ABRAXAS PETROLEUM CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in thousands, except per share data)

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

-K for the year ended

December 31, 2017

filed with the SEC on

March 16, 2018.

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 condensed consolidated financial statements have

not

been audited by our independent registered public accountants, and 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 condensed 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 ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. The results of operations and the cash flows for the

three

and

six

month period ended

June 30, 2018

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

-K for the year ended

December 31, 2017.

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These reclassifications had

effect on the Company’s previously reported results of operations.

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”).

Rig Accounting

In accordance with SEC Regulation S-

income is to be recognized in connection with contractual drilling services performed in connection with properties in which the Company or its affiliates hold 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.

Recently Adopted Accounting Standards and Disclosures

May 2014,

the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update, ("ASU")

No.

2014

09,

Revenue from Contracts with Customers

. The Company completed a detailed analysis of its revenue streams at the individual contract level to evaluate the impact of the new revenue standard on its consolidated financial statements. Based on these completed assessments, adoption of this standard did

not

impact our net earnings. The Company adopted this new standard on

January

2018,

using the modified retrospective method.

cumulative adjustment to retained earnings resulted from the adoption of this standard. See Note

"Impact of ASC

606

Adoption" and Note

"Revenue from Contracts with Customers" for further details related to the Company's adoption of this standard.

Recent Accounting Standards and Disclosures

Not

Yet Adopted

February 2016,

the FASB issued ASU

2016

02,

"Leases (Topic

842

)" (ASU

2016

), which significantly changes accounting for leases by requiring that lessees recognize a right-of-use asset and a related lease liability representing the obligation to make lease payments, for certain lease transactions. Additional disclosures about an entity's lease transactions will also be required. ASU

2016

defines a lease as "a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration." In

January 2018,

the FASB issued ASU

2018

01,

"Leases (Topic

842

) - Land Easement Practical Expedient for Transition to Topic

842"

(ASU

2018

), which permits an entity an optional election to

not

evaluate under ASU

2016

those existing or expired land easements that were

not

previously accounted for as leases prior to the adoption of ASU

2016

02.

Additionally, in

July 2018,

the FASB issued ASU

2018

11,

“Leases (Topic

842

) - Targeted Improvements” (ASU

2018

), which permits an entity (i) to apply the provisions of ASU

2016

at the adoption date instead of the earliest period presented in the financial statements, and, as a lessor, (ii) to account for lease and nonlease components as a single component as the nonlease components would otherwise be accounted for under the provisions of ASU

2014

09.

ASU

2016

and other related ASUs are effective for interim and annual periods beginning after

December 31, 2018,

and early application is permitted. Based on the provisions of ASU

2018

and other related ASUs, lessees and lessors

may

recognize and measure leases at the beginning of the earliest period presented in the financial statements, defined as the effective date, using a modified retrospective approach, or at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings.

The Company is continuing its assessment of ASU

2016

by implementing its project plan, evaluating certain operational and corporate policies and processes, further defining its population of leases and reviewing numerous contracts. The Company plans to elect the package of practical expedients within ASU

2016

that allows an entity to

not

reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases. Additionally, The Company plans to elect the practical expedient under ASU

2018

and

not

evaluate existing or expired land easements

not

previously accounted for as leases prior to the effective date. The Company does

not

intend to early-adopt ASU

2016

and other related ASUs and has

not

determined which transition method it will use.

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				Six Months Ended
June 30,				June 30,
2018		2017		2018		2017
$	574	$	635	$	914	$	1,069

The following table summarizes the Company’s stock option activity for the

six

months ended

June 30, 2018 (

shares in thousands):

	Number of Shares			Weighted Average Option Exercise Price Per Share		Weighted Average Grant Date Fair Value Per Share

Outstanding, December 31, 2017		8,317		$	2.35	$	1.67
Granted		300		$	2.80	$	1.87
Exercised		(365	)	$	1.70	$	1.18
Forfeited		(335	)	$	2.17	$	1.55
Outstanding, June 30, 2018		7,917		$	2.40	$	1.71

As of

June 30, 2018,

there was approximately

$1.0

million of unamortized compensation expense related to outstanding stock options that will be recognized from

2018

through

2021.

