UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A Number 1
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2005
( ) 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 restraint
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 Exchange Act.) Yes ___ No X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ X] No
The number of shares of the issuer's common stock outstanding as of
August 8, 2005 was:
Class Shares Outstanding
----- ------------------
Common Stock, $.01 Par Value 41,966,500
Explanatory Note
Abraxas Petroleum Corporation is filing this Amendment Number 1 to Quarterly
Report on Form 10-Q for the period ended June 30, 2005, initially filed with the
SEC on August 10, 2005, in order to correct the accounting for the gain on the
sale of Abraxas' Canadian subsidiary in February 2005. Due to an error in the
accounting for other comprehensive income related to the sale, the gain on the
transaction was understated by $2.2 million and resulted in a restatement of the
Condensed Statement of Operations and the Condensed Consolidated Statement of
Cash Flow for the six months ended June 30, 2005. Pursuant to Rule 12b-15 under
the Securities Exchange Act of 1934, the complete text of Form 10-Q as revised
is included in this filing.
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
statements including words like "believe", "expect", "anticipate", "intend",
"plan", "seek", "estimate", "could", "potentially" or similar expressions), you
must remember that these are forward-looking statements and 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 heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" 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 success in development, exploitation and exploration activities;
o our ability to make planned capital expenditures;
o declines in our production of natural gas and crude oil;
o prices for natural gas and crude oil;
o our ability to raise equity capital or incur additional indebtedness;
o economic and business conditions;
o political and economic conditions in oil producing countries,
especially those in the Middle East;
o price and availability of alternative fuels;
o our restrictive debt covenants;
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, 2004 which are incorporated by reference herein. 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.
2
ABRAXAS PETROLEUM CORPORATION
FORM 10 - Q/A Number 1
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 2005 and December 31, 2004..................................4
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2005 and 2004....................6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2005 and 2004..............................7
Notes to Condensed Consolidated Financial Statements..........................8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................14
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risks...................27
ITEM 4 - Controls and Procedures......................................................28
PART II
OTHER INFORMATION
ITEM 1 - Legal Proceedings 29
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds...........................29
ITEM 3 - Defaults Upon Senior Securities.......................................................29
ITEM 4 - Submission of Matters to a Vote of Security Holders...................................29
ITEM 5 - Other Information.....................................................................30
ITEM 6 - Exhibits..............................................................................30
Signatures ....................................................................31
3
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets
(in thousands)
June 30,
2005 December 31,
(Unaudited) 2004
------------------ -------------------
Assets:
Current assets:
Cash ........................................................ $ - $ 1,284
Accounts receivable, net
Joint owners.......................................... 247 471
Oil and gas production................................ 4,783 4,724
Other................................................. 46 66
------------------ -------------------
5,076 5,261
Equipment inventory........................................... 792 735
Other current assets.......................................... 1,029 752
------------------ -------------------
6,897 8,032
Assets held for sale.......................................... - 52,600
------------------ -------------------
Total current assets..................................... 6,897 60,632
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved.................................................... 314,973 297,647
Other property and equipment................................. 3,044 2,930
------------------ -------------------
Total................................................ 318,017 300,577
Less accumulated depreciation, depletion, and
amortization............................................ 226,015 222,500
------------------ -------------------
Total property and equipment - net........................ 92,002 78,077
Deferred financing fees, net ................................... 6,812 7,618
Deferred tax asset.............................................. - 6,060
Other assets .................................................. 298 298
------------------ -------------------
Total assets.................................................. $ 106,009 $ 152,685
================== ===================
See accompanying notes to condensed consolidated financial statements
4
Abraxas Petroleum Corporation
Condensed Consolidated Balance Sheets (continued)
(in thousands)
June 30,
2005 December 31,
(Unaudited) 2004
-------------------- -------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable.............................................. $ 7,243 $ 5,622
Oil and gas production payable................................ 2,332 2,443
Accrued interest.............................................. 1,216 2,170
Other accrued expenses........................................ 1,243 1,654
-------------------- -------------------
12,034 11,889
Liabilities related to assets held for sale................... - 66,947
-------------------- -------------------
Total current liabilities................................... 12,034 78,836
Long-term debt.................................................. 136,277 126,425
Future site restoration......................................... 942 888
-------------------- -------------------
Total liabilities...................................... 149,253 206,149
Stockholders' deficit:
Common Stock, par value $.01 per share-
Authorized 200,000,000 shares; issued, 37,889,515 and 36,597,045 at June 30,
2005 and December 31, 2004,
respectively................................................. 379 366
Additional paid-in capital................................... 146,668 146,185
Accumulated deficit........................................... (190,849) (202,534)
Treasury stock, at cost, 56,477 and 105,989 shares at June
30, 2005 and December 31, 2004 respectively.................. (408) (549)
Accumulated other comprehensive loss.......................... 966 3,068
-------------------- -------------------
Total stockholders' deficit............................... (43,244) (53,464)
-------------------- -------------------
Total liabilities and stockholders' deficit..................... $ 106,009 $ 152,685
==================== ===================
See accompanying notes to condensed consolidated financial statements
5
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands except per share data)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- -------------------------------------
2005 2004 2005 2004
------------------- ------------------ ------------------ ------------------
Revenue:
Oil and gas production revenues ................... $ 9,336 $ 8,373 $ 16,861 $ 16,156
Rig revenues ...................................... 283 129 579 304
Other ............................................ 8 2 9 4
------------------- ------------------ ------------------ ------------------
9,627 8,504 17,449 16,464
Operating costs and expenses:
Lease operating and production taxes .............. 2,522 2,319 4,800 4,607
Depreciation, depletion, and amortization ......... 1,817 1,819 3,515 3,658
Rig operations .................................... 166 123 384 268
General and administrative ........................ 1,098 1,712 2,044 2,761
Stock-based compensation .......................... (326) (2,316) 277 (253)
------------------- ------------------ ------------------ ------------------
5,277 3,657 11,020 11,041
------------------- ------------------ ------------------ ------------------
Operating income ..................................... 4,350 4,847 6,429 5,423
Other (income) expense:
Interest income ................................... - (1) (1) (5)
Interest expense .................................. 3,407 4,223 6,541 9,131
Amortization of deferred financing fee ............ 403 467 854 912
Financing cost..................................... - 602 - 1,573
Other.............................................. 235 - 244 11
------------------- ------------------ ------------------ ------------------
4,045 5,291 7,638 11,622
------------------- ------------------ ------------------ ------------------
Earnings (loss) from continuing operations ........ 305 (444) (1,209) (6,199)
Net income from discontinued operations (net of
$6,060 income tax expense in 2005) (27) 816 12,894 1,014
------------------- ------------------ ------------------ ------------------
Net earnings (loss)................................ $ 278 $ 372 $ 11,685 $ (5,185)
=================== ================== ================== ==================
Basic earnings (loss) per common share:
Net earnings (loss) per common from continuing
operations.................................... $ 0.01 $ (0.01) $ (0.03) $ (0.17)
Discontinued operations......................... - 0.02 0.34 0.03
------------------- ------------------ ------------------ ------------------
Net earnings (loss) per common share - basic....... $ 0.01 $ 0.01 $ 0.31 $ (0.14)
=================== ================== ================== ==================
Diluted earnings (loss) per common share:
Net earnings (loss) per common from continuing
operations.................................... $ 0.01 $ (0.01) $ (0.03) $ (0.17)
Discontinued operations......................... - 0.02 0.34 0.03
------------------- ------------------ ------------------ ------------------
Net earnings (loss) per common share - diluted..... $ 0.01 $ 0.01 $ 0.31 $ (0.14)
=================== ================== ================== ==================
See accompanying notes to condensed consolidated financial statements
6
Abraxas Petroleum Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended
June 30,
----------------------------------------
2005 2004
---------------- ------------------
Operating Activities
Net earnings (loss)........................................... $ 11,685 $ (5,185)
Income from discontinued operations........................... 12,894 1,014
---------------- ------------------
Loss from continuing operations............................... (1,209) (6,199)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization.................... 3,515 3,658
Amortization of deferred financing fees...................... 854 912
Accretion of future sit restoration.......................... 45 80
Non-cash interest and financing cost......................... - 5,966
Stock-based compensation 277 (253)
Changes in operating assets and liabilities:
Accounts receivable...................................... 1,209 1,759
Equipment inventory...................................... (57) 4
Other ................................................... 2,058 (6)
Accounts payable and accrued expenses.................... 154 (2,294)
---------------- ------------------
Net cash provided by continuing operations.................... 6,846 3,627
Net cash (used in) provided by discontinued operations........ (4,132) 3,573
---------------- ------------------
Net cash provided by operations 2,714 7,200
Investing Activities
Capital expenditures, including purchases and development of
properties ................................................ (17,440) (3,512)
Unrealized gain on investment................................ 966 -
---------------- ------------------
Net cash used in continuing operations........................ (16,474) (3,512)
Net cash provided by (used in) discontinued operations........ 25,719 (3,573)
---------------- ------------------
Net cash provided by (used in) investing activities........... 9,245 (7,085)
Financing Activities
Proceeds from long-term borrowings............................ 11,823 5,372
Payments on long-term borrowings.............................. (1,971) (3,600)
Proceeds from stock sale receivable........................... - 98
Issuance of stock for compensation............................ 102 328
Deferred financing fees ...................................... (48) (1,653)
Exercise of stock options ................................... 258 193
---------------- ------------------
Net cash provided by continuing operations.................... 10,164 738
Net cash used in discontinued operations...................... (23,407) -
---------------- ------------------
Net cash (used in) provided by financing activities........... (13,243) 738
---------------- ------------------
Increase (decrease) in cash................................... (1,284) 998
Cash, at beginning of period.................................. 1,284 493
---------------- ------------------
Cash, at end of period........................................ $ - $ 1,491
================ ==================
Supplemental disclosure of cash flow information:
Interest paid................................................. $ 7,290 $ 2,321
================ ==================
Non-cash items:
Future site restoration....................................... $ 19 $ 147
================ ==================
See accompanying notes to condensed consolidated financial statements
7
Abraxas Petroleum Corporation
Notes to Condensed Consolidated 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, 2004. 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 and six months ended June 30,
2005 are not necessarily indicative of results to be expected for the full year.
