10-Q 1 abp10q201.txt 10-Q PERIOD ENDED JUNE 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2001 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-19118 ABRAXAS PETROLEUM CORPORATION ---------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Nevada 74-2584033 --------------------------- ----------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization Identification Number) 500 N. Loop 1604, East, Suite 100, San Antonio, Texas 78232 --------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (210) 490-4788 ------------------ Not Applicable (Former name, former address and former fiscal year, if changed since last report) ------------------------------------------------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the restraint was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X or No __ The number of shares of the issuer's common stock outstanding as of August 10, 2001, was: Class Shares Outstanding Common Stock, $.01 Par Value 25,988,832 1 of 27 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES FORM 10 - Q INDEX PART I FINANCIAL INFORMATION ITEM 1 - Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 2001 and December 31, 2000..........................................3 Consolidated Statements of Operations - Three and Six Months Ended June 30, 2001 and 2000..............5 Consolidated Statements of Stockholders' Equity (Deficit) - Six months ended June 30, 2001.................................6 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000........................7 Notes to Consolidated Financial Statements.......................8 PART II OTHER INFORMATION ITEM 1 - Legal proceedings...................................................26 ITEM 2 - Changes in Securities...............................................26 ITEM 3 - Defaults Upon Senior Securities.....................................26 ITEM 4 - Submission of Matters to a Vote of Security Holders.................26 ITEM 5 - Other Information...................................................26 ITEM 6 - Exhibits and Reports on Form 8-K....................................26 Signatures ..................................................27 2
Abraxas Petroleum Corporation and Subsidiaries Part 1- Financial Information Item 1 - Financial Statements Consolidated Balance Sheets June 30, December 31, 2001 2000 (Unaudited) ------------------------------------------ (In thousands) Current assets: Cash ................................................................. $ 3,013 $ 2,004 Account receivable, less allowance for doubtful accounts ............. 10,115 20,718 Equipment inventory ............................................... 1,509 1,411 Other current assets .............................................. 275 179 Deferred tax asset................................................. 993 - ------------------------------------------ Total current assets ................................................. 15,905 24,312 Property and equipment: Oil and gas properties, full cost method of accounting: Proved........................................................... 500,504 481,802 Unproved, not subject to amortization............................ 10,778 12,831 Other property and equipment.......................................... 63,852 63,720 ------------------------------------------ Total................................................... 575,134 558,353 Less accumulated depreciation, depletion, and amortization...... 269,245 253,569 ------------------------------------------ Total property and equipment - net............................... 305,889 304,784 Deferred financing fees, net of accumulated amortization of $7,827 and $6,917 at June 30, 2001 and December 31, 2000 respectively .... 4,686 5,556 Other assets ......................................................... 2,343 908 ------------------------------------------ Total assets ...................................................... $ 328,823 $ 335,560 ========================================== See accompanying notes to consolidated financial statements
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Abraxas Petroleum Corporation and Subsidiaries Part 1- Financial Information Item 1 - Financial Statements Consolidated Balance Sheets (continued) June 30, December 31, 2001 2000 (Unaudited) ------------------------------------------- (In thousands) Current liabilities: Accounts payable..................................................... $ 11,673 $ 22,721 Oil and gas production payable....................................... 4,713 6,281 Accrued interest..................................................... 6,078 6,079 Other accrued expenses............................................... 888 1,932 Hedge liability...................................................... 5,255 - Current maturities of long-term debt................................. 886 1,128 -------------------- ---------------------- Total current liabilities ......................................... 29,493 38,141 Long-term debt.......................................................... 271,709 266,441 Deferred income taxes .................................................. 24,451 21,079 Hedge liability......................................................... 2,196 - Future site restoration ............................................... 4,399 4,305 Minority interest in foreign subsidiary ................................ 13,564 12,097 Stockholders' equity (Deficit): Common stock, par value $.01 per share - authorized 200,000,000 shares; issued 26,154,715 and 22,759,852 shares at June 30, 2001 and December 31, 2000, respectively ............................... 261 227 Additional paid-in capital .......................................... 128,990 130,409 Accumulated deficit ................................................. (132,395) (131,376) Treasury stock, at cost, 165,883 shares at June 30, 2001 and December 31, 2000, respectively ................................... (964) (964) Accumulated other comprehensive loss................................. (12,881) (4,799) -------------------- ---------------------- Total stockholders' equity (deficit).................................... (16,989) (6,503) -------------------- ---------------------- Total liabilities and stockholders' equity (deficit)............. $ 328,823 $ 335,560 ==================== ====================== See accompanying notes to consolidated financial statements
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Abraxas Petroleum Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2001 2000 2001 2000 ------------------- ----------------- ----------------- ------------------- (In thousands except per share data) Revenue: Oil and gas production revenues ................... $ 20,127 $ 15,501 $ 48,376 $ 31,127 Gas processing revenues ........................... 498 645 934 1,402 Rig revenues ...................................... 225 119 408 250 Other ............................................ 266 22 484 225 ------------------- ----------------- ----------------- ------------------- 21,116 16,287 50,202 33,004 Operating costs and expenses: Lease operating and production taxes .............. 4,332 4,301 9,191 8,930 Depreciation, depletion, and amortization ......... 8,288 8,518 17,129 17,466 Rig operations .................................... 191 196 344 384 General and administrative ........................ 1,575 1,643 3,684 3,082 General and administrative (Stock-based compensation) ................................... (2,332) - (1,401) - ------------------- ----------------- ----------------- ------------------- 12,054 14,658 28,947 29,862 ------------------- ----------------- ----------------- ------------------- Operating income ..................................... 9,062 1,629 21,255 3,142 Other (income) expense: Interest income ................................... (12) (267) (28) (327) Amortization of deferred financing fee ............ 455 508 910 1,015 Interest expense .................................. 7,829 7,892 15,610 15,665 Gain on sale of equity investment.................. - - - (33,983) Other expense ..................................... - - 16 436 ------------------- ----------------- ----------------- ------------------- 8,272 8,133 16,508 (17,194) ------------------- ----------------- ----------------- ------------------- Net income (loss) from operations before taxes and extraordinary item ............................. 790 (6,504) 4,747 20,336 Income tax expense (benefit).......................... 1,509 31 4,285 (296) Minority interest in income of consolidated foreign subsidiary ........................................ 555 204 1,481 215 ------------------- ----------------- ----------------- ------------------- Net income (loss) before extraordinary item ...... (1,274) (6,739) (1,019) 20,417 Extraordinary item: Debt extinguishment and restructure................ - 1,326 - 1,326 ------------------- ----------------- ----------------- ------------------- Net income (loss) ................................ $ (1,274) $ (5,413) $ (1,019) $ 21,743 =================== ================= ================= =================== Earnings (loss) per common share: Net Income (loss) before extraordinary item... $ (0.05) $ (0.30) $ (0.04) $ 0.90 Extraordinary item ........................... - 0.06 - 0.06 ------------------- ----------------- ----------------- ------------------- Net income (loss) per common share ................ $ (0.05) $ (0.24) $ (0.04) $ 0.96 =================== ================= ================= =================== Earnings (loss) per common share assuming dilution: Net Income (loss) before extraordinary item... $ (0.05) $ (0.30) $ (0.04) $ 0.43 Extraordinary item ........................... - 0.06 - 0.03 ------------------- ----------------- ----------------- ------------------- Net income (loss) per common share ................ $ (0.05) $ (0.24) $ (0.04) $ 0.46 =================== ================= ================= =================== See accompanying notes to consolidated financial statements
