markets for the remainder
of 2007 calls for continued volatility.
We seek to reduce our exposure to price volatility by hedging our
production through price floors. Under the terms of our revolving credit
facility, we are required to maintain hedging positions with respect to not less
than 25% nor more than 75% of our crude oil and natural gas production. We
currently have the following hedges in place:
Time Period Notional Quantities Price
--------------------------------------------------------------------------------
June 2007 10,000 MMbtu of production per day Floor of $5.00
July 2007 10,000 MMbtu of production per day Floor of $4.25
August 2007 10,000 MMbtu of production per day Floor of $5.00
September 2007 10,000 MMbtu of production per day Floor of $5.50
Production Volumes. Because our proved reserves will decline as natural gas
and crude oil are produced, unless we acquire additional properties containing
proved reserves or conduct successful exploration and development activities,
our reserves and production will decrease. Our ability to acquire or find
additional reserves in the near future will be dependent, in part, upon the
amount of available funds for acquisition, exploration and development projects.
We had capital expenditures during the first three months of 2007 of $3.9
million and have a capital budget for 2007 ranging from $27 to $44 million,
which will depend on our success rate, production levels and commodity prices.
Availability of Capital. As described more fully under "Liquidity and
Capital Resources" below, our sources of capital going forward will primarily be
cash from operating activities, funding under our revolving credit facility,
cash on hand, and if an appropriate opportunity presents itself, proceeds from
the sale of properties. We currently have approximately $14.1 million of
availability under our revolving credit facility.
Exploration and Development Activity. We believe that our high quality
asset base, high degree of operational control and large inventory of drilling
projects position us for future growth. Our properties are concentrated in
locations that facilitate substantial economies of scale in drilling and
production operations and more efficient reservoir management practices. We
operate 94% of the properties accounting for approximately 93% of our PV-10,
giving us substantial control over the timing and incurrence of operating and
capital expenditures. In addition, we have 51 proved undeveloped projects and
have identified over 500 drilling and recompletion opportunities on our existing
acreage, the successful development of which we believe could significantly
increase our daily production and proved reserves.
Our future natural gas and crude oil production, and therefore our success,
is highly dependent upon our ability to find, acquire and develop additional
reserves that are profitable to produce. The rate of production from our natural
gas and crude oil properties and our proved reserves will decline as our
reserves are produced unless we acquire additional properties containing proved
reserves, conduct successful development and exploration activities or, through
engineering studies, identify additional behind-pipe zones or secondary recovery
reserves. We cannot assure you that our exploration and development activities
will result in increases in our proved reserves. For example, in 2006, while we
had some success in pursuing these activities, we were not able to fully replace
the production volumes lost from natural field declines and property sales. If
our proved reserves continue to decline in the future, our production will also
decline and, consequently, our cash flow from operations and the amount that we
are able to borrow under our revolving credit facility will also decline. In
addition, approximately 52% of our total estimated proved reserves at December
31, 2006 were undeveloped. By their nature, estimates of undeveloped reserves
are less certain. Recovery of such reserves will require significant capital
expenditures and successful drilling operations. We may be unable to acquire or
develop additional reserves, in which case our results of operations and
financial condition could be adversely affected.
12
Borrowings and Interest. We currently have indebtedness of approximately
$125.9 million and availability of $14.1 million under our revolving credit
facility. Our cash interest expense will require us to increase our cash flow
from operations in order to meet our debt service requirements, as well as to
fund the development of our numerous drilling opportunities.
Results of Operations
The following table sets forth certain of our operating data for the
periods presented. All data is for continuing operations.
Three Months Ended
March 31,
---------------------------------
2007 2006
----------- --------------
Operating Revenue: (1)
Crude oil sales........................................................ $ 2,741 $ 2,783
Natural gas sales ..................................................... 8,581 10,143
Rig operations......................................................... 328 376
Other.................................................................. 1 3
----------- --------------
$ 11,651 $ 13,305
=========== ==============
Operating Income ...................................................... $ 3,547 $ 5,587
Crude oil production (MBbl)............................................ 50.2 46.7
Natural gas production (MMcf).......................................... 1,451 1,556
Average crude oil sales price ($/Bbl).................................. $ 54.63 $ 59.57
Average natural gas sales price ($/Mcf)................................ $ 5.91 $ 6.52
(1) Revenue and average sales prices are net of hedging activities.
