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Abraxas Petroleum Corporation (NASDAQ:AXAS)

Q4 2013 Earnings Conference Call

March 12, 2014, 11:00 AM ET

Executives

Geoffrey King - Vice President and Chief Financial Officer

Robert Watson - President and Chief Executive Officer

Analysts

Ryan Oatman - SunTrust

Will Green - Stephens

Welles Fitzpatrick - Johnson Rice

Hsulin Peng - R. W. Baird

Mike Kelly - Global Hunter Securities

Blake Donovan - Stifel

Steve Berman - Canaccord Genuity

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 Abraxas Petroleum Corporation's earnings conference call. My name is Britney, and I'll be the operator for today's conference. (Operator Instructions) At this time, I would now like to turn the presentation over to your host for today, Geoff King. Please proceed, sir.

Geoffrey King

Thank you, Britney, and welcome to the Abraxas Petroleum fourth quarter 2013 earnings conference call. Bob Watson, President and CEO of Abraxas, joins me today.

In addition, we have our Chief Accounting Officer and 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.

I'd 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. Abraxas had a great, great year last year. Several years ago, we came up with a go-forward business plan that we actually announced to the market about a-year-and-a-half ago, and that was to sell non-core assets, focus our portfolio and fix our balance sheet.

18 months later, we have two super core areas being the Williston Basin, in North Dakota and Montana, which includes the Bakken and the Three Forks and South Texas, which includes the Eagle Ford. We also have two additional core areas being West Texas and the Powder River Basin, and not much else.

We also have a pristine balance sheet. Our debt-to-EBITDA is the lowest in our 22-year history as a public company, and most of this was accomplished in 2013. We sold about 9 million barrels of proved reserves and about 1,000 barrels a day of production.

When you add that 9 million barrels to about 1.6 million that we've produced during the year, that represented about 35% of our proved reserve at the beginning of the year. Yet we ended the year 3% higher in proved reserves at a very low finding cost. We also grew production, despite selling 1,000 barrels a day, at 9%.

What you don't see in the numbers and these various sales, we also sold a lot of high LOE, high lifting cost and gassy barrels, and the elimination of which has created a very pleasing increase in our overall net backs of 79%.

I'm not going to dwell anymore on the path, other than to say, don't spend much time worrying about financial results, we had booked a huge gain on our divestiture, so we have a very high reported earnings. But the year was filled with a lot of noises in divestitures and other extraordinary expenses, including unfortunately the alternative minimum tax.

I'm going to focus the rest of my comments on the future and certainly invite you to do the same. We carried forward great momentum across the new year of drilling, completing and placing on production great Eagle Ford and Bakken well. In the Eagle Ford, some people thought it was a mistake to sell our WyCross property. WyCross has been our proving ground, where we proved our sales, a very capable Eagle Ford operator.

We drilled 15 wells and we learnt from each one. We tweaked our drilling techniques, completion and fracing techniques and actually now we produce the well after they came on production with what we learned from each well. We learned how to control our cost and get outstanding wells, and we established a great reputation in the industry.

WyCross was soon to become non-operated from a situation completely beyond our control, and I won't go into the details there. But we were very fortunate to be able to sell what was to become a non-operated working interest at WyCross at a very good price, which now allows us to focus on 100% owned and operated Eagle Ford wells.

Before the sale, we started gathering other Eagle Ford opportunities and just prior to the sale closing we commenced our 100% owned project. At Jourdanton, in Atascosa County, we drilled, completed and fraced, placed on production our Blue Eyes well using our recently acquired 3-D seismic to steer the lateral.

We've now drilled and offset the Snake Eyes that's waiting on a frac to commence later this week and this morning we're drilling below 8,000 feet at Spanish Eyes. We have three more to go to hold all of our legacy acreage in the area by production.

We also drilled and completed and placed on production our first well at Cave, with a 9,000 foot lateral. We also drilled and we're waiting on frac on our first well at Dilworth East. We're waiting on a gas line to be hooked up before we frac that one.

