Abraxas Petroleum: Reviewing Its Second Quarter Earnings And Second Half Outlook

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

Abraxas' total production fell 12% and its oil production fell 6% from Q1 to Q2 2019.

This was due to its non-operated Bakken divestiture and various shut-ins.

Second half oil production should rebound, although total production may be lower than in the first half.

Abraxas' non-oil production is generating minimal revenues right now, and it's contemplating switching to oil production guidance.

It should be able to deliver positive cash flow in the second half of 2019 due to its frontloaded capex budget.

Abraxas Petroleum (AXAS) reported Q2 2019 earnings recently, with its total production declining significantly due to shut-ins and its non-operated Bakken divestiture. Lease operating expenses also were elevated during the quarter due to frac protection costs and the decision to invest in some maintenance work on shut-in Bakken wells.

Abraxas' oil production should rebound a bit in the second half as its shut-in oil wells start producing again, along with contributions from its new wells. Total production may fall in the second half compared to the first half, but Abraxas' non-oil production is contributing little in the way of revenues anyway.

Q2 2019 Results

Abraxas reported 9,572 BOEPD in average total production in Q2 2019, down -12% from Q1 2019's average production levels. This drop in production was influenced by Abraxas' sale of non-operated Bakken assets (350 BOEPD) and its shut-in of 650 BOEPD in West Texas natural gas production due to low realized prices. As well, Abraxas shut-in some Bakken wells in order to frac its Lillibridge NW pad. Abraxas' oil production went down by a smaller -6% from Q1 2019 to Q2 2019.

The four Lillibridge NW pad wells have only demonstrated OK initial production, averaging 745 BOEPD per well over the first month, although Abraxas notes that production is continuing to increase.

Abraxas' lease operating expenses ended up being fairly high during the quarter, at $9.26 per BOE. This was attributed to frac protection costs as well as the workovers that Abraxas did on its older Lillibridge wells during the downtime.

Notes On Guidance

Abraxas is contemplating switching to guidance for oil production rather than total production. This is due to its non-oil production levels being more volatile due to third-party processing issues and shut-ins (such as its West Texas gas production), and also that its non-oil production currently also contributing little to Abraxas's revenues.

Abraxas realized around only $2.65 per BOE for its non-oil production during Q2 2019, which meant that 29% of its production only contributed 2% of its revenues during the quarter. Prices were particularly poor in the Delaware Basin, where its non-oil production only realized $0.63 per BOE during the quarter.

While non-oil production doesn't matter much for Abraxas at the moment, this could change again in the future, so that production shouldn't be ignored forever. Abraxas received around $12.66 per BOE for its non-oil production in 2018, when non-oil production accounted for 11% of its revenue.

Abraxas averaged 7,020 barrels per day of oil production during the first half of 2019, so it will probably end up at the low end (or below) its original implied guidance range of 7,245 to 7,935 barrels per day of oil production during 2019. This is based off of its total guidance for 10,500 BOEPD to 11,500 BOEPD in average production during 2019, with 69% of that production being oil. Some of that projected miss is due to its sale of non-operated Bakken assets though.

With lease operating expenses averaging $8.54 per BOE during the first half of 2019, it's very likely that those costs will end up above Abraxas' $4.00 to $6.00 per BOE full-year guidance range as well.

2019 Projections

If Abraxas ends up with around 10,000 BOEPD in total production during 2019 (with 7,050 barrels per day of oil production), then it may end up with around $135 million in revenue net of hedges at current strip prices. This assumes that Abraxas' oil production increases a bit during the second half of the year when its shut-in Lillibridge wells return to production, as well as its new Hackberry and Woodberry wells in the Delaware Basin starting to provide production.

Abraxas' revenue contributions from natural gas and NGLs are expected to remain fairly minimal during the remainder of the year.

Units

Price Per Unit

Revenue ($ Million)

Oil (Barrels)

2,573,250

$52.50

$135

Natural Gas [Mcf]

3,832,500

$0.85

$3

NGL (Barrels)

438,000

$5.00

$2

Hedge Value

-$5

Total

$135

Abraxas' lease operating expenses are expected to be lower in the second half of the year, but may still end up averaging around $7.50 to $8.00 per BOE over the full year. Abraxas is thus projected to have around $146 million in cash expenditures during 2019, resulting in around $11 million in cash burn during the year (excluding working capital changes). Abraxas should generate positive cash flow during the second half of 2019 due to its capex budget being concentrated in the first half of the year.

$ Million

Lease Operating Expense

$28

Production Tax

$12

Cash SG&A

$10

Interest Expense

$10

Capital Expenditures

$86

Total

$146

Conclusion

Abraxas appears likely to fall short of its initial guidance for oil production and total production as well as end up with higher than anticipated lease operating expenses. Some of the production shortfall is due to its non-operated Bakken divestiture though, and it's also likely to come closer to meeting oil production expectations than total production expectations.

Despite minimal revenue contributions from its non-oil production (and some negative value hedges), Abraxas should only end up with a modest amount of cash burn in 2019 at mid-to-high $50s oil. It should be able to generate positive cash flow in the second half of 2019 due to its front-loaded capex budget, which will give it a bit more room under its credit facility.

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.