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

Mar.17.14 | About: Abraxas Petroleum (AXAS)


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.

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(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.

Well Date Lateral (Ft.) SR Total Oil Produced Field
16929 8/08 4400 MB 54974 Grail
18448 9/10 9330 TF1 330227 Grail
17722 1/11 7865 TF1 208332 Grail
19323 8/11 9400 TF1 456217 Grail
19379 8/11 9310 TF1 196004 Grail
19680 9/11 9144 TF1 248829 Grail
19898 10/11 9456 TF1 269822 Grail
21052 12/11 9371 TF1 188461 Grail
21054 2/12 9221 TF1 195184 Grail
21437 4/12 9392 TF1 204438 Grail
21465 5/12 9350 TF1 337759 Grail
20780 6/12 9452 TF1 270236 Grail
21456 7/12 9535 TF1 229251 Grail
22880 7/12 9772 TF1 176355 Grail
22879 9/12 9444 TF1 136518 Grail
Click to enlarge

(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.

Well Date

Lateral (Ft.)

Total Oil Produced SR Operator
19737 1/12 7164 265300 TF1 (NYSE:HES)
21402 4/12 8739 183651 MB HES
22311 5/12 9246 207122 TF1 (NYSE:XOM)
22050 5/12 9751 316473 MB (NYSE:COP)
21429 12/12 9191 168967 MB HES
21985 6/12 10042 260995 TF1 (NYSE:SM)
22376 7/12 10035 244973 TF1 SM
22377 7/12 10113 247441 MB SM
Click to enlarge

(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
Well Date Lateral Total Oil Produced Bbl. Field SR  
Ravin 26-35 1H 7/10 8289 142736 North Fork TF  
Stenehjem 27-34 1H 7/11 5200 119050 North Fork MB  
Jore Federal 2-11 3H 10/12 9225 79546 North Fork TF  
Ravin 26-35 2H 2/13 8802 37317 North Fork MB  
Ravin 26-35 3H 2/13 10090 49360 North Fork MB  
Lillibridge 4H 8/13 7197 54511 Pershing TF  
Lillibridge 3H 7/13 8933 112806 Pershing MB  
Lillibridge 2H 7/13 8265 86659 Pershing TF  
Lillibridge 1H 7/13 9173 127008 Pershing MB  
Lillibridge 8H 12/13 9625 41845 Pershing TF  
Lillibridge 7H


9652 50778 Pershing MB  
Lillibridge 6H 11/13 9503 45079 Pershing TF  
Lillibridge 5H 11/13 9458 55336 Pershing MB  
Click to enlarge

(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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.