The consolidated financial statements include the accounts of the Company
and its wholly-owned foreign subsidiary, Grey Wolf Exploration Inc. ("Grey
Wolf"). On February 28, 2005 Grey Wolf closed an initial public offering,
resulting in the substantial divestiture of our capital stock and operations in
Grey Wolf. As a result of the disposal of Grey Wolf, the results of operations
of Grey Wolf through February 28, 2005 are reflected in our Financial Statements
as discontinued operations.
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 benefits of approximately $2.3 million and $253,000 during the three
and six months ended June 30, 2004, respectively, as stock-based compensation
expense in the accompanying consolidated financial statements. For the three and
six months ended June 30, 2005, the Company recognized a benefit of
approximately $326,000 and expense of $277,000, respectively.
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 quarter
and six months ended June 30, 2005 and 2004, risk-free interest rates of 2.9%
and 1.5%, respectively; dividend yields of -0-%; volatility factor of the
expected market price of the Company's common stock of .185 and .35
respectively; and a weighted-average expected life of the option of eight and
ten years, respectively.
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
8
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 123 to include prominent disclosures
in annual and interim financial 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 and six months ended June 30, 2005 and
June 30, 2004 would have been:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
2005 2004 2005 2004
(In Thousands, except per share data)
----------------------------------------------------------
Net income (loss) as reported $ 278 $ 372 $ 11,685 $ (5,185)
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects
(326) (2,316) 277 (253)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (16) (35) (41) (71)
------------- ------------ ---------- ------------
Pro forma net income (loss) $ (64) $ (1,979) 10,921$ (5,509)
============= ============ ========== ============
Earnings (loss) per share:
Basic - as reported $ 0.01 $ 0.01 0.31 (0.14)
============= ============ ========== ============
Basic - pro forma $ - $ (0.05) 0.32 (0.15)
============= ============ ========== ============
Diluted - as reported $ 0.01 $ 0.01 0.31 (0.14)
============= ============ ========== ============
Diluted - pro forma $ - $ (0.05) 0.32 (0.15)
============= ============ ========== ============
Certain prior year balances have been reclassified for comparative
purposes.
Note 2. Discontinued operations
On February 28, 2005, Grey Wolf completed an IPO resulting in Abraxas
substantially divesting itself of its investment in Grey Wolf. Pursuant to an
Underwriting Agreement, the underwriters purchased 17.8 million common shares of
Grey Wolf capital stock from Grey Wolf ("Treasury Shares"), and 9.1 million
shares of Grey Wolf common stock owned by Abraxas from Abraxas ("Secondary
Shares") at a purchase price of CDN $2.80 per share.
Grey Wolf utilized the proceeds from the sale of the Treasury Shares to
re-pay and terminate its $35 million term loan and re-pay $1 million in
inter-company debt to Abraxas. Abraxas utilized the $1 million received from
Grey Wolf and the proceeds received from the sale of the Secondary Shares to
re-pay outstanding debt under its $25 million second lien increasing rate bridge
loan.
Abraxas also granted an over-allotment option to the underwriters to
purchase from Abraxas, at the underwriters' election, up to an additional
3,902,360 shares of Grey Wolf common stock held by Abraxas (the "Option
Shares"). On March 24, 2005, Abraxas was advised of the underwriter's intent to
9
exercise 3.5 million of the over-allotment option shares. Closing occurred on
March 31, 2005 and provided approximately $7.6 million that Abraxas utilized to
re-pay the remaining balance of its bridge loan and reduce the outstanding
balance under its senior secured revolving credit facility.
The operations of Grey Wolf, previously reported as a business segment, are
reported as discontinued operations for all periods presented in the
accompanying financial statements and the operating results are reflected
separately from the results of continuing operations.
Income from discontinued operations for the six months ended June 30, 2005
includes a gain on the disposal of Grey Wolf of $21.8 million, less non-cash
income tax of $6.1 million, and a loss from operations, including debt
retirement costs, of $2.8 million.
Note 3. 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 June 30, 2005, there is no current or deferred income
tax expense or benefit due to losses and/or loss carryforwards and valuation
allowance which has been recorded against such benefits.
Note 4. Long-Term Debt
Long-term debt consisted of the following:
June 30, December 31,
-----------------------------------
2005 2004
---------------- -----------------
Floating rate senior secured notes due 2009............................ $ 125,000 $ 125,000
Senior secured revolving credit facility............................... 11,277 1,425
---------------- -----------------
136,277 126,425
Less current maturities ............................................... - -
---------------- -----------------
$ 136,277 $ 126,425
================ =================
Floating Rate Senior Secured Notes due 2009. In connection with its October
2004 financial restructuring, Abraxas issued $125 million in aggregate principal
amount of floating rate senior secured notes due 2009. The notes will mature on
December 1, 2009 and began accruing interest from the date of issuance, October
28, 2004, at a per annum floating rate of six-month LIBOR plus 7.50%. The
initial interest rate on the notes was 9.72% per annum. The interest will be
reset semi-annually on each June 1 and December 1, commencing on June 1, 2005.
The current interest rate, effective June 1, 2005, is 11.03% per annum. Interest
is payable semi-annually in arrears on June 1 and December 1 of each year,
commencing on June 1, 2005.
Senior Secured Revolving Credit Facility. On October 28, 2004, Abraxas
entered into an agreement for a new revolving credit facility having a maximum
commitment of $15 million, which includes a $2.5 million subfacility for letters
of credit. Availability under the revolving credit facility is subject to a
borrowing base consistent with normal and customary natural gas and crude oil
lending transactions. Outstanding amounts under the revolving credit facility
bear interest at the prime rate announced by Wells Fargo Bank, National
Association plus 1.00%. Subject to earlier termination rights and events of
default, the stated maturity date under the revolving credit facility is October
28, 2008.
