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Abraxas Petroleum: Opportunity To Deliver Positive Cash Flow In 2019SummaryAbraxas reported positive adjusted net income in 2017 and the first half of 2018. Adjusted net income excludes unrealised changes in the value of its derivatives. If Abraxas can maintain drilling inventory and production levels with a $110 million capital expenditure budget in 2019, then it is projected to have $19 million in positive cash flow. This includes the negative value of the company's current 2019 hedges. Looking for a community to discuss ideas with? Distressed Value Investing features a chat room of like-minded investors sharing investing ideas and strategies. Start your free trial today » There have been some questions about Abraxas Petroleum Corp.'s (NASDAQ:AXAS) ability to generate profits, as it has been spending heavily to grow production. However, as with many other shale oil companies, Abraxas should be able to deliver positive cash flow if it pares down its growth. About Reported ProfitabilityAbraxas has technically been profitable (based on adjusted net income) for a while. The company reported $0.12 in adjusted net income per diluted share in 2017 and another $0.11 in adjusted net income per diluted share in the first half of 2018. The adjusted net income number differs from the net income number through the exclusion of unrealised losses (or gains) on derivative contracts. I believe that adjusted net income provides a more accurate picture of current performance, since it only includes the realised losses (or gains) on derivative contracts during the financial reporting period. Without that adjustment, companies may end up with positive net income in times of crashing commodity prices and negative net income when commodity prices rise due to changes in the value of their hedges. (Source: Abraxas Petroleum) Abraxas's profitability has improved, as it has concentrated its portfolio on lower-cost areas. Its lease operating expense per BOE is expected to be under $6 for 2018, compared to $15.13 in 2013. 2019 Outlook With Production MaintenanceI have modeled 2019 at 12,500 BOEPD in production with the current (full-year 2018) 66% oil, 22% natural gas and 12% NGLs split. This level of production is approximately what Abraxas is expected to end 2018 with. At the current $67 WTI oil strip for 2019, the company may generate around $198 million in oil and gas revenue after accounting for differentials. (Source: Abraxas Petroleum) Abraxas's hedges would have negative $12 million in value in 2019 at $67 oil, bringing its revenue down to $186 million net of hedges. Hedges are expected to have less of a negative impact in 2019 due to the slightly higher swap price and the lower volume of swaps.
If the company's lease operating cost per BOE remains the same as 2018's guidance, it will end up with approximately $23 million in lease operating expense. I estimate that Abraxas could probably maintain 12,500 BOEPD in production with around $110 million in capital expenditures in 2019. This includes a modest amount of acquisition costs to maintain its drilling inventory levels as well.
In this scenario, it would be able to generate around $19 million in positive cash flow during 2019 while maintaining production levels. If the company didn't have hedges, it would have been able to generate $31 million in positive cash flow. The amount of capital expenditures needed to maintain production at 12,500 BOEPD and replace drilling inventory would likely come down in future years as well. Due to Abraxas's rapid production growth (Q4 2018 production is likely to be more than double its Q3 2017 production), its base decline rate is pretty high right now. That base decline rate will moderate if production growth slows. Asset ValueAbraxas is probably somewhat undervalued based on its current asset value. For example, its enterprise value is currently close to $500 million. Its reserves had a PV-10 of $427 million at the end of 2017, but that was based off of roughly $50 WTI oil. The company estimates (from its August presentation) that its reserve value PV-10 is approximately $558 million based on $57.50 WTI oil. Williston Basin and Delaware Basin sales have typically gone for above PV-10 (such as Linn Energy's (OTCQB:LNGG) 2017 Williston Basin sale for around 1.24x proved developed PV-10 at $55 oil). Delaware Basin asset sales tend to go for a significantly higher multiple reserve PV-10 value. Thus, I believe that Abraxas could sell its assets (net of debt) for above its current share price. ConclusionAbraxas has been slightly profitable (according to its income statement) for a while now, but has been burning cash in order to grow production. This has been a frequent criticism of shale oil companies, although more recently, shale oil companies have shown that they can also generate positive cash flow if they moderate growth. Abraxas's 2019 hedges don't have as much negative value as its 2018 hedges, but they may still cost the company $12 million at current strip. That would reduce its estimated 2019 positive cash flow (while maintaining production levels and drilling inventory) from $31 million to $19 million. Maintenance capital expenditures will decrease as Abraxas's base decline rate decreases. |
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