UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002
( ) 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 __
The number of shares of the issuer's common stock outstanding as of August
14, 2002 was:
Class Shares Outstanding
Common Stock, $.01 Par Value 29,979,397
1 of 42
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
FORM 10 - Q
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2002
and December 31, 2001.......................................3
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2002 and 2001...........5
Consolidated Statement of Stockholders'Equity (Deficit)
Six months ended June 30, 2002..............................6
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001.....................7
Notes to Consolidated Financial Statements............................8
ITEM 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations......................................23
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risks...........36
PART II
OTHER INFORMATION
ITEM 1 - Legal proceedings 39
ITEM 2 - Changes in Securities................................................39
ITEM 3 - Defaults Upon Senior Securities......................................39
ITEM 4 - Submission of Matters to a Vote of Security Holders..................39
ITEM 5 - Other Information 39
ITEM 6 - Exhibits and Reports on Form 8-K.....................................39
Signatures ...................................................40
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
June 30 December 31,
2002 2001
-------- --------
(In Thousands)
Assets:
Current assets:
Cash ................................................. $ 6,837 $ 7,605
Restricted cash ...................................... 9,895 --
Accounts receivable, less allowances for doubtful
accounts:
Joint owners .................................. 2,250 2,785
Oil and gas production ........................ 4,888 4,758
Other ......................................... 1,480 504
-------- --------
8,618 8,047
Equipment inventory ................................... 1,129 1,251
Other current assets .................................. 817 443
-------- --------
Total current assets ................................ 27,296 17,346
Property and equipment:
Oil and gas properties, full cost method of accounting:
Proved ............................................ 519,824 486,098
Unproved, not subject to amortization ............. 6,375 10,626
Other property and equipment ......................... 42,950 67,632
-------- --------
Total ........................................ 569,149 564,356
Less accumulated depreciation, depletion, and
amortization .................................... 420,090 282,462
-------- --------
Total property and equipment - net ................ 149,059 281,894
Deferred financing fees, net of accumulated
amortization of$9,526 and $8,668 at June 30,
2002 and December 31, 2001, respectively .............. 3,077 3,928
rred income taxes ....................................... 8,618 --
Other assets ............................................ 447 448
-------- --------
Total assets .......................................... $188,497 $303,616
======== ========
See accompanying notes to consolidated financial statements
3
Abraxas Petroleum Corporation and Subsidiaries
Part 1- Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets (continued)
(Unaudited)
June 30, December 31,
2002 2001
--------- ---------
(In Thousands)
Liabilities and Stockholder's Equity (Deficit)
Current liabilities:
Accounts payable ............................................ $ 7,723 $ 10,542
Oil and gas production payable .............................. 3,421 3,596
Accrued interest ............................................ 5,921 6,013
Other accrued expenses ...................................... 3,307 1,116
Hedge liability ............................................. 1,727 658
Current maturities of long-term debt ........................ 63,500 415
--------- ---------
Total current liabilities ......................... 85,599 22,340
Long-term debt ................................................ 227,297 285,184
Deferred income taxes ......................................... -- 20,621
Future site restoration ....................................... 4,244 4,056
Stockholders' equity (deficit):
Common Stock, par value $.01 per share-
Authorized 200,000,000 shares; issued, 30,145,280 at June 30,
2002 and December 31, 2001 ................................. 301 301
Additional paid-in capital ................................. 136,830 136,830
Accumulated deficit ......................................... (255,483) (151,094)
Receivables from stock sales ................................ (97) (97)
Treasury stock, at cost, 165,883 shares ..................... (964) (964)
Accumulated other comprehensive loss ........................ (9,230) (13,561)
--------- ---------
Total stockholders' deficit ............................. (128,643) (28,585)
--------- ---------
Total liabilities and shareholders' equity (deficit) .......... $ 188,497 $ 303,616
========= =========
See accompanying notes to consolidated financial statements
4
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands except per share data)
Revenue:
Oil and gas production revenues ................ $ 13,143 $ 20,127 $ 24,029 $ 48,376
Gas processing revenues ........................ 741 498 1,411 934
Rig revenues ................................... 193 225 344 408
Other .......................................... 158 266 258 484
--------- --------- --------- ---------
14,235 21,116 26,042 50,202
Operating costs and expenses:
Lease operating and production taxes ........... 3,353 4,332 7,262 9,191
Depreciation, depletion, and amortization ...... 9,110 8,288 15,924 17,129
Proved property impairment ..................... 115,995 -- 115,995 --
Rig operations ................................. 175 191 296 344
General and administrative ..................... 1,481 1,575 3,179 3,684
General and administrative (Stock-based
compensation) ................................ -- (2,332) -- (1,401)
--------- --------- --------- ---------
130,114 12,054 142,656 28,947
--------- --------- --------- ---------
Operating income (loss) ........................... (115,879) 9,062 (116,614) 21,255
Other (income) expense:
Interest income ................................ (8) (12) (41) (28)
Amortization of deferred financing fee ......... 431 455 858 910
Interest expense ............................... 8,761 7,829 17,174 15,610
Other expense .................................. -- -- -- 16
--------- --------- --------- ---------
9,184 8,272 17,991 16,508
--------- --------- --------- ---------
Net income (loss) from operations before taxes .... (125,063) 790 (134,605) 4,747
Income tax expense (benefit) ...................... (29,373) 1,509 (30,216) 4,285
Minority interest in income of consolidated foreign
subsidiary ..................................... -- 555 -- 1,481
--------- --------- --------- ---------
Net loss .......................................... $ (95,690) $ (1,274) $(104,389) $ (1,019)
========= ========= ========= =========
Loss per common share:
Net loss per common share - basic and diluted . $ (3.19) $ (0.05) $ (3.48) $ (0.04)
========= ========= ========= =========
See accompanying notes to consolidated financial statements
5
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
(In thousands except share amounts)
Accumulated Receiv-
Other ables
Common Stock Treasury Stock Additional Accumu- Compre- from
------------------- ---------------- Paid-In lated hensive Stock
Shares Amount Shares Amount Capital Deficit Income(Loss) Sale Total
----------- ------- ------- -------- ----------- ---------- ------------- -------- --------
Balance at December 31, 2001.........30,145,280 $ 301 165,883 $ (964) $ 136,830 $(151,094) $ (13,561) $ (97) $ (28,585)
Comprehensive income (loss) - Note 10
Net loss........................... - - - - - (104,389) - - (104,389)
Other comprehensive income:
Hedge loss....................... - - - - - - (825) - (825)
Foreign currency translation
adjustment.................... - - - - - - 5,156 - 5,156
-------
Comprehensive income (loss)... - - - - - - - - (100,058)
----------- ------- ------- -------- ----------- --------- ---------- --------- -------
Balance at June 30, 2002............30,145,280 $ 301 165,883 $ (964) $ 136,830 $ (255,483) $ (9,230) $ (97 ) $(128,643)
=========== ======= ======= ======== =========== ========= ========== ========= =======
See accompanying notes to consolidated financial statements
6
Abraxas Petroleum Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
-----------------------
2002 2001
---------- ----------
(In thousands)
Operating Activities
Net loss ................................................ $(104,389) $ (1,019)
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in income of foreign subsidiary ...... -- 1,481
Depreciation, depletion, and amortization .............. 15,924 17,129
Proved property impairment ............................. 115,995 --
Deferred income tax (benefit) expense .................. (30,216) 3,639
Amortization of deferred financing fees ................ 858 909
Amortization of debt discount .......................... 230 --
Stock-based compensation ............................... -- (1,401)
Changes in operating assets and liabilities:
Accounts receivable ................................ (453) 10,307
Equipment inventory ................................ 131 (98)
Other .............................................. (157) (1,099)
Accounts payable and accrued expenses .............. 281 (13,442)
--------- ---------
Net cash provided (used in) by operating activities ..... (1,796) 16,406
--------- ---------
Investing Activities
Capital expenditures, including purchases and development
of properties ......................................... (23,838) (30,433)
Proceeds from sale of oil and gas producing properties... 32,902 9,695
Increase in restricted cash ............................. (9,895) --
--------- ---------
Net cash used in investing activities ................... $ (831) $ (20,738)
--------- ---------
Financing Activities
Proceeds from long-term borrowings ...................... 11,614 11,316
Payments on long-term borrowings ........................ (8,145) (6,188)
Deferred financing fees ................................. -- (10)
Exercise of stock options ............................... -- 16
Other ................................................... -- 183
--------- ---------
Net cash provided by financing activities ............... 3,469 5,317
--------- ---------
Effect of exchange rate changes on cash ................. (1,610) 24
--------- ---------
Increase (decrease) in cash ............................. (768) 1,009
Cash, at beginning of period ............................ 7,605 2,004
--------- ---------
Cash, at end of period .................................. $ 6,837 $ 3,013
========= =========
Supplemental disclosures of cash flow information:
Interest paid ........................................... $ 17,036 $ 15,702
========= =========
Taxes paid .............................................. $ -- $ 505
========= =========
See accompanying notes to consolidated financial statements
7
Abraxas Petroleum Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2002
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 consolidated financial statements in the Annual Report on Form
10-K filed for the year ended December 31, 2001. 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, 2002 are not necessarily indicative of results to be
expected for the full year.
