Abraxas Petroleum Looks Weak

The past 12 months have been a torrid time for San Antonio-based Abraxas Petroleum (Nasdaq: AXAS  ) , capped by another disappointing quarterly report earlier this month. Is there any chance for revival, or will it continue its downward slide?

Poor results
Trailing-12-month revenues were their lowest since 2007. Core production fell 18% in the first half of 2011 compared to the corresponding period in 2010. Even with the company's equity interest in Blue Eagle production, production saw a 7% drop.

However, what caught my attention the most was a drop in core operational earnings. Earnings before interests, taxes, depreciation, and amortization dropped by a huge 59% over the past 12 months. This is a matter of concern.

Poor strategy
With $60 million allocated for capital expenditures in 2011, and about $25.6 million used up so far, there doesn't seem to be significant progress. And for a capital budget of this amount, Abraxas seems to be all over the place. From unconventional plays like the Bakken/Three Forks, Niobrara, and Eagle Ford to the conventional ones like the Permian Basin and onshore Gulf Coast, the company seems spread thin.

Abraxas' debt-to-equity of 205% is another red flag for Foolish investors. While interest coverage is currently 1.3 times, there isn't much certainty about its future cash flows. Operational cash flows have been fluctuating in the past five years with relatively flat growth.

How is the stock valued?
Here's how Abraxas stacks up when compared to peers:

Company

TEV/EBITDA

(TTM)

P/B

Forward P/E

(1 year)

Abraxas Petroleum 27.2 6.1 11.6

Warren Resources

(Nasdaq: WRES  )

7.4 1.5 10.8

GMX Resources

(NYSE: GMXR  )

8.1 0.8 37.9

Callon Petroleum

(NYSE: CPE  )

4.0 1.9 9.3

Panhandle Oil & Gas

(NYSE: PHX  )

8.4 3.2 18.9

Source: Capital IQ, a Standard & Poor's company. TTM = trailing 12 months.

Abraxas looks the most expensive compared to its peers. With a huge debt and weak earnings, things don't look really bright. The stock looks over-priced against its book value. An imminent correction could even be in the offing as operational progress looks pretty slow. While Mr. Market seems to be quite optimistic about the company's future earnings, I don't see a dramatic improvement on the horizon.

Foolish bottom line
Management could do better by focusing on a single region and developing its properties. While management seems to promise a lot, a deeper analysis gives a different picture. With operational fundamentals looking weak, Foolish investors would do well to avoid this stock.

What do you think? Let me know in the comments section below.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 29, 2011, at 4:02 PM, dragonslayer888 wrote:

    So predictable. Great company. Shorts losing money. Funny, when price moves up nicely, how the bashing begins. By the way... Title of article shows despair. How unprofessional.

  • Report this Comment On August 29, 2011, at 4:03 PM, Creed50 wrote:

    With all due respect, I would like to know just what crooked hedge fund is paying you off. 21 million shs are short this stock.

    Its up over 20% in the last two trading days, and all of a sudden you come out with this garbage, when the stock is running. You can't tell me that isn't planned. You guys should go to jail.

  • Report this Comment On August 29, 2011, at 4:17 PM, TruffelPig wrote:

    This superficial analysis is a joke. AXAS was not the only company having problems last winter because of the weather conditions. Analysts have upgraded AXAS recently. The price target is $6.

    I am long AXAS and will not sell my shares! AXAS up 10% today. Shorts will have to cover - lots of covering coming soon :).

  • Report this Comment On August 29, 2011, at 4:32 PM, thorny1fl wrote:

    How can you rate AXAS with an EV of $400 mil, and debt of $97 mil, against these 3:

    WRES EV $292 mil, debt &72 mil;

    GMXR, EV $481, debt $341 million;

    CPE, EV $297, debt $127 mil.

    And then you say "huge debt"

    I say: Simon says what???

  • Report this Comment On August 29, 2011, at 4:36 PM, thorny1fl wrote:

    Motley Fool, or just plain fool?

  • Report this Comment On August 29, 2011, at 5:05 PM, Creed50 wrote:

    Excellent Thorn1fl.....We all know Wall st. is a rigged game against the retail investor.

    The timing of this article just shows how they don't even try hide how blatant the corruption is within the trading community.

    Even little trolls like this Simon, gets a pay off.

  • Report this Comment On August 29, 2011, at 9:50 PM, tanktexan wrote:

    Obviously they let any half wit write for the Fool. Did you know Abraxas bought a drilling rig and begin using it in the Bakken at the beginning of October? 2 wells to be drilled first followed by 4 on the new drilling pad system. Additionally, debt has been reduced from 130M to 90M at cost savings of 6M to 8M.

    BTW - Revenue was up 3M in the 2nd quarter over the 1st quarter to 17M.

    Simon - you're as blind as a bat. Who do you work for again?

  • Report this Comment On August 30, 2011, at 3:27 AM, isacsimon wrote:

    @tanktexan,

    Thanks for your observations.

    Unfortunately, revenues going up do not mean much. What matters is margin. In the same period, because of costs involved in sales (COGS) going up by $1.8 million, gross margin has fallen to 57% from 61% in the first quarter.

    It would be skewed to talk only about revenues.

    While debt reduced to $90 million, debt-to-equity is at 205%, which is pretty HUGE for any company operating in the E&P space. Absolute value of debt matters very little in this case.

    -Isac

  • Report this Comment On August 30, 2011, at 3:50 AM, isacsimon wrote:

    @thorny1fl,

    Absolute value of debt matters very little. The fact is the company has leveraged more than comfortable limits to raise capital. That's because accumulated losses over the years have eaten away into equity capital.

    Debt-to-equity stands at 205%

    For WRES it's 45%

    For GMXR its 161%

    For CPE it's 107%

    Obviously, I don't see rosy prospects ahead.