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ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands except share amounts) Accumulated Common Stock Treasury Stock Additional Other ---------------------- --------------------- Paid-In Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Income (Loss) Total ---------------------- --------------------- ------------- ------------- -------------- ----------- Balance at December 31, 2000.. 22,759,852 $ 227 165,883 $ (964) $ 130,409 $(131,376) $ (4,799) $ (6,503) Comprehensive income (loss): Net loss................. - - - - - (1,019) - (1,019) Other comprehensive income: Hedge loss............. - - - - - - (6,043) (6,043) Foreign currency translation - - - - - - (2,039) (2,039) adjustment .......... ----------- Comprehensive income (loss) - - - - - - - (9,101) Stock-based compensation... - - - - (1,401) - - (1,401) Stock options exercised.... 8,375 - - - 16 - - 16 Issuance of common stock for CVRs ................ 3,386,488 34 - - (34) - - - ---------- ------------ -------- ----------- ------------- ------------- ------------- ------------ Balance at June 30,2001 (unaudited)................ 26,154,715 $ 261 165,883 $ (964) $ 128,990 $(132,395) $ (12,881) $ (16,989) ========== ============ ======== =========== ============= ============= ============= ============ See accompanying notes to consolidated financial statements
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Abraxas Petroleum Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, ------------------------- 2001 2000 ------------ ------------ (In Thousands) Operating Activities Net income (loss) .......................................................... $ (1,019) $ 21,743 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Minority interest in income of foreign subsidiary ..................... 1,481 215 Gain on sale of equity investment ..................................... -- (33,983) Extraordinary gain on extinguishment of debt .......................... -- (1,326) Depreciation, depletion, and amortization ............................. 17,129 17,466 Amortization of deferred financing fees ............................... 909 1,015 Stock-based compensation .............................................. (1,401) -- Deferred income tax expense (benefit) ................................. 3,639 (479) Issuance of common stock for compensation ............................. -- 46 Changes in operating assets and liabilities: Accounts receivable ............................................... 10,307 (4,676) Equipment inventory and other assets .............................. (98) (687) Accounts payable and accrued expenses ............................. (13,442) 111 Other ............................................................. (1,099) -- ----------- ---------- Net cash provided (used) by operating activities .......................... 16,406 (555) Investing Activities Capital expenditures, including purchases and development of properties ... (30,433) (25,933) Proceeds from sale of oil and gas properties ............................... 9,695 842 Proceeds from sale of equity investment .................................... -- 34,482 ----------- ---------- Net cash provided (used) by investing activities ........................... (20,738) 9,391 Financing Activities Proceeds from long-term borrowings ......................................... 11,316 4,750 Payments on long-term borrowings ........................................... (6,188) (8,329) Exercise of stock options .................................................. 16 -- Deferred financing fees .................................................... (10) (544) Other ...................................................................... 183 -- ----------- ---------- Net cash provided (used) by financing activities ........................... 5,317 (4,123) Effect of exchange rate changes on cash .................................... 24 (170) ----------- ---------- Increase in cash ........................................................... 1,009 4,543 Cash at beginning of period ................................................ 2,004 3,799 ----------- ---------- Cash at end of period ...................................................... $ 3,013 $ 8,342 =========== ========== Supplemental Disclosures Supplemental disclosures of cash flow information: Interest paid ......................................................... $ 15,702 $ 15,633 ========== ========== Taxes paid ............................................................ $ 505 $ -- ========== ========== See accompanying notes to consolidated financial statements
7 Abraxas Petroleum Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2001 Note 1. Basis of Presentation The accounting policies followed by Abraxas Petroleum Corporation and its subsidiaries (the "Company" or "Abraxas") are set forth in the notes to the Company's audited financial statements in the Annual Report on Form 10-K filed for the year ended December 31, 2000. Such policies have been continued without change. Also, refer to those financial statements and to the notes to those financial statements for additional details of the Company's financial condition, results of operations, and cash flows. The accompanying interim consolidated financial statements have not been audited by independent accountants, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the financial position and results of operations. Any and all adjustments are of a normal and recurring nature. The results of operations for the 2001 interim periods are not necessarily indicative of results that may be expected for the full year The consolidated financial statements include the accounts of the Company, its wholly-owned foreign subsidiary Canadian Abraxas Petroleum Limited ("Canadian Abraxas") and its 48.3% owned foreign subsidiary Grey Wolf Exploration Inc. ("Grey Wolf"). Minority interest represents the minority shareholders' proportionate share of the equity and income of Grey Wolf. The Company has begun an exchange offer to purchase additional ownership interest in Grey Wolf. Canadian Abraxas' and Grey Wolf's assets and liabilities are translated to U.S. dollars at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of shareholders' equity Note 2. Extraordinary Item In June 2000, the Company retired $7.1 million of its 11.5% Senior Secured Notes, due 2004 at a discount of $1.7 million. The transaction was consummated at the current market value of the notes Note 3. Long-Term Debt
Long-term debt consists of the following: June 30 December 31 2001 2000 ----------------------------------- (In thousands) 11.5% Senior Secured Notes due 2004 ("Old Notes") .................... $ 801 $ 801 12.875% Senior Secured Notes due 2003 ("First Lien Notes") ........... 63,500 63,500 11.5% Senior Secured Notes due 2004 ("Second Lien Notes") ............ 190,178 190,178 Credit facility payable to a Canadian bank (due 2002), providing for borrowings to approximately $17,600,000 at the bank's prime rate plus .125%, 6.375% at June 30, 2001, secured by the assets of 8,572 7,859 Grey Wolf........................................................... Production Payment..................................................... 9,544 5,231 ------------------- --------------- 272,595 267,569 Less current maturities ........................................ 886 1,128 ------------------- --------------- $ 271,709 $ 266,441 =================== ===============
8 Old Notes. On November 14, 1996, the Company consummated the offering of $215.0 million of it's 11.5% Senior Notes due 2004, Series A, which were exchanged for the Series B Notes in February 1997. On January 27, 1998, the Company completed the sale of $60.0 million of its 11.5% Senior Notes due 2004. The Series B Notes and the Series C Notes were subsequently combined into $275.0 million in principal amount of the Old Notes in June 1998. Interest on the Old Notes is payable semi-annually in arrears on May 1 and November 1 of each year at the rate of 11.5% per annum. The Old Notes are redeemable, in whole or in part, at the option of the Company, on or after November 1, 2000, at the redemption prices set forth below, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period commencing on November 1 of the years set forth below: Year Percentage ---- ---------- 2001....................................................... 102.875% 2002 and thereafter........................................ 