The consolidated financial statements include the accounts of the Company,
its wholly-owned foreign subsidiaries, Canadian Abraxas Petroleum Limited
("Canadian Abraxas") and Grey Wolf Exploration Inc. ("Grey Wolf"). Minority
interest in 2001 represents the minority shareholders' proportionate share of
the equity and income of Grey Wolf prior to the Company's acquiring the
remaining interest in September 2001.
Canadian Abraxas' and Grey Wolf's assets and liabilities are translated to
U.S. dollars at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders'
equity.
Certain prior years balances have been reclassified for comparative
purposes.
Note 2. Business Conditions and Liquidity Requirements
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
experienced net losses from operations before taxes during the six months ended
June 30, 2002, of $134.6 million due primarily to proved property impairments of
$116 million resulting primarily from volatile commodity prices - See note 11.
At June 30, 2002, the Company's current liabilities of approximately $85.6
million exceeded current assets of $27.3 million resulting in a working capital
deficit of $58.3 million. The Company also had a stockholders' deficit of $128.6
million. The Company's principal sources of liquidity are cash on hand, cash
flow from operations and proceeds from sales of assets and properties, in
addition to funding remaining available under the Grey Wolf credit facility with
Mirant Canada.
The Company's continued existence as a going concern is dependent upon
several factors. The Company will need additional funds in the future for both
the development of its assets and the service of its debt, including the
repayment of the $63.5 million in principal amount of the First Lien Notes
maturing in March 2003 and the $191 million of the Second Lien Notes and Old
Notes maturing in November 2004. In order to meet the goals of developing its
assets and servicing its debt obligations, the Company will be required to
obtain additional sources of liquidity and capital and/or reduce or reschedule
its existing cash requirements including repayment of the First Lien Note. In
order to do so, the Company may pursue one or more of the following
alternatives:
o refinancing existing debt;
o repaying debt with proceeds from the sale of assets;
o exchanging debt for equity;
o managing the timing and reducing the scope of its capital
expenditures;
o issuing debt or equity securities or otherwise raising additional
funds; or
o selling all or a portion of its existing assets, including
interests in its assets.
Due to our current debt levels and the restrictions contained in the
indentures governing the First Lien Notes, Second Lien Notes and Old Notes, our
best opportunity for additional sources of liquidity and capital will be through
the disposition of assets and some of the other alternatives discussed above.
There can be no assurance that any of the above alternatives, or some
combination thereof, will be available or, if available, will be on terms
acceptable to us or that such efforts will produce enough cash to fund the
8
Company's operating and capital requirements or make interest payments and
principal payments due on the First Lien Notes, Second Lien Notes and Old Notes.
In order to meet its need for additional funds, the Company is exploring
strategic opportunities through the establishment of a Planning Committee of the
Board of Directors. The Planning Committee has engaged an investment banking
firm to assist with a strategic review and to formulate a proposed plan of
action for consideration by the Board of Directors. Because the Planning
Committee is currently conducting its review and formulation of a proposed plan
of action, of the Company cannot assess the likelihood that it can effectively
implement any such proposed plan of action. Regardless of the outcome of the
strategic review, a refinancing of the Company's existing debt and the sale of
additional properties likely will be required for the Company to meet its
liquidity and capital requirements. Management believes that the Company can
implement a successful plan of action to improve its liquidity and capital
requirements. However, management cannot give any assurances that such actions
will result in the Company being able to continue as a going concern. The June
30, 2002 financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
Note 3. Divestiture of Assets
In May of 2002, the wholly owned Canadian subsidiaries, Grey Wolf and
Canadian Abraxas, sold their interest in a natural gas processing plant and
associated crude oil and natural gas reserves in the Quirk Creek and Mahaska
fields in Alberta, Canada for approximately $22.9 million.
In June 2002, Abraxas sold its interest in the East White Point field in
South Texas for approximately $9.8 million.
The condensed pro forma financial information presented below summarizes on
an pro forma basis, approximate results of the Company's consolidated results of
operations for the three and six months ended June 30, 2002, assuming the
divestiture had occurred on January 1, 2002, and the three and six months ended
June 30, 2001, assuming the divestiture had occurred on January 1, 2001.
Additionally, the pro forma information reflects an interest savings assuming
that the Company had applied a portion of the proceeds to reacquire the
Production Payment (see Note 4) on January 1st of the respective years.
--------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------
(in thousands, except per share data)
---------- ----------- --------------- --------
Revenue ............... $ 12,899 $ 17,781 $ 23,107 $ 41,833
========== =========== =============== ========
Net loss .............. $ (95,552) $ (2,547) $ (104,185) $ (4,838)
========== =========== =============== ========
Loss per common
share--basic and
diluted ........ $ (3.19) $ (0.11) $ (3.48) $ (0.21)
========== =========== =============== ========
In July 2002, Canadian Abraxas and Grey Wolf sold their interest in the
Millarville field in Alberta, Canada for approximately $1.1 million.
Proceeds from these property sales were deposited at the Trustee for the
First Lien Notes, to be held as restricted cash until disbursement to the
Company under terms permitted by the appropriate indenture, or if not disbursed
in accordance with the indenture within 180 days of receipt, to be applied
against the outstanding First Lien Notes. As of June 30, 2002, approximately
$9.8 million of these proceeds remained in the Trustee's account and available
to the Company under the terms of the indenture. The other portion of the
proceeds were used in accordance with the indentures, including reacquiring the
Production Payment (See Note 4).
Note 4. Long-Term Debt
Long-term debt consists of the following:
June 30 December 31
-------------------
2002 2001
-------- --------
(In thousands)
11.5% Senior Notes due 2004 ("Old Notes") ........................... $ 801 $ 801
12.875% Senior Secured Notes due 2003 ("First Lien Notes") .......... 63,500 63,500
11.5% Second Lien Notes due 2004 ("Second Lien Notes") .............. 190,178 190,178
9
9.5% Senior Credit Facility ("Grey Wolf Facility"), providing for
borrowings up to approximately US $96 million (CDN $150 million)
and secured by the assets of Grey Wolf and non-recourse to
Abraxas, net of US $2.1 and $2.3 million discount at June 30,
2002 and December 31, 2001, respectively ....................... 36,318 22,944
Production Payment .................................................. -- 8,176
-------- --------
290,797 285,599
Less current maturities First Lien Notes ............................ 63,500 415
-------- --------
$227,297 $285,184
======== ========
Old Notes. On November 14, 1996, the Company consummated the offering of
$215.0 million of its 11.5% Senior Notes due 2004, Series A, which were
exchanged for the Series B Notes in February 1997. On January 27, 1998, the
Company completed the sale of $60.0 million of its 11.5% Senior Notes due 2004,
Series C. The Series B Notes and the Series C Notes were subsequently combined
into $275.0 million in principal amount of the Old Notes in June 1998. In
December 1999, Abraxas and Canadian Abraxas completed an exchange offer which
reduced the amount of outstanding Old Notes to $801,000. See the description of
the Second Lien Notes below for more information.
