Organization and Significant Accounting Policies

Nature of Operations

We are an independent energy company primarily engaged in the acquisition, exploitation, development and production of oil and gas in the United States. Our oil and gas assets are located in

three

operating regions in the United States: the Rocky Mountain, Permian/Delaware Basin and South Texas.

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 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 credited to the full cost pool and recognized through lower amortization as reserves are produced.

Use of Estimates

The consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates pertain to proved oil, gas and NGL reserves and related cash flow estimates used in impairment tests of oil and gas properties, the fair value of assets and liabilities acquired in business combinations, derivative contracts, the provision for income taxes including uncertain tax positions, stock based compensation, asset retirement obligations, accrued oil and gas revenues and expenses, as well as estimates of expenses related to depreciation, depletion, amortization and accretion. Actual results could differ from those estimates.

The process of estimating oil and gas reserves in accordance with SEC requirements is complex and involves decisions and assumptions in evaluating the available geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future production, oil and gas prices, differentials, revenues, taxes, capital expenditures, operating expenses and quantities of recoverable oil and gas reserves most likely will vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of our reserves. In addition, we

may

adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and gas prices and other factors, many of which are beyond our control.

Reclassifications

Certain prior year balances have been reclassified for consistency with current year classifications. Such reclassifications had

impact on the results of operations or cash flows from operations.

Concentration of Credit Risk

Financial instruments which potentially expose the Company to credit risk consist principally of trade receivables and derivative contracts. Accounts receivable are generally from companies with significant oil and gas marketing or operating activities. The Company performs ongoing credit evaluations and, generally, requires

collateral from its customers. The counterparties to our derivative contracts are the same financial institutions from which we have outstanding debt; accordingly, we believe our exposure to credit risk to these counterparties is currently mitigated in part by this, as well as the current overall financial condition of the counterparties.

The Company maintains any cash and cash equivalents in excess of federally insured limits in prominent financial institutions considered by the Company to be of high credit quality.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of

three

months or less.

Accounts Receivable

Accounts receivable are reported net of an allowance for doubtful accounts of approximately

$0.4

million and

$0.5

million at

December 31, 2017

and

2018,

respectively. The allowance for doubtful accounts is determined based on the Company's historical losses, as well as a review of certain accounts. Accounts are charged off when collection efforts have failed and the account is deemed uncollectible.

Industry Segment and Geographic Information

The Company operates in

one

industry segment, which is the exploration, development and production of oil and gas with all of the Company’s operational activities having been conducted in the U.S. The Company’s current operational activities and the Company’s consolidated revenues are generated from markets exclusively in the U.S., and the Company has

long lived assets located outside the U.S.

Oil and Gas Properties

The Company follows the full cost method of accounting for oil and gas properties. Under this method, certain direct costs and indirect costs associated with 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 future net revenues 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. The impairment calculations do

not

consider the impact of our commodity derivative positions as generally accepted accounting principles only allow the inclusion of derivatives designated as cash flow hedges. During

2016

we recorded a proved property impairment of

$67.6

million. As of

December 31, 2017

and

2018,

our capitalized cost of oil and gas properties did

not

exceed the future net revenue from our estimated proved reserves.

Other Property and Equipment

Other property and equipment are recorded on the basis of cost. Depreciation of other property and equipment is provided over the estimated useful lives using the straight-line method. Major renewals and improvements are recorded as additions to the property and equipment accounts. Repairs that do

not

improve or extend the useful lives of assets are expensed.

Estimates of Proved Oil and Gas Reserves

Estimates of our proved reserves included in this report are prepared in accordance with GAAP and SEC guidelines. The accuracy of a reserve estimate is a function of:

•

the quality and quantity of available data;

•

the interpretation of that data;

•

the accuracy of various mandated economic assumptions; and

•

the judgment of the persons preparing the estimate.

Our proved reserve information included in this report was based on studies performed by our independent petroleum engineers assisted by the engineering and operations departments of Abraxas. Estimates prepared by other

third

parties

may

be higher or lower than those included herein. Because these estimates depend on many assumptions, all of which

may

substantially differ from future actual results, reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate

may

cause material revisions to the estimate.

