AXAS - Abraxas Petroleum Plans To Go Dark

2023-04-24 05:34:39 ET

Summary

• Abraxas has filed to terminate its public reporting requirements and deregister its shares.
• This appears to be another step in Biglari's attempts to minimize costs and facilitate harvesting the remaining value from Abraxas's assets.
• Abraxas's full-time headcount has been reduced to 18, down from 42 in March 2022.
• There have been no announced plans so far for Biglari to acquire the remaining 10% of Abraxas's common stock.
• I estimate its net asset value at approximately $0.77 per share.

I have covered Abraxas Petroleum ( OTCPK:AXAS ) for a while now , but this may be my last report on it. Abraxas has filed paperwork to go dark, as it is planning on terminating its public reporting requirements and deregistering its shares. While there is no indication yet that Biglari Holdings ( BH ) is attempting to purchase the 10% of Abraxas's common stock that it doesn't own, Abraxas will function as a semi-private company run by Biglari.

Abraxas's CEO Bob Watson resigned in Q1 2023, while CFO Steven Harris left at the end of Q3 2022 after Biglari acquired Abraxas's preferred shares (later exchanged for common shares) from Angelo Gordon. Abraxas now has four directors, all of whom are also officers or directors of Biglari Holdings.

I estimate that Abraxas's assets are worth approximately $0.77 per share. As this is pretty close to its current share price, I am neutral on it. Since I last looked at Abraxas it reported its 2022 reserves, giving more clarity to the value of its oil and gas assets.

Going Dark

Abraxas made a Form 15 filing at the start of February 2023, to give notice about deregistering its shares and suspending its public reporting obligations. This is expected to become effective in early May 2023 (90 days after the filing).

At this point, Abraxas is going dark rather than fully going private. Biglari Holdings owns 90% of Abraxas's common stock, but has not yet made a move to purchase the remaining 10% of Abraxas's common stock that it doesn't own.

Value Of Reserves

Abraxas reported having proved developed producing reserves with a PV-10 of $134 million at the end of 2022. This was based on $94.14 WTI oil and $6.357 Henry Hub gas though. At my long-term commodity price estimates of $75 WTI oil and $3.75 Henry Hub natural gas, Abraxas's PDP PV-10 is reduced to an estimated $70 million.

While Abraxas previously touted having over 200 potential net drilling locations, I don't believe that Biglari will do much in the way of development and will instead continue to harvest cash flow from the assets. Abraxas claimed several years ago that it could achieve mid-40s IRRs at $75 WTI oil. That isn't a particularly good rate of return and cost inflation has probably lowered that rate of return at $75 oil anyways.

Other Assets

Abraxas sold its drilling rig in February 2023. It is uncertain what price it sold for, but the rig was previously listed at $2.5 million and had undergone price reductions. Abraxas also owns a San Antonio office building that was under contract to be sold for $5.0 million.

Abraxas also had a $2 million working capital surplus (excluding assets held for sale) at the end of 2022 and had invested $19.5 million in the Lion Fund II.

Adding all that together gives an estimate of $29 million in net assets outside of Abraxas's oil and gas properties if we value the Lion Fund II investment at the original investment amount.

Overall Valuation For Abraxas

If we take a 0.7x multiple to PDP PV-10 at $75 WTI oil and $3.75 Henry Hub natural gas, that puts the value of its oil and gas assets at $49 million.

Abraxas's other net assets are worth $29 million as per the above calculations, resulting in a total value of $78 million. This comes out to approximately $0.77 per share.

If Abraxas keeps harvesting cash flow, it may be able to generate more than $49 million in net cash flow from oil and gas assets over time. At $75 WTI oil, Abraxas may be able to generate around $120 million in net revenues over the lifetime of the assets, although it still has ongoing G&A costs. Biglari is attempting to minimize these G&A costs, by saving on public reporting costs and lowering headcount. At last report, Abraxas had 18 full-time employees, down from 42 full-time employees in March 2022.

Abraxas may be able to generate around $19 million in operational cash flow in 2023 at current strip prices, before any cash G&A costs. Abraxas's cash G&A was approximately $9 million in 2022, but should be lower going forward due to the reduced headcount.

Conclusion

Abraxas Petroleum has filed to deregister its shares and terminate its public reporting requirements. Combined with its headcount reductions, Abraxas's G&A costs should be substantially reduced, improving its free cash flow. With reduced G&A costs, Abraxas could generate around $10 million to $15 million per year in free cash flow over the next several years.

I estimate Abraxas's value at approximately $0.77 per share, which is slightly above its current share price. Minority shareholders have little say in Abraxas's affairs though, and with the termination of public reporting requirements, there will be less visibility into what is going on. Thus Abraxas's share price would need to decrease significantly for me to consider it a potential value.

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