100.000% The Old Notes are joint and several obligations of Abraxas and Canadian Abraxas and rank pari passu in right of payment to all existing and future unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank senior in right of payment to all future subordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes are, however, effectively subordinated to the First Lien Notes to the extent of the value of the collateral securing the First Lien Notes and to the Second Lien Notes to the extent of the value of the collateral securing the Second Lien Notes. The Old Notes are unconditionally guaranteed, on a senior basis by Sandia Oil and Gas Company, a wholly owned subsidiary of the Company.. The guarantee is a general unsecured obligation of Sandia and ranks pari passu in right of payment to all unsubordinated indebtedness of Sandia and senior in right of payment to all subordinated indebtedness of Sandia. The guarantee is effectively subordinated to the First Lien Notes and the Second Lien Notes to the extent of the value of the collateral securing the First Lien Notes and the Second Lien Notes. Upon a Change of Control, as defined in the Old Notes Indenture, each holder of the Old Notes will have the right to require the Company to repurchase all or a portion of such holder's Old Notes at a redemption price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. In addition, the Company will be obligated to offer to repurchase the Old Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase in the event of certain asset sales. First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5 million of the First Lien Notes. Interest on the First Lien Notes is payable semi-annually in arrears on March 15 and September 15, commencing September 15, 1999. The First Lien Notes are redeemable, in whole or in part, at the option of Abraxas on or after March 15, 2001, at the redemption prices set forth below, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period commencing on March 15 of the years set forth below: Year Percentage ----- ---------- 2001.................................................. 103.000% 2002 and thereafter................................... 100.000% The First Lien Notes are senior indebtedness of Abraxas secured by a first lien on substantially all of the crude oil and natural gas properties of Abraxas and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are unconditionally guaranteed on a senior basis, jointly and severally, by Canadian Abraxas, Sandia and Wamsutter Holdings, Inc., a wholly-owned subsidiary of the Company. The guarantees are secured by substantially all of the crude oil and natural gas properties of the guarantors and the shares of Grey Wolf owned by Abraxas and Canadian Abraxas. Upon a Change of Control, as defined in the First Lien Notes Indenture, each holder of the First Lien Notes will have the right to require Abraxas to repurchase such holder's First Lien Notes at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. In addition, Abraxas will be obligated to offer to repurchase the First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the date of redemption in the event of certain asset sales. 9 The First Lien Notes indenture contains certain covenants that limit the ability of Abraxas and certain of its subsidiaries, including the guarantors of the First Lien Notes (the "Restricted Subsidiaries") to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of Abraxas. The First Lien Notes indenture provides, among other things, that Abraxas may not, and may not cause or permit the Restricted Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to exist or become effective any encumbrance or restriction on the ability of such subsidiary to pay dividends or make distributions on or in respect of its capital stock, make loans or advances or pay debts owed to Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted Subsidiary or transfer any of its assets to Abraxas or any other Restricted Subsidiary except in certain situations as described in the First Lien Notes indenture. Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas consummated an exchange offer whereby $269,699,000 of the Old Notes were exchanged for $188,778,000 of the Second Lien Notes, and 16,078,990 shares of Abraxas common stock and contingent value rights. An additional $5,000,000 of the Second Lien Notes were issued in payment of fees and expenses. Interest on the Second Lien Notes is payable semi-annually in arrears on May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas on or after December 1, 2000, at the redemption prices set forth below, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period commencing on December 1 of the years set forth below: Year Percentage ----- ---------- 2001................................................... 102.875% 2002 and thereafter.................................... 100.000% The Second Lien Notes are senior indebtedness of Abraxas and Canadian Abraxas and are secured by a second lien on substantially all of the crude oil and natural gas properties of Abraxas and Canadian Abraxas and the shares of Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are unconditionally guaranteed on a senior basis, jointly and severally, by Sandia and Wamsutter. The guarantees are secured by substantially all of the crude oil and natural gas properties of the guarantors. The Second Lien Notes are, however, effectively subordinated to the First Lien Notes and related guarantees to the extent the value of the collateral securing the Second Lien Notes and related guarantees and the First Lien Notes and related guarantees is insufficient to pay both the Second Lien Notes and the First Lien Notes. Upon a Change of Control, as defined in the Second Lien Notes Indenture, each holder of the Second Lien Notes will have the right to require Abraxas and Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas will be obligated to offer to repurchase the Second Lien Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the date of redemption in the event of certain asset sales. The Second Lien Notes indenture contains certain covenants that limit the ability of Abraxas and Canadian Abraxas and certain of their subsidiaries, including the guarantors of the Second Lien Notes (the "Restricted Subsidiaries") to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of Abraxas or Canadian Abraxas. The Second Lien Notes indenture provides, among other things, that Abraxas and Canadian Abraxas may not, and may not cause or permit the Restricted Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to exist or become effective any encumbrance or restriction on the ability of such subsidiary to pay dividends or make distributions on or in respect of its 10 capital stock, make loans or advances or pay debts owed to Abraxas, Canadian Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary except in certain situations as described in the Second Lien Notes indenture Note 4. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended June 30, Six Months Ended June 30, ------------------------------------- ----------------------------------- 2001 2000 2001 2000 -------------- --------------- ------------- ------------- Numerator: Net income (loss) from continuing operations $ (1,274) $ (6,739) $ (1,019) $ 20,417 -------------- --------------- ------------- ------------- Numerator for basic and diluted earnings per share - income (loss) continuing operations (1,274) (6,739) (1,019) 20,417 Extraordinary item - 1,326 - 1,326 -------------- -------------- ------------ ------------- Numerator for basic earnings per share - income (loss) applicable to common stock (1,274) (5,413) (1,019) 21,743 Denominator: Denominator for basic earnings per share - Weighted-average shares 23,616,197 22,651,701 23,106,111 22,648,946 Effect of dilutive securities: Stock options, warrants and CVR's - - - 24,643,676 -------------- -------------- ------------- ------------- Dilutive potential common shares Denominator for diluted earnings per share - adjusted weighted-average shares and assumed Conversions 23,616,197 22,651,701 23,106,111 47,292,622 Basic earnings (loss) per share: Income (loss) from continuing operations $ (0.05) $ (0.30) $ (0.04) $ 0.90 Extraordinary item - 0.06 - 0.06 ------------- -------------- ------------- ------------- $ (0.05) $ (0.24) $ (0.04) $ 0.96 ============= ============== ============= ============= Diluted earnings (loss) per share: Income (loss) from continuing operations $ (0.05) $ (0.30) $ (0.04) $ 0.43 - 0.06 - 0.03 ------------- -------------- ------------- ------------- $ (0.05) $ (0.24) $ (0.04) $ 0.46 ============= ============== ============= =============
For the three months and six months ended June 30, 2001 and for the three months ended June 30, 2000, none of the shares issuable in connection with stock options or warrants are included in diluted shares. Inclusion of these shares would be antidilutive due to losses incurred in the periods. Had there not been losses in these periods, dilutive shares would have been 1,406,731 and 1,334,232 shares for the three and six months ended June 30, 2001 and 24,642,260 shares for the three months ended June 30, 2000. Contingent Value Rights ("CVRs") As part of the exchange offer consummated by the Company in December 1999, Abraxas issued contingent value rights or CVRs, which entitled the holders to receive up to a total of 105,408,978 of Abraxas common stock under certain circumstances as defined. On May 21, 2001, Abraxas issued 3,386,488 shares upon the expiration of the CVRs. 11 Note 5. Summary Financial Information of Canadian Abraxas Petroleum Ltd. The following is summary financial information of Canadian Abraxas, a wholly owned subsidiary of Abraxas at June 30, 2001. Canadian Abraxas is jointly and severally liable with Abraxas for the entire balance of the Old Notes ($ 801,000) and the Second Lien Notes ($190.2 million) and is a guarantor of the Second Lien Notes ($ 63.5 million). The Company has not presented separate financial statements and other disclosures concerning Canadian Abraxas because management has determined that such information is not material to the holders of the Old Notes, the First Lien Notes and the Second Lien Notes.