Interest on the Old Notes is payable semi-annually in arrears on May 1 and
November 1 of each year at the rate of 11.5% per annum. The Old Notes are
redeemable, in whole or in part, at the option of the Company at the redemption
prices set forth below, plus accrued and unpaid interest to the date of
redemption, if redeemed during the 12-month period commencing on November 1 of
the years set forth below:
Year Percentage
---- ----------
2001.................................... 102.875%
2002 and thereafter..................... 100.000%
The Old Notes are joint and several obligations of Abraxas and Canadian
Abraxas and rank pari passu in right of payment to all existing and future
unsubordinated indebtedness of Abraxas and Canadian Abraxas. The Old Notes rank
senior in right of payment to all future subordinated indebtedness of Abraxas
and Canadian Abraxas. The Old Notes are, however, effectively subordinated to
the First Lien Notes to the extent of the value of the collateral securing the
First Lien Notes and to the Second Lien Notes to the extent of the value of the
collateral securing the Second Lien Notes. The Old Notes are unconditionally
guaranteed, on a senior basis by Sandia Oil and Gas Company ("Sandia"), a wholly
owned subsidiary of the Company. The guarantee is a general unsecured obligation
of Sandia and ranks pari passu in right of payment to all unsubordinated
indebtedness of Sandia and senior in right of payment to all subordinated
indebtedness of Sandia. The guarantee is effectively subordinated to the First
Lien Notes and the Second Lien Notes to the extent of the value of the
collateral securing the First Lien Notes and the Second Lien Notes.
Upon a Change of Control, as defined in the Old Notes Indenture, each
holder of the Old Notes will have the right to require the Company to repurchase
all or a portion of such holder's Old Notes at a redemption price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. In addition, the Company will be obligated to offer to repurchase
the Old Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase in the event of certain asset sales.
First Lien Notes. In March 1999, Abraxas consummated the sale of $63.5
million of the First Lien Notes. Interest on the First Lien Notes is payable
semi-annually in arrears on March 15 and September 15, commencing September 15,
1999. Beginning March 15, 2002, the First Lien Notes are redeemable, in whole or
in part, at the option of Abraxas at 100% of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption.
The First Lien Notes are senior indebtedness of Abraxas secured by a first
lien on substantially all of the crude oil and natural gas properties of Abraxas
and the shares of Grey Wolf owned by Abraxas. The First Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Canadian
Abraxas, Sandia and Wamsutter, wholly-owned subsidiaries of the Company (the
"Restricted Subsidiaries"). The guarantees are secured by substantially all of
the crude oil and natural gas properties of the guarantors and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas.
Upon a Change of Control, as defined in the First Lien Notes Indenture,
each holder of the First Lien Notes will have the right to require Abraxas to
repurchase such holder's First Lien Notes at a redemption price equal to 101% of
10
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Abraxas will be obligated to offer to repurchase the
First Lien Notes at 100% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption in the event of certain asset sales.
The First Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and certain of its subsidiaries, including the guarantors of
the First Lien Notes to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas.
The First Lien Notes indenture provides, among other things, that Abraxas
may not, and may not cause or permit the Restricted Subsidiaries, to, directly
or indirectly, create or otherwise cause to permit to exist or become effective
any encumbrance or restriction on the ability of such subsidiary to pay
dividends or make distributions on or in respect of its capital stock, make
loans or advances or pay debts owed to Abraxas or any other Restricted
Subsidiary, guarantee any indebtedness of Abraxas or any other Restricted
Subsidiary or transfer any of its assets to Abraxas or any other Restricted
Subsidiary except in certain situations as described in the First Lien Notes
indenture.
Second Lien Notes. In December 1999, Abraxas and Canadian Abraxas
consummated an exchange offer whereby $269,699,000 of the Old Notes were
exchanged for $188,778,000 of the Second Lien Notes, and 16,078,990 shares of
Abraxas common stock and contingent value rights. An additional $5,000,000 of
the Second Lien Notes were issued in payment of fees and expenses.
Interest on the Second Lien Notes is payable semi-annually in arrears on
May 1 and November 1, commencing May 1, 2000. The Second Lien Notes are
redeemable, in whole or in part, at the option of Abraxas and Canadian Abraxas
at the redemption prices set forth below, plus accrued and unpaid interest to
the date of redemption, if redeemed during the 12-month period commencing on
December 1 of the years set forth below:
Year Percentage
----- ----------
2001.................................... 102.875%
2002 and thereafter..................... 100.000%
The Second Lien Notes are senior indebtedness of Abraxas and Canadian
Abraxas and are secured by a second lien on substantially all of the crude oil
and natural gas properties of Abraxas and Canadian Abraxas and the shares of
Grey Wolf owned by Abraxas and Canadian Abraxas. The Second Lien Notes are
unconditionally guaranteed on a senior basis, jointly and severally, by Sandia
and Wamsutter. The guarantees are secured by substantially all of the crude oil
and natural gas properties of the guarantors. The Second Lien Notes are,
however, effectively subordinated to the First Lien Notes and related guarantees
to the extent the value of the collateral securing the Second Lien Notes and
related guarantees and the First Lien Notes and related guarantees is
insufficient to pay both the Second Lien Notes and the First Lien Notes.
Upon a Change of Control, as defined in the Second Lien Notes Indenture,
each holder of the Second Lien Notes will have the right to require Abraxas and
Canadian Abraxas to repurchase such holder's Second Lien Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. In addition, Abraxas and Canadian Abraxas
will be obligated to offer to repurchase the Second Lien Notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
redemption in the event of certain asset sales.
The Second Lien Notes indenture contains certain covenants that limit the
ability of Abraxas and Canadian Abraxas and certain of their subsidiaries,
including the guarantors of the Second Lien Notes (the "Restricted
Subsidiaries") to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of Abraxas or
Canadian Abraxas.
The Second Lien Notes indenture provides, among other things, that Abraxas
and Canadian Abraxas may not, and may not cause or permit the Restricted
Subsidiaries, to, directly or indirectly, create or otherwise cause to permit to
exist or become effective any encumbrance or restriction on the ability of such
subsidiary to pay dividends or make distributions on or in respect of its
capital stock, make loans or advances or pay debts owed to Abraxas, Canadian
Abraxas or any other Restricted Subsidiary, guarantee any indebtedness of
Abraxas, Canadian Abraxas or any other Restricted Subsidiary or transfer any of
its assets to Abraxas, Canadian Abraxas or any other Restricted Subsidiary
except in certain situations as described in the Second Lien Notes indenture.
11
The fair value of the Old Notes, First Lien Notes and Second Lien Notes was
approximately $168.6 million as of June 30, 2002. The Company has approximately
$325,000 of standby letters of credit and a $10,000 performance bond open at
June 30, 2002. Approximately $336,000 of cash is restricted and in escrow
related to certain of the letters of credit and the bond.
Grey Wolf Facility
General. On December 20, 2001, Grey Wolf entered into a credit facility
with Mirant Canada Energy Capital, Ltd. ("Mirant Canada"). The Grey Wolf
Facility established a revolving credit facility with a commitment amount of CDN
$150 million, (approximately US $96 million). Subject to certain restrictions,
the borrowing base may be reduced at the discretion of Mirant Canada upon 30
days written notice. Subject to earlier termination on the occurrence of events
of default or other events, the stated maturity date is December 20, 2007. The
applicable interest rate charged on the outstanding balance under the Grey Wolf
Facility is 9.5%. Any amounts in default will accrue interest at 15%. The Grey
Wolf Facility is non-recourse to Abraxas and its properties, other than Grey
Wolf properties, and Abraxas has no additional direct obligations to Mirant
Canada under the facility.
