UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-Q/A No. 1
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2003
( ) 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X or No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ or No X -
The number of shares outstanding of each of the issuer's classes of common
stock outstanding as of May 14, 2003 was:
Class Shares Outstanding
Common Stock, $.01 Par Value 35,630,115
1 of 36
PURPOSE OF THIS AMENDMENT ON FORM 10-Q/A
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934,
as amended, we are filing this amendment on Form 10-Q/A No. 1 to reflect
comments to our original report on Form 10-Q that we received from the Staff of
the Securities and Exchange Commission in connection with their review of
Post-Effective Amendment No. 1 to our registration statement on Form S-1. The
original Form 10-Q was filed on May 14, 2003 and we filed this amended and
restated Form 10-Q/A No. 1 responding to the Staff's comments and updating
certain information on July 28, 2003.
We have specifically amended and restated Items 1, 2 and 3 of Part I, in
response to the Staff's comments. For convenience, we have restated our entire
disclosure contained in this amendment. The amendment and restatement relates to
our previous reporting of the sale of our Canadian oil and gas properties as
discontinued operations. This amendment reflects the sale of our Canadian oil
and gas properties as continuing operations.
This report speaks as of the original filing date of our report on Form
10-Q and, except as indicated, has not been updated to reflect events occurring
subsequent to that date.
2
FORWARD-LOOKING INFORMATION
We make forward-looking statements throughout this document. Whenever you
read a statement that is not simply a statement of historical fact (such as when
we describe what we "believe," "expect" or "anticipate" will occur or what we
"intend" to do, and other similar statements), you must remember that our
expectations may not be correct, even though we believe they are reasonable. The
forward-looking information contained in this document is generally located in
the material set forth under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "2003 Outlook" but may be
found in other locations as well. These forward-looking statements generally
relate to our plans and objectives for future operations and are based upon our
management's reasonable estimates of future results or trends. The factors that
may affect our expectations regarding our operations include, among others, the
following:
o our high debt level;
o our ability to raise capital;
o our limited liquidity;
o economic and business conditions;
o price and availability of alternative fuels;
o political and economic conditions in oil producing countries, especially
those in the Middle East;
o our success in development, exploitation and exploration activities;
o planned capital expenditures;
o prices for crude oil and natural gas;
o declines in our production of crude oil and natural gas;
o our acquisition and divestiture activities;
o results of our hedging activities; and
o other factors discussed elsewhere in this document.
In addition to these factors, 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 for the year
ended December 31, 2002 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.
3
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q/A
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2003
and December 31, 2002.............................................5
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2003 and 2002........................7
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002.......................8
Notes to Condensed Consolidated Financial Statements.............9
ITEM 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations..............................................20
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risks...........30
ITEM 4- Controls and Procedures..............................................31
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings 32
ITEM 2 - Changes in Securities................................................32
ITEM 3 - Defaults Upon Senior Securities......................................32
ITEM 4 - Submission of Matters to a Vote of Security Holders..................32
ITEM 5 - Other Information 32
ITEM 6 - Exhibits and Reports on Form 8-K.....................................32
Signatures ...................................................34
4
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets
(in thousands)
(As Restated, see Note 13)
March 31, December 31,
2003 2002
(Unaudited)
-------------------------
Assets:
Current assets:
Cash .................................................. $ 2,510 $ 4,882
Accounts receivable, net:
Joint owners ................................... 950 2,215
Oil and gas production ......................... 5,289 7,466
Other .......................................... 561 364
-------- --------
6,800 10,045
Equipment inventory .................................... 698 1,014
Other current assets ................................... 1,026 1,240
-------- --------
Total current assets ................................. 11,034 17,181
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved ............................................. 305,320 521,995
Unproved, not subject to amortization .............. 7,052 7,052
Other property and equipment .......................... 2,987 44,189
-------- --------
Total ......................................... 315,359 573,236
Less accumulated depreciation, depletion, and
amortization ..................................... 214,400 422,842
-------- --------
Total property and equipment - net ................. 100,959 150,394
Deferred financing fees, net ............................. 5,317 5,671
Deferred income taxes .................................... 7,820 -
Other assets ............................................. 364 359
-------- --------
Total assets............................................ $117,674 $181,425
======== ========
See accompanying notes to consolidated financial statements
5
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets (continued)
(in thousands)
(As Restated, see Note 13)
March 31, December 31,
2003 2002
(Unaudited)
------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable ..................................... $ 5,186 $ 9,687
Oil and gas production payable ....................... 2,549 2,432
Accrued interest ..................................... 2,457 6,009
Other accrued expenses ............................... 2,711 1,162
Current maturities of long-term debt ................. - 63,500
--------- ---------
Total current liabilities .......................... 12,903 82,790
Long-term debt ......................................... 173,735 236,943
Future site restoration ................................ 1,237 3,946
Stockholders'deficit:
Common Stock, par value $.01 per share-
authorized 200,000,000 shares; issued, 35,795,998 and
30,145,280 in 2003 and 2002 respectively ........... 358 301
Additional paid-in capital .......................... 140,595 136,830
Receivable from stock sale ........................... (97) (97)
Accumulated deficit .................................. (206,919) (269,621)
Treasury stock, at cost, 165,883 shares .............. (964) (964)
Accumulated other comprehensive loss ................. (3,174) (8,703)
--------- ---------
Total stockholders' deficit ...................... (70,201) (142,254)
--------- ---------
Total liabilities and stockholders' deficit ............ $ 117,674 $ 181,425
========= =========
See accompanying notes to consolidated financial statements
6
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
(As Restated, see Note 13)
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
Revenue:
Oil and gas production revenues .............................. $ 12,772 $ 10,886
Gas processing revenue ....................................... 132 670
Rig revenues ................................................. 181 151
Other ........................................................ 26 100
-------- --------
13,111 11,807
Operating costs and expenses:
Lease operating and production taxes ......................... 2,726 3,909
Depreciation, depletion and amortization ..................... 3,142 6,814
Rig operations ............................................... 166 121
General and administrative ................................... 1,395 1,698
General and administrative (stock-based compensation) ........ 36 -
-------- --------
7,465 12,542
-------- --------
Operating income (loss) ......................................... 5,646 (735)
Other (income) expense
Interest income .............................................. (10) (33)
Interest expense ............................................. 5,164 8,413
Amortization of deferred financing fees ...................... 377 427
Financing cost ............................................... 3,601 -
Gain on sale of foreign subsidiaries ......................... (66,960) -
-------- --------
(57,828) 8,807
-------- --------
Earnings (loss) before cumulative effect of accounting change and
taxes ........................................................ 63,474 (9,542)
-------- --------
Cumulative effect of accounting change .......................... (395) -
-------- --------
Earnings (loss) before taxes .................................... 63,079 (9,542)
Income tax expense (benefit) .................................... 377 (843)
-------- --------
Net earnings (loss) ............................................. $ 62,702 $ (8,699)
======== ========
Basic earnings (loss) per common share:
Net earnings (loss) from ..................................... $ 1.84 $ (0.29)
Cumulative effect of accounting change ....................... (0.01) -
-------- --------
Net earnings (loss) per common - basic .......................... $ 1.83 $ (0.29)
======== ========
Diluted earnings (loss) per common share:
Net earnings (loss) .......................................... $ 1.83 $ (0.29)
Cumulative effect of accounting change ....................... (0.01 -
-------- --------
Net earnings (loss) per common share - diluted .................. $ 1.82 $ (0.29)
======== ========
See accompanying notes to consolidated financial statements
7
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
(As Restated, see Note 13)
Three Months Ended
March 31,
----------------------
2003 2002
--------- ---------
Cash flows from Operating Activities
Net income (loss) ...................................... $ 62,702 $ (8,699)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization .............. 3,142 6,814
Deferred income tax expense (benefit) ................... 377 (843)
Amortization of deferred financing fees ................ 377 427
Amortization of debt discount .......................... - 113
Stock-based compensation ............................... 36 -
Gain on sale of foreign subsidiaries .................... (66,960) -
Changes in operating assets and liabilities:
Accounts receivable ................................ (1,160) 1,099
Equipment inventory ................................ 162 91
Other .............................................. 1,650 (87)
Accounts payable and accrued expenses .............. 2,419 9,367
--------- ---------
Net cash provided by operations ......................... 2,745 8,282
Cash flows from Investing Activities
Capital expenditures, including purchases and development
of properties ......................................... (4,589) (17,408)
Proceeds from sale of foreign subsidiaries .............. 85,824
--------- ---------
Net cash provided by (used) in investing activities ..... $ 81,235 $ (17,408)
Cash flows from Financing Activities
Proceeds from long-term borrowings ...................... 43,189 6,096
Payments on long-term borrowings ........................ (130,903 (719)
Issuance of common stock in connection with exchange .... 3,651 -
Exercise of stock options ............................... 5 -
Deferred financing fees ................................. (2,529) -
--------- ---------
Net cash (used) in provided by financing activities ..... (86,587) 5,377
--------- ---------
Effect of exchange rate changes on cash ................. 235 (5)
--------- ---------
Increase (decrease) in cash ............................. (2,372) (3,754)
Cash, at beginning of period ............................ 4,882 7,605
--------- ---------
Cash, at end of period .................................. $ 2,510 $ 3,851
========= =========
Supplemental disclosures of cash flow information:
Interest paid ........................................... $ 3,029 $ 4,935
========= =========
See accompanying notes to consolidated financial statements
8
Abraxas Petroleum Corporation
Notes to CondensedConsolidated Financial Statements
(Unaudited)
(tabular amounts in thousands except per share data)
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, 2002, as amended by the annual report on Form
10-K/A No. 1 filed on July 22, 2003. 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 the 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 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 three months ended March 31, 2003 are
not necessarily indicative of results to be expected for the full year.