Comparison of Three Months Ended March 31, 2007 to Three Months Ended March 31,
2006
Operating Revenue. During the three months ended March 31, 2007, operating
revenue from natural gas and crude oil sales decreased to $11.3 million from
$12.9 million for the first quarter of 2006. The decrease in revenue was
primarily due to a reduction in realized prices during the first quarter of 2007
as compared to the same period of 2006. Reduced realized prices had a negative
impact of $1.2 million on revenue for the quarter. A decline in natural gas
production partially offset by an increase in crude oil production had a
negative impact of $427,000 for the first quarter of 2007.
Average sales prices net of hedging cost for the quarter ended March 31,
2007 were:
o $54.63 per Bbl of crude oil,
o $ 5.91 per Mcf of natural gas
Average sales prices net of hedging cost for the quarter ended March 31,
2006 were:
o $59.57 per Bbl of crude oil,
o $ 6.52 per Mcf of natural gas
Crude oil sales volumes increased from 46.7 MBbls during the quarter ended
March 31, 2006 to 50.2 MBbls for the same period of 2007. The increase in crude
oil sales volumes was primarily due to new production brought on line in 2006.
Sales in Wyoming increased from 1.1 MBbls during the first quarter of 2006 to
4.2 MBbls for the same period of 2007. Natural gas production volumes decreased
from 1,556 MMcf for the three months ended March 31, 2006 to 1,451 MMcf for the
same period of 2007. The decrease in natural gas production volumes was
primarily due to property sales in the third quarter of 2006. Properties sold
contributed 74.4 MMcf to production during the first quarter of 2006.
Lease Operating Expenses. Lease operating expenses ("LOE") for the three
months ended March 31, 2007 increased to $3.0 million compared to $2.8 million
in 2006. The increase in LOE was due to a general increase in the cost of field
services. LOE on a per Mcfe basis for the three months ended March 31, 2007 was
$1.69 per Mcfe compared to $1.54 for the same period of 2006. The increase in
per Mcfe cost was attributable to the decrease in production volumes during the
first quarter of 2007 as compared to 2006 as well as the overall increase in
cost.
13
General and Administrative ("G&A") Expenses. G&A expenses excluding
stock-based compensation remained constant at $1.1 million during the quarters
ended March 31, 2007 and 2006. G&A expense on a per Mcfe basis was $0.65 for the
first quarter of 2007 compared to $0.61 for the same period of 2006. The
increase in G&A expense on a per Mcfe basis was primarily due to a decline in
production volumes during the first quarter of 2007 compared to the same period
in 2006.
Stock-based Compensation We currently utilize a standard option pricing
model (i.e., Black-Scholes) to measure the fair value of stock options granted
to employees. Options granted to employees are valued at the date of grant and
expense is recognized over the options vesting period. For the quarters ended
March 31, 2007 and 2006, stock based compensation was approximately $172,000 and
$171,000 respectively.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expense increased to $3.7 million for the three months
ended June 30, 2007 from $3.4 million for the same period of 2006. The increase
in DD&A was primarily due to a decrease in our proved reserves. Our DD&A on a
per Mcfe basis for the three months ended March 31, 2007 was $2.09 per Mcfe
compared to $1.85 per Mcfe in 2006. The increase in the per Mcfe DD&A was due to
higher expense for the period and a decrease in production volumes for the three
months ended March 31, 2007 as compared to the same period of 2006
Interest Expense. Interest expense increased to $4.2 million for the first
three months of 2007 from $4.0 million for the same period of 2006. The increase
in interest expense was primarily due to an increase in the interest rates on
our long-term debt. The interest rate on our senior notes was 12.08% for the
three months ended March 31, 2006 compared to 12.85% for the three months ended
March 31, 2007. The rate on our senior secured revolving credit facility also
increased to 9.25% from 8.75% for the three months ended March 31, 2007 as
compared to the same period of 2006.