Principal Payments. Prior to maturity, Grey Wolf is required to make
principal payments under the Grey Wolf Facility as follows: (i) on the date of
the sale of any of its producing properties, Grey Wolf is required to make a
payment equal to the amount of the net sales proceeds; (ii) on a monthly basis,
Grey Wolf is required to make a payment equal to its net cash flow for the month
prior to the date of the payment; and (iii) on the date that any reduction in
the commitment amount becomes effective, Grey Wolf must repay all amounts over
the commitment amount so reduced.
Under the Grey Wolf Facility, "net cash flow" generally means the amount of
proceeds received by Grey Wolf from the sale of hydrocarbons less taxes, royalty
and similar payments (including overriding royalty interest payments made to
Mirant Canada), interest payments made to Mirant Canada and operating and other
expenses including approved capital and G&A expenses.
Grey Wolf may also make pre-payments at any time after December 20, 2002
with no pre-payment penalty.
The Company treats the Grey Wolf Facility as a revolving line of credit
since, under ordinary circumstances, the lender is paid on a net cash flow
basis. It is anticipated that the Company will be a net borrower for the next
several years due to a large number of exploration and exploitation projects and
the associated capital needs to complete the projects.
Security. Obligations under the Grey Wolf Facility are secured by a
security interest in substantially all of Grey Wolf's assets, including, without
limitation, working interests in producing properties and related assets owned
by Grey Wolf. None of Abraxas' assets are subject to a security interest under
the Grey Wolf Facility.
Covenants. The Grey Wolf Facility contains a number of covenants that,
among other things, restrict the ability of Grey Wolf to (i) enter into new
business areas, (ii) incur additional indebtedness, (iii) create or permit to be
created any liens on any of its properties, (iv) make certain payments,
dividends and distributions, (v) make any unapproved capital expenditures, (vi)
sell any of its accounts receivable, (vii) enter into any unapproved leasing
arrangements, (viii) enter into any take-or-pay contracts, (ix) liquidate,
dissolve, consolidate with or merge into any other entity, (x) dispose of its
assets, (xi) abandon any property subject to Mirant Canada's security interest,
(xii) modify any of its operating agreements, (xiii) enter into any unapproved
hedging agreements, and (xiv) enter into any new agreements affecting existing
agreements relating to or affecting properties subject to Mirant Canada's
security interests. In addition, Grey Wolf is required to submit a quarterly
development plan for Mirant Canada's approval and Grey Wolf must comply with
specified financial ratios and tests, including a minimum collateral coverage
ratio. Grey Wolf was in compliance with these covenants at June 30, 2002.
Upon receipt by the Company of a written request from Mirant Canada, the
Company shall promptly, and in any event within 10 days of receipt of such
request, have entered into one or more swap, hedge, floor, collar or similar
agreements which are satisfactory to the lender at a price and for a term which
is mutually acceptable to the Company and Mirant Canada.
Events of Default. The Grey Wolf Facility contains customary events of
default, including nonpayment of principal or interest, violations of covenants,
inaccuracy of representations or warranties in any material respect, cross
default and cross acceleration to certain other indebtedness, bankruptcy,
material judgments and liabilities, change of control and any material adverse
change in the financial condition of Grey Wolf.
12
Overriding Royalty Interests. As a condition to the Grey Wolf Facility,
Grey Wolf has granted two overriding royalty interests to Mirant Canada, each in
the amount of 2.5% of the revenues received by Grey Wolf from oil and gas sales
from all of its properties. These overriding royalty interest resulted in the
recording of a $2.3 million discount on the Grey Wolf Facility borrowings at
December 31, 2001.
Production Payment
In October 1999 the Company entered into a non-recourse Dollar Denominated
Production Payment agreement (the "Production Payment") with a third party. The
Production Payment has an aggregate total availability of up to $50 million at
15% interest. The Production Payment relates to a portion of the production from
several natural gas wells in South Texas. The Company reacquired the Production
Payment in June 2002, for approximately $6.8 million.
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,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- -------------- ------------- ------------
Numerator:
Net income (loss) from continuing operations $ (95,690) $ (1,274) $ (104,389) $ (1,019)
------------ ------------ ------------ ------------
Denominator:
Denominator for basic earnings per share -
Weighted-average shares .................... 29,979,397 23,616,197 29,979,397 23,106,111
Effect of dilutive securities:
Stock options, warrants and CVR's .......... -- -- -- --
------------ ------------ ------------ ------------
Dilutive potential common shares Denominator
for diluted earnings per share -
adjusted weighted-average shares and assumed
Conversions ................................ 29,979,397 23,616,197 29,979,397 23,106,111
Basic earnings (loss) per share:
Income (loss) from continuing operations ... $ (3.19) $ (0.05) $ (3.48) $ (0.04)
============ ============ ============ ============
Diluted earnings (loss) per share:
Income (loss) from continuing operations ... $ (3.19) $ (0.05) $ (3.48) $ (0.04)
============ ============ ============ ============
For the three and six months ended June 30, 2002, none of the shares
issuable in connection with stock options or warrants are included in diluted
shares. Inclusion of these shares would be antidilutive due to losses incurred
in the period. Had there not been losses in this period, dilutive shares would
have been 210 shares and 17,243 shares for the three and six months ended June
30, 2002, respectively.
Contingent Value Rights ("CVRs")
As part of the exchange offer consummated by the Company in December 1999,
Abraxas issued contingent value rights or CVRs, which entitled the holders to
receive up to a total of 105,408,978 of Abraxas common stock under certain
circumstances as defined. On May 21, 2001, Abraxas issued 3,386,488 shares upon
the expiration of the CVRs.
Note 6. Guarantor Condensed Consolidating Financial Statements
The following table presents condensed consolidating balance sheets of
Abraxas, as a parent company, and its significant subsidiaries, Canadian Abraxas
and Grey Wolf, as June 30, 2002 and December 31, 2001 and the related
consolidating statements of operations and cash flows for the three and six
months ended June 30, 2002 and 2001. Canadian Abraxas is a guarantor of the
First Lien Notes ($63.5 million) and jointly and severally liable with Abraxas
for the Second Lien Notes ($190.2 million) and the Old Notes ($801,000). Grey
Wolf is a non-guarantor with respect to the First Lien Notes, the Second Lien
Notes, and the Old Notes.
13
Condensed Consolidating Parent Company, Restricted Subsidiaries and Non-Guarantor Balance Sheet
June 30, 2002
(In thousands)
Abraxas
Petroleum Restricted Reclassifi- Abraxas
Corporation Subsidiary Non-Guarantor cations Petroleum
Inc. - Parent (Canadian Subsidiary and Corporation and
Company(1) Abraxas) (Grey Wolf) eliminations Subsidiaries
------------- ------------- ----------- ------------ ------------
Assets:
Current assets:
Cash .................................... $ 3,239 $ 348 $ 3,250 $ - $ 6,837
Restricted cash.......................... 9,895 - - - 9,895
Accounts receivable, less allowance for
doubtful accounts...................... 3,924 5,581 9,454 (10,341) 8,618
Equipment inventory ..................... 930 187 12 - 1,129
Other current assets .................... 284 401 132 - 817
------------- ------------- ----------- ------------ ------------
Total current assets ................... 18,272 6,517 12,848 (10,341) 27,296
Property and equipment - net................ 76,516 42,871 29,672 - 149,059
Deferred financing fees, net .............. 2,063 903 111 - 3,077
Other assets ............................... 108,708 822 8,618 (109,083) 9,065
------------- ------------- ----------- ------------ ------------
Total assets ........................... $ 205,559 $ 51,113 $ 51,249 $ (119,424) $ 188,497
============= ============= =========== ============ ============
Liabilities and Stockholder's deficit:
Current liabilities:
Accounts payable ......................... $ 14,369 $ 666 $ 6,325 $ (10,216) $ 11,144
Accrued interest ......................... 4,912 1,009 - - 5,921
Other accrued expenses ................... 3,307 - - - 3,307
Hedge liability .......................... 950 777 - - 1,727
Current maturities of long-term debt ..... 63,500 - - - 63.500
------------- ------------- ----------- ------------ ------------
Total current liabilities .............. 87,038 2,452 6,325 (10,216) 85,599
Long-term debt .............................. 138,350 52,629 36,318 - 227,297
Future site restoration .................... - 3,498 746 - 4,244
------------- ------------- ----------- ------------ ------------
225,388 58,579 43,389 (10,216) 317,140
------------- ------------- ----------- ------------ ------------
Stockholders' equity (deficit)............... (19,829) (7,466) 7,860 (109,208) (128,643)
------------- ------------- ----------- ------------ ------------
Total liabilities and stockholders' equity
(deficit).................................... $ 205,559 $ 51,113 $ 51,249 $ (119,424) $ 188,497
============= ============= =========== ============ ============
(1) Includes amounts for insignificant U.S. subsidiaries, Sandia and
Wamsutter, which are guarantors of the First and Second Lien Notes.