In accordance with SEC requirements, we based the estimated discounted future net cash flows from proved reserves on the average of oil and gas prices based on the unweighted average

month

first

-day-of-month pricing. Future prices and costs

may

be materially higher or lower than these prices and costs which would impact the estimated value of our reserves.

The estimates of proved reserves materially impact depreciation, depletion and amortization, or DD&A expense. If the estimates of proved reserves decline, the rate at which we record DD&A expense will increase, reducing future net income. Such a decline

may

result from lower commodity prices, which

may

make it uneconomic to drill for and produce higher cost fields.

Derivative Instruments and Hedging Activities

The Company enters into agreements to hedge the risk of future oil and gas price fluctuations. Such agreements are typically in the form of fixed price commodity and basis swaps, which limit the impact of price fluctuations with respect to the Company’s sale of oil and gas. While it is never management’s intention to hold or issue derivative instruments for speculative trading purposes, conditions could arise where actual production is less than estimated which could result in over hedged volumes.

All derivative instruments are recorded on the Consolidated Balance Sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. The derivative instruments the Company utilizes are based on index prices that

may

and often do differ from the actual oil and gas prices realized in its operations. These variations often result in a lack of adequate correlation to enable these derivative instruments to qualify for hedge accounting rules as prescribed by Accounting Standards Codification (“ASC”)

815.

Accordingly, the Company does

not

account for its derivative instruments as cash flow hedges for financial reporting purposes. Therefore, changes in fair value of these derivative instruments are recognized in earnings and included in net gains (losses) on commodity derivative contracts in the Consolidated Statements of Operations.

Fair Value of Financial Instruments

The Company includes fair value information in the notes to consolidated financial statements when the fair value of its financial instruments is materially different from the carrying value. The carrying value of those financial instruments that are classified as current, except for derivative instruments, approximates fair value because of the short maturity of these instruments. For noncurrent financial instruments, the Company uses quoted market prices or, to the extent that there are

available quoted market prices, market prices for similar instruments.

Share-Based Payments

Options granted are valued at the date of grant and expense is recognized over the vesting period. The Company currently utilizes a standard option pricing model (Black-Scholes) to measure the fair value of stock options granted to employees and directors. 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 value of such restricted stock is determined using the market price on the grant date and expense is recorded over the vesting period. For the years ended

December 31, 2016,

2017

and

2018,

stock-based compensation was approximately

$3.2

million,

$3.2

million and

$2.4

million, respectively.

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 noncapital 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 fair value of a liability for an asset's retirement obligation is 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 we amortize these costs as a component of our depletion expense in the accompanying consolidated financial statements. Each year, the Company reviews, and to the extent necessary, revises its asset retirement obligation estimates.

The following table (in thousands) summarizes changes in the Company’s future site restoration obligations during the

two

years ended

December 31:

	2017			2018
Beginning future site restoration obligation	$	8,623		$	8,775
New wells placed on production and other		1,088			612
Deletions related to property disposals and plugging costs		(1,551	)		(2,270	)
Accretion expense and other		451			516
Revisions and other		164			(141	)
Ending future site restoration obligation	$	8,775		$	7,492

Revenue Recognition and Major Purchasers

The Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells, net of royalties. The Company recognizes oil and gas revenues from its interests in producing wells when control has transferred to the purchaser and to the extent the selling price is reasonably determinable. The Company had

material gas imbalances at

December 31, 2017

and

2018.

During

2016,

two

purchasers accounted for

71%

of oil and gas revenues. During

2017

three

purchasers accounted for

69%

of oil and gas revenues. During

2018,

two

purchasers accounted for

57%

of oil and gas revenues.

Deferred Financing Fees

Deferred financing fees are being amortized on the effective yield basis over the term of the related debt.

Income Taxes

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect with respect to taxable income in the years in which those temporary differences are expected to be recovered or settled. Uncertainties exist as to the future utilization of the operating loss carryforwards. Therefore, we have established a valuation allowance of

$67.3

million for deferred tax assets at

December 31, 2018.