Theconsolidated financial statements include the accounts of the Company
and its wholly-owned foreign subsidiary, Grey Wolf Exploration Inc. ("New Grey
Wolf"). In January 2003, the Company sold all of the common stock of its
wholly-owned foreign subsidiaries, Canadian Abraxas Petroleum Limited ("Canadian
Abraxas") and Grey Wolf Exploration Inc. ("Old Grey Wolf"). Certain oil and gas
properties were retained and transferred into New Grey Wolf which was
incorporated in January 2003. The operations of Canadian Abraxas and Grey Wolf
are included in the consolidated financial statements through January 23, 2003
New 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.
The Company has incurred net losses in five of the last six years, and
there can be no assurance that operating income and net earnings will be
achieved in future periods. The Company's 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. During 2002, crude oil and natural gas prices began to
increase from 2001 levels and increased further in the first quarter of 2003. In
addition, because the Company's proved reserves will decline as crude oil,
natural gas and natural gas liquids are produced, unless it acquires additional
properties containing proved reserves or conducts successful exploration and
development activities, its reserves and production will decrease. The Company's
ability to acquire or find additional reserves in the near future will be
dependent, in part, upon the amount of available funds for acquisition,
exploitation, exploration and development projects. In order to provide
liquidity and capital resources, the Company has sold certain of its producing
properties. However, production levels have declined as the Company has been
unable to replace the production represented by the properties sold with new
production from the producing properties it has invested in with the proceeds of
property sales. In addition, under the terms of its new senior credit agreement
and New Notes, the Company is subject to limitations on capital expenditures. As
a result, the Company may be limited in its ability to replace existing
production with new production and might suffer a decrease in the volume of
crude oil and natural gas it produces. If crude oil and natural gas prices
return to depressed levels or if production levels continue to decrease, the
Company's revenues, cash flow from operations and financial condition may be
materially adversely affected.
Certain prior years balances have been reclassified for comparative
purposes.
Note 2. Income Taxes
The Company records income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
For the period ended March 31, 2002, no tax provision was required due to
operating losses. For the period ended March 31, 2003, no current taxes have
been provided due to operating losses for tax purposes resulting from, among
other items, differing book and tax basis of assets sold. Deferred tax expense
of $377,000 related to Canadian operations for the period ended March 31, 2003
has been provided for.
9
Note 3. Recent Events
Exchange Offer. On January 23, 2003, the Company completed an exchange
offer, pursuant to which it offered to exchange cash and securities for all of
the outstanding 11 1/2% Senior Secured Notes due 2004, Series A ("Second Lien
Notes") and 11 1/2% Senior Notes due 2004, Series D ("Old Notes"), issued by
Abraxas and Canadian Abraxas. In exchange for each $1,000 principal amount of
such notes tendered in the exchange offer, tendering noteholders received:
o cash in the amount of $264;
o an 11 1/2% Secured Note due 2007, Series A ("New Notes"), with a
principal amount equal to $610; and
o 31.36 shares of Abraxas common stock.
At the time the exchange offer was made, there were approximately $190.1
million of the Second Lien Notes and $800,000 of the Old Notes outstanding.
Holders of approximately 94% of the aggregate outstanding principal amount of
the Second Lien Notes and Old Notes tendered their notes for exchange in the
offer. Pursuant to the procedures for redemption under the applicable indenture
provisions, the remaining 6% of the aggregate outstanding principal amount of
the Second Lien Notes and Old Notes were redeemed at 100% of the principal
amount plus accrued and unpaid interest, for approximately $11.5 million ($11.1
million in principal and $0.4 million in interest). The indentures for the
Second Lien Notes and Old Notes have been duly discharged. In connection with
the exchange offer, Abraxas made cash payments of approximately $47.5 million
and issued approximately $109.7 million in principal amount of New Notes and
5,642,699 shares of Abraxas common stock. Fees and expenses incurred in
connection with the exchange offer were approximately $3.8 million
Redemption of First Lien Notes. On January 24, 2003, the Company completed
the redemption of 100% of its outstanding 12?% Senior Secured Notes, Series B
("First Lien Notes"), with approximately $66.4 million of the proceeds from the
sale of Canadian Abraxas and Old Grey Wolf. Prior to the redemption, the Company
had $63.5 million of its First Lien Notes outstanding. Under the terms of the
indenture for the First Lien Notes, the Company had the right to redeem the
First Lien Notes at 100% of the outstanding principal amount of the notes, plus
accrued and unpaid interest to the date of redemption, and to discharge the
indenture upon call of the First Lien Notes for redemption and deposit of the
redemption funds with the trustee. The Company exercised these rights on January
23, 2003 and upon the discharge of the indenture, the trustee released the
collateral securing the Company's obligations under the First Lien Notes.
Note 4. Long-Term Debt
Long-term debt consisted of the following:
March 31 December 31
2003 2002
---------------- -----------------
(In thousands)
11.5% Senior Notes due 2004 ("Old Notes") ............................. - $ 801
12.875% Senior Secured Notes due 2003 ("First Lien Notes") ............ - 63,500
11.5% Second Lien Notes due 2004 ("Second Lien Notes")................. - 190,178
11.5% Senior Credit Facility("Grey Wolf Facility") providing for
borrowings up to approximately US $96 million (CDN $150 million)
secured by the assets of Grey Wolf and non-recourse to Abraxas - 45,964
11.5% Secured Notes due 2007 ("New Notes")............................. 128,598 -
Senior Secured Credit Agreement........................................ 45,137 -
---------------- -----------------
173,735 300,443
Less current maturities ............................................... - 63,500
---------------- -----------------
$ 173,735 $ 236,943
================ =================
New Notes. - In connection with the financial restructuring, Abraxas issued
$109.7 million in principal amount of it's 11 1/2% Secured Notes due 2007,
Series A, in exchange for the second lien notes and old notes tendered in the
exchange offer. The New Notes were issued under an indenture with U.S. Bank, N.
A. In accordance with SFAS 15, the basis of the New Notes exceeds the face
10
amount of the New Notes by approximately $19.0 million. Such amount will be
amortized over the term of the New Notes as an adjustment to the yield of the
New Notes.
The New Notes accrue interest from the date of issuance, at a fixed annual
rate of 11 1/2%, payable in cash semi-annually on each May 1 and November 1,
commencing May 1, 2003, provided that, if we fail, or are not permitted pursuant
to our new senior credit agreement or the intercreditor agreement between the
trustee under the indenture for the New Notes and the lenders under the new
senior credit agreement, to make such cash interest payments in full, we will
pay such unpaid interest in kind by the issuance of additional New Notes with a
principal amount equal to the amount of accrued and unpaid cash interest on the
New Notes plus an additional 1% accrued interest for the applicable period. Upon
an event of default, the New Notes accrue interest at an annual rate of 16.5%.
The New Notes are secured by a second lien or charge on all of our current
and future assets, including, but not limited to, all of our crude oil and
natural gas properties. All of Abraxas' current subsidiaries, Sandia Oil & Gas
Corporation, Sandia Operating Corp. (a wholly-owned subsidiary of Sandia Oil &
Gas), Wamsutter Holdings, Inc., New Grey Wolf, Western Associated Energy
Corporation and Eastside Coal Company, Inc. are guarantors of the New Notes, and
all of Abraxas' future subsidiaries will guarantee the New Notes. If Abraxas
cannot make payments on the New Notes when they are due, the guarantors must
make them instead.
The New Notes and related guarantees
o are subordinated to the indebtedness under the new senior credit
agreement;
o rank equally with all of Abraxas' current and future senior
indebtedness; and
o rank senior to all of Abraxas' current and future subordinated
indebtedness, in each case, if any.
The New Notes are subordinated to amounts outstanding under the new senior
credit agreement both in right of payment and with respect to lien priority and
are subject to an intercreditor agreement.
Abraxas may redeem the New Notes, at its option, in whole at any time or in
part from time to time, at redemption prices expressed as percentages of the
principal amount set forth below. If Abraxas redeems all or any New Notes, it
must also pay all interest accrued and unpaid to the applicable redemption date.
The redemption prices for the New Notes during the indicated time periods are as
follows:
Period Percentage
From January 24, 2003 to June 23, 2003...............................80.0429%
From June 24, 2003 to January 23, 2004...............................91.4592%
From January 24, 2004 to June 23, 2004...............................97.1674%
From June 24, 2004 to January 23, 2005...............................98.5837%
Thereafter..........................................................100.0000%
Under the indenture, the Company is subject to customary covenants which, among
other things, restricts our ability to:
o borrow money or issue preferred stock;
o pay dividends on stock or purchase stock;
o make other asset transfers;
o transact business with affiliates;
o sell stock of subsidiaries;
o engage in any new line of business;
o impair the security interest in any collateral for the notes;
o use assets as security in other transactions; and
o sell certain assets or merge with or into other companies.
11
In addition, we are subject to certain financial covenants including covenants
limiting our selling, general and administrative expenses and capital
expenditures, a covenant requiring Abraxas to maintain a specified ratio of
consolidated EBITDA, as defined in the indenture, to cash interest and a
covenant requiring Abraxas to permanently, to the extent permitted, pay down
debt under the new senior credit agreement and, to the extent permitted by the
new senior credit agreement, the New Notes or, if not permitted, paying
indebtedness under the new senior credit agreement.
The indenture also contains customary events of default, including
nonpayment of principal or interest, violations of covenants, inaccuracy of
representations or warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, material judgments and
liabilities, change of control and any material adverse change in our financial
condition.