    -Isac

  • Report this Comment On August 30, 2011, at 9:17 AM, tanktexan wrote:

    @isacsimon,

    You failed to mention any of the drilling campaign that is currently underway. That is grossly negligent on your part.

    Fortunately revenues do matter a great deal. Also, owning a drilling rig to start drilling in the Bakken in October matters a great deal.

    Your's is a game of looking at what you want to. I'll take the following: Wunderlich Securities reiterated its Buy rating on Abraxas Petroleum (NASDAQ: AXAS). At the same time, the rating agency left its price target on the company's stock unchanged at $8.

    The initial release of a few weeks ago had this overview: In a note to clients, Wunderlich Securities writes, "Abraxas Petroleum (AXAS) has secured a rig for the Williston Basin North Fork Development project and is on track to start pad drilling. The company plans to bring roughly four gross wells on line each quarter starting in early 2012. This is a huge impact on AXAS' ability to capture probable reserves in the next five years and we raised our NAV from $6.66 to $7.89; we also raised our 2012 earnings and cash flow projection. In addition to the Williston Basin Bakken and South Texas Eagle Ford Plays, AXAS has a significant footprint in the Powder River Basin (PRB) Niobrara-Turner Play, the Reeves County Texas Wolfbone Play, and the South Alberta Bakken Play.

    Frankly speaking you are an authority on absolutely nothing. That much is clear.

  • Report this Comment On August 30, 2011, at 7:54 PM, thorny1fl wrote:

    Way to go Tanktexan,

    Now we will see if Mr Simon can con-volute an answer to your post.

    CON---VOLUTE!

  • Report this Comment On August 30, 2011, at 9:28 PM, jeffklienfelter wrote:

    Absolutely "spot on" article. Revenues down, production down, in a year (2011) where everyone else in first 6 mos. took advantage and positioned themselves to succeed. This company, historically, is always making promises and excuses, i.e. weather, crews, title searches, etc.. Debt is actually up to $95m now and running. This is after secondary offering to reduce to $80m in Q1 and selling off of properties in last 2 years. Many investors drinking the "Kool-Aid" of the hot ND props. and Eagle Ford and not understanding that they are indeed "spread too thin". Thanks Isac, for removing much of the "smoke and mirrors" here and exposing problems.

  • Report this Comment On August 31, 2011, at 9:01 AM, tanktexan wrote:

    Quarter over quarter revenue is up $3M. And debt reduced from 130M to 90M. Add two consecutive quarters of profit. Production is also up quarter over quarter.

    They now own their own drilling rig. Not a single word of the benefit that will provide both in cost savings and in profit.

    In the Eagleford, once again you neglected to state that that working capital is provided by a partner. Working interest of 42% goes to Abraxas is this a win win situation in that Abraxas provided 8,600 acres for their part.

    It is quite obvious that you refuse to look at the drilling production ramp up that is going on.

  • Report this Comment On September 01, 2011, at 12:41 AM, isacsimon wrote:

    @ jeffklienfelter,

    Thanks.

    - Isac

  • Report this Comment On September 01, 2011, at 12:56 AM, isacsimon wrote:

    @ tanktexan,

    <<You failed to mention any of the drilling campaign that is currently underway. That is grossly negligent on your part.>>

    Forgive me for not looking much into that. I understand there is a lot of hope looking into the future, but this article was more on the company's position till date.

    Of course, I hope for the best for this company in future. However, it's too early to predict how operations would turn simply because the company has secured a rig.

    Also, having a footprint in all the major shale plays isn't impressive enough. Actual production ramp up may take a long time to materialize.

    -Isac

  • Report this Comment On September 01, 2011, at 4:44 PM, tanktexan wrote:

    Forgive? Your "article" if you can call it that. Is grossly wanting and negligent for not covering the drilling campaign that is ongoing.

    There reserves are proven in these major plays with successful wells now drilled.

    <<Skewed>> there is no doubt your writing is "skewed".

    They'll double production in 8 to 9 months.

    I'll take the following over your poorly educated commentary any day of the week >>Wunderlich Securities reiterated its Buy rating on Abraxas Petroleum (NASDAQ: AXAS). At the same time, the rating agency left its price target on the company's stock unchanged at $8.

    The initial release of a few weeks ago had this overview: In a note to clients, Wunderlich Securities writes, "Abraxas Petroleum (AXAS) has secured a rig for the Williston Basin North Fork Development project and is on track to start pad drilling. The company plans to bring roughly four gross wells on line each quarter starting in early 2012. This is a huge impact on AXAS' ability to capture probable reserves in the next five years and we raised our NAV from $6.66 to $7.89; we also raised our 2012 earnings and cash flow projection. In addition to the Williston Basin Bakken and South Texas Eagle Ford Plays, AXAS has a significant footprint in the Powder River Basin (PRB) Niobrara-Turner Play, the Reeves County Texas Wolfbone Play, and the South Alberta Bakken Play.

  • Report this Comment On September 01, 2011, at 9:02 PM, KentKendall wrote:

    isac portrayed a very lop sided, one sided story. He is obviously not an authority on Abraxas Petroleum.

    Remember they let anyone write on the Fool regardless of how they spin numbers. Case in point he recommended NOG. It's a horrible company with a poor future. The NOG chart is in a massive down trend and will continue http://stockcharts.com/h-sc/ui?s=NOG&p=D&b=5&g=0... and for good reason ... very poor management. isac is not very clever.

    Abraxas on the other hand has massive upside with a rig they purchased to drill in the Williston Basin where they are averaging 70% working interest on wells they operate. They also receive free capital in the form of a partner in the Eagle Ford shale in Texas. 41% working interest is a great return when you don't put up a dime in capital!

    Kent Kendall

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