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Summary

  • Stock is up 30% since my call in August of 2013.
  • Global Hunter Securities has upgraded Abraxas to a $4.50 price target. A 30% increase from today's price.
  • It has cleaned up its balance sheet, decreasing debt and adding operated acreage.
  • Abraxas continues to have great well results in the Eagle Ford and Bakken. Better than other operators in the area.

Abraxas (NASDAQ:AXAS) continues to prove a small cap oil producer can grow market cap quickly based on quality well design. Back in August, I stated that Abraxas was turning the corner. This was based on the premise it would transition to an operator. It is up 30% since that call on August 14th. There was a time when this company had accumulated assets over several different plays. In a matter of just 18 months, Abraxas had changed this and was operating in the two best plays in the United States. In the Bakken, it utilized an excellent well design coupled with one of the better areas in North Dakota. This pad proved it was more than capable of producing top notch IP rates. Abraxas sold some of its non-core assets to pay for operated development. This will be used to fund its operated program in the Bakken and Eagle Ford. Abraxas continues to deliver, in all aspects of its business.

Abraxas has four key areas, the two core areas are the Bakken and Eagle Ford. It has additional upside in the Powder River Basin and west Texas. Its balance sheet has improved as debt-to-EBITDA is the lowest of its 22-year history. It accomplished this by selling approximately 9 million barrels of proved reserves and about 1,000 barrels a day of production. Proved reserves increased 3% on the year after selling 35% of its total at the beginning of 2013. Production improved 9%. Overall netbacks increased 79%

Abraxas has now drilled and completed 15 wells. These have provided excellent results. Its WyCross acreage was excellent, so there was some negative sentiment towards its sale. Although this is in one of its core areas, it was non-operated and not part of Abraxas' plan. Abraxas has three operated areas of interest. The first is in Atascosa County and referred to as Jourdanton.

(click to enlarge)

(Source: Abraxas)

Straight south in McMullen County is its East Dillworth acreage. To the west still in McMullen is Abraxas' Cave Prospect. Its Eagle Ford leasehold is now 100% operated. It drilled and completed an Atascosa County well. This was Blue Eyes 1H, and had a 30-day IP rate of 405 Boe/d which was done with Abraxas' 3-D seismic. EOG Resources (NYSE:EOG) has been active just a few miles to the east. Abraxas has acquired roughly 650 net acres since last quarter in Jourdanton, which brings the total to 6800 net acres. WyCross wells had a 3 month payback. Jourdanton has not produced as well, but has lower well costs. Without any additional downspacing, Abraxas could drill 100 net wells in Jourdanton.

In Cave Prospect, the first Abraxas well was turned to sales. This well is surrounded by big operators. These include EOG, Chesapeake (NYSE:CHK) and Marathon (NYSE:MRO). After 10 days of production it has averaged 1000+ Boe/d. This well is on a 20/64 choke. These operators have had one month cumulative oil production of 14000 to 23000 Bbls. It is waiting on gas hookup for its first Dillworth East well. This well could produce from 9000 to 22000 in the first month, as this is the range other operators have had. This is a very good showing by a relatively new player in the Eagle Ford.

In North Dakota, the weather has been unrelenting. It has been longer and colder than any winter in recent memory. Abraxas handled this well, and had reported it had Q4 weather related downtime. There are three core areas in its Bakken leasehold. In Montana, it has the South Elm Coulee. In North Dakota Abraxas has North Fork and Lillibridge.

(click to enlarge)

(Source: Abraxas)

North Fork is in the field of that name, and Lillibridge is in Pershing Field. Pershing has had very good results. It is important to note that both North Dakota prospects are in northeast McKenzie County. This is becoming the new Bakken/Three Forks core. The reason is like results. It is the only area where the upper Three Forks has performed as good if not better than the middle Bakken. The second bench of the Three Forks hasn't been as good but still better than most other areas. Grail Field is just to the east of Abraxas' acreage in McKenzie County. It may be the best in play as it is located south of the Nesson Anticline, and know as an area of excellent natural fracturing. To show how good Grail Field is, I have provided the well data below.