New Senior Credit Agreement. In connection with the financial
restructuring, Abraxas entered into a new senior credit agreement providing a
term loan facility and a revolving credit facility as described below. Subject
to earlier termination on the occurrence of events of default or other events,
the stated maturity date for both the term loan facility and the revolving
credit facility is January 22, 2006. In the event of an early termination, we
will be required to pay a prepayment premium, except in the limited
circumstances described in the new senior credit agreement. Outstanding amounts
under both facilities bear interest at the prime rate announced by Wells Fargo
Bank, N.A. plus 4.5%. Any amounts in default under the term loan facility will
accrue interest at an additional 4%. At no time will the amounts outstanding
under the new senior credit agreement bear interest at a rate less than 9%.
Term Loan Facility. Abraxas borrowed $4.2 million pursuant to a term loan
facility on January 23, 2003, all of which was used to make cash payments in
connection with the financial restructuring. Accrued interest under the term
loan facility will be capitalized and added to the principal amount of the term
loan facility until maturity.
Revolving Credit Facility. Lenders under the new senior credit agreement
have provided a revolving credit facility to Abraxas with a maximum borrowing
base of up to $50 million. Our current borrowing base under the revolving credit
facility is $49.9 million, subject to adjustments based on periodic calculations
and mandatory prepayments under the senior credit agreement. Portions of accrued
interest under the revolving credit facility may be capitalized and added to the
principal amount of the revolving credit facility. We have borrowed $42.5
million under the revolving credit facility, all of which was used to make cash
payments in connection with the financial restructuring. As of March 31, 2003,
the balance of the facility was $40.9 million. We plan to use the remaining
borrowing availability under the new senior credit agreement to fund our
operations, including capital expenditures.
Covenants. Under the new senior credit agreement, Abraxas is subject to
customary covenants and reporting requirements. Certain financial covenants
require Abraxas to maintain minimum levels of consolidated EBITDA (as defined in
the new senior credit agreement), minimum ratios of consolidated EBITDA to cash
interest expense and a limitation on annual capital expenditures. In addition,
at the end of each fiscal quarter, if the aggregate amount of our cash and cash
equivalents exceeds $2.0 million, we are required to repay the loans under the
new senior credit agreement in an amount equal to such excess. The new senior
credit agreement also requires us to enter into hedging agreements on not less
than 25% or more than 75% of our projected oil and gas production. We are also
required to establish deposit accounts at financial institutions acceptable to
the lenders and we are required to direct our customers to make all payments
into these accounts. The amounts in these accounts will be transferred to the
lenders upon the occurrence and during the continuance of an event of default
under the new senior credit agreement.
In addition to the foregoing and other customary covenants, the new senior
credit agreement contains a number of covenants that, among other things,
restrict our ability to:
o incur additional indebtedness;
o create or permit to be created any liens on any of our
properties;
o enter into any change of control transactions;
o dispose of our assets;
o change our name or the nature of our business;
12
o make any guarantees with respect to the obligations of third
parties;
o enter into any forward sales contracts;
o make any payments in connection with distributions, dividends or
redemptions relating to our outstanding securities; or
o make investments or incur liabilities.
Security. The obligations of Abraxas under the new senior credit agreement
are secured by a first lien security interest in all of Abraxas' assets,
including all crude oil and natural gas properties.
Guarantees. The obligations of Abraxas under the new senior secured credit
agreement are guaranteed by Sandia Oil & Gas, Sandia Operating, Wamsutter, New
Grey Wolf, Western Associated Energy and Eastside Coal. The guarantees under the
new senior credit agreement are secured by a first lien security interest in
substantially all of the guarantors' assets, including all crude oil and natural
gas properties.
Events of Default. The new senior credit facility contains customary events
of default, including nonpayment of principal or interest, violations of
covenants, inaccuracy of representations or warranties in any material respect,
cross default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in our financial condition.
Note 5. Stock-based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Effective July 1, 2000, the Financial Accounting Standards Board ("FASB")
issued FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. Under the interpretation,
certain modifications to fixed stock option awards which were made subsequent to
December 15, 1998, and were not exercised prior to July 1, 2000, require that
the awards be accounted for as variable until they are exercised, forfeited, or
expired. In January 2003, the Company amended the exercise price to $0.66 on
certain options with an existing exercise price greater than $0.66. The Company
recognized approximately $36,000 in expense during the quarter ended March 31,
2003 as General and administrative (stock-based compensation) in the
accompanying consolidated financial statements.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, "Accounting for Stock-Based Compensation" (SFAS
123), which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1995 under the fair value method prescribed by SFAS 123 The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for the quarters ended
March 31, 2003 and 2002, risk-free interest rates of 1.5%; dividend yields of
-0-%; volatility factor of the expected market price of the Company's common
stock of .35; and a weighted-average expected life of the option of ten years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In October 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure", (SFAS No. 148), providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirement of SFAS No. 123, "Accounting for Stock-Based
Compensation" to include prominent disclosures in annual and interim financial
13
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. The Company adopted the
disclosure provisions of SFAS No. 148 on December 31, 2002.
Had the Company determined stock-based compensation costs based on the
estimated fair value at the grant date for its stock options, the Company's net
income (loss) per share for the three months ended March 31, 2003 and March 31,
2002 would have been:
Three Months Ended March 31,
---------------------------------
2003 2002
------------ ------------
Net income (loss) as reported $ 62,702 $ (8,699)
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 36 -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (67) (72)
------------ ------------
Pro forma net income (loss) $ 62,671 $ (8,771)
============ ============
Earnings (loss) per share:
Basic - as reported $ 1.84 $ (0.29)
============ ============
Basic - pro forma $ 1.84 $ (0.30)
============ ============
Diluted - as reported $ 1.83 $ (0.29)
============ ============
Diluted - pro forma $ 1.82 $ (0.30)
============ ============
Note 6. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Ended March 31,
----------------------------
2003 2002
----------- ----------
Numerator:
Numerator for basic and diluted earnings per share
Net earnings (loss) before cumulative effect of accounting change (in
thousands)......... . $ 63,097) $ (8,699)
Cumulative effect of accounting change.................................. (395) -
----------- ----------
Numerator for basic and diluted earnings per share
Net earnings (loss) available to common stockholders (in thousands).... 62,702 (8,699)
=========== ==========
Denominator:
Denominator for basic earnings per share - weighted-average shares..... 34,181,118 9,979,397
Effect of dilutive securities:
Stock options and Warrants.......................................... 319,472 -
----------- ----------
Dilutive potential common shares
Denominator for diluted earnings per share - adjusted weighted-average
shares and assumed Conversions...................................... 34,500,590 9,979,397
=========== ==========
Basic earnings (loss) per share:
Net earnings (loss) before cumulative effect of accounting change .. $ 1.84 $ (0.29)
Cumulative effect of accounting change............................... (0.01) -
----------- ----------
Net earnings (loss) per common share - basic . $ 1.83 $ (0.29)
=========== ==========
Diluted earnings (loss) per share:
Net earnings (loss) before cumulative effect of accounting change... $ 1.83 $ (0.29)
Cumulative effect of accounting change............................... (0.01) -
----------- ----------
Net earnings (loss) per common share - diluted........................... $ 1.82 $ (0.29)
=========== ==========
14
For the three months ended March 31, 2002, 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
period. Had there not been losses in this period, dilutive shares would have
been 45,982 shares for the three months ended March 31, 2002.
Note 7. Hedging Program and Derivatives
On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" SFAS 133 as amended by SFAS 137 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB 133" and SFAS 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities". 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.
Under the terms of our new senior credit agreement, the Company is required
to maintain hedging agreements with respect to not less than 25% nor more than
75% of it crude oil and natural gas production for a rolling six month period.
On January 23, 2003, the Company entered into a collar option agreement with
respect to 5,000 MMBtu per day, or approximately 25% of the Company's
production, at a call price of $6.25 per MMBtu and a put price of $4.00 per
MMBtu, for the calendar months of February through July 2003. In February 2003,
the Company entered into an additional hedge agreement for 5,000 MMbtu per day
with a floor of $4.50 per MMBtu for the calendar months of March 2003 through
February 2004.
The following table sets forth the Company's hedge position as of March 31,
2003:
Time Period Notional Quantities Price Fair Value
---------------------------------------- ------------------------------ ------------------------------ ----------------
February 1, 2003--July 31, 2003 5,000 MMBtu of production Collar with floor of $4.00 $ -
per day and ceiling of $6.25
March 1, 2003 - February 29, 2004 5,000 MMBtu of production Floor of $4.50 $ 361,769
per day
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 March 31, 2003, a
commodity price increase of 10% would have resulted in an unfavorable change in
the fair market value of $36,200 and a commodity price decrease of 10% would
have resulted in a favorable change in fair market value of $36,200.
15
Note 8. Contingencies
Litigation - In 2001 the Company and a limited partnership, of which
Wamsutter Holdings, a subsidiary of the Company, is the general partner (the
"Partnership"), were named in a lawsuit filed in U.S. District Court in the
District of Wyoming. The claim asserts breach of contract, fraud and negligent
misrepresentation by the Company and the Partnership related to the
responsibility for year 2000 ad valorem taxes on crude oil and natural gas
properties sold by the Company and the Partnership. In February 2002, a summary
judgment was granted to the plaintiff in this matter and a final judgment in the
amount of $1.3 million was entered. The Company and the Partnership have filed
an appeal. The Company believes these charges are without merit. The Company has
established a reserve in the amount of $845,000, which represents the Company's
interest in the judgment.
