Abraxas Petroleum Restructures Its Debt

Summary

• Abraxas has restructured its second-lien debt into preferred shares and sold its Williston Basin assets to pay off its credit facility debt.
• This leaves it as a debt-free pure-play Delaware Basin producer with Angelo Gordon having voting control and appointing a majority of the Board of Directors.
• Common stockholders are not completely wiped out in the restructuring and are entitled to a small percentage of distribution proceeds from any deemed liquidation event.
• At $0.82 per share, the Delaware Basin assets would need to be worth around $157 million in a deemed liquidation event for the common shares to break even.
• I estimated that the Delaware Basin assets are currently worth around $118.5 million, so efficient development work will be needed for the common shares to have upside.
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Abraxas Petroleum (OTCPK:AXAS) has restructured its second-lien debt into preferred shares and given voting control of the company to Angelo Gordon, the holders of its second-lien debt. This restructuring was largely expected although common shareholders have avoided being entirely wiped out.

Abraxas has also sold its Williston Basin assets to pay off its credit facility debt. As a result, it now has no debt, but the sale price of its Delaware Basin assets will need to be over $100 million for the common stock to have any value in the end. Abraxas is planning on restarting its Permian drilling program in an attempt to help improve the value of its Delaware Basin assets.

Williston Basin Sale

The Williston Basin assets produced approximately 3,200 BOEPD (37% oil, 73% liquids) in Q3 2021. Abraxas sold these assets to Lime Rock Resources for $87.2 million in cash, which is approximately $27,250 per flowing BOE. This sale price appears reasonable given the relatively low oil content of the Williston Basin production and the few remaining development locations in Abraxas's Williston Basin position.

The cash received from this sale will fully repay Abraxas's credit facility, which had $81.7 million outstanding at the end of Q3 2021.

Angelo Gordon Gains Control

Angelo Gordon is essentially gaining control of Abraxas. It is allowed to appoint three directors to the expanded five-member Board of Directors. It also is converting its second-lien debt into preferred stock with an initial preference amount of approximately $137 million. This preferred stock accretes at 6% per annum, compounded quarterly.

Angelo Gordon (through the preferred stock) is also getting around 85% of the voting power for Abraxas and will have voting control.

Future Liquidation And Common Stock

In a future liquidation event, Abraxas common stockholders are getting 5% of any distribution above $100 million until Angelo Gordon's preference amount (currently $137 million) is fully covered. Common stockholders will receive 25% of any distribution above that amount.

Distribution Value ($ Million)	Value to Abraxas Shareholders (per Share)
$100	$0.00
$125	$0.15
$150	$0.61
$175	$1.35
$200	$2.09

Click to enlarge

If a liquidation event happened immediately, then a $100 million distribution would result in a value of $0 for Abraxas's common shareholders. A $150 million distribution would result in a value of $0.61 per share for common shareholders. A $200 million distribution would result in a value of $2.09 per share for common shareholders. This per share value at various distribution levels will go down a bit over time as Angelo Gordon's preferred shares accrete value. Abraxas's common shares are currently priced (at $0.82 per share) for a $157 million distribution.

Value of Delaware Basin Assets

Abraxas's Delaware Basin assets averaged production of around 2,400 BOEPD (55% oil, 67% liquids) during Q3 2021. Permian Basin production with that oil percentage is valued at around $35,000 per flowing BOE in the current market environment, making the value of the current production around $84 million.

Abraxas also previously reported having 11,500 net acres in the Delaware Basin. Higher quality Delaware Basin acreage is being valued at around $7,000 per net acre independent of production levels, but Abraxas's past results in the Delaware Basin haven't been as strong. If its acreage was valued at $3,000 per net acre, that would bring the value of its Delaware Basin assets up to $118.5 million.

That valuation would result in Abraxas's common shares having pretty nominal value ($0.11 per share). Thus, for the common shares to have upside (or to even be worth their current amount), Abraxas will need to efficiently increase production and generate improved well-level results (to increase the value of its land).

Conclusion

Abraxas has restructured its second-lien debt into preferred shares and also sold its Williston Basin assets to pay off its first-lien debt. Angelo Gordon is now effectively in control of Abraxas as well.

Common shareholders have avoided being entirely wiped out by the restructuring, but it appears that Abraxas will need to improve the value of its Delaware Basin assets by 30+% through efficient development for the common stock to be worth the current $0.82 per share.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.