Sandia is also a guarantor of the Old Notes. Additionally, these
subsidiaries are designated as Restricted Subsidiaries along with
Canadian Abraxas.
Condensed Consolidating Parent Company, Restricted Subsidiaries and Non-Guarantor Balance Sheet
December 31, 2001
(In thousands)
Abraxas
Petroleum Restricted Reclassifi- Abraxas
Corporation Subsidiary Non-Guarantor cations Petroleum
Inc. - Parent (Canadian Subsidiary and Corporation and
Company(1) Abraxas) (Grey Wolf) eliminations Subsidiaries
------------- ------------- ----------- ------------ ------------
Assets:
Current assets:
Cash .................................... $ 3,593 $ 1,245 $ 2,767 $ - $ 7,605
Accounts receivable, less allowance for
doubtful accounts...................... 17,281 792 6,782 (16,808) 8,047
Equipment inventory ..................... 1,061 178 12 - 1,251
Other current assets .................... 250 99 94 - 443
------------- ------------- ----------- ------------ ------------
Total current assets .................. 22,185 2,314 9,655 (16,808) 17,346
Property and equipment - net................ 116,462 122,486 42,946 - 281,894
Deferred financing fees, net .............. 2,779 1,042 107 - 3,928
Other assets ............................... 108,704 784 6,281 (115,321) 448
14
------------- ------------- ----------- ------------ ------------
Total assets ............................ $ 250,130 $ 126,626 $ 58,989 $ (132,129) $ 303,616
============= ============= =========== ============ ============
Liabilities and Stockholder's deficit:
Current liabilities:
Accounts payable ........................ $ 10,642 $ 17,009 $ 9,472 $ (22,985) $ 14,138
Accrued interest ........................ 5,000 1,009 4 - 6,013
Other accrued expenses .................. 1,052 - 64 - 1,116
Hedge liability ......................... 438 220 - - 658
Current maturities of long-term debt .... 415 - - - 415
------------- ------------- ----------- ------------ ------------
Total current liabilities ............. 17,547 18,238 9,540 (22,985) 22,340
Long-term debt ............................. 209,611 52,629 22,944 - 285,184
Deferred income taxes ...................... - 17,718 2,903 - 20,621
Future site restoration ................... - 3,399 657 - 4,056
------------- ------------- ----------- ------------ ------------
227,158 91,984 36,044 (22,985) 332,201
Stockholders' equity (deficit).............. 22,972 34,642 22,945 (109,144) (28,585)
------------- ------------- ----------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)................................... $ 250,130 $ 126,626 $ 58,989 $ (132,129) $ 303,616
============= ============= =========== ============ ============
Condensed Consolidating Parent Company, Restricted Subsidiary and Non-Guarantor Statement of Operations
For the three months ended June 30, 2002
(In thousands)
Abraxas
Petroleum Restricted Reclassifi- Abraxas
Corporation Subsidiary Non-Guarantor cations Petroleum
Inc. - Parent (Canadian Subsidiary and Corporation and
Company(1) Abraxas) (Grey Wolf) eliminations Subsidiaries
------------- ------------- ----------- ------------ ------------
Revenues:
Oil and gas production revenues ............... $ 5,501 $ 3,981 $ 3,661 $ - $ 13,143
Gas processing revenues ....................... - 605 136 - 741
Rig revenues .................................. 193 - - - 193
Other ........................................ 65 52 41 - 158
------------- ------------- ----------- ------------ ------------
5,759 4,638 3,838 - 14,235
Operating costs and expenses:
Lease operating and production taxes .......... 1,891 510 952 - 3,353
Depreciation, depletion, and amortization ..... 2,806 4,124 2,180 - 9,110
Proved property impairment..................... 28,179 60,501 27,315 - 115,995
Rig operations ................................ 175 - - - 175
General and administrative .................... 1,307 (150) 324 - 1,481
------------- ------------- ----------- ------------ ------------
34,358 64,985 30,771 - 130,114
------------- ------------- ----------- ------------ ------------
Operating income (loss)........................... (28,599) (60,347) (26,933) - (115,879)
Other (income) expense:
Interest income ............................... (8) - - - (8)
Amortization of deferred financing fees........ 332 93 6 - 431
Interest expense............................... 6,296 1,660 805 - 8,761
------------- ------------- ----------- ------------ ------------
6,620 1,753 811 - 9,184
------------- ------------- ----------- ------------ ------------
Income (loss) from operations before income tax
and extraordinary item......................... (35,219) (62,100) (27,744) - (125,063)
Income tax expense (benefit)...................... - (17,712) (11,661) - (29,373)
------------- ------------- ----------- ------------ ------------
Net income (loss)................................ $ (35,219 $ (44,388) $ (16,083) $ - $ (95,690)
============= ============= =========== ============ ============
15
Condensed Consolidating Parent Company, Restricted Subsidiary and Non-Guarantor Statement of Operations
For the six months ended June 30, 2002
(In thousands)
Abraxas
Petroleum Restricted Reclassifi- Abraxas
Corporation Subsidiary Non-Guarantor cations Petroleum
Inc. - Parent (Canadian Subsidiary and Corporation and
Company(1) Abraxas) (Grey Wolf) eliminations Subsidiaries
------------- ------------- ----------- ------------ ------------
Revenues:
Oil and gas production revenues ............... $9,962 $ 7,775 $ 6,292 $ - $ 24,029
Gas processing revenues ....................... - 1,157 254 - 1,411
Rig revenues .................................. 344 - - - 344
Other ........................................ 69 107 82 - 258
------------- ------------- ----------- ------------ -----------
10,375 9,039 6,628 - 26,042
Operating costs and expenses:
Lease operating and production taxes .......... 3,769 1,834 1,659 - 7,262
Depreciation, depletion, and amortization ..... 5,059 7,293 3,572 - 15,924
Proved property impairment..................... 28,179 60,501 27,315 - 115,995
Rig operations ................................ 296 - - - 296
General and administrative .................... 2,207 361 611 - 3,179
------------- ------------- ----------- ------------ ------------
39,510 69,989 33,157 - 142,656
------------- ------------- ----------- ------------ ------------
Operating income (loss)........................... (29,135) (60,950) (26,529) - (116,614)
Other (income) expense:
Interest income ............................... (41) - - - (41)
Amortization of deferred financing fees........ 663 183 12 - 858
Interest expense............................... 12,531 3,342 1,301 - 17,174
------------- ------------- ----------- ------------ ------------
13,153 3,525 1,313 - 17,991
------------- ------------- ----------- ------------ ------------
Income (loss) from operations before income tax
and extraordinary item......................... (42,288) (64,475) (27,842) - (134,605)
Income tax expense (benefit)...................... - (18,514) (11,702) - (30,216)
------------- ------------- ----------- ------------ ------------
Net income (loss)................................ $ (42,288) $ (45,961) $ (16,140) $ - $ (104,389)
============= ============= =========== ============ ============
Condensed Consolidating Parent Company, Restricted Subsidiary and Non-Guarantor Statement of Operations
For the three months ended June 30, 2001
(In thousands)
Abraxas
Petroleum Restricted Reclassifi- Abraxas
Corporation Subsidiary Non-Guarantor cations Petroleum
Inc. - Parent (Canadian Subsidiary and Corporation and
Company(1) Abraxas) (Grey Wolf) eliminations Subsidiaries
------------- ------------- ----------- ------------ ------------
Revenues:
Oil and gas production revenues ............... $ 9,517 $ 6,781 $ 3,829 $ - $ 20,127
Gas processing revenues ....................... - 425 73 - 498
Rig revenues .................................. 225 - - - 225
Other ........................................ 76 106 84 - 266
------------- ------------- ----------- ------------ ------------
9,818 7,312 3,986 - 21,116
Operating costs and expenses:
Lease operating and production taxes .......... 2,074 1,650 608 - 4,332
Depreciation, depletion, and amortization ..... 2,983 3,904 1,401 - 8,288
Rig operations ................................ 191 - - - 191
General and administrative .................... 1,235 251 89 - 1,575
General and administrative (Stock-based
Compensation)................................ (2,332) - - - (2,332)
------------- ------------- ----------- ------------ ------------
4,151 5,805 2,098 - 12,054
------------- ------------- ----------- ------------ ------------
Operating income (loss)........................... 5,667 1,507 1,888 - 9,062
16
Other (income) expense:
Interest income ............................... (305) - - 293 (12)
Amortization of deferred financing fees........ 348 107 - - 455
Interest expense .............................. 6,259 1,737 126 (293) 7,829
------------- ------------- ----------- ------------ ------------