In late 2000, the Company received a Final De Minimis Settlement Offer from
the United States Environmental Protection Agency concerning the Casmalia
Disposal Site, Santa Barbara County, California. The Company's liability for the
cleanup at the Superfund site is based on its acquisition of Bennett Petroleum
Corporation, which is alleged to have transported or arranged for the
transportation of oil field waste and drilling muds to the Superfund site. The
Company has engaged California counsel to evaluate the notice of proposed de
minimis settlement and its notice of potential strict liability under the
Comprehensive Environmental Response, Compensation and Liability Act. Defense of
the action is handled through a joint group of companies, all of which are
claiming a petroleum exclusion that limits the Company's liability. The
potential financial exposure and any settlement posture has yet not been
developed, but is considered by the Company to be immaterial.
Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At March 31, 2003, the Company was 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 Stockholders' Deficit and classified as Other Comprehensive
Income.
The following table illustrates the calculation of comprehensive income
(loss) for the quarter ended March 31, 2003:
Three Months Ended March 31
2003 2002
--------------------- ---------------
Net income................................................ $ 62,702 $ (8,699)
Other Comprehensive income:
Hedging derivatives (net of tax) - See Note 7 Change
in fair market value of outstanding hedge positions.. 102 (2,075)
Foreign currency translation adjustment................ 5,427 (367)
--------------- --------------
Other comprehensive income................................ 5,529 (2,442)
--------------- --------------
Comprehensive income...................................... $ 68,231 $ (11,141)
============== ==============
Note 10. Business Segments
Business segment information about our first quarter operations in
different geographic areas is as follows:
Three Months Ended March 31, 2003
----------------------------------------------------------
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
Revenues ................................ $ 8,799 $ 4,312 $ 13,111
================== ================== ===================
Operating profit ........................ $ 4,736 $ 2,243 $ 6,979
================== ==================
General corporate ....................... (1,333)
Interest expense and amortization of
deferred financing fees .............. (9,132)
Gain on sale of foreign subsidiary ...... 66,960
Cumulative effect of accounting change... (395)
-------------------
Income before income taxes ........... $ 63,079
===================
Identifiable assets at March 31, 2003 ... $ 82,179 $ 29,060 $ 111,239
================== ==================
Corporate assets ........................ 6,435
-------------------
Total assets ......................... $ 117,764
===================
16
Three Months Ended March 31, 2002
----------------------------------------------------------
U.S. Canada Total
------------------ ------------------ -------------------
(In thousands)
Revenues ................................ $ 4,616 $ 7,191 $ 11,807
================== ================== ===================
Operating profit ........................ $ 454 $ (199) $ 255
================== ==================
General corporate ....................... (990)
Interest expense and amortization of
deferred financing fees .............. (8,807)
-------------------
Income before income taxes ........... $ (9,542)
===================
Note 11 New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") 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.
SFAS No. 141 and 142 clarify that more assets should be distinguished and
classified between tangible and intangible. The Company did not change or
reclassify contractual mineral rights included in oil and gas properties on the
balance sheet upon adoption of SFAS No. 142. The Company believes the treatment
of such mineral rights as tangible assets under the full cost method of
accounting for crude oil and natural gas properties is appropriate. An issue has
arisen regarding whether contractual mineral rights should be classified as
intangible rather that tangible assets. If it is determined that
reclassification is necessary, the Company's oil and gas properties would be
reduced by $3.1 million and intangible assets would have increased by a like
amount at March 30, 2003 and December 31, 2002, representing cost incurred from
the effective date of June 30, 2001. The provisions of SFAS No. 141 and 142
impact only the balance sheet and associated footnote disclosure, and
reclassifications necessary would not impact the Company's cash flow or results
of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). SFAS 143 addresses accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 is effective for us January 1,
2003. SFAS 143 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 useful life of the
related asset. If the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized. 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 consolidated financial statements.
The Company adopted SFAS 143 effective January 1, 2003. For the quarter
ended March 31, 2003 the Company recorded an additional liability of $711,732, a
charge of $395,341 for the cumulative effect of the change in accounting
principal and current expense of $19,108.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). Effective January 1,
2002, the Company adopted SFAS No. 144. SFAS No. 144 retains the requirement to
recognize an impairment loss only where the carrying value of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure such loss as
the difference between the carrying amount and fair value of the asset. SFAS No.
144, among other things, changes the criteria that have to be met to classify an
asset as held-for-sale and requires that operating losses from discontinued
operations be recognized in the period that the losses are incurred rather than
as of the measurement date. This new standard had no impact on the Company's
consolidated financial statements during the first quarter of 2003.
17
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44,
and 64, Amendments of FASB Statement No. 13 and Technical Corrections" (SFAS
145). SFAS 145 clarifies guidance related to the reporting of gains and losses
from extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. SFAS 145 also amends other
existing pronouncements to make various technical corrections, clarify meanings
or describe their applicability under changed conditions. The provisions
relating to the reporting of gains and losses from extinguishment of debt were
effective for us beginning January 1, 2003. All other provisions of this
standard have been effective for the Company as of May 15, 2002 and did not have
a significant impact on the Company's financial condition or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires costs
associated with exit of disposal activities to be recognized when they are
incurred rather than at the date of commitment to an exit or disposal plan. SFAS
146 was effective for us beginning January 1, 2003. For the period ended March
31, 2003 this standard had no impact on the Company's financial condition or
results of operation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123," which amends SFAS 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS 148 are
effective for annual financial statements for fiscal years ending after December
15, 2002, and for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2002. The Company will continue
to use APB No. 25 to account for stock based compensation, while providing the
disclosures required by SFAS 123 as amended by SFAS 148.
Note 12 Accounting Change
The Company adopted SFAS 143 effective January 1, 2003. For the quarter
ended March 31, 2003 the Company recorded an additional liability of $711,732, a
charge of $395,341 for the cumulative effect of the change in accounting
principal and current expense of $19,108.
Note 13 Restatement
In January 2003, the Company sold its wholly owned Canadian subsidiaries,
Old Grey Wolf and Canadian Abraxas as part of a series of transactions related
to a financial restructuring - see Note 3 for additional information regarding
an exchange offer, redemption of certain notes and a new credit agreement.
Subsequent to the issuance of its consolidated financial statements for the year
ended December 31, 2002, it was determined that the wholly owned Canadian
subsidiaries should not have been presented as discontinued operations. As a
result, the accompanying consolidated balance sheets as of December 31, 2002,
and the related consolidated statements of operations, for the Quarters ended
March 31, 2002 and 2003 have been restated to present the assets and
liabilities, results of operations as components of continuing operations. The
transactions were completed in January 2003, accordingly, no restatement of the
March 31, 2003 balance sheet was necessary.
A summary of the significant effects of the restatement is as follows (In
thousands):
18
--------------------------------------------------------------
For the Three Months Ended March 31,
--------------------------------------------------------------
2003 2002
----------------------------- -----------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
------------- ------------ ------------- ------------
Revenues:
Oil and gas production revenue $ 9,653 $ 12,772 $ 4,461 $ 10,886
Gas processing revenue - 132 - 670
Rig revenue 181 181 151 151
Other 2 26 4 100
------------ ---------- ------------- -------------
9,836 13,111 4,616 11,807
Operating costs and expenses:
Lease operating and
production taxes 2,347 2,726 1,878 3,909
Depreciation, depletion and
amortization 2,350 3,142 2,253 6,814
Rig operations 166 166 121 121
General and administrative 1,230 1,395 1,093 1,698
General and administrative
(Stock-based compensation) 36 36 - -
------------ ---------- ------------- -------------
6,129 7,465 5,345 12,542
------------ ---------- ------------- -------------
Operating income (loss) 3,707 5,646 (729) (735)
Other (income) expense:
Interest income (10) (10) (33) (33)
Amortization of deferred
financing fees 329 377 331 427
Interest expense 4,523 5,164 6,235 8,413
Financing costs 3,601 3,601 - -
(Gain) loss on sale of foreign
subsidiaries - (66,960) - -
------------ ---------- ------------- -------------
8,443 (57,828) 6,533 8,807
------------ ---------- ------------- -------------
Income (loss) before income tax (4,736) 63,474 (7,262) (9,542)
Income tax expense (benefit): - 377 - (843)
Loss from discontinued operations:
Earnings loss from discontinued
operations 873 - (1,437) -
Gain of sale of foreign
subsidiaries 66,960 - - -
------------ ---------- ------------- -------------
Net earnings from discontinued
operations 67,833 - (1,437) -
Cumulative effect of accounting
change (395) (395) - -
------------ ---------- ------------- -------------
Net income (loss) $ 62,702 $ 62,702 $ (8,699) $ (8,699)
============ ========== ============= =============
19
December 31, 2002
--------------------------------
As
Previously As
Reported Restated
--------------- ------------
Current Assets:
Cash $ 557 $ 4,882
Accounts receivable:
Joint owners 516 2,215
Oil and gas production sales 5,292 7,466
Other 221 364
------------ ------------
6,029 10,045
Equipment inventory 1,021 1,014
Other current assets 316 1,240
------------ ------------
7,923 17,181
Assets held for sale 74,247 -
------------ ------------
Total current assets 82,170 17,181
Property and equipment:
Oil and gas properties:
Proved 298,972 521,995
Unproved 7,052 7,052
Other property and equipment 2,713 44,189
------------ ------------
Total 308,737 573,236
Less accumulated depreciation, depletion
and amortization 212,811 422,842
------------ ------------
Total property and equipment - net 95,926 150,394
Deferred financing fees 2,970 5,671
Deferred income taxes - 7,820
Other 359 359
------------ ------------
Total assets $ 181,425 $ 181,425
============ ============
Current Liabilities:
Accounts payable $ 4,171 $ 9,687
Joint interest oil and gas production payable 1,637 2,432
Accrued interest 5,000 6,009
Other accrued expenses 1,162 1,162
Hedge liability - -
Current maturities of long-term debt 63,500 63,500
----------- ------------
75,470 82,790
Liabilities related to assets held for sale 56,697 -
----------- ------------
Total current liabilities 132,167 82,790
Long-term debt 190,979 236,943
Deferred income taxes - -
Future site restoration 533 3,946
Stockholders' equity (deficit) (142,254) (142,254)
----------- ------------
Total liabilities and stockholders' deficit $ 181,425 $ 181,425
=========== ============
20
ABRAXAS PETROLEUM CORPORATION
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 our Annual Report on Form 10-K filed for the year ended December 31,
2002. The results of operations of Canadian Abraxas and Old Grey Wolf are
included in this report through January 23, 2003, the date of the consummation
of the sale.
