Although the EPX Index has had a so-so run since late December of 2013 (up around 6%), plenty of individual plays have outperformed, but few have done so to the same extent as Abraxas Petroleum (NASDAQ:AXAS). Back in late December, I thought Abraxas was a good candidate to pick up if it traded down closer to $3, which it did within the next month or so, but I didn't think that it was going to shoot through $4.50, $5, and eventually $6. Granted, a lot happened between then and now to help the shares along the way and management has been active in selling non-core assets and picking up new acreage to enhance value.
The acreage Abraxas holds in the Williston Basin (the Bakken) is pretty mature, but there is quite a bit of growth potential via the drill bit in the Eagle Ford acreage, not to mention the possibility that the company will continue to acquire when and where it can. Strong production growth and a pretty clean balance sheet support a fair value range around $6 to $7 per share and I wouldn't underestimate management's ability to execute more value-creating transactions.
What Has Changed?
My net asset value estimate for Abraxas has jumped significantly since late December of 2013 (from around $3.50 to $6). That's a big jump and the difference comes down to three basic changes. First, the company has accelerated its drilling program more than I had anticipated - from an initial capex budget of $105M for 2014, management has almost doubled that to $190M with significant incremental additions to its Eagle Ford drilling program. Drilling more wells sooner pulls that cash flow in, increasing the value (particularly for a smaller player like Abraxas where the higher discount rates punish those cash flows further off).
Second, the drilling programs have been going better than I'd expected. The company's Bakken wells have been performing above the type curve, and recent wells drilled from the Jore pad were well ahead of the company's averages (two wells targeting the Bakken generated 30-day IPs of 904 boepd versus an 880 boepd average, and one targeting the Three Forks formation averaged 1,037 boepd). Abraxas is also testing downspacing, which could add over 30 additional drilling locations and offer some meaningful per-share value upside.
It's not just the Williston (Bakken, Three Forks) wells that have been performing well. The company's Eagle Ford wells are also performing well. Although the Spanish Eyes 1H and Eagle Eyes 1H wells were disappointing (with sub-250 boepd 30-day IPs), the Blue Eyes 1H and Snake Eyes 1H wells within the Jourdanton area have done quite well, even though the lateral on the Blue Eyes 1H was relatively short. The Cave and Dilworth East areas have also been seeing good well results and the company has just started to drill into the southern part of its Jourdanton acreage.
Last and certainly not least, I think I was too aggressive with my prior risk weightings for Abraxas's prospective acreage. I don't necessarily regret that given the data that were available in late 2013, but the company's results since then argue for lower discounts when assessing the remaining Eagle Ford acreage.
Still Work To Do Away From The Rigs
Abraxas seems to have its drilling programs working well, so I don't have much to quibble with when it comes to what's going on in the field. I do believe, though, that there is more than can be done back at HQ to add more value.
Abraxas has been pretty sharp with its acreage acquisitions in the Eagle Ford, growing its position to over 10,000 net acres. In the case of the Cave prospect in McMullen County, Abraxas moved quickly to pick up an expired lease formerly held by Marathon Oil (NYSE:MRO) and they did it again with Dilworth East. There were valid reasons why these leases were abandoned by their prior lessees, but Abraxas nevertheless managed to move quickly and get them before others in the area like Chesapeake (NYSE:CHK) or BHP Billiton (NYSE:BHP). With more leases likely expiring after the big industry rush to tie up acreage in 2009, I wouldn't be surprised if Abraxas announced more transactions like these before year-end.
There's also still plenty of scope for sales and acquisitions. The company wants to sell its approximately 30K net acres in Canada, as well as its nearly 22K acres in the Powder River Basin. It's fairly easy to look around at neighboring operators to play the match game - EOG (NYSE:EOG) has a sizable acreage position near the company's PRB acreage - but getting deals done is usually not so simple. Bill Barrett (BBG) is looking to sell its PRB acreage as well and a deal there could reshape expectations for Abraxas. That said, I think it's a "when, not if" situation insofar as selling the PRB and Canadian acreage.
On the acquisition side, the company may still try to get some additional acreage in the Williston (in McKenzie County) and is almost certainly looking for more acreage in the Eagle Ford. I also wouldn't rule out the possibility that Abraxas itself gets an offer - its acreage is close to EOG in the Eagle Ford as well.
Reassessing The Value
I was much too skeptical about the potential value of the company's acreage in the Eagle Ford and in correcting for that mistake, I'm also wary of over-correcting and going too far in the other direction. I believe the company's expedited drilling program has boosted the value of the proved reserves to $4.50/share, with another $2.50/share in risked value and $1 in net debt, future costs, and other expenses.
Within the risked NAV estimate, I come up with a $0.40/share value to the remaining Williston/Bakken drilling opportunities (with some upside to downspacing), $1.75/share for the Eagle Ford, and about $0.35/share in value across the Permian, PRB, and Canadian acreage. Additional acreage acquisitions would presumably increase the NAV, as would meaningfully better than expected drilling results. I believe that Abraxas could also realize a better price/value for its Canadian and PRB acreage than my model suggests, as that acreage could be worth more to established operators than it currently is to the company. On the other hand, there is no guarantee that the company can/will find a buyer.
Looking at EV/EBITDA, the company is definitely reaping the benefits of that accelerated drilling program as drilling leads to production and production leads to EBITDA. At 6.5x the average 12-month EBITDA estimate, I come up with a fair value of almost $7/share for Abraxas.
The Bottom Line
I won't be shocked if Abraxas pulls back periodically on worries about the company's drilling inventory and/or the impact of announced drilling results (the Street tends to focus on the last results, not the moving average or the big picture). I do think there are cheaper E&P stocks to consider today (including Cabot (NYSE:COG) in the Eagle Ford and Bill Barrett), but Abraxas is performing well with respect to production growth and drilling results and I think there is more the company can do to build its acreage position and drilling inventory.
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