BALANCE SHEET Assets Liabilities and Shareholders Equity -------------------------------------------- --------------------------------------------------- (In Thousands) Total current assets........ $ 1,972 Total current liabilities....... $ 3,797 Oil and gas properties...... 140,027 11.5% Notes due 2004........... 52,629 Other assets................ 2,072 Note payable to Abraxas......... 17,525 ------------ Other liabilities............... 23,967 $ 144,071 Equity.......................... 46,153 ============ ----------- $ 144,071 ===========
STATEMENT OF OPERATIONS Revenues .................................. $ 17,451 Operating costs and expenses .............. 12,204 Interest expense .......................... 3,689 Other expense.............................. 215 Income tax expense ........................ 1,725 ---------------- Net income (loss)....................... $ (382) ================ Note 6. Business Segments Business segment information about the Company's second quarter operations in different geographic areas is as follows:
Three Months Ended June 30, 2001 ------------------------------------------------------------- U.S. Canada Total ------------------ ----------------- ------------------- (In thousands) Revenues ............................... $ 9,818 $ 11,298 $ 21,116 ================== ================ =================== Operating profit........................ $ 4,660 $ 3,395 $ 8,055 ================== ================ General Corporate................................................................. 1,007 Interest expense and amortization of deferred financing fees........................................................ (8,272) ------------------- Income before income taxes........................................................ $ 790 ===================
Three Months Ended June 30, 2000 ------------------------------------------------------------- U.S. Canada Total ------------------ ----------------- ------------------- (In thousands) Revenues ............................... $ 4,997 $ 10,504 $ 15,501 ================== ================= =================== Operating profit ....................... $ 400 $ 2,282 $ 2,682 ================== ================= General Corporate................................................................. (1,053) Interest expense and amortization of deferred financing fees........................................................ (8,133) ------------------- Income before income taxes........................................................ $ (6,504) ===================
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Six Months Ended June 30, 2001 ------------------------------------------------------------- U.S. Canada Total ------------------ ----------------- ------------------- (In thousands) Revenues ............................... $ 23,035 $ 27,167 $ 50,202 ================== ================= =================== Operating profit........................ $ 11,853 $ 10,641 $ 22,494 ================== ================= General Corporate................................................................. (1,239) Interest expense and amortization of deferred financing fees........................................................ (16,508) ------------------- Income before income taxes........................................................ $ 4,747 ===================
Six Months Ended June 30, 2000 ------------------------------------------------------------- U.S. Canada Total ------------------ ----------------- ------------------- (In thousands) Revenues ............................... $ 11,283 $ 21,721 $ 33,004 ================== ================= =================== Operating profit (loss)................. $ 1,724 $ 3,227 $ 4,951 ================== ================= General Corporate................................................................. (1,809) Interest expense and amortization of deferred financing fees........................................................ (16,353) Other Income...................................................................... 33,547 ------------------- Income before income taxes........................................................ $ 20,336 ===================
At June 30, 2001 ------------------------------------------------------------- U.S. Canada Total ------------------ ----------------- ------------------- (In Thousands) Identifiable assets at June 30, 2001... $ 134,680 $ 185,851 $ 320,531 ================== ================= Corporate assets.................................................................. 8,292 ------------------- Total assets ..................................................................... $ 328,823 ===================
At December 31, 2000 ------------------------------------------------------------- U.S. Canada Total ------------------ ----------------- ------------------- (In Thousands) Identifiable assets at December 31, 2000... $ 132,327 $ 197,229 $ 329,556 ================== ================= Corporate assets.................................................................. 6,004 ------------------- Total assets ..................................................................... $ 335,560 ===================
Note 7. Hedging Program and Derivatives On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under SFAS 133, all derivative instruments are recorded on the balance sheet at fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss on the derivative is recognized currently in earnings. To qualify for hedge accounting, the derivative must qualify either as a fair value hedge, cash flow hedge or foreign currency hedge. Currently, the Company uses only cash flow hedges and the remaining discussion will relate exclusively to this type of derivative instrument. If the derivative qualifies for hedge accounting, the gain or loss on the derivative is deferred in Other Comprehensive Income/(Loss), a component of Stockholders' Equity, to the extent that the hedge is effective. The relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. Hedge accounting is discontinued prospectively when a hedge instrument 13 becomes ineffective. Gains and losses deferred in accumulated Other Comprehensive Income/(Loss) related to a cash flow hedge that becomes ineffective, remain unchanged until the related production is delivered. If the Company determines that it is probable that a hedged transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately. Gains and losses on hedging instruments related to accumulated Other Comprehensive Income/(Loss) and adjustments to carrying amounts on hedged production are included in natural gas or crude oil production revenue in the period that the related production is delivered. The following table sets forth the Company's hedge position as of June 30, 2001.
Time Period Notional Quantities Price Fair Value --------------------------------------- ------------------------------ ------------------------------ ---------------- July 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed price swap $2.60-$2.95 $(7.5) million gas or 1,000 Bbl/day of natural gas or crude oil $18.90 Crude oil
On January 1, 2001, in accordance with the transition provisions of SFAS 133, the Company recorded $31.0 million, net of tax, in Other Comprehensive Income/(Loss) representing the cumulative effect of an accounting change to recognize the fair value of cash flow derivatives. The Company recorded cash flow hedge derivative liabilities of $38.2 million on that date and a deferred tax asset of $7.2 million. During the first six months of 2001, losses before tax of $11.2 million were transferred from Other Comprehensive Income/(Loss) to revenue and the fair value of outstanding liabilities decreased by $19.5 million. For the three months and six months ended June 30, 2001, the ineffective portion of the cash flow hedges were not material For the three months and six months ended June 30, 2001, $14.5 and $(6.0) million, respectively, of deferred net income (loss) on derivative instruments were recorded in Other Comprehensive Income /(Loss). Approximately $4.3 million is expected to be reclassified to earnings during the next twelve-month period. All hedge transactions are subject to the Company's risk management policy, approved by the Board of Directors. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedged transaction, the nature of the risk being hedged and how the hedging instrument's effectiveness will be assessed. Both at the inception of the hedge and on an ongoing basis, the Company assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The fair value of the hedging instrument was determined based on the base price of the hedged item and NYMEX forward price quotes. As of June 30, 2001, a commodity price increase of 10% would have resulted in an unfavorable change in the fair market value of $3.4 million and a commodity price decrease of 10% would have resulted in a favorable change in fair market value of $3.4 million Note 8. Contingencies Litigation - From time to time, the Company is involved in litigation relating to claims arising out of operations in the normal course of business. At June 30, 2001, the Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company. Note 9. Comprehensive Income Comprehensive income includes net income, losses and certain items recorded directly to Stockholder's Equity and classified as Other Comprehensive Income. The following table illustrates the calculation of comprehensive income (loss) for the three and six months ended June 30, 2001: 14
Accumulated Other Comprehensive Comprehensive Income (loss) Income (loss) ---------------------------------- ------------------ Three Six Months Ended Months Ended As of June 30, 2001 ------------------ June 30, 2001 ---------------------------------- (In thousands) Accumulated other comprehensive loss at December 31, 2000.............................. $ (4,799) Net loss.................................... $ (1,019) $ (1,274) Other Comprehensive loss: Hedging derivatives (net of tax) - See Note 7 Cumulative effect of change in accounting principle January 1, 2001................. (30,980) - Reclassification adjustment for settled hedge contracts........................... 9,096 3,083 Change in fair market value of outstanding hedge positions............... 15,841 11,462 ----------------- --------------- (6,043) 14,545 Foreign currency translation adjustment..... (2,039) 5,050 ----------------- --------------- Other comprehensive income (loss).............. (8,082) 19,595 (8,082) ----------------- --------------- Comprehensive income (loss).................... $ (9,101) $ 18,321 ================= =============== ----------------- Accumulated other comprehensive loss at June 30, 2001.............................. $ (12,881) =================
Note 10. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued issued SFAS No. 141, Business Combinations, which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible Assets, which discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Intangible assets with a determinable useful life will continue to be amortized over that period. The amortization provisions apply to goodwill and intangible assets acquired after June 30, 2001. The Company will determine the impact that these standards will have on its consolidated financial statements at the time that the tender offer to purchase additional ownership interest in Grey Wolf is complete. 15 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES PART I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion of our financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in the our Annual Report on Form 10-K filed for the year ended December 31, 2000. Results of Operations The factors which most significantly affect our results of operations are: o the sales prices of crude oil and natural gas o the level of total sales volumes of crude oil and natural gas, and o the level and success of exploration and development activity. Selected operating data. The following table sets forth certain of our operating data for the periods presented.