As discussed in Note 13 to the consolidated financial statements, the
Company's financial statements have been restated. The accompanying management's
discussion and analysis gives effect to that restatement.
Critical Accounting Policies
There have been no changes from the Critical Accounting Polices described
in our Annual Report on Form 10-K and Form 10-K/A for the year ended December
31, 2002.
General
We have incurred net losses in five of the last six years, and there can be
no assurance that operating income and net earnings will be achieved in future
periods. 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. During 2002, crude
oil and natural gas prices began to increase from 2001 levels and increased
further in the first quarter of 2003. In addition, because our proved reserves
will decline as crude oil, natural gas and natural gas liquids are produced,
unless we acquire additional properties containing proved reserves or conduct
successful exploration and development activities, our reserves and production
will decrease. Our ability to acquire or find additional reserves in the near
future will be dependent, in part, upon the amount of available funds for
acquisition, exploitation, exploration and development projects. In order to
provide us with liquidity and capital resources, we have sold certain of our
producing properties. However, our production levels have declined as we have
been unable to replace the production represented by the properties we have sold
with new production from the producing properties we have invested in with the
proceeds of our property sales. In addition, under the terms of our new senior
credit agreement and our new notes, we are subject to limitations on capital
expenditures. As a result, we will be limited in our ability to replace existing
production with new production and might suffer a decrease in the volume of
crude oil and natural gas we produce. If crude oil and natural gas prices return
to depressed levels or if our production levels continue to decrease, our
revenues, cash flow from operations and financial condition will be materially
adversely affected. For more information, see "Liquidity and Capital Resources."
Results of Operations
General. Our financial results depend upon many factors, particularly the
following factors which most significantly affect our results of operations:
o the sales prices of crude oil, natural gas liquids and natural gas;
o the level of total sales volumes of crude oil, natural gas liquids
and natural gas;
o the ability to raise capital resources and provide liquidity to meet
cash flow needs;
o the level of and interest rates on borrowings; and
o the level and success of exploration and development activity.
Commodity Prices. Our results of operations are significantly affected by
fluctuations in commodity prices. Price volatility in the natural gas market has
remained prevalent in the last few years. In the first quarter of 2003, we
experienced an increase in energy commodity prices from the prices that we
received in the first quarter of 2002. Price declines experienced in 2001
continued during the first quarter of 2002, primarily due to the economic
21
downturn. Beginning in March 2002, commodity prices began to increase and
continued higher through 2002 and have continued to increase during the first
part of 2003.
The table below illustrates how natural gas prices fluctuated over the
eight quarters prior to and including the quarter ended March 31, 2003. The
table below also contains the last three day average of NYMEX traded contracts
price and the prices we realized during each quarter presented, including the
impact of our hedging activities.
Natural Gas Prices by Quarter (in $ per Mcf)
----------------------------------------------------------------------------------------------------
Quarter Ended
----------------------------------------------------------------------------------------------------
June 30, Sept.30, Dec 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
2001 2001 2001 2002 2002 2002 2002 2003
------------ ---------- ----------- ------------- ------------- ----------- ----------- ------------
Index $ 4.82 $ 2.98 $ 2.47 $ 2.38 $ 3.36 $ 3.28 $ 3.99 $ 6.61
Realized 3.41 2.26 2.09 2.21 2.44 2.08 3.47 5.13
The NYMEX natural gas price on May 8, 2003 was $5.77 per Mcf.
Prices for crude oil have followed a similar path as the commodity market
fell throughout 2001 and the first quarter of 2002. The table below contains the
last three day average of NYMEX traded contracts price and the prices we
realized during each quarter presented
Crude Oil Prices by Quarter (in $ per Bbl)
-------------------------------------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
2001 2001 2001 2002 2002 2002 2002 2003
----------- ---------- ------------- -------------- ------------- ---------- ------------- ------------
Index $ 27.94 $ 26.50 $ 22.12 $ 19.48 $ 26.40 $ 27.50 $ 28.29 $ 33.71
Realized 25.32 25.06 18.72 16.640 23.47 27.47 24.83 33.22
The NYMEX crude oil price on May 8, 2003 was $ 26.98 per Bbl.
Hedging Activities. We seek to reduce our exposure to price volatility by
hedging our production through swaps, options and other commodity derivative
instruments. During the first quarter of 2002 we experienced hedging losses of
$250,000. In October 2002, all of these hedge agreements expired. Under the
expired hedge agreements, we made total payments over the term of these
arrangements to various counterparties in the amount of $35.1 million.
Under the terms of our new senior credit agreement, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our crude oil and natural gas production for a rolling six month period. On
January 23, 2003, we entered into a collar option agreement with respect to
5,000 MMBtu per day, or approximately 25% of our production, at a call price of
$6.25 per MMBtu and a put price of $4.00 per MMBtu agreement, for the calendar
months of February through July 2003. In February 2003, we entered into a second
hedge agreement for the calendar months of March 2003 through February 2004,
related to 5,000 MMBtu which provides for a floor price of $4.50 per MMBtu.
During the first quarter of 2003, we incurred hedging losses of $470,890 in
connection with our collar option agreement.
Selected operating data. The following table sets forth certain of our
operating data for the periods presented.
Three Months Ended
March 31,
----------------------------
2003 2002
----------- ----------
Operating Revenue:
Crude Oil Sales................................................... $ 2,174 $ 1,232
Natural Gas Sales ................................................ 10,087 8,782
Natural Gas Liquids Sales......................................... 511 872
Gas processing revenue............................................ 132 670
Rig Operations.................................................... 181 151
Other............................................................. 26 100
----------- ----------
$ 13,111 $ 11,807
=========== ==========
22
Operating Income (loss)........................................... $ 5,646 $ (735)
Crude Oil Production (MBBLS)...................................... 65.4 74.0
Natural Gas Production (MMCFS).................................... 1,965.3 3,973.1
Natural Gas Liquids Production (MBBLS)............................ 20.2 68.4
Average Crude Oil Sales Price ($/BBL)............................. $ 33.22 $ 16.64
Average Natural Gas Sales Price ($/MCF)........................... $ 5.13 $ 2.21
Average Liquids Sales Price ($/BBL)............................... $ 25.29 $ 12.76
Comparison of Three Months Ended March 31, 2003 to Three Months Ended March 31,
2002
Operating Revenue. During the three months ended March 31, 2003, operating
revenue from crude oil, natural gas and natural gas liquid sales increased to
$12.8 million compared to $10.9 million in the three months ended March 31,
2002. The increase in revenue was primarily due to increased prices realized
during the period, partially offset by a decline in production volumes. Higher
commodity prices impacted crude oil and natural gas revenue by $7.2 million
while reduced production volumes had a $5.6 million negative impact on revenue.
Average sales prices net of hedging losses for the quarter ended March 31,
2003 were:
o $33.22 per Bbl of crude oil,
o $25.29 per Bbl of natural gas liquid, and
o $ 5.13 per Mcf of natural gas
Average sales prices net of hedging losses for the quarter ended March 31, 2002
were:
o $16.64 per Bbl of crude oil,
o $12.76 per Bbl of natural gas liquid, and
o $ 2.21 per Mcf of natural gas
Crude oil production volumes declined by 8.6 MBbls from 74.0 MBbls during the
quarter ended March 31, 2002 to 65.4 MBbls for the same period of 2003. The
decline in crude oil production was due to the sale of U.S. properties in the
second quarter of 2002. These properties contributed 4.9 MBbbls of crude oil in
the first quarter of 2002. Additionally the Canadian properties sold in January
2003, in connection with the sale of Canadian Abraxas and Grey Wolf contributed
6.4 MBbls during the quarter ended March 2002 compared to 2.4 MBbls during the
quarter ended March 2003 (through January 23, 2003). Natural gas production
volumes declined by 2,007.8 MMcf to 1,965.3 MMcf for the three months ended
March 31, 2003 from 3,973.1 MMcf for the same period of 2002. This decline was
due to the sale of U.S properties in the second quarter of 2002 and the sale of
Canadian properties in January 2003 in connection with the sale of our Canadian
subisidiaries. The U.S. properties contributed 152.2 MMcf for the quarter ended
March 31, 2002 while the Canadian properties contributed 2,507.4 MMcf in the
first quarter of 2002, compared to 558.9 MMcf during the quarter ended March 31,
2003 (through January 23, 2003.) The decrease in production applicable to the
properties which were sold was offset by new production from drilling activities
which contributed 4.5 MBbls of crude oil and 225.4 MMcf of natural gas during
the first quarter of 2003
Lease Operating Expenses. Lease operating expenses ("LOE") for the three
months ended March 31, 2003 decreased to $2.7 million from $3.9 million for the
same period in 2002. The decrease in LOE was primarily due to the sale of
Canadian Abraxas and Grey Wolf in January 2003. LOE related to the properties
sold was $2.0 million for the first quarter of 2002 compared to $379,000 during
the first quarter of 2003 through the date of the sale. Partially offsetting the
decline was an increase in production tax expense due to higher commodity prices
in the quarter ended March 31, 2003 compared to the same period of 2002. LOE on
a per Mcfe basis for the three months ended March 31, 2003 was $1.10 per Mcfe
compared to $0.81 for the same period of 2002. The increase in the per Mcfe
expense was primarily due to the increase in production tax expense described
above and by a decline in production volumes in the first quarter of 2003
compared to the same period in 2002.
