Note 1. Basis of Presentation

The accounting policies followed by Abraxas Petroleum Corporation and its subsidiaries (the "Company") are set forth in the notes to the Company's audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013. Such policies have been continued without change. Also, refer to the notes to those financial statements for additional details of the Company's financial condition, results of operations, and cash flows. All material items included in those notes have not changed except as a result of normal transactions in the interim, or as disclosed within this report. The accompanying interim consolidated financial statements have not been audited by our independent registered public 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. Although management believes the unaudited interim related disclosures in these consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the SEC. The results of operations and the cash flows for the period ended March 31, 2013 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

Consolidation Principles

The terms "Abraxas," "Abraxas Petroleum," "we," "us," "our" or the "Company" refer to Abraxas Petroleum Corporation and all of its subsidiaries, including Raven Drilling, LLC ("Raven Drilling") and a wholly-owned foreign subsidiary, Canadian Abraxas Petroleum, ULC ("Canadian Abraxas").

Canadian Abraxas' 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 stockholders' equity.

Rig Accounting

In accordance with SEC Regulation S-X, no income is to be recognized in connection with contractual drilling services performed in connection with properties in which the Company or its affiliates holds an ownership, or other economic interest. Any income not recognized as a result of this limitation is to be credited to the full cost pool and recognized through lower amortization as reserves are produced.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stock-based Compensation and Option Plans

Stock Options

The Company currently utilizes a standard option-pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees and directors.

The following table summarizes the Company's stock-based compensation expense related to stock options for the periods presented:

Three Months Ended March 31,
2013		2012
$	362	$	346

The following table summarizes the Company's stock option activity for the three months ended March 31, 2013:

	Number of Shares			Weighted Average Option Exercise Price Per Share		Weighted Average Grant Date Fair Value Per Share
Outstanding, December 31, 2012		4,761		$	2.77	$	1.98
Granted		—			—		—
Exercised		(1	)		0.68		0.32
Outstanding, March 31, 2013		4,760		$	2.77	$	1.86

Additional information related to stock options at March 31, 2013 and December 31, 2012 is as follows:

	March 31,		December 31,
	2013		2012
Options exercisable		3,544		2,992

As of March 31, 2013, there was approximately $2.2 million of unamortized compensation expense related to outstanding stock options that will be recognized in 2013 through 2016.

Restricted Stock Awards

Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the awardee terminates employment with the Company prior to the lapse of the restrictions. The fair value of such stock was determined using the closing price on the grant date and compensation expense is recorded over the applicable vesting periods.

The following table summarizes the Company's restricted stock activity for the three months ended March 31, 2013:

	Number of Shares			Weighted Average Grant Date Fair Value Per Share
Unvested, December 31, 2012		482		$	3.09
Granted		—			—
Vested/Released		(38	)		1.77
Forfeited		—			—
Unvested, March 31, 2013		444		$	3.20

The following table summarizes the Company's stock-based compensation expense related to restricted stock for the periods presented:

Three Months Ended March 31,
2013		2012
$	112	$	131

As of March 31, 2013, there was approximately $1.0 million of unamortized compensation expense relating to outstanding restricted shares that will be recognized in 2013 through 2015.

Assets Held for Sale

During the first quarter of 2013 the Company sold certain non-core properties to various parties. The Company's assets sold in the first quarter of 2013 are presented separately as "Assets held for sale" in the condensed consolidated balance sheet at March 31, 2013. Assets held for sale were recorded at the amount of the sales proceeds with a corresponding reduction to the full cost pool. As the sale is not significant under full cost accounting rules, no gain or loss was recognized. Proceeds from these sales were received in April 2013.

Oil and Gas Properties

The Company follows the full cost method of accounting for oil and gas properties. Under this method, all direct costs and certain indirect costs associated with the acquisition of properties and successful, as well as unsuccessful, exploration and development activities are capitalized. Depreciation, depletion, and amortization of capitalized oil and gas properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves. Net capitalized costs of oil and gas properties, less related deferred taxes, are limited by country, to the lower of the unamortized capitalized cost or the cost ceiling. The ceiling cost is calculated as PV-10, plus the cost of properties not being amortized, if any, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any, less related income taxes. We calculate the projected income tax effect using the "short-cut" method for the cost ceiling test calculation. Costs in excess of the cost ceiling are charged to proved property impairment expense. No gain or loss is recognized upon sale or disposition of oil and gas properties, except where the sale or disposition causes a significant change in the relationship between capitalized cost and the estimated quantity of proved reserves. We apply the full cost ceiling test on a quarterly basis on the date of the latest balance sheet presented. At March 31, 2013, our net capitalized costs of oil and gas properties in the United States and Canada did not exceed the cost ceiling of our estimated proved reserves.

Restoration, Removal and Environmental Liabilities

The Company is subject to extensive Federal, provincial, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed.

Liabilities for expenditures of a non-capital nature are recorded when environmental assessments and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component are fixed or reliably determinable.

The Company accounts for asset retirement obligations based on the guidance of ASC 410 which addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. ASC 410 requires that the fair value of a liability for an asset's retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. For all periods presented, we have included estimated future costs of abandonment and dismantlement in our full cost amortization base and amortize these costs as a component of our depletion expense in the accompanying condensed consolidated financial statements.

The following table summarizes the Company's asset retirement obligation transactions for the three months ended March 31, 2013 and the year ended December 31, 2012:

	March 31, 2013			December 31, 2012
Beginning asset retirement obligation	$	11,381		$	8,412
New wells placed on production and other		81			330
Deletions related to property disposals and plugging costs		(431	)		(423	)
Accretion expense		172			474
Revisions		(2	)		2,588
Ending asset retirement obligation	$	11,201		$	11,381

Working Capital (Deficit)

At March 31, 2013, our current liabilities of approximately $66.2 million exceeded our current assets of $32.8 million resulting in a working capital deficit of $33.4 million. This compares to a working capital deficit of $31.5 million at December 31, 2012. Current assets at March 31, 2013 primarily consisted of accounts receivable of $29.2 million and assets held for sale of $2.7 million. Current liabilities at March 31, 2013 primarily consisted of trade payables of $45.1 million, revenues due third parties of $14.3 million, current portion of derivative liabilities of $4.2 million, current maturities of long-term debt of $1.2 million and accrued liabilities of $1.3 million.