Three Months Ended June 30 Six Months Ended June 30 2001 2000 2001 2000 -------------------------------------------------------------------------- Operating Revenue (in thousands): Crude Oil Sales $ 3,104 $ 2,577 $ 6,706 $ 5,227 Natural Gas Sales 15,438 11,311 37,864 22,512 Natural Gas Liquids Sales 1,585 1,613 3,806 3,388 Processing Revenue 498 645 934 1,402 Rig Operations 225 119 408 250 Other 266 22 484 225 ----------- ----------- ------------- ------------ $ 21,116 $ 16,287 $ 50,202 $ 33,004 =========== =========== ============= ============ Operating Income (in thousands) $ 9,062 $ 1,629 $ 21,255 $ 3,142 Crude Oil Production (MBBLS) 123 161 255 330 Natural Gas Production (MMCFS) 4,529 5,108 9,156 10,548 Natural Gas Liquids Production (MBBLS) 66 82 144 164 Average Crude Oil Sales Price ($/BBL) $ 25.32 $ 15.98 $ 26.31 $ 15.85 Average Natural Gas Sales Price ($/MCF) $ 3.41 $ 2.21 $ 4.14 $ 2.13 Average Liquids Sales Price ($/BBL) $ 24.10 $ 19.72 $ 26.46 $ 20.62
Comparison of Three Months Ended June 30, 2001 to Three Months Ended June 30, 2000 Operating Revenue. During the three months ended June 30, 2001, operating revenue from crude oil, natural gas and natural gas liquid sales increased to $20.1 million from $15.5 million for the same period in 2000. This increase was primarily attributable to higher prices. After deducting losses from hedging activities of $3.8 million increased commodity prices contributed $6.8 million in additional revenue. Reduced production volumes had a $2.2 million negative impact on revenue. Average sales price for the quarter ended June 30, 2001 were: o $25.32 per Bbl of crude oil, o $24.10 per Bbl of natural gas liquid, and o $ 3.41 per Mcf of natural gas 16 Average sales price for the quarter ended June 30, 2000 were: o $15.98 per Bbl of crude oil o $19.72 per Bbl of natrual gas liquid, and o $ 2.21 per Mcf of natural gas Crude oil production declined from 161.3 Mbbls for the three months ended June 30, 2000 to 122.6 MBbls for the same period of 2001. Natural gas production volumes declined to 4,529 MMcf for the three months ended June 30, 2001 from 5,108 MMcf for the same period of 2000. The declines in crude oil and natural gas production were primarily the result of the sale of non-core properties in Canada during the second half of 2000 and the first half of 2001, and the natural field decline in production. Natural gas liquids volumes declined from 81.9 MBbls for the three months ended June 30, 2000, to 65.8 MBbls for the same period of 2001. The decline in natural gas liquids is primarily due to the natural field decline in production volumes in the areas that we process liquids. Lease Operating Expenses. Lease operating expenses and natural gas processing costs ("LOE") for the three months ended June 30, 2001 remained constant at $4.3 million compared to the same period in 2000. Our LOE on a per MCFE basis for the three months ended June 30, 2001 was $0.77 compared to $0.66 for the same period of 2000. The increase on a per MCFE basis was primarily due to a decline in production volumes. General and Administrative "G&A" Expenses. G&A expenses remained constant at $1.6 million for the three months ended June 30, 2000 and 2001. G&A expense on a per MCFE basis increased from $0.25 for the quarter ended June 30, 2000 to $0.28 for the same period of 2001. The increase in per MCFE cost was primarily due to the decline in production volumes during the second quarter of 2001 compared to the same period of 2000. G&A - stock-based compensation. Effective July 1, 2000, the Financial Accounting Standards Board ("FASB") issued FIN 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of Accounting Principles Board Opinion No. ("APB") 25. Under the interpretation, certain modifications to fixed stock option awards which were made subsequent to December 15, 1998, and not exercised prior to July 1, 2000, require that the awards be accounted for as variable until they are exercised, forfeited, or expired. In March 1999, we amended the exercise price to $2.06 per share on all options with an existing exercise price greater than $2.06 per share. We recognized a credit of approximately ($2.3) million as stock-based compensation expense during the quarter ended June 30, 2001 related to these repricings. The credit recognized in the quarter was due to a decline in the price of our common stock from March 31, 2001 to June 30, 2001. Depreciation, Depletion and Amortization Expenses. Depreciation, depletion and amortization ("DD&A") expense decreased from $8.5 million for the three months ended June 30, 2000, to $8.3 million in the same period of 2001. Our DD&A on a per MCFE basis for the three months ended June 30, 2001 was $1.46 per MCFE compared to $1.30 in 2000. The decline was primarily due to decreased production during the second quarter of 2001. The per MCFE increase was due to higher finding costs added to the full cost pool in 2000 and in the first six months of 2001. Interest Expense. Interest expense remained constant at $7.9 million for the three months ended June 30, 2001 and 2000. Debt levels remained relatively constant for the period ending June 30, 2001 as compared to the same period of 2000. Minority interest. Minority interest in the net income of our 48.3% owned subsidiary, Grey Wolf, increased to $555,000 for the three months ended June 30, 2001 compared to $204,000 for the same period of 2000. This increase was due to increased profitability of Grey Wolf, primarily due to higher commodity prices received in 2001 compared to 2000, and an increase in crude oil and natural gas production for the quarter ended June 30, 2001 as compared to the same period of 2000. Income taxes. Income taxes expense increased to $1.5 million for the three months ended June 30, 2001 compared to $31,000 for the same period of 2000. This increase was due primarily to increased profitability in our Canadian operations, as a result of higher commodity prices. 17 Comparison of Six Months Ended June 30, 2001 to Six Months Ended June 30, 2000 Operating Revenue. During the six months ended June 30, 2001, operating revenue from crude oil, natural gas and natural gas liquid sales increased from $31.1 million in the six months ended June 30, 2000 to $48.4 million for the same period in 2001. The increase in revenue was primarily attributable to higher prices realized during the six months ended June 30, 2001 as compared to the same period of 2000. After deducting losses from hedging activities of $11.2 million, increased prices contributed $21.8 million in additional revenue. Reduced production volumes had a $4.6 million negative impact on revenue. Average sales price for the six months ended June 30, 2001 were: o $26.31 per Bbl of crude oil, o $26.46 per Bbl of natural gas liquid, and o $ 4.14 per Mcf of natural gas Average sales price for the six months ended June 30, 2000 were: o $15.85 per Bbl of crude oil o $20.62 per Bbl of natural gas liquid, and o $ 2.13 per Mcf of natural gas Crude oil production declined from 329.8 MBbls for the six months ended June 30, 2000 to 254.9 MBbls for the same period of 2001. Natural gas production volumes declined to 9,156 MMcf for the six months ended June 30, 2001 from 10,548 MMcf for the same period of 2000. The decline in crude oil and natural gas production was primarily the result of the sale of non-core properties, primarily in Canada, during the second half of 2000 and first half of 2001 and the natural field decline in production. Natural gas liquids volumes declined from 164.4 MBbls for the six months ended June 30, 2000 to 143.9 MBbls for the same period of 2001. The decline in natural gas liquids was primarily due to the natural field decline in production in the areas that we process liquids. Lease Operating Expenses. LOE and natural gas processing expenses increase slightly from $8.9 million for six months ended June 30, 2000 to $9.2 million for the same period in 2001. The increase was primarily due to a general increase in cost of field services. LOE on a per MCFE basis increased to $0.80 per MCFE for the six months ended June 30, 2001 from $0.66 for the same period of 2000. The increase on a per MCFE basis was due to a decline in production volumes. G&A Expenses. G&A expenses increased from $3.1 million for the six months ended June 30, 2000 to $3.7 million for the same period of 2001. The increase in G&A expense was due to the loss of approximately $150,000 in overhead reimbursement from a partnership, the assets of which were sold in March 2000. Other increases were in professional and consulting fees and group insurance cost. G&A on a per MCFE basis increased to $0.32 per MCFE from $0.23 for the same period of 2000. The increase in per MCFE expense was primarily due to lower production volumes for the six months ended June 30, 2001 compared to the same period of 2000 and the increased costs discussed above. G&A - stock-based compensation. Effective July 1, 2000, the Financial Accounting Standards Board ("FASB") issued FIN 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of Accounting Principles Board Opinion No. ("APB") 25. Under the interpretation, certain modifications to fixed stock option awards which were made subsequent to December 15, 1998, and not exercised prior to July 1, 2000, require that the awards be accounted for as variable until they are exercised, forfeited, or expired. In March 1999, we amended the exercise price to $2.06 per share on all options with an existing exercise price greater than $2.06 per share. We recognized a credit of approximately $(1.4) million as stock-based compensation expense during the six months ended June 30, 2001 related to these