Abraxas Petroleum Launches Stock Offering And Updates Guidance

| About: Abraxas Petroleum (AXAS)

Summary

Abraxas is selling 25 million shares, with an underwriters' option to increase this to 28.75 million shares.

The proceeds will go towards Abraxas's higher $40 million capital expenditure budget and to pay down debt and/or make acquisitions.

I estimate that Abraxas will be able to net approximately $31 million from the offering, allowing it to pay down its credit facility by $8 million.

The expanded budget will allow Abraxas to drill wells in areas that may produce better returns than the Bakken such as the Permian and Austin Chalk.

Dilution is not necessarily bad if the money is used wisely, and Abraxas has been pretty careful with expenditures in the past.

I wrote an article last week about Abraxas Petroleum (NASDAQ:AXAS) and noted that its borrowing base decrease appeared manageable, but that the borrowing base limit probably would prevent Abraxas from going with the $40 million capital expenditure budget option that it outlined without asset sales or additional funding. Abraxas has now decided to do an equity offering to pay for the $40 million capital expenditure budget and pay down its credit facility some more.

The equity offering involves 25 million shares with an underwriters' option for 3.75 million additional shares. As of right now, there has been no indication of pricing, but I would guess that it gets priced at somewhere in between $1.10 to $1.20 per share, leading to net proceeds of around $29 million to $32 million if the underwriters' option is exercised. In conjunction with this, Abraxas has also updated its guidance for 2016.

Financials From April To December

I am going to take a look at Abraxas's projected cash burn during Q2 to Q4 with its updated guidance, in order to project how much of the capital raise will go towards covering the cash burn created by the $40 million capital expenditure plan, and how much will go towards paying down debt.

Based on Abraxas's guidance, production during the last three quarters of 2016 may average around 6,270 BOEPD including a 62.4% oil split. This is a slightly higher oil split than Q1 2016's 60.7% oil split.

If WTI oil averages $48 during April to December and natural gas averages around $2.50, Abraxas is expected to generate around $45 million in revenue including slightly negative hedge value.

Units

Price Per Unit

Revenue ($ Million)

Oil (Barrels)

1,076,279

$40.50

$44

Natural Gas [Mcf]

2,209,019

$1.50

$3

NGL (Barrels)

235,011

$5

$1

Hedge Value

-$3

Total

$45

Click to enlarge

Abraxas is expected to have approximately $68 million in cash expenses during the last three quarters of 2016 based on its guidance, including its plan for $40 million in capital expenditures during 2016. Abraxas spent under $2 million on capital expenditures in Q1 2016, leaving $38 million remaining for the rest of the year.

$ Million

Lease Operating Expense

$15

Production Tax

$5

Cash SG&A

$7

Interest Expense

$3

Capital Expenditures

$38

Total

$68

Click to enlarge

As a result, Abraxas has a $23 million deficit to fund from April to December. If it sells 28.75 million shares in its offering, it may net $31 million. This would leave $8 million to reduce credit facility debt and/or make additional acquisitions beyond the $7 million allocated in the capital expenditure budget for leasing/acquisitions/other. If it sells its ranch and puts all the remaining offering proceeds towards paying down its credit facility, it would be able to get its outstanding borrowings down to approximately $105 million. This should give it a decent amount of room under its expected $120 million October borrowing base, especially given that the increased capital expenditure budget may allow Abraxas to increase its reserves.

Valuation After Stock Offering

Abraxas will end up with 135.1 million shares outstanding if it sells 28.75 million shares. It also has increased the midpoint of its production guidance by 150 BOEPD for the year, indicating an approximate 300 BOEPD increase in guidance for the latter half of the year. Abraxas may also end up with slightly less debt as it pays down its credit facility. Between the increased share count, higher production and lower debt, I am adjusting my expected value range for Abraxas to approximately $1.10 to $1.40 per share. Its upside is reduced slightly due to the dilution. However, there is also less risk of borrowing base issues now, although I previously believed that Abraxas would be okay on that front anyway.

Conclusion

Abraxas's stock offering may increase its outstanding shares by 27%, which is a significant amount. However, the offering does give Abraxas the benefit of some additional breathing room under its credit facility as well as allow it to increase production levels. The additional capital expenditures are largely going to areas such as the Permian and Austin Chalk, which may prove to provide higher returns than the Bakken.

Abraxas has previously been careful about managing its resources and keeping its spending under control, so I will assume that it will use this additional money wisely. I have been increasing or decreasing the size of my position depending on where Abraxas is trading, and will attempt to add to my position if market reaction to the equity offering pushes its shares towards the bottom of my valuation range. Dilution is not necessarily a bad thing for E&P companies if the money is used wisely.

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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.