Back in Jourdanton, we've been fairly quite about our Blue Eyes result, because we were out acquiring more acreage and we didn't want any competition. We now have in-house or close to in-house leases totaling about 6,800 net acres in a very geologically specific area in between two faults, as shown on our 3-D seismic, where we feel you have to be for the Eagle Ford to be successful in this area.

Since placing our Blue Eyes well on submersible pump, we're now producing more today than the initial 30-day flowing rate. These wells are shallower and less expensive. We don't have to have the big EURs to be highly profitable.

I look forward to showing the market within the next several months, our future development plans along with a type curve and our thoughts of driving down cost that's increasing rate of returns like we did in WyCross. I can now say, we think we have at least 100 net wells to drill at Jourdanton and that might grow over time.

In the meantime, down in McMullen County in the same general area as our WyCross property, we acquired two smaller properties both of which have a chance of growing over time and both of which exhibit very great near-term impact.

At the Cave prospect, our Dutch number 2, we drilled a 9,000 foot lateral, fraced with 37 stages. It's been on production now about 10 days or so and rates well in excess of 1,000 BOEs per day on 20/64 choke. We'll give you our normal 30-day rate around the end of the month.

We had three more 100% owned locations at Cave. And the Dilworth East, just a little bit east of Cave, we drilled our Henry 2H. It was only a 4,500 foot lateral and that's the longest we could fit on to our lease. We don't like to flare gas around here, especially high BTU rich gas, and so we've elected to postpone to frac there until the gas markets in place, and hopefully that will be within the next 30 days or so.

Now, let's move to Eagle Ford. Up north it gets cold in North Dakota, but rarely has it been this cold. Cold weather has prevented or at least slowed down necessary well work to where we've had seven high-volume Bakken wells down, a significant amount of December, January, February and March.

Of late, well work has picked up and three of the wells came on back on production earlier this week and hopefully the rest will be on by the end of the week. That will put current production well above our first quarter average guidance.

The true productive capacity of the company's developed production base is obviously above the 4,000 to 4,100 barrel a day guidance we issued for the first quarter this morning. However, a well downtime has a considerable impact, especially on a company bringing high rate wells on to a small production base.

The upside of this, of course, as a shareholder, you get a needle moving production boost with each well we drill. And the downside is when one of these wells goes down for remediation, and we lose a large percentage of our production base. An example of this can be found in the Lillibridge pad, in the Pershing Field, McKenzie County.

Net of royalties, the Lillibridge pad produces over 1,000 barrels a day net to Abraxas or approximately 20% of our first quarter guidance. Every well will go down for some reason for a period to time, whether it's install a pump or clean it out, drill out plugs, install tower, install vapor recovery units, and this downtime unfortunately is only amplified by the cold weather.

That said, there will be period sometimes extended, where one well or a group of wells, which could represent up to 20% of our production base are down for an extended period of time. Therefore, for everyday, we've recently produced over 5,000 barrels a day. When we are at full capacity, we have one offsetting that for a lower amount.

And putting out this year's guidance, we attempted to take a very conservative approach to this downtime. We assume that the downtime we witnessed in the first quarter would repeat throughout the year. And hopefully that is overly conservative, but we felt like it was prudent at the time.

Cold weather has not impacted our drilling operation as much as well work. Our company-owned Raven number 1 rig continues to show exceptional efficiency. We've recently completed the drilling of three Jore Federal wells, in which Abraxas owns 76% working interest, all of which have 10,000 foot laterals.

We're waiting on frac on those wells, now probably in April. We've delayed this because of cold weather. And we've learned that fracing in this exceedingly cold environment could be very costly and it also interjects a very high risk that fracing in warmer weather does not. So we thought it was prudent just to postpone these wells until we had a better break in the weather.

We've removed the rig from the Jore Federal pad to the Raven West pad, where we're drilling four Middle Bakken wells. We have got about 50% working interest. Surface casing has been set on all four and we're drilling the intermediate hole on the first, and this morning it's below 10,000 feet.