repricings. The credit is due a decline in the market price of our common stock from December 31, 2000 to June 30, 2001. Depreciation, Depletion and Amortization Expenses. DD&A expense decreased from $17.5 million for the six months ended June 30, 2000, to $17.1 million for the same period of 2001. DD&A expense on a per MCFE basis was $1.48 per MCFE for the six months ended June 30, 2001 compared to $1.29 per MCFE for the six months ended June 30, 2000. The decline is primarily due to decreased production during 18 the first six months of 2001. The per MCFE increase was due to higher finding costs added to the full cost pool in 2000 and the first six months of 2001. Interest Expense. Interest expense remained constant at $15.7 million for the six months ended June 30, 2001 and the six months ended June 30, 2000. Debt levels remained relatively constant during the first six months of 2001 compared to the same period of 2000. Minority interest. Minority interest in the net income of our 48.3% owned subsidiary, Grey Wolf, increased to $1.5 million for the six months ended June 30, 2001 compared to $215,000 for the same period of 2000. This increase was due to increased profitability of Grey Wolf, primarily due to higher commodity prices received in 2001 compared to 2000. Income taxes. Income taxes increased to an expense of $4.3 million for the first six months of 2001 compared to a benefit of $296,000 for the same period of 2000. This increase was due primarily to increased profitability in our Canadian operations, primarily as a result of higher commodity prices. General. Our revenues, profitability and future rate of growth are substantially dependent upon prevailing prices for crude oil and natural gas and the volumes of crude oil, natural gas and natural gas liquids we produce. The prices of natural gas and crude oil and natural gas liquids we receive increased during the first six months of 2001 compared to the same period in 2000. The average natural gas price we realized increased by 94% to $4.14 per MCF during the first six months of 2001, including the impact of a loss from hedging activities of $11.2 million, compared with $2.13 per MCF during the same period of 2000. Crude oil prices, including losses from hedging activities, increased from $15.85 per BBL during the six months of 2000, to $26.31 per BBL for the same period of 2001. Natural gas liquids prices increased to $26.46 per BBL compared to $20.62 per BBL in the first quarter of 2000. In addition, our proved reserves will decline as crude oil, natural gas and natural gas liquids are produced unless we are successful in acquiring properties containing proved reserves or conducts successful exploration and development activities. In the event crude oil, natural gas and natural gas liquid prices decrease or if our production levels decrease, our revenues, cash flow from operations and profitability will be materially adversely affected. Liquidity and Capital Resources General. Capital expenditures excluding property divestitures during the six months ended June 30, 2001 were $30.4 million compared to $25.9 million during the same period of 2000. The table below sets forth the components of these capital expenditures on a historical basis for the six months ended June 30, 2001 and 2000.
Six Months Ended June 30 -------------------------------------------- 2001 2000 ----------------------- -------------------- Expenditure category (in thousands): Acquisitions $ - $ 135 Development 30,046 25,031 Facilities and other 387 767 --------------- --------------- Total $ 30,433 $ 25,933 =============== ===============
At June 30, 2001, we had current assets of $15.9 million and current liabilities of $29.5 million resulting in a working capital deficit of $13.6 million. This compares to a working capital deficit of $13.8 million at December 31, 2000 and working capital of $2.5 million at June 30, 2000. The material components of our current liabilities at June 30, 2001 include trade accounts payable and revenues due third parties of $16.4 million and accrued interest of $6.1 million and hedge liability of $5.3 million. Operating activities during the six months ended June 30, 2001 provided $16.4 million cash compared to using $0.6 million in the same period in 2000. Net income plus non-cash expense items during 2001 and net changes in operating assets and liabilities accounted for most of these funds. Investing used $20.7 million net during the first six months of 2001, $30.4 million of which was utilized for the development of crude oil and natural gas properties and $9.7 million of which was provided from the sale of non-core assets in Canada. This compares to providing $9.4 million during the same period of 2000. The sale of our equity investment in Abraxas Wamsutter, L.P. provided $34.0 million with $25.0 million being utilized for the acquisition and development of crude oil and natural gas properties and $770,000 of which was utilized for facilities and other. Financing activities provided $5.3 million for the first six months of 19 2001 compared to using $4.1 million for the same period of 2000. Financing activities for the first six months of 2001 include advances of $10.5 million from Mirant Americas Energy Capital, LP under our dollar denominated production payment. Our current budget for capital expenditures for the last six months of 2001 other than acquisition expenditures is approximately $12.0 million. Such expenditures will be made primarily for the development of existing properties. Additional capital expenditures may be made for acquisitions of producing properties if such opportunities arise, but we currently have no agreements, arrangements or undertakings regarding any material acquisitions. We have no material long-term capital commitments and are consequently able to adjust the level of our expenditures as circumstances dictate. Additionally, the level of capital expenditures will vary during future periods depending on market conditions and other related economic factors. Should commodity prices remain at depressed levels or decline further, reductions in the capital expenditure budget may be required. Current Liquidity Needs. Since January 1999, we have sought to improve our liquidity in order to allow us to meet our debt service requirements and to maintain and increase existing production. In October 1999, we sold a dollar denominated production payment to Mirant Americas Energy Capital, LP. ("Mirant") for $4.0 million relating to existing natural gas wells in the Edwards Trend in South Texas. During 2000, we sold additional production payments to Mirant for $6.4 million relating to additional natural gas wells in the Edwards Trend. In 2001, we have received $10.5 million from Mirant ($2.5 million in March and an additional $8.0 million in April) relating to additional south Texas gas wells and facilities. In the future, we have the ability to sell additional production payments to Mirant for drilling opportunities in the Edwards Trend. The current arrangement with Mirant allows for cumulative total production payments of up to $50 million. In December 1999, Abraxas and Canadian Abraxas, completed an exchange offer whereby we exchanged the Second Lien Notes, common stock, and contingent value rights for approximately 98.43% of our outstanding Old Notes. The exchange offer reduced our long term debt by $76 million net of fees and expenses. In March 2000, we sold our interest in certain crude oil and natural gas properties that we owned and operated in Wyoming. Simultaneously, Abraxas sold its interest in crude oil and natural gas properties in the same area. Our net proceeds from these transactions were approximately $34.0 million. In March 2001, we announced that we had engaged Credit Lyonnais Securities (USA) Inc. and CIBC World Markets Corp. to assist us in a review of alternative financial strategies. Under the terms of this engagement, we may restructure, refinance or recapitalize some or all of our existing debt and/or issue equity securities. During the first six months of 2001 we had proceeds of approximately $9.1 million from the sale of non-core properties in Canada. We are continuing to rationalize our significant non-core Canadian assets to allow us to continue to grow while reducing our debt. We may sell non-core assets or seek partners to fund a portion of the exploration costs of undeveloped acreage and are considering other potential strategic alternatives. We will have three principal sources of liquidity going forward: (i) cash on hand, (ii) cash flow from operations, and (iii) the production payment from Mirant. We also intend to continue to sell certain non-core properties, although the terms of the First Lien Notes indenture, the Second Lien Notes indenture and the Old Notes indenture substantially limit our use of proceeds from such sales. We expect that the significantly improved commodity prices realized by us compared to those received in the prior year and the expiration of a significant portion of the crude oil and natural gas hedges that we had put in place in earlier years will improve our liquidity position in 2001. Should commodity prices fall, all of our capital expenditures are discretionary and can be delayed to maintain liquidity. While the availability of capital resources cannot be predicted with certainty and is dependent upon a number of factors including factors outside of management's control, management believes that the net cash flow from operations plus cash on hand, cash available under the production payment and the proceeds from the sale of additional non-core properties will be adequate to fund operations and planned capital expenditures. 