Liquidity and Capital Resources
General. The natural gas and crude oil industry is a highly capital
intensive and cyclical business. Our capital requirements are driven principally
by our obligations to service debt and to fund the following costs:
o the development of existing properties, including drilling and
completion costs of wells;
o acquisition of interests in additional natural gas and crude oil
properties; and
o production and transportation facilities.
The amount of capital expenditures we are able to make has a direct impact
on our ability to increase cash flow from operations and, thereby, will directly
affect our ability to service our debt obligations and to continue to grow the
business through the development of existing properties and the acquisition of
new properties.
Our sources of capital going forward will primarily be cash from operating
activities, funding under our revolving credit facility, cash on hand, and if an
appropriate opportunity presents itself, proceeds from the sale of properties.
However, under the terms of the notes, proceeds of optional sales of our assets
that are not timely reinvested in new natural gas and crude oil assets will be
required to be used to reduce indebtedness and proceeds of mandatory sales must
be used to repay or redeem indebtedness.
Working Capital (Deficit). At March 31, 2007, our current liabilities of
approximately $11.4 million exceeded our current assets of $7.2 million
resulting in a working capital deficit of $4.2 million. This compares to a
working capital deficit of approximately $3.7 million at December 31, 2006.
Current liabilities at March 31, 2007 consisted of trade payables of $2.5
million, revenues due third parties of $2.5 million, accrued interest of $5.4
million and other accrued liabilities of $1.0 million.
Capital expenditures. Capital expenditures during the first three months of
2007 were $3.9 million compared to $7.1 million during the same period of 2006.
The table below sets forth the components of these capital expenditures on a
historical basis for the three months ended March 31, 2007 and 2006.
14
Three Months Ended
March 31,
-------------------------------------------
2007 2006
------------------- ---------------------
Expenditure category (in thousands):
Development..................................................... $ 3,896 $ 7,108
Facilities and other............................................ 4 25
------------------- ----------------------
Total....................................................... $ 3,900 $ 7,133
=================== ======================
During the three months ended March 31, 2007 and 2006, capital expenditures
were primarily for the development of existing properties. We anticipate making
capital expenditures ranging from $27 to $44 million in 2007. These anticipated
expenditures are subject to adequate cash flow from operations and availability
under our revolving credit facility. Our ability to make all of our budgeted
capital expenditures will also be subject to availability of drilling rigs and
other field equipment and services. Our capital expenditures could also include
expenditures for acquisition of producing properties if such opportunities
arise, but we currently have no agreements, arrangements or undertakings
regarding any material acquisitions. Should the prices of natural gas and crude
oil begin to decline, or if our costs of operations increase as a result of the
scarcity of drilling rigs or if our production volumes decrease, our cash flow
from operations will decrease which may result in a further reduction of the
capital expenditures budget.
Sources of Capital. The net funds provided by and/or used in each of the
operating, investing and financing activities relating to continuing operations
are summarized in the following table and discussed in further detail below:
Three Months Ended
March 31,
---------------------------------
2007 2006
--------------- --------------
Net cash provided by operating activities.......................... $ 4,760 $ 6,372
Net cash used in investing activities.............................. (3,900) (7,133)
Net cash provided by (used in) financing activities............... (293) 762
--------------- --------------
Total.............................................................. $ 567 $ 1
=============== ==============
Operating activities during the three months ended March 31, 2007 provide
us $4.8 million of cash compared to providing $6.4 million in the same period in
2006. Net income plus non-cash expense items during 2006 and 2007 and net
changes in operating assets and liabilities accounted for most of these funds.
Financing activities used $293,000 for the first three months of 2007 compared
to providing $762,000 for the same period of 2006. Funds used in 2007 were the
result of a net reduction in the outstanding balance of our revolving line of
credit. In 2006, the funds were provided by net proceeds from our revolving line
of credit and proceeds from the exercise of employee stock options. Investing
activities used $3.9 million during the three months ended March 31, 2007
compared to using $7.1 million for the quarter ended March 31, 2006.
Expenditures during the quarter ended March 31, 2007 and March 31, 2006 were
primarily for the development of existing properties.