10
Note 5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2005 2004 2005 2004
------------- ------------- -------------- -------------
Numerator:
Net income (loss) before effect of
discontinued operations.................... $ 305 $ (444) $ (1,209) $ (6,199)
Discontinued operations....................... (27) 816 12,894 1,014
------------- ------------- -------------- -------------
Net earnings (loss) available to common
stockholders............................... 278 372 11,685 (5,185)
============= ============= ============== =============
Denominator:
Denominator for basic earnings per share -
Weighted-average shares..................... 37,821,152 36,191,155 37,215,732 36,112,112
Effect of dilutive securities:
Stock options and warrants 1,613,758 - - -
------------- ------------- -------------- -------------
Dilutive potential common shares Denominator for
diluted earnings per share - adjusted
weighted-average shares and assumed
Conversions................................. 39,434,910 36,191,155 37,215,732 36,112,112
Basic earnings (loss) per share:
Net income (loss) from continuing
operations ................................ $ 0.01 $ (0.01) $ (0.03) $ (0.17)
Discontinued operations..................... - 0.02 0.34 0.03
------------- ------------- -------------- -------------
Net earnings (loss) per common share - basic.... $ 0.01 $ 0.01 $ 0.31 $ (0.14)
============= ============= ============== =============
Diluted earnings (loss) per share:
Net income (loss) from continuing
operations ................................ $ 0.01 $ (0.01) $ (0.03) $ (0.17)
Discontinued operations..................... - 0.02 0.34 0.03
------------- ------------- -------------- -------------
Net earnings (loss) per common share - basic.... $ 0.01 $ 0.01 $ 0.31 $ (0.14)
============= ============= ============== =============
For the three months ended June 30, 2004 and six months ended June 30, 2005
and 2004, 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 from continuing operations incurred in the periods.
Had there not been losses from continuing operations in these periods, dilutive
shares would have been 1,769,614 for the three months ended June 30, 2004 and
1,579,067 shares and 1,866,245 shares for the six months ended June 30, 2005 and
2004, respectively.
Note 6. 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. As of June 30, 2005, the derivatives that the
Company had in place were not designated as hedges and, accordingly, changes in
the fair value of the derivatives are recorded in current period oil and gas
revenue.
Under the terms of our revolving credit facility, we are required to
maintain hedging positions on not less than 25% nor more than 75% of our
projected natural gas and crude oil production for a rolling six month period.
11
The following table sets forth the Company's current hedge position:
Time Period Notional Quantities Price
---------------------------------- -------------------------------------------- ----------------------
July - December 2005 9,500 MMbtu of production per day Floor of $5.00
January 2006 10,000 MMbtu of production per day Floor of $5.00
February 2006 10,000 MMbtu of production per day Floor of $5.00
Note 7. Contingencies - Litigation
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 June 30,
2005, the Company was not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on its
operations.
Note 8. 2005 Non-Employee Directors Long-Term Equity Incentive Plan.
On June 1, 2005, Abraxas Petroleum Corporation held its 2005 Annual Meeting
of Stockholders at which the stockholders approved the 2005 Non-Employee
Directors Long-Term Equity Incentive Plan (the "2005 Directors Plan"). The
following is a summary of the Directors Plan.
Purpose. The purpose of the 2005 Directors Plan is to attract and retain
members of the Board of Directors and to promote the growth and success of
Abraxas by aligning the long-term interests of the Board of Directors with those
of Abraxas' stockholders by providing an opportunity to acquire an interest in
Abraxas and by providing both rewards for exceptional performance and long term
incentives for future contributions to the success of Abraxas.
Administration and Eligibility. The 2005 Directors Plan will be
administered by the Compensation Committee (the "Committee") of the Board of
Directors and authorizes the Board to grant non-qualified stock options or issue
restricted stock to those persons who are non-employee directors of Abraxas,
including advisory directors of Abraxas, which currently amounts to a total of
ten people.
Shares Reserved and Awards. The 2005 Directors Plan reserves 900,000 shares
of Abraxas common stock, subject to adjustment following certain events, as
discussed below. The 2005 Directors Plan provides that each year, at the first
regular meeting of the Board of Directors immediately following Abraxas' annual
stockholder's meeting, each non-employee director shall be granted or issued
awards of 10,000 shares of Abraxas common stock, for participation in Board and
Committee meetings during the previous calendar year. The maximum annual award
for any one person is 10,000 shares of Abraxas common stock. If options, as
opposed to shares, are awarded, the exercise share price shall be no less than
100% of the fair market value on the date of the award while the option terms
and vesting schedules are at the discretion of the Committee.
Note 9. Subsequent events
In July 2005 the Company acquired an average 44% of the mineral rights, all
executive rights and certain surface rights under approximately 12,000
contiguous acres in the Oates SW Field area of West Texas, plus a 3-year lease
on a large portion of the remaining minerals.
On July 20, 2005, the Company also completed a $12.0 million private
placement pursuant to which we issued 4.0 million shares of common stock to
accredited investors at a price of $3.00 per share. Net proceeds of
approximately $11.3 million from the private placement were used to re-pay
indebtedness under our revolving credit facility, for development in Texas and
Wyoming, and for working capital and general corporate purposes.
12
Note 10. Recent Accounting Standards
In May 2005, the FASB issued "Summary of Statement No. 154 Accounting
Changes and Error Corrections" - a replacement of APB Opinion No. 20 and FASB
Statement No. 3
This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
Opinion 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable.
This Statement defines retrospective application as the application of a
different accounting principle to prior accounting periods as if that principle
had always been used or as the adjustment of previously issued financial
statements to reflect a change in the reporting entity. This Statement also
redefines restatement as the revising of previously issued financial statements
to reflect the correction of an error.
This Statement requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle, such as a change in
nondiscretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change.
This Statement also requires that a change in depreciation, amortization,
or depletion method for long-lived, nonfinancial assets be accounted for as a
change in accounting estimate effected by a change in accounting principle.
This Statement carries forward without change the guidance contained in
Opinion 20 for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. This Statement also
carries forward the guidance in Opinion 20 requiring justification of a change
in accounting principle on the basis of preferability.
This statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. This statement
did not effect the Company's financial statements for the period ended June 30,
2005.
13
ABRAXAS PETROLEUM CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Prior to February 2005, Grey Wolf Exploration Inc. was a wholly-owned
Canadian subsidiary of Abraxas. In February 2005, Grey Wolf, completed an
initial public offering resulting in the substantial divestiture of our capital
stock in Grey Wolf. As a result of the Grey Wolf IPO and the significant
divestiture of our interest in Grey Wolf, the results of operations of Grey Wolf
are reflected in our Financial Statements and in this document as "Discontinued
Operations" and our remaining operations are referred to in our Financial
Statements and in this document as "Continuing Operations" or "Continued
Operations". Unless otherwise noted, all disclosures are for continuing
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,
2004.
Critical Accounting Policies
There have been no changes from the Critical Accounting Polices described
in our Annual Report on Form 10-K for the year ended December 31, 2004.
General
We are an independent energy company primarily engaged in the development
and production of natural gas and crude oil. Historically, we have grown through
the acquisition and subsequent development and exploitation of producing
properties, principally through the redevelopment of old fields utilizing new
technologies such as modern log analysis and reservoir modeling techniques as
well as 3-D seismic surveys and horizontal drilling. As a result of these
activities, we believe that we have a substantial inventory of low risk
development opportunities, which provide a basis for significant production and
reserve increases. In addition, we intend to expand upon our exploitation and
development activities with complementary exploration projects in our core areas
of operation.