December 22, 2017,

the President of the United States signed Public Law

115

97,

commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, (i) permanently reduces the U.S. federal corporate income tax rate from

35%

21%,

(ii) repeals the corporate alternative minimum tax, (iii) imposes new limitations on the utilization of net operating losses (iv) limits deductibility of interest expense and (v) changes the cost recovery rules. Under U.S. GAAP, the effects of new legislation are recognized upon enactment, which, for federal legislation, is the date the President signs a bill into law. Accordingly, recognition of the tax effects of the Tax Act was required in the interim and annual periods that included

December 22, 2017.

December 2017,

the SEC issued Staff Accounting Bulletin

No.

118

“Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB

118”

) which allows a company up to

one

year to finalize and record the tax effects of the Tax Act and clarifies certain aspects of Accounting Standards Codification

740,

“Income Taxes” (“ASC

740”

) and provides a

three

-step process for applying ASC

740.

The tax effect of the Tax Act, did

not

have a material impact to the Company's deferred tax position.

Accounting for Uncertainty in Income Taxes

Evaluation of a tax position is a

two

-step process. The

first

step is to determine whether it is more-likely-than-

not

that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The

second

step is to measure a tax position that meets the more-likely-than-

not

threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than

50%

likely of being realized upon ultimate settlement.

Tax positions that previously failed to meet the more-likely-than-

not

recognition threshold should be recognized in the

first

subsequent period in which the threshold is met. Previously recognized tax positions that

longer meet the more-likely-than-

not

criteria should be de-recognized in the

first

subsequent reporting period in which the threshold is

longer met. Penalties and interest are classified as income tax expense. The Company had

uncertain income tax positions as of

December 31, 2018.

New Accounting Standards and Disclosures

February 2016,

the FASB issued new guidance in ASC

842,

Leases

("ASC

842"

), which will supersede the current guidance in ASC

840,

Leases

("ASC

840"

). The core principle of the new guidance is that a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for leases currently classified as operating leases. For leases with a term of

months or less, a lessee is permitted to make an accounting policy election, by class of underlying asset,

not

to recognize lease assets and lease liabilities. In

January 2018,

the FASB issued new guidance in ASC

842

to provide an optional transition practical expedient to

not

evaluate existing or expired land easements that were

not

previously accounted for as leases under ASC

840.

July 2018,

the FASB issued new guidance in ASC

842

to provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with ASC

840.

An entity that elects this transition method must provide the required ASC

840

disclosures for all periods that continue to be reported in accordance with ASC

840.

The amendments in these ASUs are effective for fiscal years beginning after

December 15, 2018,

including interim periods within those fiscal years. Early adoption was permitted. The Company expects to adopt ASU

2016

using a modified retrospective method in the

first

quarter of

2019

(that is, the initial period of adoption) through a cumulative-effect adjustment to the opening balance of retained earnings. At transition, the Company plans to apply the package of practical expedients provided in ASC

842

that allow companies, among other things, to

not

reassess contracts that commenced prior to adoption.

The Company has a team, including

third

-party consultants, to implement the standard and is implementing a software solution that will be used to track and account for its leases under ASC

842

on an ongoing basis. The primary effect on the Company's consolidated financial statements will be to record a right-of-use (ROU) asset and lease liability on the balance sheet for all leases with terms at commencement that are greater than

twelve

months. Leases will be classified as either finance or operating, with that classification affecting the pattern of expense recognition in the income statement. We anticipate the impact of recording leases as a result of the adoption of this standard to be less than

$2.0

million.

The Company enters into certain lease agreements in support of its operations for assets such as compressors, a drilling rig, employee housing and office equipment. As of

December 31, 2018,

the Company does

not

anticipate that the adoption and implementation of ASC

842

will result in material changes in assets and liabilities on the consolidated balance sheet in

2019,

and will

not

result in a material impact to the consolidated statement of operations.

The Company has made certain accounting policy decisions including that it plans on adopting the short-term lease recognition exemption, account for certain asset classes and has established a balance sheet recognition capitalization threshold. The Company also expects for certain lessee asset classes to elect the practical expedient to

not

separate lease and non-lease components. For these asset classes, the agreements will be accounted for as a single component.