Future Capital Resources. We currently have three principal sources of
liquidity going forward: (i) cash from operating activities, (ii) funding under
our revolving credit facility, and (iii) if an appropriate opportunity presents
itself, the sale of producing properties. If these sources of liquidity do not
prove to be sufficient, we may also issue additional shares of equity securities
although we may not be able to complete equity financings on terms acceptable to
us, if at all. Covenants under the indenture for the notes and the revolving
credit facility restrict our use of cash from operating activities, cash on hand
and any proceeds from asset sales. Under the terms of the notes, proceeds of
optional sales of our assets that are not timely reinvested in new natural gas
and crude oil assets will be required to be used to reduce indebtedness and
15
proceeds of mandatory sales must be used to redeem indebtedness. The terms of
the notes and the revolving credit facility also substantially restrict our
ability to:
o incur additional indebtedness;
o grant liens;
o pay dividends or make certain other restricted payments;
o merge or consolidate with any other entity; or
o sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
Our cash flow from operations depends heavily on the prevailing prices of
natural gas and crude oil and our production volumes of natural gas and crude
oil. Although we have hedged a portion of our natural gas and crude oil
production and will continue this practice as required pursuant to the revolving
credit facility, future natural gas and crude oil price declines would have a
material adverse effect on our overall results, and therefore, our liquidity.
Falling natural gas and crude oil prices could also negatively affect our
ability to raise capital on terms favorable to us or at all.
Our cash flow from operations will also depend upon the volume of natural
gas and crude oil that we produce. Unless we otherwise expand reserves, our
production volumes may decline as reserves are produced. Due to sales of
properties in 2002 and 2003, the divestiture of Grey Wolf during the first
quarter of 2005, property sales in 2006 and restrictions on capital expenditures
under the terms of our 11 1/2% secured notes due 2007 (which were refinanced in
October 2004), we now have significantly reduced reserves and production as
compared with pre-2003 levels. In the future, if an appropriate opportunity
presents itself, we may sell additional properties, which could further reduce
our production volumes. To offset the loss in production volumes resulting from
natural field declines and sales of producing properties, we must conduct
successful, exploration and development activities, acquire additional producing
properties or identify additional behind-pipe zones or secondary recovery
reserves. We believe our numerous drilling opportunities will allow us to
increase our production volumes; however, our drilling activities are subject to
numerous risks, including the risk that no commercially productive natural gas
or crude oil reservoirs will be found. While we have had some success in
pursuing these activities, we have not been able to fully replace the production
volumes lost from natural field declines and property sales. For example, during
2006, we added approximately 3.6 Bcfe of proved reserves which were offset by
1.8 Bcfe of reserves attributable to properties we sold and 7.7 Bcfe of
production. If our proved reserves continue to decline in the future, our
production will also decline and, consequently, our cash flow from operations
and the amount that we are able to borrow under our revolving credit facility
will also decline. The risk of not finding commercially productive reservoirs
will be compounded by the fact that 52% of our total estimated proved reserves
at December 31, 2006 were undeveloped. During 2006, we expended approximately
$26.1 million for wells in south Texas, west Texas and Wyoming. These activities
did not result in significant new production or reserves. In west Texas, we are
currently drilling a horizontal lateral in the Devonian formation. We continue
to perform general well maintenance and work-overs utilizing our own work-over
rigs. In addition, approximately 24% of our production for the three months
ended March 31, 2007 was from a single well in west Texas. If production from
this well decreases, the volume of our production would also decrease which, in
turn, would likely cause our cash flow from operations to decrease.
Contractual Obligations
We are committed to making cash payments in the future on the following
types of agreements:
o Long-term debt
o Operating leases for office facilities
We have no off-balance sheet debt or unrecorded obligations and we have not
guaranteed the debt of any other party. Below is a schedule of the future
payments that we are obligated to make based on agreements in place as of March
31, 2007:
16
Payments due in twelve month periods ended:
---------------------------------------------------------------------------------
Contractual Obligations March 31, March 31, March 31,
(dollars in thousands) Total 2008 2009-2010 2011-2012 Thereafter
------------------------------------------------------ ------------------ ------------------ ------------------ ------------------
Long-Term Debt (1) $ 127,322 $ - $ 127,322 $ - $ -
Interest on long-term debt (2) 43,173 16,277 26,896 - -
Operating Leases (3) 471 259 212 - -
---------------- ------------------ ------------------ ------------------ ------------------
Total $ 170,966 $ 16,536 $ 154,430 $ $ -
================ ================== ================== ================== ==================
(1) These amounts represent the b outstanding under the revolving credit
facility and the notes. These repayments assume that we will not draw
down additional funds.
