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Abraxas Petroleum Corporation (NASDAQ:AXAS)

Q3 2012 Earnings Call

November 12, 2012 11:30 a.m. ET

Executives

Robert Watson - President & Chief Executive Officer

Geoffrey King - Vice President & Chief Financial Officer

Lee Billingsley - Vice President, Exploration

Analysts

Welles Fitzpatrick - Johnson Rice & Company

Irene Haas - Wunderlich Securities

Trevor Menke - Robert W. Baird

Steve Berman - Canaccord Genuity

Joel Musante - C. K. Cooper & Company

Joshua Young - Young Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Abraxas Petroleum Corporation Earnings Conference Call. My name is Cheverly and I'll be your operator for today. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Geoffrey King, Vice President and Chief Financial Officer. You may proceed, sir.

Geoffrey King

Thank you, Cheverly, and welcome to the Abraxas Petroleum Third Quarter 2012 Earnings Conference Call. Bob Watson, President and CEO of Abraxas, joins me today for the call. In addition, we have our Chief Accounting Officer and our VPs of Land, Operations, Engineering and Exploration available to answer any questions that you may have after Bob's overview. As a reminder, today's call is being taped and a webcast replay will be available immediately after the conclusion of the call.

Before I get started, I would like to remind everyone that any statements made during this call that are not statements of historical fact are considered forward-looking statements and actual results could vary materially from those contained in these statements. Factors that could cause our actual results to vary are described in our filings with the Securities and Exchange Commission. I would encourage everyone to review the risk factors contained in these filings and in our press releases.

I'll now turn the call over to Bob.

Robert Watson

Thank you, Geoff, and good morning. First, I want to apologize for the two releases. The pretty simple answer is that we had to get the Q out and today is Veterans Day which is a SEC holiday, so we couldn’t get it out today and we were not ready to get our operations release out in Friday so we had to have two releases. Hopefully everybody has a chance to see this morning’s release.

Earlier this year we embarked on a plan to create liquidity and to focus on our four identified core areas. And they are the Bakken and the Williston Basin of North Dakota and Montana, the Eagle Ford here in South Texas, the Power River Basin in Wyoming, and our West Texas legacy asset area. We have got good assets outside these areas and we are going to use those to create liquidity. And even some assets inside of our areas that are either non-operated, low working interest or isolated, could also be crystallized for value.

This is not an easy process. There are always bumps along the road. So predicting timing is next to impossible. This weekend we finished negotiating the sale of our Nordheim assets in the Eagle Ford DeWitt County. Definitive agreements should be signed today. For about $20 million cash we sold 544 net acres and approximately 64 barrels of equivalent production per day, which was about 50% gas.

Also late week we did execute a purchase and sales agreement with a large independent to sell our leases in the Alberta Basin Bakken play in Montana, for approximately $2.9 million plus an overriding royalty interest between 1.25% and 5%. Now we also leased our minerals up there to the same party for a 20% royalty. These are just the first of a long list of other assets of considerable value that we expect to use to create liquidity over the next six to 12 months.

We also recently upsized our bank borrowing base to $150 million. I would like to emphasize that this was net of the Nordheim assets and production. We let the banks know early on to remove these from the borrowing base calculation. Now some would say that this sounds like a shrinking to grow business plan. It’s absolutely not. These assets sales allow us to clean up our balance sheet but our business plan is going to still allows us to grow production double-digits for the foreseeable future. It’s a good business plan. It’s all self funded.

So now I will bring you up to date on what is happening in various of our core areas. In North Dakota, there is a [boom] going on, in case you haven’t figured that out. And consequently nothing goes as fast, as smooth as you would like. Winter weather also arrived a little sooner than we expected. So things have been delayed somewhat, frustratingly so. Our first three well pad in the Bakken, completions are underway. We do have one well on production, two more hopefully shortly.

We do announce the initial potential in shale plays. The Bakken and the Eagle Ford, we feel like initial potentials IPs are subject to too many variables. If everybody did the same practices on potentialing their wells it would be different, but everybody is different in their practices and consequently IPs can vary all across the map.

