AXAS - Abraxas Petroleum Invests In The Lion Fund II

Summary

• Abraxas is projected to end 2023 with around $50 million in cash and investments.
• Abraxas' oil production has been declining due to limited capex and it is now projected to generate around $10 million in positive cash flow in 2024 at current strip.
• Abraxas has invested $19.5 million in The Lion Fund II, which is affiliated with Biglari (Abraxas's main shareholder).
• Thus, Abraxas' value is now starting to be tied to the value of assets such as Cracker Barrel (a main Lion Fund II holding) in addition to oil and gas.

Abraxas Petroleum ( AXAS ) appears to be investing some of its cash in The Lion Fund II, which is an investment fund affiliated with Sardar Biglari and Biglari Holdings ( BH ). At last report, Biglari Holdings owned approximately 90% of Abraxas' common stock.

Abraxas is now projected to end 2023 with approximately $50 million in cash and investments. Abraxas' oil production is declining, making it likely that its cash flow from operations will also decline in future years. With the decline in its share price since I looked at it in November , it appears to be roughly fairly priced now. If there are additional investments in The Lion Fund II, Abraxas' value may end up being more dependent on the performance of that fund than on oil and gas prices.

Production Levels

Abraxas' total Delaware Basin production levels have remained relatively stable recently despite the minimal capex it has spent. Abraxas last completed a Delaware Basin well in 2019.

Abraxas' oil production has trended a bit lower, with Q3 2022 oil production down -15% compared to Q3 2021 for the Delaware Basin. Abraxas' oil cut has decreased from 55% to 48% over that time period.

Cash Flow Generation

Based on current 2023 strip prices (including roughly $80 WTI oil and $3.50 NYMEX gas), I believe that Abraxas can generate approximately $15 million in positive cash flow if its drilling and completion activities remain halted. This assumes that 2023 average production is down around -9% from Q3 2022 levels, while oil production is down around -13% over the same period.

Abraxas' projected results are negatively affected by low natural gas prices. Natural gas represented 33% of its production in Q3 2022 and realized prices are likely to be quite low in 2023 due to the combination of weaker benchmark prices and widening regional differentials. Abraxas was realizing approximately $1.50 less than NYMEX in the first half of 2022, which is a differential that would result in it realizing around $2 per Mcf for its natural gas at $3.50 NYMEX gas. However, the wide Waha differentials ( based on strip ) could theoretically result in it realizing $1 or less for its natural gas in 2023.

Abraxas may be able to improve its cash flow generation if it is able to reduce its G&A expenses by relying on Biglari Holdings to help out with some business functions.

Investment In Lion Fund

Abraxas invested $19.5 million in The Lion Fund II in December 2022. Abraxas had $25.1 million in cash on hand at the end of Q3 2022, and it may have generated another $5 million in positive cash flow (from operations) in Q4 2022. Abraxas also sold its corporate headquarters for $5 million , so it may have ended 2022 with approximately $35 million in cash before accounting for its investment in The Lion Fund II. The $19.5 million investment in The Lion Fund II thus may represent a bit over 50% of Abraxas' cash balance.

It is uncertain whether Abraxas will continue to invest more in The Lion Fund II. If it does, Abraxas's financial results will eventually start becoming more dependent on The Lion Fund II's performance than on oil and gas prices. The largest holding of The Lion Fund II appears to be Cracker Barrel ( CBRL ), of which it owns 2 million shares with a current value of $212 million.

Notes On Valuation

Abraxas appears roughly fairly valued at $0.94 per share, which translates into a market cap of approximately $95 million. It looks capable of ending 2023 with approximately $50 million in cash on hand and investments.

Abraxas' oil production has been declining due to the lack of capital investment, so there is a good chance that its cash flow from operations will be lower in subsequent years than the roughly $15 million projected for 2023.

If it continues to invest more in The Lion Fund II, the performance of that fund could end up being more important than oil and gas prices to Abraxas' value. Biglari's high ownership stake in Abraxas makes it essentially a semi-private company.

Conclusion

Abraxas is now expected to end 2023 with approximately $50 million in cash and investments, which is nearly $0.50 per share. While this is over half of Abraxas' current market cap, its declining oil production makes it likely that its cash flow from operations will be lower in future years. At current strip, Abraxas may be able to generate around $10 million in positive cash flow in 2024 if it continues to invest minimal capex and doesn't reduce its G&A from current levels.

Abraxas has also invested the majority of its cash on hand in The Lion Fund II, so its value is now affected by the value of companies such as Cracker Barrel in addition to oil and gas prices.

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