(2) Interest expense assumes the balances of long-term debt at the end of
the period and current effective interest rates.
(3) Office lease obligations. The lease for office space for Abraxas
expires in 2009.
We maintain a reserve for cost associated with the retirement of tangible
long-lived assets. At March 31, 2007, our reserve for these obligations totaled
$1.0 million for which no contractual commitment exist.
Off-Balance Sheet Arrangements. At March 31, 2007, we had no existing
off-balance sheet arrangements, as defined under SEC regulations, that have or
are reasonably likely to have a current or future effect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
Other obligations. We make and will continue to make substantial capital
expenditures for the acquisition, development, exploration and production of
crude oil and natural gas. In the past, we have funded our operations and
capital expenditures primarily through cash flow from operations, sales of
properties, sales of production payments and borrowings under our bank credit
facilities and other sources. Given our high degree of operating control, the
timing and incurrence of operating and capital expenditures is largely within
our discretion.
Long-term Indebtedness.
March 31, December 31,
2007 2006
--------------------- -----------------
(in thousands)
Floating rate senior secured notes due 2009............................ $ 125,000 $ 125,000
Senior secured revolving credit facility............................... 2,322 2,614
--------------------- -----------------
127,322 127,614
Less current maturities ............................................... - -
--------------------- -----------------
$ 127,322 $ 127,614
===================== =================
Floating Rate Senior Secured Notes due 2009. In connection with the October
2004 financial restructuring, Abraxas issued $125 million in aggregate principal
amount of Floating Rate Senior Secured Notes due 2009. The notes will mature on
December 1, 2009 and began accruing interest from the date of issuance, October
28, 2004 at a per annum floating rate of six-month LIBOR plus 7.50%. The current
interest rate is 12.85% per annum. The interest rate is reset semi-annually on
each June 1 and December 1. Interest is payable semi-annually in arrears on June
1 and December 1 of each year.
The notes rank equally among themselves and with all of our unsubordinated
and secured indebtedness, including our credit facility and senior in right of
payment to our existing and future subordinated indebtedness.
17
Each of our subsidiaries, Eastside Coal Company, Inc., Sandia Oil & Gas
Corporation, Sandia Operating Corp., Wamsutter Holdings, Inc. and Western
Associated Energy Corporation (collectively, the "Subsidiary Guarantors"), has
unconditionally guaranteed, jointly and severally, the payment of the principal,
premium and interest on the notes on a senior secured basis. In addition, any
other subsidiary or affiliate of ours, that in the future guarantees any other
indebtedness with us, or our restricted subsidiaries, will also be required to
guarantee the notes.
The notes and the Subsidiary Guarantors' guarantees thereof, together with
our revolving credit facility and the Subsidiary Guarantors' guarantees thereof,
are secured by shared first priority perfected security interests, subject to
certain permitted encumbrances, in all of our and each of our restricted
subsidiaries' material property and assets, including substantially all of our
and their natural gas and crude oil properties and all of the capital stock (or
in the case of an unrestricted subsidiary that is a controlled foreign
corporation, up to 65% of the outstanding capital stock) of any entity, owned by
us and our restricted subsidiaries (collectively, the "Collateral").
The notes may be redeemed, at our election, as a whole or from time to time
in part, at any time after April 28, 2007, upon not less than 30 nor more than
60 days notice to each holder of notes to be redeemed, subject to the conditions
and at the redemption prices (expressed as percentages of principal amount) set
forth below, together with accrued and unpaid interest and Liquidating Damages
(as defined in the indenture) if any, to the applicable redemption date.
Year Percentage
------------------------------------------------------------------
From April 29, 2007 to April 28, 2008 104.00%
From April 29, 2008 to April 28, 2009 102.00%
After April 28, 2009 100.00%
If we experience specific kinds of change of control events, each holder of
notes may require us to repurchase all or any portion of such holder's notes at
a purchase price equal to 101% of the principal amount of the notes, plus
accrued and unpaid interest to the date of repurchase.
