Abraxas Petroleum Set To Release Strong Second Quarter Earnings

Aug. 5.14 | About: Abraxas Petroleum (AXAS)

Summary

Abraxas Petroleum is down 20% since June 30 due to declining oil prices.

2014 production should increase by 35-40% over 2013.

Abraxas has the lowest P/E (TTM) and 12 month forward P/E among its peers.

An average analyst price target of $6.90 is 35% higher than the stock's current price.

AXAS Chart

AXAS data by YCharts

Abraxas Petroleum (NASDAQ:AXAS) has dropped nearly 20% since 6/30/14, spurred on by a 6% drop in light crude oil to $98/barrel over the same time period. This has created a nice entry point for investors to own a rapidly expanding independent energy company engaged in exploitation, development and production of oil and gas in the Eagle Ford and Bakken. The company has successfully divested non-core assets to pay down debt and focus on production in its highly lucrative acreage in the Eagle Ford and Bakken. As a result, the company has significantly paid down debt and has improved its balance sheet.

AXAS Financial Debt to Equity (Quarterly) Chart

AXAS Financial Debt to Equity (Quarterly) data by YCharts

Production Increases

1Q2013

2Q2013

3Q2013

4Q2013

Full Year 2013

1Q2014

2Q2014

3Q2014

Full Year 2014

Average Boepd

4216

4109

4781

4084

4298

4189

4987

6500-6700*

5800-6000*

Click to enlarge

*Abraxas estimates

During 2Q2014, Abraxas expected to produce between 4,600-4,750 boepd, and exceeded guidance by 312 boepd, with an average boepd of 4,987. This is a 21% year-over-year increase and 19% sequential increase. The production exceeding expectations in the second quarter has become the norm as the company continues to drill successful wells that are exceeding expectations. 3Q2014 production is expected to increase 30-35% sequentially and 35-40% year-over-year. Full year 2014 production is expected to increase 35-40% over 2013. Average production for July 2014 is estimated at 6,600 boepd and the company also expects a 2014 exit rate of 8,000 boepd. Abraxas has raised its initial 2014 production guidance from 4,900-5,100 boepd to 5,800-6,000 boepd due to newly drilled wells performing better than expected.

Abraxas's board of directors recently approved an increase in the capital budget by $25 million to $190 million. The total $65 million increase since the start of this year will go directly to maintaining a one rig program for the remainder of 2014 in the Eagle Ford and for additional Eagle Ford acreage acquisitions.

Valuation

($ billions)

Market Cap.

P/E (TTM)

Fwd. P/E

Abraxas Petroleum

$ 0.54

11.2

9.5

Emerald Oil (NYSEMKT:EOX)

$ 0.49

--

24.5

Warren Resources (NASDAQ:WRES)

$ 0.44

12.1

15.1

Halcon Resources (NYSE:HK)

$ 2.3

--

25.8

Carrizo Oil (NASDAQ:CRZO)

$ 2.9

97.9

19

Kodiak Oil (NYSE:KOG)

$ 4.1

27.6

16.5

Triangle Petroleum (NYSEMKT:TPLM)

$ 0.95

13.5

13.6

SandRidge (NYSE:SD)

$ 3.0

--

26.5

Rosetta Resources (NASDAQ:ROSE)

$ 3.2

17.2

14.5

Cabot Oil & Gas (NYSE:COG)

$ 14.0

37.8

25.6

Devon Energy (NYSE:DVN)

$ 31.3

19

12.3

Marathon Oil (NYSE:MRO)

$ 26.5

15.8

12.8

Continental Resources (NYSE:CLR)

$ 27.8

32.5

19.2

EOG Resources (NYSE:EOG)

$ 61.1

30.1

18.7

Apache (NYSE:APA)

$ 39.5

18.2

14.1

Click to enlarge

Source: CNBC

Comparing Abraxas to other small to major Eagle Ford and Bakken producers, Abraxas Petroleum has the lowest trailing P/E and forward P/E. Many small-cap E&P companies struggle to produce profits while they expand operations, but Abraxas has been able to maintain healthy profitability while growing production by 35-40% year-over-year. The current valuation puts Abraxas on the same value level of the major E&P companies like Exxon (NYSE:XOM), ConocoPhillips (NYSE:COP) and Chevron (NYSE:CVX). Considering 2014 production growth of over 35% and 2015 production growth likely to be over 30%, Abraxas is trading at deep discounts to comparable companies.

2Q2014 Earnings

Abraxas is scheduled to release second quarter earnings on August 6. The average EPS analyst consensus is $0.08 for 2Q2014. With the strong production seen in the second quarter, the company is very likely to beat Wall Street expectation. The company beat 1Q2014 production estimates by 139 boepd and ended up beating the Wall Street consensus estimates by $0.01. With 2Q2014 production beating company estimates by 312 boepd and actual crude oil production of 68.9%, ahead of an estimate of 65%, Abraxas is set up for a strong 2Q2014 report. With a steady increase in crude oil price during 2Q2014, I'm expecting Abraxas's second quarter EPS to come in around $0.10, beating Wall Street estimates by $0.02.

Conclusion

Abraxas Petroleum is a well run company that has followed a successful strategy of divesting non-core assets to pay down debt and focus spending on key acreage in the Eagle Ford and Bakken. Second quarter production came in ahead of estimates, setting the company up to beat the Wall Street consensus. With 2014 production expected to increase 35-40% year-over-year and a 2014 exit rate of 8,000 boepd, the company is significantly undervalued at its current price of $5.09 per share. Comparing its valuation to peers in the industry, you again see the deep value and potential for tremendous capital appreciation. The average analyst price target is $6.90/share, or 35% above current prices. Now is a great time to accumulate Abraxas before shares start to appreciate again.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in AXAS over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.