6,302 1,844 126 - 8,272
------------- ------------- ----------- ------------ ------------
Income (loss) from operations before income tax
and extraordinary item......................... (635) (337) 1,762 - 790
Income tax expense (benefit)...................... 505 546 458 - 1,509
Minority interest in income of consolidated 112
foreign subsidiary ............................ - - - (555) 555
------------- ------------- ----------- ------------ ------------
Net income (loss)................................. $ (1,140) $ (883) $ 1,304 $ (555) $ (1,274)
============= ============= =========== ============ ============
Condensed Consolidating Parent Company, Restricted Subsidiary and Non-Guarantor Statement of Operations
For the six months ended June 30, 2001
(In thousands)
Abraxas
Petroleum Restricted Reclassifi- Abraxas
Corporation Subsidiary Non-Guarantor cations Petroleum
Inc. - Parent (Canadian Subsidiary and Corporation and
Company(1) Abraxas) (Grey Wolf) eliminations Subsidiaries
------------- ------------- ----------- ------------ ------------
Revenues:
Oil and gas production revenues ............... $ 22,548 $ 16,423 $ 9,405 $ - $ 48,376
Gas processing revenues ....................... - 793 141 - 934
Rig revenues .................................. 408 - - - 408
Other ........................................ 79 235 170 - 484
------------- ------------- ----------- ------------ ------------
23,035 17,451 9,716 - 50,202
Operating costs and expenses:
Lease operating and production taxes .......... 4,741 3,349 1,101 - 9,191
Depreciation, depletion, and amortization ..... 6,187 8,156 2,786 - 17,129
Rig operations ................................ 344 - - - 344
General and administrative .................... 2,550 699 435 - 3,684
General and administrative (Stock-based
Compensation)................................ (1,401) - - - (1,401)
------------- ------------- ----------- ------------ ------------
12,421 12,204 4,322 - 28,947
------------- ------------- ----------- ------------ ------------
Operating income (loss)........................... 10,614 5,247 5,394 - 21,255
Other (income) expense:
Interest income ............................... (704) - - 676 (28)
Amortization of deferred financing fees........ 695 215 - - 910
Interest expense .............................. 12,431 3,624 231 (676) 15,610
Other ......................................... 16 - - - 16
------------- ------------- ----------- ------------ ------------
12,438 3,839 231 - 16,508
------------- ------------- ----------- ------------ ------------
Income (loss) from operations before income tax
and extraordinary item......................... (1,824) 1,408 5,163 - 4,747
Income tax expense (benefit)...................... 505 1,725 2,055 - 4,285
Minority interest in income of consolidated
foreign subsidiary ............................ - - - (1,481) (1,481)
------------ ------------- ----------- ------------ ------------
Net income (loss)................................. $ (2,329) $ (317) $ 3,108 $ (1,481) $ (1,019)
============ ============= =========== ============ ============
17
Condensed Consolidating Parent, Restricted Subsidiary and Non-Guarantor Statement of Cash Flow
For the Six months ended June 30, 2002
(In thousands)
Abraxas
Petroleum Restricted Reclassifi- Abraxas
Corporation Subsidiary Non-Guarantor cations Petroleum
Inc. - Parent (Canadian Subsidiary and Corporation and
Company(1) Abraxas) (Grey Wolf) eliminations Subsidiaries
------------- ------------- ----------- ------------ ------------
Operating Activities
Net loss .................................... $ (42,288) $ (45,961) $ (16,140) $ - $ (104,389)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation, depletion, and
amortization ......................... 5,059 7,293 3,572 - 15,924
Proved property impairment.............. 28,179 60,501 27,315 - 115,995
Deferred income tax benefit............. - (18,514) (11,702) - (30,216)
Amortization of deferred financing fees. 663 183 12 - 858
Amortization of debt discount........... - - 230 - 230
Changes in operating assets and
liabilities:
Accounts receivable ................ 18,329 (20,265) 3,435 (1,952) (453)
Equipment inventory ................ 131 - - - 131
Other ............................. (39) (102) (16) - (157)
Accounts payables and accrued
expenses ......................... 922 354 (2,947) 1,952 281
------------- ------------- ----------- ------------ ------------
Net cash provided (used) by operating
activities ............................... 10,956 (16,511) 3,759 - (1,796)
Investing Activities
Capital expenditures, including purchases
and development of properties............. (3,242) (3,592) (17,004) - (23,838)
Proceeds from sale of oil and gas properties. 9,950 20,783 2,169 - 32,902
Increase in restricted cash.................. (9,895) - - - (9,895)
------------- ------------- ----------- ------------ ------------
Net cash provided (used) by investing
activities ............................... (3,187) 17,191 (14,835) - (831)
Financing Activities
Proceeds from long-term borrowings .......... - - 11,614 - 11,614
Payments on long-term borrowings ............ (8,123) - (22) - (8,145)
------------- ------------- ----------- ------------ ------------
Net cash provided (used) by financing
Activities.................................. (8,123) - 11,592 - 3,469
------------- ------------- ----------- ------------ ------------
-
Effect of exchange rate changes on cash ..... - (1,577) (33) - (1,610)
------------- ------------- ----------- ------------ ------------
Increase (decrease) in cash ................. (354) (897) 483 - (768)
Cash at beginning of year ................... 3,593 1,245 2,767 - 7,605
------------- ------------- ----------- ------------ ------------
Cash at end of year.......................... $ 3,239 $ 348 $ 3,250 $ - $ 6,837
============= ============= =========== ============ ============
Condensed Consolidating Parent, Restricted Subsidiary and Non-Guarantor Statement of Cash Flow
For the six months ended June 30, 2001
(In thousands)
Abraxas
Petroleum Restricted Reclassifi- Abraxas
Corporation Subsidiary Non-Guarantor cations Petroleum
Inc. - Parent (Canadian Subsidiary and Corporation and
Company(1) Abraxas) (Grey Wolf) eliminations Subsidiaries
------------- ------------- ----------- ------------ ------------
Operating Activities
Net income (loss) ........................... $ (2,329) $ (317) $ 3,108 $ (1,481) $ (1,019)
18
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Minority interest in income of foreign
subsidiary ........................... - - - 1,481 1,481
Depreciation, depletion, and
amortization ......................... 6,187 8,156 2,786 - 17,129
Deferred income tax expense (benefit)... - 1,610 2,029 - 3,639
Amortization of deferred financing fees. 694 215 - - 909
Stock-based compensation ............... (1,401) - - - (1,401)
Changes in operating assets and
liabilities:
Accounts receivable ................ 16,963 (8,804) 2,148 - 10,307
Equipment inventory ................ (98) - - - (98)
Other ............................. (919) (67) (113) - (1,099)
Accounts payables and accrued
expenses ......................... (8,736) (372) (4,334) (13,442)
------------- ------------- ----------- ------------ ------------
Net cash provided by operating activities ... 10,361 421 5,624 - 16,406
Investing Activities
Capital expenditures, including purchases
and development of properties ............ (12,382) (10,916) (7,135) - (30,433)
Proceeds from sale of oil and gas
properties ............................... - 9,186 509 - 9,695
------------- ------------- ----------- ------------ ------------
Net cash provided (used) by investing
activities ............................... (12,382) (1,730) (6,626) - (20,738)
Financing Activities
Proceeds from long-term borrowings .......... 10,500 - 816 - 11,316
Payments on long-term borrowings ............ (6,188) - - - (6,188)
Exercise of stock options ................... 16 - - - 16
Deferred financing fees...................... (10) - - - (10)
Other........................................ - - 183 - 183
------------- ------------- ----------- ------------ ------------
Net cash provided (used) by financing
activities ............................... 4,318 - 999 - 5,317
------------- ------------- ----------- ------------ ------------
Effect of exchange rate changes on cash ..... - 21 3 - 24
------------- ------------- ----------- ------------ ------------
Increase (decrease) in cash ................. 2,297 (1,288) - - 1,009
Cash at beginning of period ................. 326 1,678 - - 2,004
------------- ------------- ----------- ------------ ------------
Cash at end of period........................ $ 2,623 $ 390 $ - $ - $ 3,013
============= ============= =========== ============ ============
Note 7. Business Segments
Business segment information about the three months and six months ended
June 30, 2002 in different geographic areas is as follows:
Three Months Ended June 30, 2002
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 5,759 $ 8,476 $ 14,235