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 recipient of the award terminates employment with the Company prior to the lapse of the restrictions. The fair value of such shares of restricted 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

six

months ended

June 30, 2018 (

shares in thousands):

	Number of Shares			Weighted Average Grant Date Fair Value Per Share

Unvested, December 31, 2017		1,479		$	3.43
Granted		753		$	2.22
Vested/ Released		(733	)	$	3.15
Forfeited		(77	)	$	3.16
Unvested June 30, 2018		1,422		$	2.95

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

Three Months Ended				Six Months Ended
June 30,				June 30,
2018		2017		2018		2017
$	221	$	344	$	468	$	680

As of

June 30, 2018,

there was approximately

$1.6

million of unamortized compensation expense relating to outstanding restricted shares that will be recognized from

2018

through

2021.

Performance Based Restricted Stock Awards

Effective on

April 1, 2018,

the Company issued performance-based shares of restricted stock to certain officers and employees under the Abraxas Petroleum Corporation Amended and Restated

2005

Employee Long-Term Equity Incentive Plan. The shares will vest in

2021

upon the achievement of performance goals based on the Company’s Total Shareholder Return (“TSR”) as compared to a peer group of companies. The number of shares which would vest depends upon the rank of the Company’s TSR as compared to the peer group at the end of the

three

-year vesting period, and can range from

zero

percent of the initial grant up to

200%

of the initial grant.

The table below provides a summary of Performance Based Restricted Stock as of the date indicated (shares in thousands):

	Number of Shares			Weighted Average Option Exercise Price Per Share
Unvested, December 31, 2017		-		$	-
Granted		464		$	2.37
Vested/ Released		-		$	-
Forfeited		(31	)	$	2.37
Unvested June 30, 2018		433		$	2.37

Compensation expense associated with the performance based restricted stock is based on the grant date fair value of a single share as determined using a Monte Carlo Simulation model which utilizes a stochastic process to create a range of potential future outcomes given a variety of inputs. As the Compensation Committee intends to settle the performance based restricted stock awards with shares of the Company's common stock, the awards are accounted for as equity awards and the expense is calculated on the grant date assuming a

100%

target payout and amortized over the life of the awards.

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

Three Months Ended				Six Months Ended
June 30,				June 30,
2018		2017		2018		2017
$	84	$	-	$	84	$	-

As of

June

30,

2018,

there was approximately

$0.9

million of unamortized compensation expense relating to outstanding performance based restricted shares that will be recognized from

2018

through

2021.

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 unamortized cost or the cost ceiling, defined as the sum of the present value of estimated future net revenues from proved reserves based on unescalated prices discounted at

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. Costs in excess of the present value of estimated net revenue from proved reserves discounted at

10%

are charged to proved property impairment expense.

gain or loss is recognized upon sale or disposition of oil and gas properties for full cost accounting companies with proceeds accounted for as an adjustment of capitalized cost. An exception to this rule occurs when the adjustment to the full cost pool results in a significant alteration of the relationship between capitalized cost and proved reserves. The Company applies the full cost ceiling test on a quarterly basis on the date of the latest balance sheet presented. At

June 30, 2018

and

2017,

our net capitalized costs of oil and gas properties did

not

exceed the cost ceiling of our estimated proved reserves.

Restoration, Removal and Environmental Liabilities

The Company is subject to extensive federal, 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

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 is fixed or reliably determinable.

The Company accounts for future site restoration 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 future site restoration obligation transactions for the

six

months ended

June 30, 2018

and the year ended

December 31, 2017:

	June 30, 2018			December 31, 2017
Beginning future site restoration obligation	$	8,775		$	8,623
New wells placed on production and other		452			1,088
Deletions related to property disposals and plugging costs		(445	)		(1,551	)
Accretion expense and other		264			451
Revisions and other		29			164
Ending future site restoration obligation	$	9,075		$	8,775