20 Long-Term Indebtedness. Old Notes. On November 14, 1996, the Company consummated the offering of $215.0 million of it's 11.5% Senior Notes due 2004, Series A, which were exchanged for the Series B Notes in February 1997. On January 27, 1998, the Company completed the sale of $60.0 million of its 11.5% Senior Notes due 2004. The Series B Notes and the Series C Notes were subsequently combined into $275.0 million in principal amount of the Old Notes in June 1998. Interest on the Old Notes is payable semi-annually in arrears on May 1 and November 1 of each year at the rate of 11.5% per annum. The Old Notes are redeemable, in whole or in part, at the option of the Company, on or after November 1, 2000, at the redemption prices set forth below, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period commencing on November 1 of the years set forth below: Year Percentage ---- ---------- 2001...................................................... 102.875% 2002 and thereafter....................................... 100.000% The Old Notes are joint and several obligations of Abraxas and Canadian Abraxas and rank pari passu in right of payment to all existing and future unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank senior in right of payment to all future subordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes are, however, effectively subordinated to the First Lien Notes to the extent of the value of the collateral securing the First Lien Notes and to the Second Lien Notes to the extent of the value of the collateral securing the Second Lien Notes. The Old Notes are unconditionally guaranteed, on a senior basis by Sandia Oil and Gas Company, a wholly owned subsidiary of the Company.. The guarantee is a general unsecured obligation of Sandia and ranks pari passu in right of payment to all unsubordinated indebtedness of Sandia and senior in right of payment to all subordinated indebtedness of Sandia. The guarantee is effectively subordinated to the First Lien Notes and the Second Lien Notes to the extent of the value of the collateral securing the First Lien Notes and the Second Lien Notes. Upon a Change of Control, as defined in the Old Notes Indenture, each holder of the Old Notes will have the right to require the Company to repurchase all or a portion of such holder's Old Notes at a redemption price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. In addition, the Company will be obligated to offer to repurchase the Old Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase in the event of certain asset sales. First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5 million of the First Lien Notes. Interest on the First Lien Notes is payable semi-annually in arrears on March 15 and September 15, commencing September 15, 1999. The First Lien Notes are redeemable, in whole or in part, at the option of Abraxas on or after March 15, 2001, at the redemption prices set forth below, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period commencing on March 15 of the years set forth below: Year Percentage ----- ---------- 2001............................................... 103.000% 2002 and thereafter................................ 100.000% The First Lien Notes are senior indebtedness of Abraxas secured by a first lien on substantially all of the crude oil and natural gas properties of Abraxas and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are unconditionally guaranteed on a senior basis, jointly and severally, by Canadian Abraxas, Sandia and Wamsutter Holdings, Inc., a wholly-owned subsidiary of the Company. The guarantees are secured by substantially all of the crude oil and natural gas properties of the guarantors and the shares of Grey Wolf owned by Abraxas and Canadian Abraxas. Upon a Change of Control, as defined in the First Lien Notes Indenture, each holder of the First Lien Notes will have the right to require Abraxas to repurchase such holder's First Lien Notes at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. In addition, Abraxas will be obligated to offer to repurchase the First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the date of redemption in the event of certain asset sales. 21 The First Lien Notes indenture contains certain covenants that limit the ability of Abraxas and certain of its subsidiaries, including the guarantors of the First Lien Notes (the "Restricted Subsidiaries") to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of Abraxas. The First Lien Notes indenture provides, among other things, that Abraxas may not, and may not cause or permit the Restricted Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to exist or become effective any encumbrance or restriction on the ability of such subsidiary to pay dividends or make distributions on or in respect of its capital stock, make loans or advances or pay debts owed to Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted Subsidiary or transfer any of its assets to Abraxas or any other Restricted Subsidiary except in certain situations as described in the First Lien Notes indenture. Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas consummated an exchange offer whereby $269,699,000 of the Old Notes were exchanged for $188,778,000 of the Second Lien Notes, and 16,078,990 shares of Abraxas common stock and contingent value rights. An additional $5,000,000 of the Second Lien Notes were issued in payment of fees and expenses. Interest on the Second Lien Notes is payable semi-annually in arrears on May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas on or after December 1, 2000, at the redemption prices set forth below, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period commencing on December 1 of the years set forth below: Year Percentage ----- ---------- 2001................................................... 102.875% 2002 and thereafter.................................... 100.000% The Second Lien Notes are senior indebtedness of Abraxas and Canadian Abraxas and are secured by a second lien on substantially all of the crude oil and natural gas properties of Abraxas and Canadian Abraxas and the shares of Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are unconditionally guaranteed on a senior basis, jointly and severally, by Sandia and Wamsutter. The guarantees are secured by substantially all of the crude oil and natural gas properties of the guarantors. The Second Lien Notes are, however, effectively subordinated to the First Lien Notes and related guarantees to the extent the value of the collateral securing the Second Lien Notes and related guarantees and the First Lien Notes and related guarantees is insufficient to pay both the Second Lien Notes and the First Lien Notes. Upon a Change of Control, as defined in the Second Lien Notes Indenture, each holder of the Second Lien Notes will have the right to require Abraxas and Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas will be obligated to offer to repurchase the Second Lien Notes at 100% of the principal amount thereof plus accrued and unpaid interest to the date of redemption in the event of certain asset sales. The Second Lien Notes indenture contains certain covenants that limit the ability of Abraxas and Canadian Abraxas and certain of their subsidiaries, including the guarantors of the Second Lien Notes (the "Restricted Subsidiaries") to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of Abraxas or Canadian Abraxas. The Second Lien Notes indenture provides, among other things, that Abraxas and Canadian Abraxas may not, and may not cause or permit the Restricted Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to exist or become effective any encumbrance or restriction on the ability of such subsidiary to pay dividends or make distributions on or in respect of its capital stock, make loans or advances or pay debts owed to Abraxas, Canadian Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of 22 Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary except in certain situations as described in the Second Lien Notes indenture. Hedging Activities. On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under SFAS 133, all derivative instruments are recorded on the balance sheet at fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss on the derivative is recognized currently in earnings. To qualify for hedge accounting, the derivative must qualify either as a fair value hedge, cash flow hedge or foreign currency hedge. Currently, the Company uses only cash flow hedges and the remaining discussion will relate exclusively to this type of derivative instrument. If the derivative qualifies for hedge accounting, the gain or loss on the derivative is deferred in Other Comprehensive Income/(Loss), a component of Stockholders' Equity, to the extent that the hedge is effective. The relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. Hedge accounting is discontinued prospectively when a hedge instrument becomes ineffective. Gains and losses deferred in accumulated Other Comprehensive Income/(Loss) related to a cash flow hedge that becomes ineffective, remain unchanged until the related production is delivered. If the Company determines that it is probable that a hedged transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately. Gains and losses on hedging instruments related to accumulated Other Comprehensive Income/(Loss) and adjustments to carrying amounts on hedged production are included in natural gas or crude oil production revenue in the period that the related production is delivered. The following table sets forth the Company's hedge position as of June 30, 2001.