Our financial results depend upon many factors which significantly affect
our results of operations including the following:
o the sales prices of natural gas, natural gas liquids and crude oil;
o the level of total sales volumes of natural gas, natural gas liquids
and crude oil;
o the availability of, and our ability to raise additional capital
resources and provide liquidity to meet cash flow needs;
o our ability to use our cash flow from operations for capital
expenditures to increase production and reserves;
o the level of and interest rates on borrowings; and
o the level and success of exploitation, exploration and development
activity.
Commodity Prices and Hedging Activities. 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 with prices
generally being strong since the first quarter of 2004. The table below
illustrates how natural gas prices have fluctuated over the eight quarters prior
to and including the quarter ended June 30, 2005 and 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.
14
Natural Gas Prices by Quarter (in $ per Mcf)
Quarter Ended
----------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31 Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
2003 2003 2004 2004 2004 2004 2005 2005
---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
Index $5.10 $4.60 $5.69 $5.97 $5.85 $6.77 $6.30 $ 6.80
Realized $4.47 $4.29 $4.98 $5.52 $5.24 $6.14 $5.26 $ 6.33
The NYMEX natural gas price August 4, 2005 was $8.47 per Mcf.
The table below illustrates how crude oil prices have fluctuated over the
eight quarters prior to and including the quarter ended June 30, 2005 and
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.
Crude Oil Prices by Quarter (in $ per Bbl)
Quarter Ended
----------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31 Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
2003 2003 2004 2004 2004 2004 2005 2005
---------- ---------- ----------- ---------- ---------- ---------- ---------- -----------
Index $30.85 $29.64 $34.76 $38.48 $42.32 $49.46 $47.33 $ 51.76
Realized $29.55 $29.99 $34.18 $37.29 $42.43 $46.81 $47.13 $ 49.43
The NYMEX crude oil price on August 4, 2005 was $61.38 per Bbl.
Under the terms of our revolving credit facility, we are required to
maintain hedging positions on not less than 25% nor more than 75% of our
projected natural gas and crude oil production for a rolling six month period.
We currently have the following hedges in place:
Time Period Notional Quantities Price
---------------------------- ----------------------------------- ---------------
July - December 2005 9,500 MMbtu of production per day Floor of $5.00
January 2006 10,000 MMbtu of production per day Floor of $5.00
February 2006 10,000 MMbtu of production per day Floor of $5.00
Production Volumes. Because our proved reserves will decline as natural
gas, natural gas liquids and crude oil are produced, unless we acquire
additional properties containing proved reserves or conduct successful
exploitation, 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 and development projects.
We had capital expenditures of $3.5 million and $17.4 million during the
first six months of 2004 and 2005, respectively. As a result of the capital
spending limitations included in our previous credit agreement (which was
terminated in October 2004) and our 11 1/2 % secured notes due 2007 (which were
redeemed in October 2004), we were limited for most of 2004 in our ability to
replace existing production and, consequently, our production volumes decreased
during 2004 and continued to decrease in the first six months of 2005. If
natural gas and crude oil 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.
Availability of Capital. As described more fully under "Liquidity and
Capital Resources" below, our sources of capital going forward will primarily be
cash from operating activities, funding under our revolving credit facility,
cash on hand, and if an appropriate opportunity presents itself, proceeds from
the sale of properties. As of June 30, 2005, we had approximately $3.6 million
of availability under our revolving credit facility. At August 8, 2005, we had
approximately $11.7 million of availability. Proceeds from a private placement
of common stock completed in July 2005 were used to reduce the amount of
indebtedness outstanding under our revolving facility. See "Recent Events".
15
Exploitation and Development Activity. We believe that our high quality
asset base, high degree of operational control and large inventory of drilling
projects position us for future growth. Our properties are concentrated in
locations that facilitate substantial economies of scale in drilling and
production operations and efficient reservoir management practices. We currently
operate 94% of our properties accounting for approximately 90% of our PV-10,
giving us substantial control over the timing and incurrence of operating and
capital expenditures. In addition, at December 31, 2004 we had 47 proved
undeveloped locations and have identified over 100 drilling and recompletion
opportunities on our existing U.S. acreage, the successful development of which
we believe could significantly increase our daily production and proved
reserves. During the three months ended June 30, 2005, we continued exploitation
activities on our properties. We invested $17.3 million in capital spending on
these activities during the first six months of 2005.
Our future natural gas and crude oil production, and therefore our success,
is highly dependent upon our ability to find, acquire and develop additional
reserves that are profitable to produce. The rate of production from our natural
gas and crude oil properties and our proved reserves will decline as our
reserves are produced unless we acquire additional properties containing proved
reserves, conduct successful development and exploitation activities or, through
engineering studies, identify additional behind-pipe zones or secondary recovery
reserves. We cannot assure you that our exploitation and development activities
will result in increases in our proved reserves. In addition, approximately 49%
of our total estimated proved reserves at December 31, 2004 were undeveloped. By
their nature, estimates of undeveloped reserves are less certain. Recovery of
such reserves will require significant capital expenditures and successful
drilling operations.
Borrowings and Interest. At August 8, 2005, we had indebtedness of
approximately $125.0 million under the notes and $3.3 million under the
revolving credit facility and availability of $11.7 million. Unlike the 11 1/2%
secured notes due 2007 (which were redeemed in October 2004), interest on the
notes is payable in cash, which will require us to increase our production and
cash flow from operations in order to meet our debt service requirements, as
well as to fund the development of our numerous drilling opportunities.
Recent events. In July 2005, we acquired an average 44% of the mineral
rights, all executive rights and certain surface rights under approximately
12,000 contiguous acres in the Oates Southwest Field area of West Texas, plus a
3-year lease on a large portion of the remaining mineral interests, for
approximately $2.9 million.
On July 20, 2005, we also completed a $12.0 million private placement
pursuant to which we issued 4.0 million shares of common stock to accredited
investors at a price of $3.00 per share. Net proceeds of approximately $11.3
million from the private placement were used to re-pay indebtedness under our
revolving credit facility, for development in Texas and Wyoming, and for working
capital and general corporate purposes.
Outlook for 2005. The Company has provided adjusted guidance for the
calendar year 2005. As a result of industry conditions, namely the delays in
obtaining various stimulation and completion services, several of the Company's
newly drilled wells have taken longer to get on production than originally
estimated. A general increase in field operating costs experienced by the entire
industry has also had an impact on the Company's direct operating costs and will
affect our per unit costs for 2005. The Company's G&A costs have been adversely
impacted due to Sarbanes Oxley related costs during the year and will continue
to do so for the remainder of 2005. We will also be revising upward our total
capital spending amount for 2005 as a result of the recent private equity
transaction and the Company's improved liquidity position, pending board
approval in early September. Based on these factors, our adjusted guidance for
2005 is as follows:
Production:
Bcfe(approximately 80% gas).................. 6.5 - 7.5
Exit Rate (Mmcfe/d)............................. 19-21
16
Price Differentials (Pre Hedge):
$ Per Bbl.................................... 0.55
$ Per Mcf.................................... 0.75
Direct Lifting Costs, $ Per Mcfe................ 1.10
Production taxes................................ 10% of Revenue
G&A, $ Per Mcfe................................. 0.75
Results of Operations
The following table sets forth certain of our operating data for the
periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
2005 2004 2005 2004
---------------------------------- ------------------------------------
Operating Revenue (1):
Crude Oil Sales................................... $ 2,407 $ 2,065 $ 4,844 $ 3,989
Natural Gas Sales ................................ 6,929 6,256 12,017 12,060
Natural Gas Liquids Sales......................... - 52 - 107
Rig Operations.................................... 283 129 579 304
Other............................................. 8 2 9 4
----------- ------------ ------------- ------------
$ 9,627 $ 8,504 $ 17,449 $ 16,464
=========== ============ ============= ============
Operating Income (Loss) in thousands.............. $ 4,350 $ 4,847 $ 6,429 $ 5,423
Crude Oil Production (MBbls)...................... 49 55 100 112
Natural Gas Production (MMcfs).................... 1,094 1,132 2,061 2,299
Natural Gas Liquids Production (MBbls)............ - 2 - 5
Average Crude Oil Sales Price ($/Bbl)............. $ 49.43 $ 37.29 $ 48.25 $ 35.72
Average Natural Gas Sales Price ($/Mcf)........... $ 6.33 $ 5.52 $ 5.83 $ 5.25
Average Liquids Sales Price ($/Bbl)............... $ - $ 23.19 $ - $ 23.37
(1) Revenue and average sales prices are net of hedging activities.