================== ================ ===================
Operating loss.......................... $ (27,292) $ (87,280) $ (114,572)
================== ================
General Corporate................................................................. (1,307)
Interest expense and amortization of deferred financing fees...................... (9,184)
-------------------
Loss before income taxes.......................................................... $ (125,063)
===================
19
Three Months Ended June 30, 2001
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 9,818 $ 11,298 $ 21,116
================== ================= ===================
Operating profit........................ $ 4,660 $ 3,395 $ 8,055
================== =================
General Corporate................................................................. 1,007
Interest expense and amortization of deferred financing fees...................... (8,272)
-------------------
Income before income taxes........................................................ $ 790
===================
Six Months Ended June 30, 2002
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 10,375 $ 15,667 $ 26,042
================== ================= ===================
Operating loss.......................... $ (26,838) $ (87,479) $ (114,317)
================== =================
General Corporate................................................................. (2,297)
Interest expense and amortization of deferred financing fees...................... (17,991)
-------------------
Loss before income taxes.......................................................... $ (134,605)
===================
Six Months Ended June 30, 2001
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In thousands)
Revenues ............................... $ 23,035 $ 27,167 $ 50,202
================== ================= ===================
Operating profit........................ $ 11,853 $ 10,641 $ 22,494
================== =================
General Corporate................................................................. (1,239)
Interest expense and amortization of deferred financing fees...................... (16,508)
-------------------
Income before income taxes........................................................ $ 4,747
===================
At June 30, 2002
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In Thousands)
Identifiable assets .................... $ 94,890 $ 89,713 $ 184,603
================== =================
Corporate assets.................................................................. 3,894
-------------------
Total assets ..................................................................... $ 188,497
===================
At December 31, 2001
-------------------------------------------------------------
U.S. Canada Total
------------------ ----------------- -------------------
(In Thousands)
Identifiable assets .................... $ 124,993 $ 174,063 $ 299,056
================== =================
Corporate assets.................................................................. 4,657
-------------------
Total assets ..................................................................... $ 303,713
===================
Note 8. Hedging Program and Derivatives
On January 1, 2001, the Company adopted SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138. Under
SFAS 133, all derivative instruments are recorded on the balance sheet at fair
value. If the derivative does not qualify as a hedge or is not designated as a
hedge, the gain or loss on the derivative is recognized currently in earnings.
To qualify for hedge accounting, the derivative must qualify either as a fair
value hedge, cash flow hedge or foreign currency hedge. Currently, the Company
uses only cash flow hedges and the remaining discussion will relate exclusively
to this type of derivative instrument. If the derivative qualifies for hedge
accounting, the gain or loss on the derivative is deferred in Other
Comprehensive Income/Loss, a component of Stockholders' Equity, to the extent
that the hedge is effective. Any ineffective portion is reflected in current
operations.
The relationship between the hedging instrument and the hedged item must be
highly effective in achieving the offset of changes in cash flows attributable
to the hedged risk both at the inception of the contract and on an ongoing
basis. Hedge accounting is discontinued prospectively when a hedge instrument
becomes ineffective. Gains and losses deferred in Accumulated Other
Comprehensive Income/Loss related to a cash flow hedge that becomes ineffective,
20
remain unchanged until the related production is delivered. If the Company
determines that it is probable that a hedged transaction will not occur,
deferred gains or losses on the hedging instrument are recognized in earnings
immediately.
Gains and losses on hedging instruments related to Accumulated Other
Comprehensive Income/Loss and adjustments to carrying amounts on hedged
production are included in natural gas or crude oil production revenue in the
period that the related production is delivered.
The following table sets forth the Company's hedge position as of June 30,
2002.
Time Period Notional Quantities Price Fair Value
- -------------------------------------- ---------------------------------- ------------------------------ ------------
July 1, 2002 - October 31, 2002 20,000 Mcf/day of natural gas Fixed price swap $2.60-$2.95 $(1.7)
or 1,000 Bbl/day of crude oil natural gas or million
$18.90 Crude oil
On January 1, 2001, in accordance with the transition provisions of SFAS
133, the Company recorded $31.0 million, net of tax, in Other Comprehensive
Income/Loss representing the cumulative effect of an accounting change to
recognize the fair value of cash flow derivatives. The Company recorded cash
flow hedge derivative liabilities of $38.2 million on that date and a deferred
tax asset of $7.2 million.
During the first six months of 2002 the fair value of the hedge increased
by $2.5 million. For the three and six months ended June 30, 2002, the
ineffective portion of the cash flow hedges were not material.
As of June 30, 2002, $1.4 million of deferred net losses on derivative
instruments were recorded in other comprehensive income, of which $1.4 million
is expected to be reclassified to earnings during the next four-month period.
All hedge transactions are subject to the Company's risk management policy,
which has been approved by the Board of Directors. The Company formally
documents all relationships between hedging instruments and hedged items, as
well as its risk management objectives and strategy for undertaking the hedge.
This process includes specific identification of the hedging instrument and the
hedged transaction, the nature of the risk being hedged and how the hedging
instrument's effectiveness will be assessed. Both at the inception of the hedge
and on an ongoing basis, the Company assesses whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows of hedged items.
Note 9. Contingencies
Litigation - In 2001 the Company and a limited partnership, of which a
subsidiary of the Company is the general partner (the "Partnership"), were named
in a lawsuit filed in U.S. District Court in the District of Wyoming. The claim
asserts breach of contract, fraud and negligent misrepresentation by the Company
and the Partnership related to the responsibility for year 2000 ad valorem taxes
on crude oil and natural gas properties sold by the Company and the Partnership.
In February 2002, a summary judgment was granted to the plaintiff in this matter
and a final judgment in the amount of $1.3 million was entered. The Company and
the Partnership have filed an appeal. The Company believes these charges are
without merit. The Company has established a reserve in the amount of $845,000,
which represents the Company's share of the judgment. The Company believes that
the remaining portion of the judgment represents the other partner's share of
such judgment.
In late 2000, the Company received a Final De Minimis Settlement Offer from
the United States Environmental Protection Agency concerning the Casmalia
Disposal Site, Santa Barbara County, California. The Company's liability for the
cleanup at the Superfund site is based on its acquisition of Bennett Petroleum
Corporation, which is alleged to have transported or arranged for the
transportation of oil field waste and drilling muds to the Superfund site. The
Company has engaged California counsel to evaluate the notice of proposed de
minimis settlement and its notice of potential strict liability under the
Comprehensive Environmental Response, Compensation and Liability Act. Defense of
the action is handled through a joint group of oil companies, all of which are
claiming a petroleum exclusion that would limit the Company's liability. The
potential financial exposure and any settlement posture has yet not been
developed, but is considered by the Company to be immaterial.