We will intend to announce 30-day rates. We think most the variables have passed at that time. A 90-day rate would be even better. I will say that our first well is above our curve and we own a 76% working interest in it. Our company owned drilling rig has moved over to the Lillibridge east pad which is a four well pad. All four wells had surface casing set at about 2000 feet in record time and we are now drilling the first intermediate hole. We are at 9900 feet this morning. Abraxas currently has about a 40% working interest in the Lillibridge east pad or four wells.

Down here in the Eagle Ford, a month or so ago we started the first of a multiwall program. We now think it’s going to be greater than ten wells. The first well, the Cobra B1H, we set a company record in less than eight days of drilling time. We drilled 15,150 feet of hole. This includes an approximately 4,600 foot lateral. A 19 stage frac started today. So that well hopefully will be on production in the very near future.

The second well in the program, the Mustang 1H, was drilled to 10,300 feet in a pilot hole and the Eagle Ford was logged. This was to satisfy some acreage earning requirements. We are now [uphold] and beginning to work on building the curve. The third well will be the Corvette C1H. That location is ready. The rig will move immediately to that from the Mustang. Abraxas has a 25% working interest in all of these three well.

Unfortunately, during late August and September we experienced an interruption in a third-party owned gas plant that was taking our gas from the WyCross area, so we elected to shut our well and to not flare gas. We lost more than a month’s worth of production. Hopefully this issues has been solved on a long-term basis and we can expect to have a steady take of our natural gas from the WyCross wells as we bring them online.

In the Jourdanton area also in the Eagle Ford where Abraxas has a 100% working interest, we recently a commissioned a 22 square-mile 3D seismic survey which we will use to help evaluate the Eagle Ford, the Buda and the Austin Chalk under our acreage.

West Texas, Spires Ranch, again we own a 100% of it. We recently drilled 891H. Came in with an extremely high initial potential rate. This is an open hole well and it’s un-stimulated. The rate did fall of fast which was no real surprise, but it has leveled off in the 60 to 70 barrels of oil per day rate along with some very high liquids gas. We have a number of additional locations that we are evaluating in what appears to be a higher pressure part of the reservoir.

And in closing, with the Spires Ranch on for the entire quarter, three high working interest Bakken wells coming online during the quarter and at least one Eagle Ford well coming on line during the quarter, we expect to have a nice boost in production for the quarter and a very nice boost to our exit rate.

So with that we will ask for questions.

Question-and-Answer Session

Operator

(Operator Instructions) You first question comes from Welles Fitzpatrick with Johnson Rice. You may proceed.

Welles Fitzpatrick - Johnson Rice & Company

The sale in Nordheim, the 544, you guys listed 932 as your net acreage in that area. Do you have a small working interest across of a large section or a geographically distinct portion? What portion of that did you keep or is that just a net gross difference?

Robert Watson

The difference in that is some acreage that was beyond the fault and deemed to be in the dry gas window, which we don’t think is commercial currently. We have elected to led those leases expire and they were not part of the transaction.

Welles Fitzpatrick - Johnson Rice & Company

And then jumping to Atascosa and the Buda, can you remind us when deer season ends there. Kind of when you will get the 3D back and I guess basically when you will get out there to drill?

Robert Watson

Lee -- I am looking at Lee, do you know when the 3D is...?

Lee Billingsley

Yeah, they can't starting shooting or acquiring the data till deer season ends which will be about the third week of January. And we anticipate getting the 3D back in process in the second quarter, near the end of the second quarter.

Welles Fitzpatrick - Johnson Rice & Company

Okay. So maybe 3Q drilling?

Lee Billingsley

Yeah.

Welles Fitzpatrick - Johnson Rice & Company

If it happens. All right. And one more if I would sneak it in. Obviously Canadian (inaudible) have been bouncing around quite a lot here, but anything to encourage you to get back at Pekisko in the near term?

Robert Watson

Probably not the Pekisko. We are very excited about our stealth shale play which we hope to be able to announce any day now. And we think by combining the production from the Pekisko and the upside from the upside from the Pekisko with the very high risk but extremely high upside of our shale play, we might be able to entice somebody to participate in that deal for a nice of liquidity ourselves.