General and Administrative ("G&A") Expenses. G&A expenses decreased by $0.3
million to $1.4 million during the quarter ended March 31, 2003 for the first
three months of 2003 from $1.7 million for the first three months of 2002. G&A
expense on a per Mcfe basis was $0.56 for the first quarter of 2003 compared to
$0.33 for the same period of 2002. The decrease in G&A expense was primarily due
to a reduction in personnel in connection with the sale of Canadian Abraxas and
Grey Wolf on January 23, 2003. The increase in G&A expense on a per Mcfe basis
was due to a decline in production volumes during the first quarter of 2003
compared to the same period in 2002.
23
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 January 2003, we amended the exercise price to $0.66 per share on
certain options with an existing exercise price greater than $0.66 per share. We
recognized approximately $36,000 as stock-based compensation expense during the
quarter ended March 31, 2003 related to these repricings. During 2002, we did
not recognize any stock-based compensation due to the decline in the price of
our common stock.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion
and amortization ("DD&A") expensedecreased to $3.1 million for the three months
ended March 31, 2003 from $6.8million for the same period of 2002. The decline
in DD&A was primarily due to the sale of Canadian properties in January 2003, as
well as ceiling limitation write-downs in the second quarter of 2002. Our DD&A
on a per Mcfe basis for the three months ended March 31, 2003 was $1.27 per Mcfe
compared to $1.41 in 2002.
Interest Expense. Interest expense decreased from $8.4 million for the
first three months of 2002 to $5.2 million in 2003. The decrease in interest
expense was due to the reduction in long-term debt in the first quarter of 2003
as compared to the same period of 2002. The reduction in debt was the result of
the financial transactions which occurred on January 23, 2003 as described in
Note 2 in the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
General. The crude oil and natural gas industry is a highly capital
intensive and cyclical business. Our capital requirements are driven principally
by our obligations to service debt and to fund the following costs: o the
development of existing properties, including drilling and completion costs of
wells;
o acquisition of interests in crude oil and natural gas properties; and
o production and transportation facilities.
The amount of capital available to us will affect our ability to service our
existing debt obligations and to continue to grow the business through the
development of existing properties and the acquisition of new properties.
Our sources of capital are primarily cash on hand, cash from operating
activities, funding under the new senior credit agreement and the sale of
properties. Our overall liquidity depends heavily on the prevailing prices of
crude oil and natural gas and our production volumes of crude oil and natural
gas. Significant downturns in commodity prices, such as that experienced in the
last nine months of 2001 and the first quarter of 2002, can reduce our cash from
operating activities. Although we have hedged a portion of our natural gas and
crude oil production and will continue this practice as required pursuant to the
new senior credit agreement, future crude oil and natural gas price declines
would have a material adverse effect on our overall results, and therefore, our
liquidity. Low crude oil and natural gas prices could also negatively affect our
ability to raise capital on terms favorable to us.
If the volume of crude oil and natural gas we produce decreases, our cash
flow from operations will decrease. Our production volumes will decline as
reserves are produced. In addition, due to sales of properties in 2002 and
January 2003, we now have significantly reduced reserves and production levels.
In the future we may sell additional properties, which could further reduce our
production volumes. To offset the loss in production volumes resulting from
natural field declines and sales of producing properties, we must conduct
successful exploration, exploitation and development activities, acquire
additional producing properties or identify additional behind-pipe zones or
secondary recovery reserves. While we have had some success in pursuing these
activities historically, we have not been able to fully replace the production
volumes lost from natural field declines and property sales.
Working Capital. At March 31, 2003, our current liabilities of
approximately $12.9 million exceeded our current assets of $11.0 million
resulting in a working capital deficit of $1.9 million. This compares to a
working capital deficit of approximately $65.7 million at December 31, 2002.
However, as a result of the financial restructuring completed in January 2003,
our current liabilities were significantly reduced. Current liabilities at March
24
31, 2003 consisted of trade payables of $5.2 million, revenues due third parties
of $2.5 million and accrued interest of $2.5 million related to our new notes,
which was paid in kind May 1 with the issuance of additional notes. After giving
effect to the scheduled principal reductions required during 2003 under our new
senior credit agreement we will have cash interest expense of approximately $4.0
million. We do not expect to make cash interest payments with respect to the
outstanding new notes, and the issuance of additional new notes in lieu of cash
interest payments thereon will not affect our working capital balance.
Capital expenditures. Capital expenditures, excluding property divestitures
during the first three months of 2003, were $4.4 million compared to $2.1
million during the same period of 2002. The table below sets forth the
components of these capital expenditures on a historical basis for the three
months ended March 31, 2003 and 2002.
Three Months Ended
March 31
------------------------
2003 2002
----------- -----------
Expenditure category (in thousands):
Acquisitions.................................................. $ - $ 28
Development................................................. 4,423 17,249
Facilities and other........................................ 166 131
----------- -----------
Total................................................... $ 4,589 $ 17,408
=========== ===========
During the three months ended March 31, 2003 and 2002, capital expenditures
were primarily for the development of existing properties. For 2003, our capital
expenditures are subject to limitations imposed under the new senior credit
facility and new notes, including a maximum annual capital expenditure budget of
$15 million for 2003, and subject to reduction in the event of a reduction in
our net assets. Our capital expenditures could include expenditures for
acquisition 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 the prices of crude oil and natural gas decline from current levels, our
cash flows will decrease which may result in a reduction of the capital
expenditures budget. If we decrease our capital expenditures budget, we may not
be able to offset crude oil and natural gas production volumes decreases caused
by natural field declines and sales of producing properties.
Sources of Capital. The net funds provided by and/or used in each of the
operating, investing and financing activities are summarized in the following
table and discussed in further detail below:
Three Months Ended
March 31,
-------------------------------
2003 2002
-------------- --------------
Net cash provided by operating activities $ 2,745 $ 8,282
Net cash (used) in provided by financing activities (86,587) 5,377
Net cash provided by (used) in investing activities 81,235 (17,408)
-------------- --------------
Total $ (2,607) $ (3,749)
============== ==============
Operating activities during the three months ended March 31, 2003 provided
us $2.7 million cash compared to providing $8.3 million in the same period in
2002. Net income plus non-cash expense items during 2003 and net changes in
operating assets and liabilities accounted for most of these funds. Financing
activities used $86.6 million for the first three months of 2003 compared to
providing 5.4 million for the same period of 2002. Most of these funds were used
to reduce our long-term debt and were generated by the sale of our Canadian
subsidiaries and the exchange offer completed in January 2003. Investing
activities provided $81.2 million for the quarter ended March 31, 2003 compared
to using $17.4 million for the same period of 2002. The sale of our Canadian
subsidiaries contributed $85.8 million in 2003 reduced by $4.6 million in
exploration and development expenditures. Expenditures in 2002 were primarily
for the development of crude oil and natural gas properties.
Future Capital Resources. We will have four principal sources of liquidity going
forward: (i) cash on hand, (ii) cash from operating activities, (iii) funding
under the new senior credit agreement , and (iv) sales of producing properties.
However, covenants under the indenture for the outstanding new notes and the new
senior credit agreement restrict our use of cash on hand, cash from operating
activities and any proceeds from asset sales. We may attempt to raise additional
25
capital through the issuance of additional debt or equity securities, though the
terms of the new note indenture and the new senior credit agreement
substantially restrict our ability to:
o incur additional indebtedness;
o incur liens;
o pay dividends or make certain other restricted payments;
o consummate certain asset sales;
o enter into certain transactions with affiliates;
o merge or consolidate with any other person; or
o sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
Our best opportunity for additional sources of liquidity and capital will be
through the issuance of equity securities or through the disposition of assets.
Contractual Obligations
We are committed to making cash payments in the future on the following
types of agreements:
o Long-term debt
o Operating leases for office facilities
We have no off-balance sheet debt or unrecorded obligations and we have not
guaranteed the debt of any other party. Below is a schedule of the future
payments that we are obligated to make based on agreements in place as of March
31, 2003:
Contractual Obligations
(dollars in thousands) Payments due in:
----------------------------- ------------------------------------------------------------------------
Total Less than More than 5
one year 1-3 years 3-5 years years
----------------------------- ------------- -------------- ------------- -------------- --------------
Long-Term Debt (1) $ 230,638 $ - $ 46,394 $ 184,244 $ -
Operating Leases (2) 1,546 351 929 265 -
(1) These amounts represent the balances outstanding under the term loan
facility, the revolving credit facility and the new notes. These
repayments assume that interest will be capitalized under the term loan
facility and that periodic interest on the revolving credit facility will
be paid on a monthly basis and that we will not draw down additional
funds thereunder.
(2) Office lease obligations. Leases for office space for Abraxas and New
Grey Wolf expire in April 2006 and December 2008, respectively.
Other obligations. We make and will continue to make substantial capital
expenditures for the acquisition, exploitation, development, exploration and
production of crude oil and natural gas. In the past, we have funded our
operations and capital expenditures primarily through cash flow from operations,
sales of properties, sales of production payments and borrowings under our bank
credit facilities and other sources. Given our high degree of operating control,
the timing and incurrence of operating and capital expenditures is largely
within our discretion.
Long-Term Indebtedness.