The indenture governing the notes contains covenants that, among other
things, limit our ability to:
o incur or guarantee additional indebtedness and issue certain types of
preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make
other restricted payments, including repurchasing, redeeming or
retiring capital stock or subordinated debt or making certain
investments or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o permit restrictions on the ability of our subsidiaries to distribute or
lend money to us;
o cause a restricted subsidiary to issue or sell its capital stock; and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of our and our restricted subsidiaries.
The indenture also contains customary events of default, including
nonpayment of principal or interest, violations of covenants, cross default and
cross acceleration to certain other indebtedness, including our revolving credit
facility, bankruptcy, and material judgments and liabilities.
18
Senior Secured Revolving Credit Facility. On October 28, 2004, we entered
into an agreement for a revolving credit facility having a maximum commitment of
$15 million, which includes a $2.5 million subfacility for letters of credit.
Availability under the revolving credit facility is subject to a borrowing base
consistent with normal and customary natural gas and crude oil lending
transactions.
Outstanding amounts under the revolving credit facility bear interest at
the prime rate announced by Wells Fargo Bank, National Association plus 1.00%.
The current interest rate is 9.25% per annum. Subject to earlier termination
rights and events of default, the stated maturity date under the revolving
credit facility is October 28, 2008.
We are permitted to terminate the revolving credit facility, and under
certain circumstances, may be required, from time to time, to permanently reduce
the lenders' aggregate commitment under the revolving credit facility. Such
termination and each such reduction is subject to a premium equal to the
percentage listed below multiplied by the lenders' aggregate commitment under
the revolving credit facility, or, in the case of partial reduction, the amount
of such reduction.
Year % Premium
-------- -------------
1 1.5
2 1.0
3 0.5
4 0.0
Each of our current subsidiaries has guaranteed, and each of our future
restricted subsidiaries will guarantee, our obligations under the revolving
credit facility on a senior secured basis. In addition, any other subsidiary or
affiliate of ours, that in the future guarantees any of our other indebtedness
or of our restricted subsidiaries will be required to guarantee our obligations
under the revolving credit facility. Obligations under the revolving credit
facility are secured, together with the notes, by a shared first priority
perfected security interest, subject to certain permitted encumbrances, in all
of our and each of our restricted subsidiaries' material property and assets,
including substantially all of our and their natural gas and crude oil
properties and all of the capital stock (or in the case of an unrestricted
subsidiary that is a controlled foreign corporation, up to 65% of the
outstanding capital stock) in any entity, owned by us and our restricted
subsidiaries.
Under the revolving credit facility, we are subject to customary covenants,
including certain financial covenants and reporting requirements. The revolving
credit facility requires us to maintain a minimum net cash interest coverage
ratio and also requires us to enter into hedging agreements on not less than 25%
or more than 75% of our projected natural gas and crude oil production.
In addition to the foregoing and other customary covenants, the revolving
credit facility contains a number of covenants that, among other things,
restrict Abraxas' ability to:
o incur or guarantee additional indebtedness and issue certain types of
preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make
other restricted payments, including repurchasing, redeeming or
retiring capital stock or subordinated debt or making certain
investments or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o make any change in the principal nature of our business;
o prepay, redeem, purchase or otherwise acquire any of our or our
restricted subsidiaries' indebtedness;
19
o permit a change of control;
o directly or indirectly make or acquire any investment;
o cause a restricted subsidiary to issue or sell our capital stock; and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of Abraxas and our restricted subsidiaries.
The revolving credit facility also contains customary events of default,
including nonpayment of principal or interest, violations of covenants, cross
default and cross acceleration to certain other indebtedness, bankruptcy and
material judgments and liabilities, and is subject to an Intercreditor, Security
and Collateral Agency Agreement, which specifies the rights of the parties
thereto to the proceeds from the Collateral.
