Abraxas Petroleum Management Hit The Ball

| About: Abraxas Petroleum (AXAS)
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The Permian well results, at nearly 1,000 BOE/D for the first thirty days, is a good result for the acreage and economically viable.

Management has done wonders with the Bakken acreage, which is now profitable in the current environment.

An upgraded hedging program would reassure the market tremendously.

The Austin Chalk well may be viable, but it is a disappointment and management needs to determine why.

Asset sales will now decline in importance and some minor acquisitions have been made in the Permian. A reverse acquisition with a private company or acquisition should be pursued.

Abraxas Petroleum (NASDAQ:AXAS) announced that the Permian well initially flowed 997 BOE/D for the first 30 days. Of that, more than 811 was oil. That is a good solid result for the acreage. The Williston Basin also had some excellent results, with two of the new Bakken wells producing 100,000 BO in a little over four months. That is a very large improvement over previous well experience in the Bakken.

The Austin Chalk well has so far been a disappointment. It has produced about 321 BOD and some gas. Supposedly, the well is still improving but the results are much less than some of the neighboring wells reported. Depending upon the decline rates and the maximum production rate from which the decline starts, these Austin Chalk wells may be profitable to drill and produce. But they will be far less favorable than management had led analysts to believe.

Still, management has some very solid results to use for a growth basis in 2017. Plus, management is using the downtime until drilling begins again to further improve well designs and decrease costs. So there could be some better results in the offing.

Source: Abraxas Petroleum December, 2016, Corporate Presentation

The first solid accomplishment was the well results in the Permian. Abraxas is a small company, so the acreage there is significant to the company. As shown in the second slide, the acreage may not be the best, but the well results were pretty good for the acreage.

Investors need to keep their eyes on the decline rate and performance of this well. It does appear that the well will pay for itself in less than two years. So further development should be profitable, though an upgrade to the hedging program may be in order to aid profits as the industry continues to improve operating results in the Permian area.

Management has shown an unusual amount of focus by making some tiny acquisitions in the area. A possible merger with another small player in the Permian should not be ruled out or even a reverse merger with a private company. Management has pointed to increased cash flow, so that cash flow needs to increase enough to convince the market that the breakeven point for the company is now acceptably low. Then the market will not be waiting for more dilutive stock issuances.

Source: Abraxas Petroleum December, 2016, Corporate Presentation

These upgraded assumptions in the above two slides may prove conservative. During the conference call there was a discussion about the assumption used for some of the completion methods. Management has admitted to studying changes since the wells were completed. So there is a good possibility of better numbers with the next round of drilling. The biggest deal is that the rate of return exceeded 20% in the current pricing environment, so drilling will resume in the Bakken. Again, there are other operators with better acreage and better returns, but management can drill and complete the wells provided that the profits are protected by hedging. Management especially should want to guarantee that payback is achieved.

The Austin Chalk well has so far been a disappointment to the market. Drilling wells on the company acreage may pay, but so far the return realized by neighboring operators has not happened. So for the time being the market will probably focus on the progress in the Permian and the Bakken. Management needs to do a thorough and blunt assessment as to why the Austin Chalk well results happened. There may be gains available that were missed on the first well.

The asset sales are becoming less and less visible as the larger asset sales have been completed. Cash flow is forecasted to improve quite a bit, but management needs to end with more than 7,000 BOE/D for the money spent. The stock, which is up nicely from its lows, could be ahead of itself, but there are still potential discoveries and development that could make this speculative stock look cheap. At this time, conservative investors may want to sell and watch from the sidelines. But for speculators betting on favorable operational outcomes, the ride may not yet be over by a long shot.

Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.