New Notes . In connection with the financial restructuring, Abraxas issued
$109.7 million in principal amount of it's 11 1/2% Secured Notes due 2007,
Series A, in exchange for the second lien notes and old notes tendered in the
exchange offer. The new notes were issued under an indenture with U.S. Bank, N.
A. senior secured credit agreement
The new notes accrue interest from the date of issuance, at a fixed annual
rate of 11 1/2%, payable in cash semi-annually on each May 1 and November 1,
commencing May 1, 2003, provided that, if we fail, or are not permitted pursuant
to our new senior credit agreement or the intercreditor agreement between the
trustee under the indenture for the new notes and the lenders under the new
senior credit agreement, to make such cash interest payments in full, we will
pay such unpaid interest in kind by the issuance of additional new notes with a
26
principal amount equal to the amount of accrued and unpaid cash interest on the
new notes plus an additional 1% accrued interest for the applicable period. Upon
an event of default, the new notes accrue interest at an annual rate of 16.5%.
The new notes are secured by a second lien or charge on all of our current
and future assets, including, but not limited to, all of our crude oil and
natural gas properties. All of Abraxas' current subsidiaries, Sandia Oil & Gas,
Sandia Operating (a wholly-owned subsidiary of Sandia Oil & Gas), Wamsutter, New
Grey Wolf, Western Associated Energy and Eastside Coal, are guarantors of the
New Notes, and all of Abraxas' future subsidiaries will guarantee the New Notes.
If Abraxas cannot make payments on the New Notes when they are due, the
guarantors must make them instead.
The new notes and related guarantees:
o are subordinated to the indebtedness under the new senior credit
agreement;
o rank equally with all of Abraxas' current and future senior
indebtedness; and
o rank senior to all of Abraxas' current and future subordinated
indebtedness, in each case, if any.
The new notes are subordinated to amounts outstanding under the new senior
credit agreement both in right of payment and with respect to lien priority and
are subject to an intercreditor agreement.
Abraxas may redeem the new notes, at its option, in whole at any time or in
part from time to time, at redemption prices expressed as percentages of the
principal amount set forth below. If Abraxas redeems all or any new notes, it
must also pay all interest accrued and unpaid to the applicable redemption date.
The redemption prices for the new notes during the indicated time periods are as
follows:
Period Percentage
From January 24, 2003 to June 23, 2003..................................80.0429%
From June 24, 2003 to January 23, 2004..................................91.4592%
From January 24, 2004 to June 23, 2004..................................97.1674%
From June 24, 2004 to January 23, 2005..................................98.5837%
Thereafter.............................................................100.0000%
Under the indenture, we are subject to customary covenants which, among other
things, restricts our ability to:
o borrow money or issue preferred stock;
o pay dividends on stock or purchase stock;
o make other asset transfers;
o transact business with affiliates;
o sell stock of subsidiaries;
o engage in any new line of business;
o impair the security interest in any collateral for the notes;
o use assets as security in other transactions; and
o sell certain assets or merge with or into other companies.
In addition, we are subject to certain financial covenants including covenants
limiting our selling, general and administrative expenses and capital
expenditures, a covenant requiring Abraxas to maintain a specified ratio of
consolidated EBITDA, as defined in the indenture, to cash interest and a
covenant requiring Abraxas to permanently, to the extent permitted, pay down
debt under the new senior credit agreement and, to the extent permitted by the
new senior credit agreement, the new notes or, if not permitted, paying
indebtedness under the new senior credit agreement.
The indenture also contains customary events of default, including
nonpayment of principal or interest, violations of covenants, inaccuracy of
representations or warranties in any material respect, cross default and cross
acceleration to certain other indebtedness, bankruptcy, material judgments and
liabilities, change of control and any material adverse change in our financial
condition.
27
New Senior Credit Agreement. In connection with the financial
restructuring, Abraxas entered into a new senior credit agreement providing a
term loan facility and a revolving credit facility as described below. Subject
to earlier termination on the occurrence of events of default or other events,
the stated maturity date for both the term loan facility and the revolving
credit facility is January 22, 2006. In the event of an early termination, we
will be required to pay a prepayment premium, except in the limited
circumstances described in the new senior credit agreement. Outstanding amounts
under both facilities bear interest at the prime rate announced by Wells Fargo
Bank, N.A. plus 4.5%. Any amounts in default under the term loan facility will
accrue interest at an additional 4%. At no time will the amounts outstanding
under the new senior credit agreement bear interest at a rate less than 9%.
Term Loan Facility. Abraxas has borrowed $4.2 million pursuant to a term
loan facility at January 23, 2003, all of which was used to make cash payments
in connection with the financial restructuring. Accrued interest under the term
loan facility will be capitalized and added to the principal amount of the term
loan facility until maturity.
Revolving Credit Facility. Lenders under the new senior credit agreement
have provided a revolving credit facility to Abraxas with a maximum borrowing
base of up to $50 million. Our current borrowing base under the revolving credit
facility is $49.9 million, subject to adjustments based on periodic calculations
and mandatory prepayments under the senior credit agreement. We have borrowed
$42.5 million under the revolving credit facility, all of which was used to make
cash payments in connection with the financial restructuring. We plan to use the
remaining borrowing availability under the new senior credit agreement to fund
our operations, including capital expenditures. As of March 31, 2003, the
balance of the facility was $40.9 million
Covenants. Under the new senior credit agreement, Abraxas is subject to
customary covenants and reporting requirements. Certain financial covenants
require Abraxas to maintain minimum levels of consolidated EBITDA (as defined in
the new senior credit agreement), minimum ratios of consolidated EBITDA to cash
interest expense and a limitation on annual capital expenditures. In addition,
at the end of each fiscal quarter, if the aggregate amount of our cash and cash
equivalents exceeds $2.0 million, we are required to repay the loans under the
new senior credit agreement in an amount equal to such excess. The new senior
credit agreement also requires us to enter into hedging agreements on not less
than 25% or more than 75% of our projected oil and gas production. We are also
required to establish deposit accounts at financial institutions acceptable to
the lenders and we are required to direct our customers to make all payments
into these accounts. The amounts in these accounts will be transferred to the
lenders upon the occurrence and during the continuance of an event of default
under the new senior credit agreement.
In addition to the foregoing and other customary covenants, the new senior
credit agreement contains a number of covenants that, among other things,
restrict our ability to:
o incur additional indebtedness;
o create or permit to be created any liens on any of our properties;
o enter into any change of control transactions;
o dispose of our assets;
o change our name or the nature of our business;
o make any guarantees with respect to the obligations of third
parties;
o enter into any forward sales contracts;
o make any payments in connection with distributions, dividends or
redemptions relating to our outstanding securities, or
o make investments or incur liabilities.
Security. The obligations of Abraxas under the new senior credit agreement
are secured by a first lien security interest in substantially all of Abraxas'
assets, including all crude oil and natural gas properties.
28
Guarantees. The obligations of Abraxas under the new senior credit
agreement are guaranteed by Sandia Oil & Gas, Sandia Operating, Wamsutter, New
Grey Wolf, Western Associated Energy and Eastside Coal. The guarantees under the
new senior credit agreement are secured by a first lien security interest in
substantially all of the guarantors' assets, including all crude oil and natural
gas properties.
Events of Default. The new senior credit agreement contains customary
events of default, including nonpayment of principal or interest, violations of
covenants, inaccuracy of representations or warranties in any material respect,
cross default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in our financial condition.
Hedging Activities.
Our results of operations are significantly affected by fluctuations in
commodity prices and we seek to reduce our exposure to price volatility by
hedging our production through swaps, options and other commodity derivative
instruments. Under the new senior credit agreement, we are required to maintain
hedge positions on not less than 25% or more than 75% of our projected oil and
gas production for a six month rolling period. On January 23, 2003, we entered
into a collar option agreement with respect to 5,000 MMBtu per day, or
approximately 25% of our production, at a call price of $6.25 per MMBtu and a
put price of $4.00 per MMBtu, for the calendar months of February through July
2003. In February 2003, we entered into a second hedge agreement related to
5,000 MMBtu for the calendar months of March 2003 through February 2004 which
provides for a floor price of $4.50 per MMBtu.
Net Operating Loss Carryforwards.
At December 31, 2002 the Company had, subject to the limitation discussed
below, $167.1 million of net operating loss carryforwards for U.S. tax purposes.
These loss carryforwards will expire from 2003 through 2022 if not utilized. At
December 31, 2002, the Company had approximately $1.0 million of net operating
loss carryforwards for Canadian tax purposes. These carryforwards will expire
from 2003 through 2009 if not utilized. In connection with January 2003
financial transactions certain of the loss carryforwards may be utilized.
As a result of the acquisition of certain partnership interests and crude
oil and natural gas properties in 1990 and 1991, an ownership change under
Section 382 occurred in December 1991. Accordingly, it is expected that the use
of the U.S. net operating loss carryforwards generated prior to December 31,
1991 of $3,203,000 will be limited to approximately $235,000 per year.
During 1992, the Company acquired 100% of the common stock of an unrelated
corporation. The use of net operating loss carryforwards of the acquired
corporation of $257,000 acquired in the acquisition are limited to approximately
$115,000 per year.
As a result of the issuance of additional shares of common stock for
acquisitions and sales of common stock, an additional ownership change under
Section 382 occurred in October 1993. Accordingly, it is expected that the use
of all U.S. net operating loss carryforwards generated through October 1993
(including those subject to the 1991 and 1992 ownership changes discussed above)
of $6,590,000 will be limited as described above and in the following paragraph.
An ownership change under Section 382 occurred in December 1999, following
the issuance of additional shares. It is expected that the annual use of U.S.
net operating loss carryforwards subject to this Section 382 limitation will be
limited to approximately $363,000, subject to the lower limitations described
above. Future changes in ownership may further limit the use of the Company's
carryforwards. In 2000 assets with built-in gains were sold, increasing the
Section 382 limitation for 2001 by approximately $31,000,000.