Comparison of Three Months Ended June 30, 2005 to Three Months Ended June 30,
2004
Operating Revenue. During the three months ended June 30, 2005, operating
revenue from natural gas, natural gas liquid and crude oil sales increased to
$9.3 million compared to $8.4 million in the three months ended June 30, 2004.
The increase in revenue was primarily due to higher commodity prices realized
during the period which were partially offset by decreased production volumes.
Increased prices increased revenue by approximately $1.5 million while decreased
production decreased revenue by approximately $600,000.
Average sales prices, net of hedging cost, for the quarter ended June 30,
2005 were:
o $49.43 per Bbl of crude oil, and
o $ 6.33 per Mcf of natural gas
Average sales prices, net of hedging cost, for the quarter ended June 30,
2004 were:
o $ 37.29 per Bbl of crude oil,
o $ 23.19 per Bbl of natural gas liquid, and
o $ 5.52 per Mcf of natural gas
Crude oil production volumes decreased from 55.4 MBbls during the quarter ended
June 30, 2004 to 48.7 MBbls for the same period of 2005. The decrease in crude
oil production volumes was primarily due to natural field declines. Natural gas
production volumes decreased to 1,094 MMcf for the three months ended June 30,
2005 from 1,132 MMcf for the same period of 2004. The decrease in natural gas
17
production volumes was attributable to natural field declines which were
partially offset by new production during the quarter ended June 30, 2005. New
production contributed 10.5 MMcf during the three months ended June 30, 2005.
Lease Operating Expenses ("LOE"). LOE for the three months ended June 30,
2005 increased to $2.5 million from $2.3 million for the same period in 2004.
The increase in LOE was primarily due to increased production taxes as a result
of higher commodity prices. LOE on a per Mcfe basis for the three months ended
June 30, 2005 was $1.82 per Mcfe compared to $1.57 for the same period of 2004.
General and Administrative Expenses ("G&A"). G&A expenses decreased to $1.1
million for the quarter ended June 30, 2005 from $1.7 million for the same
period of 2004. The decrease in G&A expense was primarily due to lower
performance bonuses paid during the quarter ended June 30, 2005 as compared to
the same period of 2004. G&A expense on a per Mcfe basis was $0.79 for the
second quarter of 2005 compared to $1.16 for the same period of 2004. The per
Mcfe decrease was attributable to lower G&A expense which was partially offset
by decreased production volumes during the second quarter of 2005 as compared to
the same period of 2004.
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. 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
expenses 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 a credit of
stock based compensation expense of approximately $326,000 during the quarter
ended June 30, 2005 compared to a credit to stock based compensation of $2.3
million during the quarter ended June 30, 2004. The credit was due to a decrease
in our common stock price as of June 30, 2005 from the price as of March 31,
2005.
Depreciation, Depletion and Amortization Expenses ("DD&A"). DD&A expense
remained constant at $1.8 million for the three months ended June 30, 2005 and
2004. Our DD&A on a per Mcfe basis for the quarter ended June 30, 2005 was $1.31
per Mcfe as compared to $1.23 in 2004. The increase in the per Mcfe rate was due
to a decline in production volumes in the second quarter of 2005 as compared to
the same period of 2004.
Interest Expense. Interest expense decreased to $3.4 million for the second
quarter of 2005 compared to $4.2 million (of which $1.2 million was cash
interest expense) for the same period of 2004. The decrease in interest expense
(and increase in cash interest expense) was due to the restructuring of our
long-term debt in October. Our long-term debt was $136.3 million at June 30,
2005 compared to $192.4 at June 30, 2004.
Income taxes. There is no current or deferred income tax expense or benefit
due to losses or loss carryforwards and valuation allowance which has been
recorded against such benefits.
Comparison of Six Months Ended June 30, 2005 to Six Months Ended June 30, 2004
Operating Revenue. During the six months ended June 30, 2005, operating
revenue from natural gas, natural gas liquid and crude oil sales increased to
$16.9 million compared to $16.2 million in the six months ended June 30, 2004.
The increase in revenue was primarily due to higher commodity prices realized
during the period, which were partially offset by decreased production volumes.
Increased prices increased revenue by approximately $2.6 million while decreased
production decreased revenue by approximately $1.9 million.
Average sales prices, net of hedging cost, for the six months ended June
30, 2005 were:
o $48.25 per Bbl of crude oil, and
o $ 5.83 per Mcf of natural gas
18
Average sales prices net, of hedging cost, for the six months ended June
30, 2004 were:
o $35.72 per Bbl of crude oil,
o $23.37 per Bbl of natural gas liquid, and
o $ 5.25 per Mcf of natural gas
Crude oil production volumes decreased from 111.7 MBbls during the six months
ended June 30, 2004 to 100.4 MBbls for the same period of 2005. The decrease in
crude oil production volumes was primarily due to natural field declines.
Natural gas production volumes decreased to 2,061 MMcf for the six months ended
June 30, 2005 from 2,299 MMcf for the same period of 2004. The decrease in
natural gas production volumes was attributable to natural field declines which
were partially offset by new production during the six months ended June 30,
2005. New production contributed 10.9 MMcf during the six months ended June 30,
2005.
Lease Operating Expenses. LOE for the six months ended June 30, 2005
increased to $4.8 million from $4.6 million for the same period in 2004. The
increase in LOE was primarily due to increased production taxes as a result of
higher commodity prices. LOE on a per Mcfe basis for the six months ended June
30, 2005 was $1.80 compared to $1.54 for the same period of 2004.
General and Administrative Expenses. G&A expenses decreased to $2.0 million
for the first six months of 2005 from $2.8 million for the same period of 2004.
The decrease in G&A expense was primarily due to lower performance bonuses paid
during the second quarter of 2005 as compared to the same period of 2004. G&A
expense on a per Mcfe basis was $0.77 for the first six months of 2005 compared
to $0.92 for the same period of 2004. The per Mcfe decrease was attributable to
lower G&A expense which was partially offset by decreased production volumes
during the six months ended June 30, 2005 as compared to the same period in
2004.
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. 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
expenses 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 stock based
compensation expense of approximately $277,000 during the six months ended June
30, 2005 as compared to a credit to stock based compensation of approximately
$253,000 during the same period of 2004. We recognized stock based compensation
expense due to the increase in the price of our common stock since December 31,
2004.
Depreciation, Depletion and Amortization Expenses. DD&A expense decreased
to $3.5 million for the six months ended June 30, 2005 from $3.7 million for the
same period of 2004. The decrease was primarily due to decreased production
volumes during the six months ended June 30, 2005 as compared to the same period
of 2004. Our DD&A on a per Mcfe basis for the six months ended June 30, 2005 was
$1.32 per Mcfe as compared to $1.22 in 2004. The increase in the per Mcfe rate
was due to a decline in production volumes in the six months ended June 30, 2005
as compared to the same period of 2004.
Interest Expense. Interest expense decreased to $6.5 million for the first
six months of 2005 compared to $9.1 million (of which approximately $3.0 million
was cash interest expense) for the same period of 2004. The decrease in interest
expense (and increase in cash interest expense) was due to the restructuring of
our long-term debt in October 2004 and the reduction of our total long-term debt
as a result of the Grey Wolf IPO completed during the first quarter of 2005. Our
long-term debt was $136.3 million at June 30, 2005 compared to $192.4 at June
30, 2004.
Income taxes. There is no current or deferred income tax expense or benefit
due to losses or loss carryforwards and valuation allowance which has been
recorded against such benefits.