WellDateLateral (Ft.)SRTotal Oil ProducedField
169298/084400MB54974Grail
184489/109330TF1330227Grail
177221/117865TF1208332Grail
193238/119400TF1456217Grail
193798/119310TF1196004Grail
196809/119144TF1248829Grail
1989810/119456TF1269822Grail
2105212/119371TF1188461Grail
210542/129221TF1195184Grail
214374/129392TF1204438Grail
214655/129350TF1337759Grail
207806/129452TF1270236Grail
214567/129535TF1229251Grail
228807/129772TF1176355Grail
228799/129444TF1136518Grail

(Source: NDIC)

The above wells were drilled and completed by Helis. This was acquired by QEP Resources (NYSE:QEP) back in August 24th of 2012. QEP paid $1.38 billion for 27600 acres. This was fair on valuation, but the main reason was the fantastic upper Three Forks results. At the time, I was uncertain as to why Helis had so much success. Now I believe Helis was using the same technique as EOG Resources, and now being used by Whiting (NYSE:WLL). If this was the case, Helis may not have used adequate amounts of proppant. Although it was using an all ceramic frac. It is a very good possibility that Abraxas could attain like results. Other operators have done well in fields around Pershing and Grail fields. Below I have provided some of those results over the same time frame.

WellDate

Lateral (Ft.)

Total Oil ProducedSROperator
197371/127164265300TF1(NYSE:HES)
214024/128739183651MBHES
223115/129246207122TF1(NYSE:XOM)
220505/129751316473MB(NYSE:COP)
2142912/129191168967MBHES
219856/1210042260995TF1(NYSE:SM)
223767/1210035244973TF1SM
223777/1210113247441MBSM

(Source: NDIC)

The above wells didn't produce as well as the Helis wells earlier in this article, but it does show Helis was ahead of its time as an operator. Looking at the HES, XOM, COP, and SM results, less proppant and water was used with the exception of SM.

Abraxas' production will vary significantly due to its completion schedule. It is important to note, that as Abraxas downspaces, adjacent wells are down for remediation. It loses production with each well, so timing is of the essence at each earnings announcement. Just one Abraxas' pad could produce up to 20% of guidance. Each well will have down time. This is a matter of when and not if. In the Bakken, it is important to not schedule completion work during the coldest months. Below is a list of current Abraxas wells and total oil production. These are comparable to the wells I listed earlier.

AXAS ND Well Results
WellDateLateralTotal Oil Produced Bbl.FieldSR 
Ravin 26-35 1H7/108289142736North ForkTF 
Stenehjem 27-34 1H7/115200119050North ForkMB 
Jore Federal 2-11 3H10/12922579546North ForkTF 
Ravin 26-35 2H2/13880237317North ForkMB 
Ravin 26-35 3H2/131009049360North ForkMB 
Lillibridge 4H8/13719754511PershingTF 
Lillibridge 3H7/138933112806PershingMB 
Lillibridge 2H7/13826586659PershingTF 
Lillibridge 1H7/139173127008PershingMB 
Lillibridge 8H12/13962541845PershingTF 
Lillibridge 7H

11/13

965250778PershingMB 
Lillibridge 6H11/13950345079PershingTF 
Lillibridge 5H11/13945855336PershingMB 

(Source: NDIC)

There were some non-recurring costs this quarter. G&A was high due to bonuses. It also had costs associated with well remediation, that was unsuccessful. $125 million dollar capital budget was approved for 2014. Of the additional cap ex, $10 million will go to for new leases and the rest to drill and complete 2 or 3 additional locations in the Eagle Ford. It will keep debt at or below 1x EBITDA. Another positive is net debt fell 41% sequentially. This was due to the sale of it WyCross acreage for $73 million. AXAS's full year 2014 EV/EBITDA dropped to a multiple of 5.1x. This is better than its peer group's 6x. It also increased debt-adjusted production growth to 10% this year. This compares to the industry average of 7%. This is why Global Hunter Securities upgraded AXAS to Accumulate and increased its price target to $4.50. Well count continues upward as Abraxas continues to add locations per section.

In summary, Abraxas continues to outperform. It initially acquired acreage in several different plays. It sold some of those assets, and has evolved to a focused operator. This focus has been in the two best U.S. plays. Abraxas also continues to clean up its balance sheet. This has created value, and a price target of $4.50.

Source: Bakken Update: Small Cap Bakken Operator Is Up 30% Since My Call, Has 30% To Go

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.