We've been monitoring very closely industry results and down spacing in the immediate area. A number of companies have experimented with 660 foot between well pilots, ours are currently at 1,320 feet. Because these results appears to be successful, we've decided to do our own down spacing pilot. Thus we are drilling four Middle Bakken wells, 660 feet apart instead of alternating the Middle Bakken with the Three Forks well. If this is successful then that will give us about another 40 gross wells to drill in North Fork and Pershing.

As announced today, our Board approved yesterday an increase in our capital budget to $125 million for 2014, which should keep us busy in the Eagle Foard and the Bakken, but it also should keep us with debt at or below 1x EBITDA. I could go on and talk about other exciting things we have in to offer in our existing core areas, but realistically we probably won't get to them this year. So I'll throw this conversation open to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Ryan Oatman with SunTrust.

Ryan Oatman - SunTrust

Thanks for the color on 1Q and kind of the current production capacity, it kind of helps us get there. Is it fair to say that by the end of the year the company could be producing 6,000 or more barrels of oil equivalent per day from you call it 4,000 in 1Q?

Robert Watson

I would say, it's a distinct possibility that we could get there by yearend or even a little sooner. You don't have to do a whole lot of math to see the impact of these wells that we're drilling. Obviously, they come on it very high-plus rate and start declining. But we have so many of them, I'd be very disappointed if we don't get there fairly quickly.

Ryan Oatman - SunTrust

And then, on Jourdanton just wanted to confirm did I hear you correctly, did the current net acreage count is about 6,800 up from 6,150?

Robert Watson

Yes, that's what leases we have -- our incremental leases we have in-house, plus deals that we have that are very close to closing.

Ryan Oatman - SunTrust

And what sort of spacing are you looking at for that? Have you run any sort of tests or thoughts on whether it could be 160s, 80s is something tighter?

Robert Watson

Well, we don't really look at acres, we look at distance between wells, and we're thinking that right now 330 make some sense. There are some other operators in the up dip portion of the play, they're actually down spacing to as low as 200 feet between wells. So we'll be working on that this year. That will be one of the experiments we work on to come up with spacing, the optimum spacing to develop this. But it got us very excited around here.

Operator

And your next question comes from Will Green with Stephens.

Will Green - Stephens

I'm wondering if we could start on the additional CapEx this year. Can you guys talk about how much that goes to the additional two wells and then how much is for land and is that land that is already closed or expected to close? I assume that may have something to do with the additional Jourdanton leases, but just any additional color around that CapEx would be great?

Robert Watson

Roughly about $10 million of that will be for new leases, principally in the Eagle Ford. The rest of it will be two or three more wells in the Eagle Ford, about 100% well.

Will Green - Stephens

And so the $10 million land spend, not all of that is closed or probably reflected in acreage counts at this point, is that fair to assume?

Robert Watson

That's a very good assumption.

Will Green - Stephens

And then, maybe kind of more of a housekeeping. Do you guys still have acreage down in Reeves County or was that part of the one of these asset packages that you guys sold?

Robert Watson

It's gone.

Operator

And your next question comes from the line of Welles Fitzpatrick with Johnson Rice.

Welles Fitzpatrick - Johnson Rice

On the completed well cost in Atascosa, is that going to be around the $6 million in WyCross or is that going to be a little cheap, because it's a little shallower?

Robert Watson

Well, the big expense in any of these wells is the frac job, and yes, it will be a little bit less towards our requirement, because it's a little shallower. We want to another couple of wells under our belt, before we start talking about well cost and economics. And that's why I said, we look forward to bringing that to the market here in a couple of months with our development plan and what the overall economics looks like.

Those wells are active right now. One of them will be fraced later on this week. The frac will start later on this week and the other one is drilling, then the rig will move and drill two more back-to-back. So we'll have some additional information over the next couple of months, which will greatly impact our thinking on overall economics.

Welles Fitzpatrick - Johnson Rice

And then, as far as the acreage left to grab in Atascosa, obviously you have that in your budget. Can you give us a little color as to, you probably don't want say a price, but about how much is left there? I mean is it substantial relative to your current position?

Robert Watson

We think we're very comfortable with the position that we have right now. It's very geologically specific in between two faults. We now have all the acreage in between those faults. And so we're comfortable where we stand.

