3. Formation of Joint Venture

On August 18, 2010, Abraxas Petroleum and its wholly-owned subsidiary, Abraxas Operating, LLC, contributed 8,333 net acres in the Eagle Ford Shale play to Blue Eagle Energy, LLC (“Blue Eagle”) and received a $25.0 million equity interest in Blue Eagle pursuant to the terms of the Subscription and Contribution Agreement among Abraxas Petroleum, Abraxas Operating, Blue Eagle and Rock Oil Company, LLC (“Rock Oil”) formerly known as Blue Stone Oil & Gas, LLC. Simultaneously, Rock Oil contributed $25.0 million in cash to Blue Eagle for a $25.0 million equity interest in Blue Eagle. Rock Oil committed to contribute an additional $50.0 million to Blue Eagle and upon full funding, Abraxas Petroleum would own a 25% equity interest and Rock Oil would own a 75% equity interest.

Blue Eagle's subject area encompasses 12 counties across the Eagle Ford Shale play. Abraxas Petroleum operates the wells owned by Blue Eagle and Rock Oil and Abraxas jointly manage the day-to-day business affairs of Blue Eagle. Robert L. G. Watson, our President and CEO, serves as one of the three members of the Board of Managers of Blue Eagle.

At formation and through June 29, 2011, we owned a non-controlling 50.0% interest in the joint venture. On June 29, 2011, Rock Oil contributed $11.0 million to Blue Eagle to purchase approximately 2,487 net acres in northern McMullen County, Texas, which reduced our equity interest to 41.0%. On October 19, 2011 and December 9, 2011, Rock Oil contributed an additional $3.0 million and $8.0 million, respectively, to Blue Eagle to drill and complete a well in McMullen County, Texas and for general corporate purposes. As of December 31, 2011, we owned a non-controlling 34.7% interest in the joint venture.

We account for the joint venture under the equity method of accounting. Under this method, Abraxas' share of net income (loss) from the joint venture is reflected as an increase (decrease) in its investment account in “Investment in joint venture” and is also recorded as equity investment income (loss) in “Equity in loss (income) of joint venture.” For the years ended December 31, 2010 and 2011, we incurred a loss of $473,000 and income of $2.2 million, respectively.

The following is condensed financial data from Blue Eagle's December 31, 2010 and 2011 financial statements:

Balance Sheet:	As of December 31, 2010		As of December 31, 2011
Assets:	(In thousands)
Current assets	$	19,625	$	11,910
Oil and gas properties		31,753		66,663
Other assets		45		36
Total assets	$	51,423	$	78,609

Liabilities and Members' Capital:
Current liabilities	$	3,368	$	3,070
Other liabilities		-		41
Members' capital		48,055		75,498
Total liabilities and members' capital	$	51,423	$	78,609

Statement of Operations:	For the period August 18, 2010 (inception) through December 31, 2010			Year Ended December 31, 2011
	(In thousands)
Revenue	$	-		$	12,579

Operating expenses		682			7,138
Other expense (income)		263			(11	)
Net (loss) income	$	(945	)	$	5,452