Seeking Alpha
Oil & gas, small-cap, growth at reasonable price, hedge fund analyst
Profile| Send Message|
( followers)  

Abraxas (NASDAQ:AXAS) has been making some significant changes in 2013. What used to be a non-operated company is now beginning its horizontal program. This has been the story for a large number of oil and gas names, and a good reason to be bullish. This creates a large ramp up in production, and an operator only needs to outperform a small percentage to see a large move in stock price. This goes both ways, as a miss can create the same amount of volatility. Abraxas is focusing on the Bakken and Eagle Ford with respect to its operated program, with acreage in good areas of both plays. This is a big step for management, as it will have to manage several growing areas. More importantly, it will have to learn how to properly drill and complete wells in those different geologies.

Abraxas had a very good Q3, as it beat on both the top and bottom lines. It reported revenues of $29.1 million, $3.5 million better than analyst estimates. It had an EPS of $.09, $.04 better than expectations. Abraxas has accomplished this by focusing on its best producing basins. It will continue to focus on the Bakken and Eagle Ford shales going forward. Production is up 16% from Q2. This was accomplished as it completed four wells from the Lillibridge East pad in McKenzie County, North Dakota. These were good results, and decreased worries about Abraxas' ability as an operator. In the table below, I have included all four of these wells. I have provided the number of days on production and the total production over that time frame. I did it this way, as we do not have 90 days of production in three of the four wells.

WellIntervalDaysTotal Production BoeLateral Length (Ft.)ChokeStagesWater (Bbl.)Proppant (Lbs.)
1HMB90103320903816/6433621653227695
2HTF18675250788018/643064483

2735158

3HMB8294464893312/6433642013280372
4HTF16648576719720/6426535272515762

The above wells are performing well above expectations. When we consider operator experience, well design and area this looks to be a home run type result. Pershing Field is good with respect to geology, but this result is much better than other completions nearby. Conoco (NYSE:COP) has recently completed wells much better, but still not as good as Abraxas'. Even more important is well design. All of these wells fall within average numbers associated with stages, water and proppant. It is using a mix of sand and ceramic proppants as well, but nothing out of the ordinary. Abraxas uses some of the tightest chokes in the Bakken. These variables do not generally produce high end results. It is possible that better geosteering is one of the reasons for this very good location. Another would be source rock stimulation, much like we are seeing from EOG Resources (NYSE:EOG) and Whiting (NYSE:WLL).

In obtaining comparable well data in Pershing Field I had difficulty finding IP rates. Conoco is the main operator here, and logs production in an unreliable fashion. Because it is not real good about removing producing days from the monthly sheets, results are inconsistent. Because of this, I have decided to use results from Siverston Field which is to the west of Pershing. I have pulled two wells from 3 different operators.

WellOperatorLateralChokeStagesWaterProppantIP 90 BOEDTotal Production BOE
24996(NYSE:NFX)10193

18/64

3262814360240856951210
24997NFX1003918/643262745356388055049500
23833(NYSE:XOM)956736/643075586288888575367770
23834XOM953336/643080183289578571063900
24042(NYSE:SM)1003520/642673275291288153548150
24044SM1004918//642676072302898064558050

As you can see, the Lillibridge 1H (90-Day IP of 1148 Boe/d) is much better than any of the other wells listed. In some cases it is twice as good. Lillibridge 1H accomplished this with shorter lateral lengths, tighter chokes and less water than any of the wells from Siverston Field. Using the 90 day initial production rate, Lillibridge 1H models to approximately 1200 MBoe. This wouldn't be so shocking if it were in Parshall, Sanish or Grail Fields; but this well is too far west to be associated with such a good number. It gets more interesting when we analyze the Lillibridge 3H well. 3H looks to be on pace with 1H, and this shows the first was not an anomaly.

Abraxas also drilled the Lillibridge West pad in Q3, and it was done 79 days quicker than the east. This is attributed to better weather and drilling efficiencies. All four of the Lillibridge West wells should be producing in the next couple of weeks. Abraxas' rig is at the Jore Federal East, where it will drill three wells. It plans this pad will be on production some time in Q1.