Additionally, from time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. At June 30, 2002, the Company was not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company.
21
Note 10. Comprehensive Income
Comprehensive income includes net income, losses and certain items recorded
directly to Stockholder's Equity and classified as Other Comprehensive Income.
The following table illustrates the calculation of comprehensive income
(loss) for the three and six months ended June 30, 2002:
Accumulated
Other
Comprehensive
Comprehensive Income (loss) Income (loss)
---------------------------------- ------------------
Six Months Three Months
Ended Ended As of
June 30, 2002 June 30, 2002
---------------------------------- ------------------
(In thousands)
Accumulated other comprehensive loss at
December 31, 2001.............................. $ (13,561)
Net loss.................................... $ (104,389) $ (95,690)
Other Comprehensive loss:
Hedging derivatives (net of tax) - See Note
Reclassification adjustment for settled
hedge contracts........................... 1,151 1,151
Change in fair market value of
outstanding hedge positions............... (1,976) 99
Foreign currency translation adjustment..... 5,156 5,523
----------------- ---------------
Other comprehensive income (loss).............. 4,331 6,773 4,331
----------------- ---------------
Comprehensive income (loss).................... $ (100,058) $ (88,917)
================= =============== -----------------
Accumulated other comprehensive loss at June 30, 2002................ $ (9,230)
=================
Note 11. Proved Property Impairment
In accordance with the Securities and Exchange Commission requirements, the
estimated discounted future net cash flows from proved reserves are generally
based on prices and costs as of the end of a period, or alternatively, if prices
subsequent to that date have increased, a price near the periodic filing date of
the Company's financial statements. As of June 30, 2002, the Company's net
capitalized costs of crude oil and natural gas properties exceeded the present
value of its estimated proved reserves by $138.7 million ($28.2 million on the
U.S. properties and $110.5 million on the Canadian properties). These amounts
were calculated considering June 30, 2002 period-end prices of $26.12 per Bbl
for crude oil and $2.16 per Mcf for natural gas as adjusted to reflect the
expected realized prices for each of the full cost pools. The Company used the
subsequent increased prices in Canada to evaluate its Canadian properties, and
reduced the period end June 30, 2002 write-down to an amount of $87.8 million on
those properties. The subsequent prices in the U.S. would not have resulted in a
reduction of the write-down for the U.S. properties. An expense recorded in one
period may not be reversed in a subsequent period even though higher crude oil
and natural gas prices may have increased the ceiling applicable to the
subsequent period.
The Company cannot assure you that it will not experience additional
write-downs in the future. Should commodity prices decline or if any of our
proved reserves are revised downward, a future write-down of the carrying value
of it crude oil and natural gas properties may be required.
Note 12. New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, " Accounting for Asset
Retirement Obligations." SFAS No. 143 requires an asset retirement obligation to
be recorded at fair value during the period incurred and an equal amount
recorded as an increase in the value of the related long-lived asset. The
22
capitalized cost is depreciated over the useful life of the asset and the
obligation is accreted to its present value each period. SFAS No. 143 is
effective for the Company beginning January 1,2003. The Company is currently
evaluating the impact the standard will have on its future results of operations
and financial condition.
Effective January 1, 2002, the Company adopted SFAS No. 144 " Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the
requirement to recognize an impairment loss only where the carrying value of a
long-lived asset is not recoverable from its undiscounted cash flows and to
measure such loss as the difference between the carrying amount and fair value
of the asset. SFAS No. 144, among other things, changes the criteria that have
to be met to classify an asset as held-for-sale and requires that operating
losses from discontinued operations be recognized in the period that the losses
are incurred rather than as of the measurement date. This new standard had no
impact on the Company's consolidated financial statements during the first six
months of 2002.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB No. 4, 44,
and 64, Amendments of FASB Statement No. 13 and Technical Corrections." SFAS No.
145 clarifies guidance related to the reporting of gains and losses from
extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. SFAS No. 145 also amends
other existing pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions relating to the reporting of gains and losses from extinguishment of
debt become effective for the Company beginning January 1, 2003 with earlier
adoption encouraged. All other provisions of this standard have been effective
for the Company as of May 15, 2002 and did not have a significant impact on its
financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities." SFAS No. 146 requires costs associated with
exit of disposal activities to be recognized when they are incurred rather than
at the date of commitment to an exit or disposal plan. SFAS No. 146 is effective
for the Company beginning January 1, 2003. The Company is currently evaluating
the impact the standard will have on its results of operations and financial
condition.
The American Institute of Certified Public Accountants has issued an
Exposure Draft for a Proposed Statement of Position, " Accounting for Certain
Costs and Activities Related to Property, Plant and Equipment" which would
require major maintenance activities to be expensed as costs are incurred. The
Company is currently evaluating the impact on its results of operations and
financial condition if this proposed Statement of Position is adopted in its
current form.
ABRAXAS PETROLEUM CORPORATION AND SUBSIDIARIES
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The following is a discussion of our financial condition, results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with our consolidated financial statements and the notes thereto,
included in our Annual Report on Form 10-K filed for the year ended December 31,
2001.
General
We have incurred net losses in four of the last five years and for the
first six months of 2002, and there can be no assurance that operating income
and net earnings will be achieved in future periods. Our revenues, profitability
and future rate of growth are substantially dependent upon prevailing prices for
crude oil and natural gas and the volumes of crude oil, natural gas and natural
gas liquids we produce. Natural gas and crude oil prices weakened during 1998.
Crude oil and natural gas prices increased somewhat in 1999 and increased
substantially in 2000. During 2001, crude oil and natural gas prices weakened
substantially from the 2000 levels. During the first six months of 2002, prices
began to increase. In addition, because our proved reserves will decline as
crude oil, natural gas and natural gas liquids are produced, unless we acquire
additional properties containing proved reserves or conduct successful
exploration and development activities, our reserves and production will
decrease. Our ability to acquire or find additional reserves in the near future
will be dependent, in part, upon the amount of available funds for acquisition,
exploitation, exploration and development projects. If crude oil and natural gas
prices return to the depressed levels experienced in the last six months of
2001, or if our production levels decrease, our revenues, cash flow from
operations and financial condition will be materially adversely affected. For
more information, see "Liquidity and Capital Resources-Current Liquidity
Requirements" and "-Future Capital Resources."
23
Results of Operations
Our financial results depend upon many factors, particularly the following
factors which most significantly affect our results of operations:
o the sales prices of crude oil, natural gas liquids and natural gas; o the
level of total sales volumes of crude oil, natural gas liquids and natural gas;
o the ability to raise capital resources and provide liquidity to meet cash flow
needs; o the level of and interest rates on borrowings; and o the level and
success of exploration and development activity.
Price volatility in the natural gas market has remained prevalent in the
last few years. In the first quarter of 2002, we experienced a decline in energy
commodity prices from the prices that we received in the first quarter of 2001.
During the first quarter of 2001, we had certain crude oil and natural gas
hedges in place that prevented us from realizing the full impact of a favorable
price environment. In January 2001, the market price of natural gas was at its
highest level in our operating history and the price of crude oil was also at a
high level. However, over the course of 2001 and the beginning of the first
quarter of 2002, prices again became depressed, primarily due to the economic
downturn. Beginning in March 2002, commodity prices began to increase and
continued higher through June 2002.
The table below illustrates how natural gas prices fluctuated over the
course of 2001 and the first two quarters of 2002. The table below contains the
last three days average of NYMEX traded contracts index price and the prices we
realized during each quarter for 2001 and the first two quarters of 2002,
including the impact of our hedging activities.
(in $ per Mcf) Natural Gas Prices by Quarter
- -------------------------------------------------------------------------------------------------------------------
Quarter ended
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March 31, June 30, September 30, December 31, March 31,