19
Liquidity and Capital Resources
General. The natural gas and crude oil 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 natural gas and crude oil properties; and
o production and transportation facilities.
The amount of capital expenditures we are able to make has a direct impact on
our ability to increase cash flow from operations, and, thereby, will directly
affect our ability to service our 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 going forward will primarily be cash from operating
activities, funding under our revolving credit facility, cash on hand, and if an
appropriate opportunity presents itself, proceeds from the sale of properties.
However, under the terms of the notes, proceeds of optional sales of our assets
that are not timely reinvested in new natural gas and crude oil assets will be
required to be used to reduce indebtedness and proceeds of mandatory sales must
be used to repay or redeem indebtedness.
Working Capital (Deficit). At June 30, 2005, we had current assets of $6.9
million and current liabilities of $12.0 million resulting in a working capital
deficit of approximately $5.1 million. This compares to a working capital
deficit of $3.9 million at December 31, 2004. Current liabilities at June 30,
2005 consisted of trade payables of $7.2 million, revenues due third parties of
$2.3 million, accrued interest of $1.2 million and other accrued liabilities of
$1.3 million.
Capital expenditures. The table below sets forth the components of our
capital expenditures on a historical basis for the six months ended June 30,
2005 and 2004.
Six Months Ended
June 30,
--------------------------------------
2005 2004
--------------- ----------------
Expenditure category (in thousands):
Development................................... $ 17,326 $ 3,438
Facilities and other.......................... 114 74
--------------- ----------------
Total..................................... $ 17,440 $ 3,512
=============== ================
During the six months ended June 30, 2005 and 2004, capital expenditures
were primarily for the development of existing properties. During 2004, our
capital expenditures were subject to limitations imposed under our previously
existing credit facility and 11 1/2% secured notes due 2007. These limitations
were removed in connection with the refinancing that was completed in October
2004. We anticipate increasing our previously stated capital expenditure budget
of $22.0 million for 2005, as a result of the increased liquidity provided by
our recently completed private placement of common stock. We anticipate our
board of directors will establish the estimated new budget in early September.
During the first six months of 2005, we undertook seven projects expending
approximately $17.3 million. 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 natural gas and crude oil 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 natural gas and crude oil production volumes decreases caused
by natural field declines and sales of producing properties, if any.
20
Sources of Capital. The net funds provided by and/or used in each of the
operating, investing and financing activities relating to continuing operations
are summarized in the following table:
Six Months Ended
June 30,
---------------------------------------
2005 2004
---------------------------------------
(dollars in thousands)
---------------------------------------
Net cash provided by operating activities $ 6,846 $ 3,627
Net cash used in investing activities (16,474) (3,512)
Net cash provided by financing activities 10,164 738
------------------ ---------------
Total $ 536 $ 853
================== ===============
Operating activities during the six months ended June 30, 2005 provided us
$6.8 million in cash compared to providing $3.6 million in the same period in
2004. Net income plus non-cash expense items and net changes in operating assets
and liabilities accounted for most of these funds. Financing activities provided
approximately $10.2 million for the first six months of 2005 compared to
providing $738,000 for the same period of 2004. Proceeds from long-term
borrowings provided $11.8 million in 2005. Investing activities used $16.5
million for the six months ended June 30, 2005 compared to using $3.5 million
for the same period of 2004. Expenditures during the six months ended June 30,
2005 and 2004 were primarily for the development of existing properties.
Future Capital Resources. We currently have four principal sources of
liquidity going forward: (i) cash from operating activities, (ii) funding under
our revolving credit facility, (iii) cash on hand, and (iv) if an appropriate
opportunity presents itself, the sale of producing properties. While we are no
longer subject to limitations on capital expenditures under our 11 1/2% secured
notes due 2007, covenants under the indenture for the notes and the revolving
credit facility restrict our use of cash from operating activities, cash on hand
and any proceeds from asset sales. Under the terms of the notes, proceeds of
optional sales of our assets that are not timely reinvested in new natural gas
and crude oil assets will be required to be used to reduce indebtedness and
proceeds of mandatory sales must be used to redeem indebtedness. The terms of
the notes and the revolving credit facility also substantially restrict our
ability to:
o incur additional indebtedness;
o grant liens;
o pay dividends or make certain other restricted payments;
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 cash flow from operations depends heavily on the prevailing prices of
natural gas and crude oil and our production volumes of natural gas and crude
oil. Although we have hedged a portion of our natural gas and crude oil
production and will continue this practice as required pursuant to the revolving
credit facility, future natural gas and crude oil price declines would have a
material adverse effect on our overall results, and therefore, our liquidity.
Low natural gas and crude oil prices could also negatively affect our ability to
raise capital on terms favorable to us.
Our cash flow from operations will also depend upon the volume of natural
gas and crude oil that we produce. Unless we otherwise expand reserves, our
production volumes may decline as reserves are produced. Due to sales of
properties in 2002 and 2003 and the divestiture of Grey Wolf during the first
quarter of 2005, and restrictions on capital expenditures under the terms of our
11 1/2% secured notes due 2007, we now have significantly reduced reserves and
production as compared with pre-2003 levels. In the future, if an appropriate
opportunity presents itself, 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, exploitation, exploration and development activities,
acquire additional producing properties or identify additional behind-pipe zones
21
or secondary recovery reserves. While we have had some success in pursuing these
activities since January 1, 2003, we have not been able to fully replace the
production volumes lost from natural field declines and property sales. We
believe our numerous drilling opportunities will allow us to increase our
production volumes; however, our drilling activities are subject to numerous
risks, including the risk that no commercially productive natural gas or crude
oil reservoirs will be found. The risk of not finding commercially productive
reservoirs will be compounded by the fact that 49% of our total estimated proved
reserves at December 31,2004 were undeveloped. During the first half of 2005, we
expended approximately $17.3 million for seven wells in South and West Texas,
which resulted in 10.9 MMcf of new natural gas production. We are currently
completing and/or testing two vertical wells in West Texas and three horizontal
wells in South Texas. If the volume of natural gas and crude oil we produce
decreases, our cash flow from operations may decrease.
Our total indebtedness and cash interest expense as a result of issuing the
notes and entering into the revolving credit facility require us to increase our
production and cash flow from operations in order to meet our debt service
requirements, as well as to fund the development of our numerous drilling
opportunities. The ability to satisfy these new obligations will depend upon our
drilling success as well as prevailing commodity prices.
Contractual Obligations. We are committed to making cash payments in the
future on the following types of agreements:
o Long-term debt
o Interest on 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 June
30, 2005:
Payments due in:
----------------------------------------------------------------------
Contractual Obligations Total Less than More than
(dollars in thousands) one year 1-3 years 3-5 years 5 years
---------------------------------- --------------- ------------- ------------ -------------- ------------
Long-Term Debt (1) $ 136,277 $ - $ - $ 136,277 $ -
Interest on long-term debt (2) 63,461 14,577 29,154 19,730 -
Operating Leases (3) 708 149 537 22 -
--------------- ------------- ------------ -------------- ------------
Total $ 200,446 $ 14,726 $ 29,691 $ 156,029 $ -
=============== ============= ============ ============== ============
(1) These amounts represent the balances outstanding under the revolving
credit facility and the new notes. These repayments assume that we will
not draw down additional funds.
(2) Interest expense assumes the balances of long-term debt at the end of
the period and current effective interest rates.
(3) Office lease obligations. The leases for office space expire in
February 2006 and January 2009.
Other obligations. We make and will continue to make substantial capital
expenditures for the acquisition, exploitation, development, exploration and
production of natural gas and crude oil. 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.