Operator

Your next question comes from the line of Irene Haas with Wunderlich Securities. You may proceed.

Irene Haas - Wunderlich Securities

Wondering what is your exit rate for this year?

Robert Watson

We haven’t announced that, Irene.

Irene Haas - Wunderlich Securities

Should we expect a guidance at some point understanding that at least the Bakken wells are doing well?

Robert Watson

Well, we are not very good at predicting production rates as far as timing goes, and so we hesitate to issue guidance until we have a little bit better handle on timing.

Irene Haas - Wunderlich Securities

Okay. Maybe some update on Powder River Basin, and that’s it for me.

Robert Watson

The Powder is going great. That well continues to outperform even our wildest expectations. All of our acreage is HBP. We don’t have to get in there and drill at any time but we certainly could, should conditions warrant. Probably not going to do anything during the winter season but certainly a possibility during the warmer weather next year.

Operator

Your next question comes from the line of Trevor Menke with Robert W. Baird. You may proceed.

Trevor Menke - Robert W. Baird

I was just wondering if the Alberta Basin properties you sold include the 20,000 stealth oil play acres you had talked about earlier.

Robert Watson

No, it does not. These were all in Montana. The stealth play is all in Alberta.

Trevor Menke - Robert W. Baird

All right.

Robert Watson

It’s confusing to call it Alberta Basin but that’s what the industry has chosen to call it. But all of the acreage we had was Montana.

Trevor Menke - Robert W. Baird

All right. And then on the Cobra B1HD drilled in 8 drilling days, what are the implications on that per cost and are you doing anything special there?

Robert Watson

It’s a very good question and we will certainly be vocal about the cost as soon as the frac is completed but it looks like it’s coming in at considerably under our AFE, and implications are that if we can continue this kind of pace that this program will be even more economic than what we anticipated when we started it.

Operator

Your next question come from the line of [Tom Mattison]. You may proceed.

Unidentified Speaker

Got a question. Back in the IPAA presentation in September a couple of months ago, you had listed total production at 4272 barrels equivalent per day. And then Spires Ranch well and Wes Texas came online for 828 barrels of oil plus the 734 mcf per day of dry gas, why isn’t the daily average in excess of 5,000 for the company even with the declined rate average, been.

Robert Watson

Well, the 4272 was the second quarter average. The Spires Ranch came on during the last week of the third quarter, and we have announced over the weekend was our third quarter average. So it only participated in a couple of days and you divide that by 90, the impact of that well was minimal during the quarter.

Unidentified Speaker

Okay. So going forward, where adding in a full quarter, where would you see your total production at?

Robert Watson

We are not estimating or giving our guidance. We just don’t do that for the very reason that you are discussing. People don’t understand it and they start adding numbers up and wonder why you are not at a certain level. So it is what's going to be.

Unidentified Speaker

What's the current production of the Spires well on in oil?

Robert Watson

I just said in my presentation that it is stabilized. It’s 60 to 70 barrels of oil per day.

Unidentified Speaker

So from 828 to 60 to 70?

Robert Watson

Correct.

Unidentified Speaker

What's the working interest in the Lillibridge wells, each one of them?

Robert Watson

I just said in my presentation we have a 40% working interest.

Unidentified Speaker

In each well?

Robert Watson

Correct.

Unidentified Speaker

Okay. Just clarifying. And then the proceeds from the Nordheim sale, is that exclusively going to pay down debt or you using it for other purposes?

Robert Watson

Well, it initially goes to pay down debt but it just creates liquidity under our borrowing base.

Unidentified Speaker

No, I understand that. I am just wondering if all of it is going to pay down debt or if you are using some of it for other purposes.

Robert Watson

No, it just goes into our borrowing base.

Operator

Your next question comes from the line of Steve Berman with Canaccord. You may proceed.

Steve Berman - Canaccord Genuity

The Lillibridge pad, Bob, I think previously you had said that you’d finish drilling those wells in December and have them on in January. Has the weather up there may be pushed that out a little bit or how does that look right now?

