Abraxas Petroleum: New Bakken Wells Outperform Expectations

| About: Abraxas Petroleum (AXAS)

Summary

Abraxas's newest Bakken wells have averaged 1,126 BOEPD for their highest 30 days of production.

This puts its production trend line above historical averages and has resulted in Abraxas updating its type curve upwards.

Abraxas's production may potentially average over 8,000 BOEPD in Q4 2016 depending on the contribution from other wells.

Natural gas and NGL pricing has improved, likely leading to significantly increases in revenues for Abraxas with those streams after very modest revenue in 1H 2016.

Austin Chalk and Permian wells may drive further upside if successful.

Abraxas Petroleum (NASDAQ:AXAS) has updated its corporate presentation with further information about the production from its newest Bakken/Three Forks wells. The information indicates that those wells have trended well. After an initial start that was roughly in-line with previous wells in the North Fork field, the new wells have often produced significantly above the previous wells based on days of production. This should result in a strong finish to 2016.

Bakken/Three Forks Production

Abraxas reported strong results for its six Stenehjem Super Pad wells, with a 30-day average rate of 1,126 BOEPD. This is only a minor dropoff versus the 1,131 BOEPD average it reported for the first 15 days of production.

This compares to my expectations for an average 30-day IP of 900 to 1,000 BOEPD (based off of the first 15 day well results), and Abraxas's 999 BOEPD average 30-day IP for its previous 25 Bakken/Three Forks wells. Abraxas did use a different measurement for its new Stenehjem Super Pad wells though. Abraxas's October presentation discussing the six Stenehjem Super Pad wells mentions that for those wells the "30 day average rates represent the highest 30 days of production". Previous presentations discussing other Bakken/Three Forks wells appear to have just measured the first 30 days of production, not the highest 30 days.

The reason for this change is that it appears that the six Stenehjem Super Pad wells had lower production rates in the first few days and then peaked after that. As a result, the first 30 days of production would not be their highest 30 day period of production.

As shown in the production graph below, the six Stenehjem Super Pad wells (in green) have production levels that have been tracking above Abraxas's historical average (in red) for its North Fork field wells based on days of production. At times the new wells appear to reach around 25% or 30% higher production than historical averages, and Abraxas has updated its type curve upwards as a result. Its Middle Bakken type curve assumptions have gone from 533 MBOE to 728 MBOE.

Click to enlarge

Source: Abraxas Petroleum

This raises the possibility that Abraxas's Q4 2016 production could even average 8,000+ BOEPD depending on the timing of the production from its Permian and Austin Chalk wells.

Pricing For Natural Gas And NGLs

Abraxas has been hampered by low realized prices for natural gas and NGLs during 2016 and late 2015. In the first half of 2016, Abraxas only realized $0.98 per Mcf for natural gas and $2.94 per barrel for NGLs. This is down 62% and 75% respectively from the first half of 2015. While Abraxas's production was 60% oil during the first half of 2016, the impact from low natural gas and NGL pricing was still reasonably significant. If natural gas and NGL realized prices only fell 30% year-over-year during the first half of 2016, Abraxas would have realized $2 more per BOE, equivalent to approximately a $3.40 per barrel increase in the price of oil.

With natural gas prices holding above $3 now and NGL prices also showing signs of improvement from earlier in the year, Abraxas should be getting significantly improved revenues from its Bakken gas stream. As well, if its Delaware third-party gas processing issues get resolved as expected, that will benefit the realized prices for its natural gas and NGLs.

Conclusion

Abraxas looks to be in pretty good shape with a relatively modest debt load and the promise of surging production levels and improved realized prices during the last quarter of 2016. It has shown that it can get strong results out of its Bakken/Three Forks assets, and now the focus will be on the results from its Austin Chalk and Permian wells. If it can prove its acreage in those areas, there may be additional upside for Abraxas despite it reaching 52 week highs recently. Going forward, I would also like to see Abraxas make additional progress in bringing its lease operating expenses down. It has made significant progress since last year, with a $9.17 per BOE first half 2016 average compared to $10.58 per BOE in 2015. However, there may be potential for Abraxas to keep lease operating expenses down to the $8 to $9 per BOE range.

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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.