22
Long-Term Indebtedness
June 30, December 31,
-----------------------------------
2005 2004
---------------- -----------------
(In thousands)
Floating rate senior secured notes due 2009............................ $ 125,000 $ 125,000
Senior secured revolving credit facility............................... 11,277 1,425
---------------- -----------------
136,277 126,425
Less current maturities ............................................... - -
---------------- -----------------
$ 136,277 $ 126,425
================ =================
Floating Rate Senior Secured Notes due 2009. In connection with our October
2004 financial restructuring, Abraxas issued $125 million in principal aggregate
amount of Floating Rate Senior Secured Notes due 2009. The notes will mature on
December 1, 2009 and began accruing interest from the date of issuance, October
28, 2004 at a per annum floating rate of six-month LIBOR plus 7.50%. The initial
interest rate on the notes was 9.72% per annum. The interest will be reset
semi-annually on each June 1 and December 1, commencing on June 1, 2005. The
current interest rate, effective June 1, 2005, is 11.03% per annum. Interest is
payable semi-annually in arrears on June 1 and December 1 of each year,
commencing on June 1, 2005.
The notes rank equally among themselves and with all of our unsubordinated
and unsecured indebtedness, including our credit facility and senior in right of
payment to our existing and future subordinated indebtedness.
Each of our subsidiaries, Eastside Coal Company, Inc., Sandia Oil & Gas
Corporation, Sandia Operating Corp., Wamsutter Holdings, Inc. and Western
Associated Energy Corporation (collectively, the "Subsidiary Guarantors"), has
unconditionally guaranteed, jointly and severally, the payment of the principal,
premium and interest on the notes on a senior secured basis. In addition, any
other subsidiary or affiliate of ours, that in the future guarantees any other
indebtedness with us, or our restricted subsidiaries, will also be required to
guarantee the notes.
The notes and the Subsidiary Guarantors' guarantees thereof, together with
our credit facility and the Subsidiary Guarantors' guarantees thereof, are
secured by shared first priority perfected security interests, subject to
certain permitted encumbrances, in all of our and each of our restricted
subsidiaries' material property and assets, including substantially all of our
and their natural gas and crude oil properties and all of the capital stock (or
in the case of an unrestricted subsidiary that is a controlled foreign
corporation, up to 65% of the outstanding capital stock) of any entity, owned by
us and our restricted subsidiaries (collectively, the "Collateral").
After April 28, 2007, we may redeem all or a portion of the notes at the
redemption prices set forth in the indenture with U.S. Bank National Association
under which the notes were issued, plus accrued and unpaid interest to the date
of redemption. Prior to that date, we may redeem up to 35% of the aggregate
original principal amount of the notes using the net proceeds of one or more
equity offerings, in each case at the redemption price equal to the product of
(i) the principal amount of the notes being so redeemed and (ii) a redemption
price factor of 1.00 plus the per annum interest rate on the notes (expressed as
a decimal) on the applicable redemption date plus accrued and unpaid interest to
the applicable redemption date, provided certain conditions are also met.
If we experience specific kinds of change of control events, each holder of
notes may require us to repurchase all or any portion of such holder's notes at
a purchase price equal to 101% of the principal amount of the notes, plus
accrued and unpaid interest to the date of repurchase.
The indenture governing the notes contains covenants that, among other
things, limit our ability to:
o incur or guarantee additional indebtedness and issue certain types of
preferred stock or redeemable stock;
23
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make
other restricted payments, including repurchasing, redeeming or
retiring capital stock or subordinated debt or making certain
investments or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o permit restrictions on the ability of our subsidiaries to distribute or
lend money to us;
o cause a restricted subsidiary to issue or sell its capital stock; and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of our and our restricted subsidiaries.
The indenture also contains customary events of default, including
nonpayment of principal or interest, violations of covenants, cross default and
cross acceleration to certain other indebtedness, including our credit facility,
bankruptcy, and material judgments and liabilities.
Senior Secured Revolving Credit Facility. On October 28, 2004, we entered
into an agreement for a new revolving credit facility having a maximum
commitment of $15 million, which includes a $2.5 million subfacility for letters
of credit. Availability under the revolving credit facility is subject to a
borrowing base consistent with normal and customary natural gas and crude oil
lending transactions.
Outstanding amounts under the revolving credit facility bear interest at
the prime rate announced by Wells Fargo Bank, National Association plus 1.00%.
Subject to earlier termination rights and events of default, the stated maturity
date under the revolving credit facility is October 28, 2008.
We are permitted to terminate the revolving credit facility, and under
certain circumstances, may be required, from time to time, to permanently reduce
the lenders' aggregate commitment under the revolving credit facility. Such
termination and each such reduction is subject to a premium equal to the
percentage listed below multiplied by the lenders' aggregate commitment under
the revolving credit facility, or, in the case of partial reduction, the amount
of such reduction.
Year % Premium
-------------- --------------------
1 1.5
2 1.0
3 0.5
4 0.0
Each of our current subsidiaries has guaranteed, and each of our future
restricted subsidiaries will guarantee, our obligations under the revolving
credit facility on a senior secured basis. In addition, any other subsidiary or
affiliate of ours, that in the future guarantees any of our other indebtedness
or of our restricted subsidiaries will be required to guarantee our obligations
under the revolving credit facility. Obligations under the revolving credit
facility are secured, together with the notes, by a shared first priority
perfected security interest, subject to certain permitted encumbrances, in all
of our and each of our restricted subsidiaries' material property and assets,
including substantially all of our and their natural gas and crude oil
properties and all of the capital stock (or in the case of an unrestricted
subsidiary that is a controlled foreign corporation, up to 65% of the
outstanding capital stock) in any entity, owned by us and our restricted
subsidiaries.
24
Under the revolving credit facility, we are subject to customary covenants,
including certain financial covenants and reporting requirements. The revolving
credit facility requires us to maintain a minimum net cash interest coverage and
also requires us to enter into hedging agreements on not less than 25% or more
than 75% of our projected natural gas and crude oil production for a rolling six
month period.
In addition to the foregoing and other customary covenants, the revolving
credit facility contains a number of covenants that, among other things,
restrict Abraxas' ability to:
o incur or guarantee additional indebtedness and issue certain types of
preferred stock or redeemable stock;
o transfer or sell assets;
o create liens on assets;
o pay dividends or make other distributions on capital stock or make
other restricted payments, including repurchasing, redeeming or
retiring capital stock or subordinated debt or making certain
investments or acquisitions;
o engage in transactions with affiliates;
o guarantee other indebtedness;
o make any change in the principal nature of our business;
o prepay, redeem, purchase or otherwise acquire any of our or our
restricted subsidiaries' indebtedness;
o permit a change of control;
o directly or indirectly make or acquire any investment;
o cause a restricted subsidiary to issue or sell our capital stock; and
o consolidate, merge or transfer all or substantially all of the
consolidated assets of Abraxas and our restricted subsidiaries.
The revolving credit facility also contains customary events of default,
including nonpayment of principal or interest, violations of covenants, cross
default and cross acceleration to certain other indebtedness, bankruptcy and
material judgments and liabilities, and is subject to an Intercreditor, Security
and Collateral Agency Agreement, which specifies the rights of the parties
thereto to the proceeds from the Collateral.
Intercreditor Agreement. The holders of the notes, together with the
lenders under our credit facility, are subject to an Intercreditor, Security and
Collateral Agency Agreement, which specifies the rights of the parties thereto
to the proceeds from the Collateral. The Intercreditor Agreement, among other
things, (i) creates security interests in the Collateral in favor of a
collateral agent for the benefit of the holders of the notes and the credit
facility lenders and (ii) governs the priority of payments among such parties
upon notice of an event of default under the Indenture or the credit facility.
So long as no such event of default exists, the collateral agent will not
collect payments under the credit facility documents or the indenture governing
the notes and other note documents (collectively, the "Secured Documents"), and
all payments will be made directly to the respective creditor under the
applicable Secured Document. Upon notice of an event of default and for so long
as an event of default exists, payments to each credit facility lender and
holder of the notes from us and our current subsidiaries and proceeds from any
disposition of any collateral, will, subject to limited exceptions, be collected
25
by the collateral agent for deposit into a collateral account and then
distributed as provided in the following paragraph.