Robert Watson

I think it’s probably going to be on production, March timeframe. The weather -- the roads are closed as we speak. We can't get equipment in and out. This is much earlier than we expected it. And it’s just going to slow things down.

Operator

(Operator Instructions) And your next question comes from the line of Joel Musante with C. K. Cooper & Company. You may proceed.

Joel Musante - C. K. Cooper & Company

Well, I was going to ask you another question about production. Could you give us a normalized production rate when you take into account all the transactions that you did for the fourth quarter?

Robert Watson

Well, we are not giving out guidance but certainly when you add in the Spires Well, the contribution from three Bakken wells and contribution from at least one Eagle Ford well, we would expect a nice increase in the fourth quarter over the third quarter, and an even higher exit rate.

Joel Musante - C. K. Cooper & Company

Okay. And in terms of the -- so you have one Bakken well online and you are going to be fracking the other two soon or...?

Robert Watson

Yes.

Joel Musante - C. K. Cooper & Company

Okay. And will they be -- do you think they will be fracked before the end of the quarter or December or....?

Robert Watson

Hopefully, one is going to be done in very near future and then we will have to just see about the third one. But certainly a second one should contribute for a decent amount of the fourth quarter.

Joel Musante - C. K. Cooper & Company

Okay. And on your current liabilities, you have a trade receivable. I think it was $24 million. Can you just discuss what that is and when you expect it to come due?

Robert Watson

That’s just the accumulation of all the activity that we are doing right now. It’s higher than it normally would be. But we have got a lot going on and those things will be current and certainly we will have liquidity to pay it off between proceeds we are getting from these assets sales plus the increased borrowing base, really doesn’t present a problem.

Operator

Your next question come from the line of Josh Young with Young Capital.

Joshua Young - Young Capital Management

Question on the Eagle Ford transaction. You guys say it was a large institutional buyer. Is that a financial buyer that bought you out?

Robert Watson

It’s a hybrid financial buyer, how about that.

Joshua Young - Young Capital Management

Okay. So I guess you guys can't say who the buyer was?

Robert Watson

No, we cannot.

Joshua Young - Young Capital Management

Okay. And then when you wrote off a portion of that acreage because it was dry gas and you mentioned there was a fault. Can you talk a little bit about that? So is that area, on one side it’s liquids rich on the other side it’s totally dry or what's happening with the geology there?

Robert Watson

That’s pretty much it. There is a -- the Edwards Reef system which underlies the Eagle ford, the edge of that reef crates a significant fall or drop off to much deeper depth. So the Eagle Ford -- and it becomes dry gas at that level and also more expensive to get to because it’s deeper. So the combination of more expense and dry gas in our opinion is -- it’s really not commercial. And the buyers weren’t all that concerned about it. So we let those leases expire.

Joshua Young - Young Capital Management

And then from a process perspective, did this bid come out of the larger review you guys were doing earlier in the year selling potentially your whole block in Eagle Ford. How did this sale come about?

Robert Watson

Yes. It did.

Joshua Young - Young Capital Management

And then I guess just one more follow up question just on this. So what was the reason for that kind of larger process stopping? Was it insufficiently high bids, do you think that there will be more value that you create through more drilling. Can you just explain, I guess briefly, what happened there and why have you guys decided to stop trying to sell whole thing?

Robert Watson

I think you are right on point. When the original bids were due this spring, crude oil had collapsed down into the $70 per barrel. The M&A market, especially in the Eagle Ford kind of came to a screeching halt. The offers that we did get were not acceptable. And with crude oil getting a little bit stronger, the offer from one particular party because acceptable. And we elected to go on and sell an individual asset instead of all the assets and we have elected to start a pretty aggressive development program on the other asset and that is the WyCross where we are now in well number 2 in our greater than 10 well program.

Operator

At this time we have no additional questions. I would like to turn the call back over to Mr. King for closing remarks.

Geoffrey King

Thank you. Okay. We appreciate your participation today on Abraxas’ earnings conference call. As I mentioned at the start of the call, a webcast replay will be available on our website and a transcript will be posted in approximately 24 hours. Thank you and have a great day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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