Hedges Give Abraxas Petroleum Stability Through 2018

| About: Abraxas Petroleum (AXAS)

Summary

Abraxas Petroleum added hedges for 2017 and 2018 as well as reconfigured its Q4 2016 hedges.

The hedges mean that it is likely going to be around breakeven cash flow in 2017 and 2018, while delivering positive cash flow in 2016.

Production appears likely to remain near 2016 levels as well in 2017 and 2018.

Debt levels appear quite reasonable compared to projected EBITDA.

Abraxas appears to offer significant upside if long-term oil prices reach $60+, while being fairly protected against lower oil prices until 2018.

Abraxas Petroleum's (NASDAQ:AXAS) additional hedging activity indicates that it is most likely going to be able to maintain production with neutral cash flow for the next few years. The additional hedges do serve to limit upside until after 2018 as well, but Abraxas appears to be a relatively low risk (as small producers go) play on a long-term oil rebound.

Added Hedges

Abraxas appears to have made some moves with its hedges, monetizing its existing Q4 2016 hedges to help pay down its credit facility and adding new hedges for Q4 2016, 2017 and 2018. The Q4 2016 transactions shouldn't affect 2016's results by that much, although Abraxas gives up some upside and is better protected against downside in Q4 2016 with its reconfigured hedges now.

Abraxas also went from having 2017 oil hedges on 608 barrels per day at an average price of $78.55 to 1,908 barrels per day at an average price of $55.39. Abraxas added 1,300 barrels per day of hedges at $44.55 per barrel for 2017 and also added 1,500 barrels per day of hedges at $46.39 per barrel. These hedges are at relatively low prices, but since Abraxas can reach breakeven and maintain production at just over $50 oil without hedges, adding some hedges at $45 doesn't put Abraxas in a difficult position like it would companies requiring $70 oil to breakeven.

Abraxas In 2017

I am going to assume that Abraxas ends up with 6,050 BOEPD in production during 2016. This is in between the two production scenarios that it previously mentioned. If Abraxas then maintains 6,050 BOEPD in production during 2017, it should end up with approximately $72 million in revenue (including $4 million in hedge value) at $50 oil and $2.75 natural gas.

 

Units

Price Per Unit

Revenue ($ Million)

Oil (Barrels)

1,413,280

$42.50

$60

Natural Gas [Mcf]

3,312,375

$2.00

$7

NGL (Barrels)

242,908

$7

$2

Hedge Value

   

$4

Total

   

$72

Click to enlarge

Abraxas will likely also have approximately $70 million in cash expenditures in this scenario, including $29 million in capital expenditures to maintain 6,050 BOEPD production. Thus, at $50 oil Abraxas could have slightly positive cash flow.

 

$ Million

Lease Operating Expense

$22

Production Tax

$7

Cash SG&A

$8

Interest Expense

$4

Capital Expenditures

$29

Total

$70

Click to enlarge

Abraxas In 2018

In 2018, Abraxas has hedged 1,500 barrels of oil per day at a lower price of $46.39. This results in Abraxas having negative $2 million in hedge value at $50 oil. As a result total revenues would fall to $67 million with the same production level of 6,050 BOEPD and the same oil and gas prices as detailed in the 2017 scenario.

 

Units

Price Per Unit

Revenue ($ Million)

Oil (Barrels)

1,413,280

$42.50

$60

Natural Gas [Mcf]

3,312,375

$2.00

$7

NGL (Barrels)

242,908

$7

$2

Hedge Value

   

-$2

Total

   

$67

Click to enlarge

Assuming that expenses don't change from 2017, Abraxas would be looking at around $3 million in cash burn at $50 oil in 2018.

Variations In Projected Cash Flow

Due to its hedges, Abraxas is probably going to be close to breakeven cash flow in 2017 and 2018 (breakeven point roughly $45 oil in 2017 and $55 in 2018. If it holds production steady, it will have around $2 million in negative cash flow with $40 oil in 2017 and $3 million in negative cash flow with $50 oil in 2018. Abraxas will likely modify its capital expenditure plans to aim for around breakeven cash flow if oil is significantly higher or lower than those breakeven points. $60 or $70 oil in 2017 and 2018 probably results in increased production, while $30 or $40 oil may result in decreased production.

Projected Cash Flow In $ Millions At Various Oil Prices

Oil

$30

$40

$50

$60

$70

2017

-$8

-$2

$2

$8

$13

2018

-$17

-$9

-$3

$4

$10

Click to enlarge

Borrowing Base On The Credit Facility

Abraxas expects a 20% reduction in its borrowing base with the April redetermination. This would reduce its borrowing base to approximately $132 million. Abraxas had $134 million in outstanding borrowings under its credit facility at the end of 2015 and expects to reduce this to around $125 million by monetizing some of its hedges. If Abraxas goes with its lower capital expenditure plan for 2016 and oil averages $40, Abraxas should be able to get its outstanding borrowings down under $120 million by the end of the year without any asset sales.

Abraxas's proved reserves have a PV-10 of $197 million at SEC pricing, of which 81% of the PV-10 is attributable to developed properties. That makes a $132 million borrowing base equal to 83% of Abraxas's proved developed reserves at SEC prices. With Abraxas having minimal debt outside its credit facility, a decent amount of hedges until 2018 and a relatively low breakeven point, the credit facility lenders are probably comfortable enough with their position to avoid requiring major additional borrowing base reductions.

Valuation

With its added hedges, Abraxas appears likely to be in a similar position in 2018 as it is now in terms of both debt and production levels. Stronger oil prices might allow it to modestly increase production and/or pay down its debt a bit more. Lower oil prices may lead to a modest decrease in production.

Abraxas's debt is roughly 3.5x its adjusted EBITDA at $50 oil, leaving a decent amount of room for its stock to have some value. At $50 oil long-term, Abraxas is probably worth around its current price. At $70 oil long-term it is probably worth over double its current price.

Conclusion

Abraxas Petroleum is more of a long-term play now that it has added more hedges for 2017 and 2018. These hedges add stability, but also limit Abraxas's upside for now. It appears unlikely to grow its production significantly during the next two years, but is also unlikely to have dire financial problems during this period as well. Abraxas appears to be a good long-term investment, with only partial exposure to oil prices from now until 2018, but significant upside if the long-term price of oil settles at $60+.

Disclosure: I am/we are 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.