Time Period Notional Quantities Price Fair Value --------------------------------------- ------------------------------ ------------------------------ ---------------- July 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed price swap $2.60-$2.95 $(7.5) million gas or 1,000 Bbl/day of natural gas or crude oil $18.90 Crude oil
On January 1, 2001, in accordance with the transition provisions of SFAS 133, the Company recorded $31.0 million, net of tax, in Other Comprehensive Income/(Loss) representing the cumulative effect of an accounting change to recognize the fair value of cash flow derivatives. The Company recorded cash flow hedge derivative liabilities of $38.2 million on that date and a deferred tax asset of $7.2 million. During the first six months of 2001 losses before tax of $11.2 million were transferred from Other Comprehensive Income/(Loss) to revenue and the fair value of outstanding liabilities decreased by $19.5 million. For the three months and six months ended June 30, 2001, the ineffective portion of the cash flow hedges were not material For the three months and six months ended June 30, 2001, $14.5 and $(6.0) million, respectively, of deferred net income (loss) on derivative instruments were recorded in Other Comprehensive Income/(Loss). Approximately $4.3 million is expected to be reclassified to earnings during the next twelve-month period. All hedge transactions are subject to the Company's risk management policy, approved by the Board of Directors. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedged transaction, the nature of the risk being hedged and how the hedging instrument's effectiveness will be assessed. Both at the inception of the hedge and on an ongoing basis, the Company assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The fair value of the hedging instrument was determined based on the base price of the hedged item and NYMEX forward price quotes. As of June 30, 2001, a commodity price increase of 10% would have resulted in an unfavorable change in 23 the fair market value of $3.4 million and a commodity price decrease of 10% would have resulted in a favorable change in fair market value of $3.4 million Net Operating Loss Carryforwards. At December 31, 2000, the Company had, subject to the limitation discussed below, $101.8 million of net operating loss carryforwards for U.S. tax purposes. These loss carryforwards will expire from 2001 through 2020 if not utilized. At December 31, 2000, the Company had approximately $11.4 million of net operating loss carryforwards for Canadian tax purposes. These carryforwards will expire from 2001 through 2020 if not utilized. Certain of the NOL carryforwards are subject to limitations due to transactions in prior years which resulted in a change of ownership under Section 382. It is expected that the use of NOL carryforwards related to these transactions will be limited to varying amounts between $115,000 to $363,000 per year. In addition to the Section 382 limitations, uncertainties exist as to the future utilization of the operating loss carryforwards under the criteria set forth under FASB Statement No. 109. Therefore, the Company has established a valuation allowance for deferred tax assets at December 31, 2000 and June 30, 2001. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Commodity Price Risk Our exposure to market risk rests primarily with the volatile nature of crude oil, natural gas and natural gas liquids prices. We manage crude oil and natural gas prices through the periodic use of commodity price hedging agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources". Assuming the production levels we attained during the six months ended June 30, 2001, a 10% decline in crude oil, natural gas and natural gas liquids prices would have reduced our operating revenue, cash flow and net income (loss) by approximately $4.8 million for the six months ended June 30, 2001. Hedging Sensitivity The fair value of our hedge instrument was determined based on NYMEX forward price quotes as of June 30, 2001. As of June 30, 2001, a commodity price increase of 10% would have resulted in an unfavorable change in the fair market value of our hedging instrument of $3.4 million and a commodity price decrease of 10% would have resulted in a favorable change in the fair value of our hedge instrument of $3.4 million.
The following table sets forth our hedge position as of March 31, 2001. Time Period Notional Quantities Price Fair Value ------------------------------------------------ --------------------------- ---------------------------- -------------------- July 1, 2001 - October 31, 2002 20,000 Mcf/day of natural Fixed price swap $(7.5) million gas or 1,000 Bbl/day of $2.60-$2.95 natural gas or crude oil $18.90 Crude oil
Interest rate risk At June 30, 2001, substantially all of our long-term debt is at fixed interest rates and not subject to fluctuations in market rates. Foreign currency Our Canadian operations are measured in the local currency of Canada. As a result, our financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in the foreign markets. Canadian operations reported a pre tax earnings of $6.5 million for the six months ended June 30, 2001. It is estimated that a 5% change in the value of the U.S. dollar to the Canadian dollar would have changed our pre tax income by approximately $325,000. We do not maintain any derivative instruments to mitigate the exposure to translation risk. However, this does not preclude the adoption of specific hedging strategies in the future. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, which requires the purchase method of accounting for 24 business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible Assets, which discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Intangible assets with a determinable useful life will continue to be amortized over that period. The amortization provisions apply to goodwill and intangible assets acquired after June 30, 2001. The Company will determine the impact that these standards will have on its consolidated financial statements at the time that the tender offer to purchase additional ownership interest in Grey Wolf is complete. Disclosure Regarding Forward-Looking Information This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed under "Risk Factors" in our Annual Report on Form 10-K which is incorporated by reference herein and this report. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the Cautionary Statements. 25 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K None 26 ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABRAXAS PETROLEUM CORPORATION (Registrant) Date: August 14, 2001 By:/s/ ----------------- ------------------------------- ROBERT L.G. WATSON, President and Chief Executive Officer Date: August 14, 2001 By:/s/ ----------------- ------------------------------- CHRIS WILLIFORD, Executive Vice President and Principal Accounting Officer 27