Upon notice of any such event of default and so long as an event of default
exists, funds in the collateral account will be distributed by the collateral
agent generally in the following order of priority:
first, to reimburse the collateral agent for expenses incurred in
protecting and realizing upon the value of the Collateral;
second, to reimburse the credit facility administrative agent and the
trustee, on a pro rata basis, for expenses incurred in protecting and
realizing upon the value of the Collateral while any of these parties was
acting on behalf of the Control Party (as defined below);
third, to reimburse the credit facility administrative agent and the
trustee, on a pro rata basis, for expenses incurred in protecting and
realizing upon the value of the Collateral while any of these parties was
not acting on behalf of the Control Party;
fourth, to pay all accrued and unpaid interest (and then any unpaid
commitment fees) under the credit facility;
fifth, if, the collateral coverage value of three times the outstanding
obligations under the credit facility would be met after giving effect to
any payment under this clause "fifth," to pay all accrued and unpaid
interest on the notes;
sixth, to pay all outstanding principal of (and then any other unpaid
amounts, including, without limitation, any fees, expenses, premiums and
reimbursement obligations) the credit facility;
seventh, to pay all accrued and unpaid interest on the notes (if not
paid under clause "fifth");
eighth, to pay all outstanding principal of (and then any other unpaid
amounts, including, without limitation, any premium with respect to) the
notes; and
ninth, to pay each credit facility lender, holder of the notes, and
other secured party, on a pro rata basis, all other amounts outstanding
under the credit facility and the notes.
To the extent there exists any excess monies or property in the collateral
account after all of ours and our subsidiaries' obligations under the credit
facility, the indenture and the notes are paid in full, the collateral agent
will be required to return such excess to us.
The collateral agent will act in accordance with the Intercreditor
Agreement and as directed by the holders of the notes and the credit facility
lenders, acting as a single class, by vote of the holders of a majority of the
aggregate principal amount of outstanding obligations under the notes and the
credit facility.
The Intercreditor Agreement provides that the lien on the assets
constituting part of the Collateral that is sold or otherwise disposed of in
accordance with the terms of each Secured Document may be released if (i) no
default or event of default exists under any of the Secured Documents, (ii) we
have delivered an officers' certificate to each of the collateral agent, the
trustee, the credit facility administrative agent certifying that the proposed
sale or other disposition of assets is either permitted or required by, and is
in accordance with the provisions of, the applicable Secured Documents and (iii)
the collateral agent has acknowledged such certificate.
The Intercreditor Agreement provides for the termination of security
interests on the date that all obligations under the Secured Documents are paid
in full.
26
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 commodity derivative instruments. Under the
revolving credit facility, we are required to maintain hedge positions on not
less than 25% nor more than 75% of our projected oil and gas production for a
rolling six month period.
Net Operating Loss Carryforwards.
At December 31, 2004, we had $184.0 million of net operating loss
carryforwards for U.S. tax purposes. These loss carryforwards will expire
through 2022 if not utilized.
Uncertainties exist as to the future utilization of the operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, we have established a valuation allowance of $73.0 million for
deferred tax assets at December 31, 2004 and June 30, 2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Commodity Price Risk
As an independent natural gas and crude oil 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 natural gas, natural gas liquids and crude oil. 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 natural gas and crude oil 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 natural gas and crude oil
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 six months ended June 30, 2005, a 10% decline in natural
gas, natural gas liquids and crude oil prices would have reduced our operating
revenue, cash flow and net income by approximately $1.7 million for the period.
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.
None of the derivatives in place as of June 30, 2005 are designated as hedges.
Accordingly, the change in the market value of the instrument is reflected in
current oil and gas revenue.
Under the terms of the revolving credit facility, we are required to
maintain hedging positions on not less than 25% nor more than 75% of our natural
gas and crude oil production for a rolling six month period.
See "General - Commodity Prices and Hedging Activities" for a summary of
our current hedge positions.
Interest Rate Risk
At June 30, 2005, as a result of the financial restructuring that occurred
in October 2004, we had $125.0 million in outstanding indebtedness under the
floating rate senior secured notes due 2009. The notes bear interest at a per
annum rate of six-month LIBOR plus 7.5%. The rate is redetermined on June 1 and
27
December 1 of each year, beginning June 1, 2005. The current rate on the notes
is 11.03%. For every percentage point that the LIBOR rate rises, our interest
expense would increase by approximately $1.3 million on an annual basis. At June
30, 2005 we had $11.3 million of outstanding indebtedness under our revolving
credit facility. Interest on this facility accrues at the prime rate announced
by Wells Fargo Bank plus 1.00%. For every percentage point increase in the
announced prime rate, our interest expense would increase by approximately
$113,000 on an annual basis.
Item 4. Controls and Procedures.
As of the end of the period covered by 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-15(e)and 15d-15(e)) and concluded
that the disclosure controls and procedures were effective 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 known to them by others within those
entities. There were no changes in our internal controls that could materially
affect, or are reasonably likely to materially affect, our financial reporting
during the second quarter of 2005.
28
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, 2004, and
in Note 7 in the Notes to Condensed Consolidated Financial Statements contained
in Part I of this report on Form 10-Q/A Number 1.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
-----------------------------------------------------------------------
On July 20, 2005, we entered into a Common Stock Purchase Agreement with
certain accredited investors, pursuant to which we issued 4.0 million shares of
our common stock, par value $.01 per share, to the accredited investors at a
price of $3.00 per share, or an aggregate of $12.0 million in cash before
transaction expenses. The common stock has not been registered under the
Securities Act of 1933, as amended, or any applicable state securities laws in
reliance on the exemption provided by ss. 4(2) of the Securities Act and Rule
506 of the regulations promulgated thereunder. There was no general solicitation
involved in the offer and the common stock was sold exclusively to accredited
investors as defined under Regulation D. We paid a 5% cash commission out of
such proceeds to Energy Capital Solutions LLC which acted as our financial
advisor. Net proceeds of approximately $11.3 million from the private placement
were used to re-pay indebtedness under our revolving credit facility, for
development in Texas and Wyoming, and for working capital and general corporate
purposes.
Item 3. Defaults Upon Senior Securities.
-------------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------------------
At the Annual Meeting of Shareholders held on June 1, 2005 the following
proposals were adopted by the margins indicated:
1. Election of four directors for a term of three years, to hold office
until the expiration of his term in 2008 or until a successor shall have been
elected & qualified.
Number of Shares
For Withheld
-------------------- -------------------
C. Scott Bartlett, Jr. 30,619,934 2,006,378
Ralph F. Cox 30,669,330 1,956,982
Dennis E. Logue 30,673,182 1,953,130
Joseph A. Wagda 30,676,670 1,949,642
In addition, the terms of office of Franklin A. Burke, Harold D. Carter,
Barry J. Galt, James C. Phelps and Robert L. G. Watson continued after the
meeting.
2. Approval of the 2005 Non-Employee Directors Long-Term Equity Incentive
Plan.
Number of Shares
For Against Abstain Non-vote
------------------- ------------ -------------- --------------------
8,375,750 4,623,324 643,843 18,983,395
3. Approval of the appointment of BDO Seidman, LLP as the Company's
auditors.
29
Number of Shares
For Against Abstain
------------------ ------------- -------------
31,965,416 551,070 109,926
Item 5. Other Information.
-----------------------------
None
Item 6. Exhibits.
--------------------
(a) Exhibits
Exhibit 31.1 Certification - Robert L.G. Watson, CEO
Exhibit 31.2 Certification - Chris E. Williford, CFO
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 -
Robert L.G. Watson, CEO
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 - Chris
E. Williford, CFO
30
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: March 30, 2006 By:/s/ Robert L.G. Watson
--------------------------
ROBERT L.G. WATSON,
President and Chief
Executive Officer
Date: March 30, 2006 By:/s/ Chris E. Williford
---------------------------
CHRIS E. WILLIFORD,
Executive Vice President and
Principal Accounting Officer
31