The annual Section 382 limitation may be increased during any year, within
5 years of a change in ownership, in which built-in gains that existed on the
date of the change in ownership are recognized.
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 of $39.7 million and $99.1 million for deferred tax assets
at December 31, 2001 and 2002, respectively.
29
Outlook for 2003
We have previously communicated the following guidance for 2003:
Production:
BCFE (approximately 80% gas) 7 - 8
Price differentials (Pre Hedge):
$ per Bbl of oil 0.64
$ per Mcf of natural gas 0.51
LOE , $ per MCFE 1.21
G&A, $ per MCFE 0.69
Capital Expenditures ($ millions) 15.0
Actual results could materially differ and will depend on, among other
things, our ability to successfully increase our production of crude oil,
natural gas liquids and natural gas through our drilling activities. We
undertake no duty to update these forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Commodity Price Risk
As an independent crude oil and natural gas producer, our revenue, cash
flow from operations, other income and profitability, reserve values, access to
capital and future rate of growth are substantially dependent upon the
prevailing prices of crude oil, natural gas and natural gas liquids. Declines in
commodity prices will materially adversely affect our financial condition,
liquidity, ability to obtain financing and operating results. Lower commodity
prices may reduce the amount of crude oil and natural gas that we can produce
economically. Prevailing prices for such commodities are subject to wide
fluctuation in response to relatively minor changes in supply and demand and a
variety of additional factors beyond our control, such as global political and
economic conditions. Historically, prices received for crude oil and natural gas
production have been volatile and unpredictable, and such volatility is expected
to continue. Most of our production is sold at market prices. Generally, if the
commodity indexes fall, the price that we receive for our production will also
decline. Therefore, the amount of revenue that we realize is partially
determined by factors beyond our control. Assuming the production levels we
attained during the year ended December 31, 2002 , a 10% decline in crude oil,
natural gas and natural gas liquids prices would have reduced our operating
revenue, cash flow and net income by approximately $2.2 million for the year.
Hedging Sensitivity
On January 1, 2001, we adopted SFAS 133 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, we use 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 we determine 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 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.
Under the terms of the new senior credit agreement, we are required to
maintain hedging positions with respect to not less than 25% nor more than 75%
of our crude oil and natural gas production for a rolling six month period. On
January 23, 2003, we entered into a collar option agreement with respect to
5,000 MMBtu per day, or approximately 25% of our production, at a call price of
$6.25 per MMBtu and a put price of $4.00 per MMBtu. In February of 2003 we
30
entered into an additional hedge agreement for 5,000 MMBtu per day with a floor
of $4.50 per MMBtu. For Abraxas, the fair value of the hedging instrument was
determined based on the base price of the hedged item and NYMEX forward price
quotes.
The following table sets forth the Company's hedge position as of March 31,
2003:
Time Period Notional Quantities Price Fair Value
---------------------------------------- ------------------------------ ------------------------------ ----------------
February 1, 2003--July 31, 2003 5,000 MMBtu of production Collar with floor of $4.00 $ -
per day and ceiling of $6.25
March 1, 2003 - February 29, 2004 5,000 MMBtu of production Floor of $4.50 $ 361,769
per day
All hedge transactions are subject to our risk management policy, which has
been approved by the Board of Directors. We formally document all relationships
between hedging instruments and hedged items, as well as our 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, we assess whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of hedged
items.
Interest rate risk
As a result of the financial restructuring that occurred in January 2003,
at March 31, 2003 we have $45.1 million in outstanding indebtedness under the
new senior credit agreement, accruing interest at a rate of prime plus 4.5%,
subject to a minimum interest rate of 9.0%. In the event that the prime rate
(currently 1.5%) rises above 4.5% the interest rate applicable to our
outstanding indebtedness under the new senior credit agreement will rise
accordingly. For every percentage point that the prime rate rises above 4.5%,
our interest expense would increase by approximately $451,000 on an annual
basis. Our new notes accrue interest at fixed rates and is accordingly 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 are affected by changes in foreign currency
exchange rates or weak economic conditions in the foreign markets. Canadian
operations reported a pre-tax income of $304,000 for the quarter ended March 31,
2003. It is estimated that a 5% change in the value of the U.S. dollar to the
Canadian dollar would have changed our net income by approximately $15,000. 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.
Item 4. Controls and Procedures.
Within the 90 days prior to the date of this report, our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of Abraxas' "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) and have
concluded that the disclosure controls and procedures were adequate and designed
to ensure that material information relating to Abraxas and our consolidated
subsidiaries which is required to be included in our periodic Securities and
Exchange Commission filings would be made know to them by others within those
entities. There were no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the date of this evaluation, nor any significant deficiencies or
material weaknesses in such disclosure controls and procedures requiring
corrective actions.
31
ABRAXAS PETROLEUM CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no changes in legal proceedings from that described in the
Company's Annual Report of Form 10-K for the year ended December 31, 2002, and
in Note 8 in the Notes to Condensed Consolidated Financial Statements contained
in Part 1 of this report on Form 10-Q.
Item 2. Changes in Securities.
The exchange offer was conducted pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, and as
such, the new notes and shares of Abraxas common stock issued in the exchange
offer are restricted securities. Pursuant to a registration rights agreement
with the dealer manager for the exchange offer on behalf of the tendering note
holders, we agreed to file with the SEC an exchange offer registration statement
with respect to the new notes and a resale shelf registration statement with
respect to the new notes and Abraxas common stock. The registration statements
were declared effective by the SEC on April 18, 2003.
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) Exhibits
99.1 Registrant's Certification of Periodic Report by the Chief
Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Registrant's Certification of Periodic Report by the Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K on January 8, 2003. Other Events, including a
press release extending exchange offer.
2. Current Report on Form 8-K on January 9, 2003. Other Events, including a
press release extending exchange offer.
3. Current Report on Form 8-K on January 10, 2003. Other Events, including
a press release extending exchange offer.
4. Current Report on Form 8-K on January 13, 2003. Other Events, including
a press release extending exchange offer.
5. Current Report on Form 8-K on January 14, 2003. Other Events, including
a press release extending exchange offer.
6. Current Report on Form 8-K on January 15, 2003. Other Events, including
a press release extending exchange offer.
7. Current Report on Form 8-K on January 24, 2003. Other Events, including
a press release announcing the closing of Canadian Asset Sale, New
Secured Credit Facility and completion of exchange offer and redemption
of debt.
32
8. Current Report on Form 8-K on February 6, 2003, Disposition of Assets
announcing the completion of the sale of the common stock of Canadian
Abraxas and Grey Wolf Exploration, Inc.; Other Event, completion of
exchange offer, new credit facility and redemption of notes; Financial
Statements and exhibits, including pro forma financial statements giving
effect of the sale of Canadian properties, exchange offer, new credit
facility and redemption of notes.
9. Current Report on Form 8-K on February 24, 2003, Regulation FD,
including press release announcing 2003 capital budget, hedge agreements
and resignation of director.
10.Current Report on Form 8-K on March 25, 2003, Regulation FD, including
press release announcing 2002 financial results and year end reserves.
11.Current Report on Form 8-K on March 25, 2003, Regulation FD,
Certifications pursuant to U.S.C. Sec 1350.
12.Current Report on Form 8-K on January 24, 2003. Other Events, including
a press release announcing the effectiveness of the registration
statement.
13.Current report on Form-8-K on April 23, 2003. Change in Registrant's
Certifying Accountant.
14.Current Report on Form 8-K on April 30, 2003, Regulation FD, including
exhibit of slide presentation.
15.Current report on Form-8-K/A on April 30, 2003. Change in Registrant's
Certifying Accountant
33
ABRAXAS PETROLEUM CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: July 28, 2003 By:/s/
--------------- -------------------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: July 28, 2003 By:/s/
--------------- -------------------------------
CHRIS WILLIFORD,
Executive Vice President and
Principal Accounting Officer
34
CERTIFICATIONS
I, Robert L.G. Watson, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A No. 1 of Abraxas
Petroleum Corporation;
2. Based on my knowledge, this quarterly report does not contain untrue
statements of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly presents in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designated such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluate the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5.The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6.The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
July 28, 2003
/s/ Robert L.G. Watson
Robert L.G. Watson
President, Chief Executive Officer
and Chairman of the Board
CERTIFICATIONS
I, Chris Williford, certify that:
1.I have reviewed this quarterly report on Form 10-Q/A No. 1 of Abraxas
Petroleum Corporation;
2.Based on my knowledge, this quarterly report does not contain untrue
statements of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly presents in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4.The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designated such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluate the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5.The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6.The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses
July 28, 2003
/s/ Chris Williford
Chris Williford
Executive Vice President and
Principal Accounting Officer
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Amendment No. 1 to the Quarterly Report of Abraxas Petroleum
Corporation (the "Company") on Form 10-Q/A for the period ending March 31, 2003
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Robert L.G. Watson, Chairman of the Board, President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Robert L.G. Watson
Robert L.G. Watson
Chairman of the Board, President
and Chief Executive Officer
July 28, 2003
This certification accompanies the Report pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18
of the Securities Exchange Act of 1964, as amended.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Amendment No. 1 to the Quarterly Report of Abraxas Petroleum
Corporation (the "Company") on Form 10-Q/A for the period ending March 31, 2003
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Chris E, Williford, Executive Vice President and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Chris E. Williford
Chris E. Williford
Executive Vice President
and Chief Financial Officer
July 28, 2003
This certification accompanies the Report pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18
of the Securities Exchange Act of 1964, as amended.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.