Intercreditor Agreement. The holders of the notes, together with the
lenders under our credit facility, are subject to an Intercreditor, Security and
Collateral Agency Agreement, which specifies the rights of the parties thereto
to the proceeds from the Collateral. The Intercreditor Agreement, among other
things, (i) creates security interests in the Collateral in favor of a
collateral agent for the benefit of the holders of the notes and the credit
facility lenders and (ii) governs the priority of payments among such parties
upon notice of an event of default under the Indenture or the credit facility.
So long as no such event of default exists, the collateral agent will not
collect payments under the new credit facility documents or the indenture
governing the notes and other note documents (collectively, the "Secured
Documents"), and all payments will be made directly to the respective creditor
under the applicable Secured Document. Upon notice of an event of default and
for so long as an event of default exists, payments to each credit facility
lender and holder of the notes from us and our current subsidiaries and proceeds
from any disposition of any collateral, will, subject to limited exceptions, be
collected by the collateral agent for deposit into a collateral account and then
distributed as provided in the following paragraph.
Upon notice of any such event of default and so long as an event of default
exists, funds in the collateral account will be distributed by the collateral
agent generally in the following order of priority:
first, to reimburse the collateral agent for expenses incurred in
protecting and realizing upon the value of the Collateral;
second, to reimburse the credit facility administrative agent and the
trustee, on a pro rata basis, for expenses incurred in protecting and realizing
upon the value of the Collateral while any of these parties was acting on behalf
of the Control Party (as defined below);
third, to reimburse the credit facility administrative agent and the
trustee, on a pro rata basis, for expenses incurred in protecting and realizing
upon the value of the Collateral while any of these parties was not acting on
behalf of the Control Party;
fourth, to pay all accrued and unpaid interest (and then any unpaid
commitment fees) under the credit facility;
fifth, if, the collateral coverage value of three times the outstanding
obligations under the credit facility would be met after giving effect to any
payment under this clause "fifth," to pay all accrued and unpaid interest on the
notes;
sixth, to pay all outstanding principal of (and then any other unpaid
amounts, including, without limitation, any fees, expenses, premiums and
reimbursement obligations) the credit facility;
seventh, to pay all accrued and unpaid interest on the notes (if not
paid under clause "fifth");
20
eighth, to pay all outstanding principal of (and then any other unpaid
amounts, including, without limitation, any premium with respect to) the notes;
and
ninth, to pay each credit facility lender, holder of the notes, and
other secured party, on a pro rata basis, all other amounts outstanding under
the credit facility and the notes.
To the extent there exists any excess monies or property in the collateral
account after all of ours and our subsidiaries' obligations under the credit
facility, the indenture and the notes are paid in full, the collateral agent
will be required to return such excess to us.
The collateral agent will act in accordance with the Intercreditor
Agreement and as directed by the "Control Party" which for purposes of the
Intercreditor Agreement is the holders of the notes and the credit facility
lenders, acting as a single class, by vote of the holders of a majority of the
aggregate principal amount of outstanding obligations under the notes and the
credit facility.
The Intercreditor Agreement provides that the lien on the assets
constituting part of the Collateral that is sold or otherwise disposed of in
accordance with the terms of each Secured Document may be released if (i) no
default or event of default exists under any of the Secured Documents, (ii) we
have delivered an officers' certificate to each of the collateral agent, the
trustee, the credit facility administrative agent certifying that the proposed
sale or other disposition of assets is either permitted or required by, and is
in accordance with the provisions of, the applicable Secured Documents and (iii)
the collateral agent has acknowledged such certificate.
The Intercreditor Agreement provides for the termination of security
interests on the date that all obligations under the Secured Documents are paid
in full.
Hedging Activities.
Our results of operations are significantly affected by fluctuations in
commodity prices and we seek to reduce our exposure to price volatility by
hedging our production through commodity derivative instruments. Under the
senior credit agreement, we are required to maintain hedge positions on not less
than 25% or more than 75% of our projected oil and gas production..
Net Operating Loss Carryforwards.
At December 31, 2006 we had $191.7 million of net operating loss
carryforwards for U.S. tax purposes. These loss carryforwards will expire
through 2026 if not utilized.
Uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, we have established a valuation allowance of $67.1 million for
deferred tax assets at March 31, 2007.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 is an interpretation of SFAS
109, "Accounting for Income Taxes", and it seeks to reduce the diversity in
practice associated with certain aspects of measurement and accounting for
income taxes and requires expanded disclosure with respect to the uncertainty in
income taxes. FIN 48 is effective for fiscal years beginning after December 15,
2006. Accordingly, the Company adopted FIN 48 on January 1, 2007. The adoption
of FIN 48 did not have any effect on the Company's financial position or results
of operations for the quarter ended March 31, 2007. The Company recognizes
interest and penalties related to uncertain tax positions in income tax expense.
As of March 31, 2007, the Company did not have any accrued interest or penalties
related to uncertain tax positions. The tax years from 1999 through 2006 remain
open to examination by the tax jurisdictions to which the Company is subject.
21
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
As an independent crude oil and natural gas producer, our revenue, cash
flow from operations, other income and profitability, reserve values, access to
capital and future rate of growth are substantially dependent upon the
prevailing prices of crude oil and natural gas. Declines in commodity prices
will materially adversely affect our financial condition, liquidity, ability to
obtain financing and operating results. Lower commodity prices may reduce the
amount of crude oil and natural gas that we can produce economically. Prevailing
prices for such commodities are subject to wide fluctuation in response to
relatively minor changes in supply and demand and a variety of additional
factors beyond our control, such as global political and economic conditions.
Historically, prices received for crude oil and natural gas production have been
volatile and unpredictable, and such volatility is expected to continue. Most of
our production is sold at market prices. Generally, if the commodity indexes
fall, the price that we receive for our production will also decline. Therefore,
the amount of revenue that we realize is partially determined by factors beyond
our control. Assuming the production levels we attained during the quarter ended
March 31, 2007, a 10% decline in crude oil and natural gas prices would have
reduced our operating revenue, cash flow and net income by approximately $1.1
million for the quarter.
Hedging Sensitivity
On January 1, 2001, we adopted SFAS 133 as amended by SFAS 137 and SFAS
138. Under SFAS 133, all derivative instruments are recorded on the balance
sheet at fair value. In 2003 we elected not to designate derivative instruments
as hedges. Accordingly the instruments are recorded on the balance sheet at fair
value with changes in the market value of the derivatives being recorded in
current oil and gas revenue.
Under the terms of our revolving credit facility, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our natural gas and crude oil production.
Interest rate risk
At March 31, 2007 we had $125.0 million in outstanding indebtedness under
the floating rate senior secured notes due 2009. The notes bear interest at a
per annum rate of six-month LIBOR plus 7.5%. The rate is redetermined on June 1
and December 1 of each year, beginning June 1, 2005. The current rate on the
notes is 12.85%. For every percentage point that the LIBOR rate rises, our
interest expense would increase by approximately $1.3 million on an annual
basis. At March 31, 2007, we had $2.3 million of outstanding indebtedness under
our revolving credit facility. Interest on this facility accrues at the prime
rate announced by Wells Fargo Bank plus 1.00%. For every percentage point
increase in the announced prime rate, our interest expense would increase by
approximately $23,000 on an annual basis.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of Abraxas' "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e)and 15d-15(e)) and concluded
that the disclosure controls and procedures were effective.
There were no changes in our internal controls over financial reporting
during the period covered by this report that could materially affect, or are
reasonably likely to materially affect, our financial reporting.
22
ABRAXAS PETROLEUM CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no changes in legal proceedings from that described in the
Company's Annual Report of Form 10-K for the year ended December 31, 2006, and
in Note 6 in the Notes to Condensed Consolidated Financial Statements contained
in Part I of this report on Form 10-Q.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2006, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing
Abraxas. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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
(a) Exhibits
Exhibit 31.1 Certification - Robert L.G. Watson, CEO
Exhibit 31.2 Certification - Chris E. Williford, CFO
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 -
Robert L.G. Watson, CEO
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 - Chris
E. Williford, CFO
23
ABRAXAS PETROLEUM CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November 14, 2007 By: /s/Robert L.G. Watson
------------------ ----------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: November 14, 2007 By: /s/Chris E. Williford
------------------- ----------------------------
CHRIS E. WILLIFORD,
Executive Vice President and
Principal Accounting Officer