In the Eagle Ford, Abraxas drilled 3 new wells and brought 4 to production in McMullen County. This was in its WyCross Prospect, which is now down to 40 acre spacing. There is no evidence of well communication, so it is possible Abraxas could downspace further. The results of two of those wells are listed below.

WellDaysTotal Production Boe
Camaro B3H8344986
Camaro B4H8447040

These results are not as good as the Lillibridge pad wells, but still good for this area. Abraxas is currently drilling the Camaro A1 and Camaro A2. These are also on 40 acre spacing. These wells will be zipper fracced soon. Abraxas will then mobilize its rig to its Cave Prospect in McMullen County. It will drill two 9000 foot laterals at this location. It has decided to go with longer laterals after drilling two 7500 foot laterals at WyCross. Abraxas states these have produced much better, and more than enough to cover the added costs associated with increased lateral feet. At the end of Q3, its Blue Eyes 1H well was drilled to 13000 feet (5000 foot lateral). The frac on this well will begin on the 17th of this month. This well is very important, as it is a 100% working interest area. How this well performs will give us a better idea of how the other 4000 acres of this prospect will produce.

In west Texas, Abraxas has drilled and completed Spires Ranch 129-2H in Nolan County. This is a 21 stage 3000 foot lateral. There are four additional wells scheduled to be completed in this prospect. Watch this area closely as this well has taken a little longer to clean up. I am interested to see how this progresses. It currently has about a 50% oil cut.

Going forward there are still plenty of catalysts for Abraxas. In Q4, it should have four more Lillibridge wells on production plus the Blue Eyes well. Two new WyCross wells will also be completed. Moving to Q1, there should be three Jore Federal wells on production. These wells have a 76% working interest versus a much lower working interest in earlier Bakken/Three Forks wells. It expects two additional long laterals in the Eagle Ford. I would expect equal to better production on the Bakken wells, and a much more significant improvement from the Eagle Ford, as those wells are not only going to get better with experience but also through an increase in lateral feet. Keep in mind, all of these wells could create some big swings in stock price due to the large spikes in production created through the addition of horizontal wells for small oil and gas operators. Where these wells end up can mean beating on the top and bottom lines, or missing by a wide margin.

Abraxas has been divesting its non-op assets. This is all part of its transition from a non-operative to operated producer. About $40 million of its Bakken acreage was recently divested. I believe the strong operated results will push Abraxas to shed more of these assets quicker. Abraxas will need the cash to fund its increasing production. Additional acreage divestments are in Wyoming, west Texas and Montana. These will be auctioned in December. Abraxas is planning some bolt on operated acquisitions. Specifically, it plans to add acreage in the Eagle Ford.

In summary, this was a big quarter for Abraxas. Q3 provided some very good well results, but more importantly it proved Abraxas is a good operator. Its production ramp up is already off to a good start and it is possible we could see outperformance in Q4 as well. If Abraxas can continue to get these types of results or better, we will see a large ramp up in stock price over the next few quarters. Not only are these wells good, we continue to see costs decrease. I think we will continue to see Abraxas divest non-operated and non-core properties. It will funnel these dollars into its operated horizontal programs in the Bakken and Eagle Ford. With this we should continue to see solid growth. Most importantly, its management will need to continue to do a good job of controlling costs. If these two things happen, this stock will provide very good returns.

Disclosure: I am long AXAS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not a buy recommendation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take into consideration commissions, margin interest and other costs, and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market or financial product does not guarantee future results or returns. For more articles like this check out our website at shaleexperts.com. Fracwater Solutions L.L.C. engages in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines and disposal wells. It also provides contracting services for all types of construction at well sites. Other services include soil remediation. Please contact me via email if you are interested in working with us. For more of my articles and other pertinent information on the oil and gas sector, go to shaleexperts.com.

Source: Bakken Update: Abraxas Has A Huge Quarter As Its Well Results Are Twice As Good As Others Near Pershing Field