Abraxas Petroleum (NASDAQ:AXAS) is a micro-cap e&p company with assets in the Bakken (23.0k net), Eagle Ford (7.3k net), Powder River Basin (17.0k net) and Permian Basin (40.0k net). Its reserves are trading in the $11 to $12 range, meaning investors haven't priced much growth into the company. While AXAS has an impressive leasehold across three proven plays, its acreage isn't contiguous and production hasn't been consistent. With that said, the company has several solid prospects providing room for optimism over the near-term.
In the Eagle Ford, AXAS completed its Cobra #1H well in McMullen County (see map below) in March, 2012 which had an estimated 25-day IP rate of 889 BOEPD (96% liquids). The well has produced 113 thousand barrels of oil equivalent (NYSE:BOE) (91% oil and liquids) as of October, 2012 and should pay for itself within its first year of production. This well is the first of a ten well program in Abraxas' WyCross prospect where it operates 999 net acres which projects to 19 net drilling locations at 90-acre spacing. The Cobra well is not an outlier in the area as evidenced by multiple Comstock (NYSE:CRK) and Carrizo (NASDAQ:CRZO) wells which have had strong results to date. Consequentially, AXAS should see increased production from the Eagle Ford throughout 2013.
The company's largest prospect in the Eagle Ford is its Jourdantan Prospect in Atascosa County where it operates 4,399 net acres. The lone Jourdantan result I've seen for the company is its Grass Farm Unit #1H well (see map below) which produced an estimated 120 BOEPD (91% oil and liquids) during its first 30 days. This well was completed in September, 2011 and has produced only 31 MBOE as of October, 2012. EOG Resources (NYSE:EOG) and Murphy Oil (NYSE:MUR) have both drilled wells in this area with similar results from which we can extrapolate that the Atascosa acreage might not be economic. The company is currently testing this acreage to see if its prospective for economic quantities of hydrocarbons at the Buda and Austin Chalk intervals.
In North Dakota's Bakken Shale, Abraxas has 23,320 net acres, 3,314 of which lie in its North Fork Prospect (McKenzie County) where its results have been strong to date. Its Stenehjem 27-34-1H and Ravin 26-35-1H wells produced 571 BOEPD (78% oil) and 488 BOEPD (79% oil), respectively, during their first 31 days. Continental Resources (NYSE:CLR) has achieved similar results from its nearby wells which makes me confident in saying that I expect wells from this prospect to payout within two to three years assuming $8.7 drilling and completion (D&C) costs. So while North Fork clearly isn't analogous to Kodiak's (NYSE:KOG) Koala prospect in Northern McKenzie, it's economic and a nice cash flow piece for the company. It recently completed a third well here and is drilling and completing three others.
Outside of McKenzie, AXAS has a checkerboard of Bakken acreage across several counties in North Dakota and Montana, with 9,179 net acres on the unproven Montana side. It also has 2,681 net acres in Divide and Williams Counties which may be economic depending upon where they're located. Outside of that there's not much to talk about, with the good news being I don't believe the company spent much on the acreage.
Source: Chesapeake corporate presentation.
I've talked about a couple nice cash flow pieces, but in my view Abraxas is still looking for an asset that will provide long-term growth. Its 17,800 net acres in Wyoming's Powder River Basin (PRB) (see map above) is an asset that has the potential to be that piece. The negatives on the play are that it's expensive ($7 million per well) and gassy but it contains a lot of hydrocarbons. AXAS speaks highly of its lone result in the PRB, Hedgehog State 16-2H, completed in South-Central Campbell County which produced at an average 30-day rate of 422 BOEPD (35% oil). This well is North of Chesapeake's (NYSE:CHK) leasehold and offset by EOG's. EOG's average 30-day rate in Campbell County is approximately 587 BOEPD (41% oil), similar to AXAS' Hedgehog result.
The economics of the PRB are helped by the NGL cut which Abraxas estimates is around 10-12% of total production. Even so, I don't see this play being very economic with $7 million D&C costs. The company has a second acreage block in Eastern Converse/Western Niobrara Counties and it's worth noting that CHK's results in Niobrara County have not been economic.
The company has begun production in the Permian Basin at its Spires Ranch Prospect in Nolan County, TX. This has the potential to be a nice ancillary asset for AXAS, but I don't believe it has a large growth engine in its portfolio at present, justifying its low valuation. With that said, it has plenty of exploration upside and recently revealed a 20k net acre stealth play in Alberta, Canada.
Abraxas is a good operator, as evidenced by its production results which have been on par with offset operators. The company has done a good job of acquiring acreage on the cheap, unfortunately, a lot of it hasn't been economic and to that end it's due for some good luck. The company should grow production over the near-term from its Wycross and North Fork Prospects, but the long-term remains a question. I like Abraxas but it's a risky play, as you're really buying a wildcatter with a lot of exploration risk. If you're looking for that kind of risk in your portfolio, you could do much worse.