Abraxas Petroleum: Trading At Around 4x Estimated 2019 EBITDA At $50 Oil

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About: Abraxas Petroleum Corporation (AXAS)
by: Elephant Analytics
Summary

Abraxas is now trading at an enterprise value of approximately 4.0x estimated 2019 EBITDA at $50 oil.

It's also trading at around 0.8x the estimated PV-10 of its reserves at current strip prices.

A price of $1.85 per share would translate into 5.0x 2019 EBITDA at $50 oil and 1.0x PV-10 at current strip prices.

There is some risk of another equity offering to give Abraxas additional space under its credit facility.

This may reduce its value slightly (such as from $1.85 to $1.70) with the same metrics.

Abraxas Petroleum (AXAS) has seen its share price fall significantly recently along with many other E&P companies. This has left it trading at only around 4.0x estimated 2019 EBITDA at $50 oil and at around 0.8x the estimated PV-10 of its reserves at strip prices.

The main risk is that it issues additional equity in order to give it additional breathing room with its credit facility (currently around 73% utilized). This would modestly reduce its potential value, but would still be significantly above its current share price.

Notes On Valuation

Abraxas had $149 million in long-term debt at the end of Q3 2018. It also had a working capital deficit of $27 million at that time, after excluding the value of the derivatives. At the end of Q3 2018, Abraxas' derivatives had significant negative value (around negative $40 million). This has changed to around positive $8 million now.

Abraxas' market capitalization is approximately $208 million now. Adding those items together results in an enterprise value of approximately $376 million for Abraxas. This assumes the monetisation of its hedges for calculation purposes.

I've noted before that Abraxas is expected to generate around $98 million EBITDA in 2019 at $50 WTI oil without hedges. This results in Abraxas having an enterprise value that's approximately 3.8x 2019 EBITDA at the moment, which seems quite cheap given that it's based on $50 oil. Even allowing for a bit of cash burn during 2019 at $50 oil, that would still leave Abraxas at only around 4.0x estimated 2019 EBITDA.

Another way to look at it is that Abraxas estimated that its reserves had a PV-10 of approximately $558 million in the middle of 2018, based on $57.50 oil. Lower oil prices would reduce this value by a bit, but I estimate that Abraxas probably has an enterprise value of approximately 0.8x the PV-10 of its reserves at current strip prices.

Risks

Abraxas looks undervalued based on the metrics mentioned above, even with the fall in oil prices. I'd argue that its value should be closer to $2 per share in the current oil price environment. For example a $1.85 per share price would result in an enterprise value that is around 5.0x estimated 2019 EBITDA at $50 oil. It also would result in an enterprise value that's approximately 1.0x PV-10 at current strip prices.

I expect Abraxas' share price to trend back toward that level ($1.85 per share) over time assuming a stable oil pricing environment. However, there's the danger of equity offerings reducing its potential share value.

Abraxas had $146 million outstanding under its credit facility at the end of Q3 2018, and is projected to have modest cash burn in 2019 at $50 oil if it sticks with a capital expenditure budget around $108 million. That could push its outstanding credit facility borrowings to around $160 million by the end of 2019.

Abraxas currently has a $200 million borrowing base for its credit facility. That borrowing base was redetermined in a stronger oil price environment though, so it's uncertain whether Abraxas' additional development activity will be enough to offset the impact of lower prices on its borrowing base redeterminations.

Effect Of Potential Dilution

Due to that factor, there's a risk that Abraxas issues equity to give it more breathing room in terms of borrowing capacity. Overall, Abraxas' debt load isn't bad. Credit facility borrowings would be around 1.5x to 1.6x EBITDA (depending on whether hedges were included in the calculation) by the end of 2019. The variability of the credit facility borrowing base can cause some uncertainty though. Abraxas ended up issuing equity at a low price ($1.00) in 2016 when its borrowing base was reduced to slightly below its outstanding borrowings.

If Abraxas were to end up issuing 30 to 35 million shares at $1.00 per share now (as an example), then its targeted value per share in the current oil price environment would go down from around $1.85 per share to $1.70 per share.

Conclusion

Abraxas Petroleum appears to be quite cheap now even if one assumes a $50 oil environment. There's some risk that it does another equity offering though, which would reduce its potential value slightly, albeit at still well above current levels.

I consider Abraxas a buy at its current share price, but wouldn't commit overly much due to the potential dilution issue. However, if it does an equity offering and its share price goes down some more, it may turn into a strong buy.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AXAS over 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.