Operator

And your next question comes from Hsulin Peng with R. W. Baird.

Hsulin Peng - R. W. Baird

My first question is trying to kind of quantify the weather impact there. And maybe a better question is what do you think the current production will be, after you get all the wells back online versus the current production, the guidance that you gave?

Robert Watson

I've said, we've had some days over 5,000 barrels a day and then when wells are off it goes down to about 3,000 barrels a day. So it is very impactful by weather. High volume wells have that impact on small company. But hopefully, with better weather coming forward, we'll have more in 5,000 or greater area than the other.

Hsulin Peng - R. W. Baird

And then just in terms of the Bakken down spacing wells, the Raven West pad, I know you are working on this right now, but can you give us anticipated timing in terms of when you will have the results potentially?

Robert Watson

I am looking across the table at Will. The drilling should be finished -- it should be on production mid-to-late summer.

Hsulin Peng - R. W. Baird

And are we talking about all four or will you one at a time?

Robert Watson

We'll ultimately put them altogether, we'll different frac them.

Hsulin Peng - R. W. Baird

And then a housekeeping item, in terms of your fourth quarter expenses, I know you had mentioned that the LOE, they were priced some additional workover costs in 4Q. I was trying to see if you can quantify that, how much of that do you think is non-recurring? And also G&A, it was a bit higher as well, is there any non-recurring one-time items in there?

Robert Watson

The G&A, we triggered our performance bonus last year with our results, and so bonuses were accrued in the fourth quarter. So hopefully it recurs again. It was an extraordinary event in the fourth quarter. We also had one well down in our Edwards play in South Texas that took a frac hit from an Eagle Ford well. And we tried to remediate that well and it cost us a little $2 million and we were not successful, and so all of that went into non-recurring LOE in the fourth quarter.

Hsulin Peng - R. W. Baird

Now, that's exactly what I wanted to know, just so that I can back it out. That sounds good. I'll go back in the queue.

Operator

And your next question comes from the line of Mike Kelly with Global Hunter Securities.

Mike Kelly - Global Hunter Securities

I was hoping to get just a little bit more color on the geological attributes at Jourdanton, in Atascosa that are really unique. You mentioned that you've got your position between two faults, and maybe you could break that down for us finance guys there, why exactly that's important and why this acreage could be better than what we're seeing out of Atascosa acreage in general?

Robert Watson

This is a ground, which is offsetting down to the coast and up to the coast faults. We're in the down block, which puts us a little bit deeper, the Shale becomes thicker. It's probably been subject to more micro fracturing, because of the closeness to the faults. That was our original thesis when we went into this. It's very similar to what EOG did originally in Karnes County in the Karnes trough, and that's why we are buying leases in the Atascosa trough, and it appears to be working.

Mike Kelly - Global Hunter Securities

And in terms of I guess the consistency of that acreage across the 6,800, you expect fairly consistent returns or there is some geological differences across that?

Robert Watson

No. We think we've pretty much nailed down the geology with our 3-D seismic. We're hopeful that we'll have very consistent returns. These next three or four wells that we're drilling and putting on production will validate that, hopefully.

Mike Kelly - Global Hunter Securities

And it's obviously very encouraging to see shallow production declines out of it so far. And I know, you mentioned in the next couple of months you'll layout type curves probably. But maybe just initial thoughts to compare potential returns here versus WyCross and adjust the initial thoughts there, how we should think about it?

Robert Watson

Well, hopefully, we can duplicate what we did at WyCross. We drove our drilling cost down considerably over time and we expect to do that here. I don't expect to have the EURs here that we have at WyCross, and hopefully we can offset that by lower drilling and completion cost. But just time will tell.

I mean we're excited about it. The first well initially indicates it's a very nice rate of return. We had wells at WyCross that paid out as quick as three months, and I don't see anything in Jourdanton that we'll do that. So we're not going to have the exceptional high rate of return wells, but hopefully we have a whole bunch of a very good rate of return.

Mike Kelly - Global Hunter Securities

And just a final one from me, under that lens, you've done a great job of repositioning the company here and selling off non-core assets. You mentioned you've got the debt down to lowest levels in 22 years. If you see a continuance of really strong results at Jourdanton, is there a potential for the company to become really a pure play Eagle Ford company, you've got a 100 wells there, you bring the rig down from the Bakken put in the Eagle Ford or if you want to be kind of a Bakken, Eagle Ford player, despite just the success you're seeing here?

Robert Watson

I guess everything is possible. Right now, the rate of returns that we are generating in the Bakken are exceptional. And that really doesn't even reflect the return that we're getting from our drilling rig in addition to that. So as long as we have a nice inventory up there, I would expect us to stay there, but that being said, if we continue to hit it out of the park in the Eagle Ford and have a way to exit the Bakken, that's fair to shareholders. We would certainly consider it, but it's certainly not plan for at this time.

Operator

And your next question comes from the line of Blake Donovan with Stifel.

Blake Donovan - Stifel

You said that Dutch 2H well at your Cave Prospect was flowing at about 1,000 BOE per day, which is great. But how similar is your Cave Prospect acreage to the WyCross acreage in terms of oil and gas cuts?

Robert Watson

It's about the same. It's about the same GOR because of our desire not to flare gas, we are pushing every button we can to get the gas market in there as quickly as we can, which we hopefully will have here in a very near future. And as far as the well in place there, we can come up with a scenario that's even greater at Cave than it is at WyCross. The rocks appear to be a little bit better, so time will tell.

Blake Donovan - Stifel

And then, when talking about the successful down spacing in the Bakken, you spoke of other operators. How far away from these other operators is your acreage?

Robert Watson

From the Kodiak Polar, it's probably six miles.

Geoffrey King

Maybe tens of miles, pretty close. And then the activity that the Continental is doing is east of us, probably tens of miles as well. The Rockstone appear to be any significantly different. So we feel like they are close enough to use as an analogy on ours. The other, Oasis, is doing it north of us. Hess is doing it north of us. There is none of it directly offsetting it, so that is what is your question, but we don't feel like we need to have it offsetting as to get comfortable with it.

Operator

And your next question comes from the line of Erika Brownson with Canaccord Genuity.

Steve Berman - Canaccord Genuity

It's actually Steve Berman. Bob, we've heard a lot about the cold weather up in the Williston, but from what I understand, it hasn't snowed a whole lot there, so kind of thinking ahead to the second quarter, if we get a normal warm up and there is not a lot of thawing and wet roads and stuff, what's your thinking for the second quarter out there?

I mean what are you baking into your own thoughts, because I mean some companies are, I think out there wanted to maybe set the bar low and talk about the whole first half maybe being weather impacted, but if we're not going to get a lot of wetness up there, I'm just wondering if maybe we could see some positive surprises from the industry in the second quarter. Just interested in your thoughts there?

Robert Watson

I think it's very possible, especially the companies that have planned ahead and are kind of fully integrated in and around their operating areas to where they don't need a whole lot of trucks on the road, which we are. I think we're pretty comfortable with our April date and certainly that's the start of our second quarter, which hopefully we'll put those wells on production in the middle of the quarter, which should have a very significant impact on us since we owned 76% working interest in them.

And then summer time, we'll have four wells coming online on the Ravin West pad. And then possibly by the end of the year, four more on -- three more on the Stenehjem pad. So periodically we're going to have nice boost in production coming out of the Bakken. And hopefully we planned well enough ahead so that we're not impacted by bad weather.

Steve Berman - Canaccord Genuity

And then one more from me, and I apologize, if you addressed this. But this, small $2.6 million divestiture, does that finish like a formal divestiture process? I mean where we go from here on that front?

Robert Watson

We still have one property in the Permian Basin that we might divest and our Canadian operation is hopefully going to be divested here fairly shortly, but that should finish it.

Operator

And there are no further questions in the queue. I will now turn the call back over to Geoff King for closing remarks.

Geoffrey King

Thank you, Britney. We appreciate your participation today in 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 the presentation for today's conference. You may now all disconnect. And have a wonderful day.

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