Abraxas Petroleum (AXAS) announced that it completed its refinancing transactions and is renewing its review of strategic alternatives. This points to a potential outcome where the company attempts to sell itself for any amount that covers its existing debt.

Abraxas’s second-lien lenders have control over the company’s capital expenditure plans, so the main focus will be on reducing its credit facility debt over the next couple years with the help of its hedges. In the current environment, the company may find it challenging to sell itself for more than its total debt. However, if there is some improvement in the oil and gas markets, Abraxas could end up potentially selling itself for a few cents per share as its debt maturities approach.

Role Of Second-Lien Lenders

As I’ve noted before, the second-lien lenders (Angelo Gordon) will play a pivotal role in Abraxas’s future. Todd Dittman from Angelo Gordon has joined Abraxas’s Board of Directors. The company looks capable of paying down its credit facility debt by a decent amount over the next couple years with the help of its hedges if it maintains a minimal capex budget. This would leave the second-lien term loan as the bulk (perhaps 75+%) of its remaining debt by the time that term loan matures in 2022. It seems likely that Abraxas will stick to a minimal capex budget unless oil prices soar. The second-lien credit facility amendment limits capex spend to what Angelo Gordon approves, unless Abraxas can raise subordinated debt to pay for additional capex.

The review of strategic alternatives will likely result in an attempt to sell Abraxas for any amount that can cover its debt. As part of the refinancing transactions, Angelo Gordon was given the right to purchase up to 33.4 million shares at $0.01 per share. Abraxas may also potentially pay the second-lien term loan interest with shares, so Angelo Gordon will also participate in any upside, should the company be sold for more than its debt.

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If no transaction that covers the debt can be arranged before the second-lien term loan matures, Angelo Gordon would end up with control of the company via its debt stake.

Hedges

Abraxas does have a considerable amount of oil hedges over the next several years with swap prices of over $50 per barrel. These derivatives had a net value of $44 million at the end of Q2 2020. The hedges are helpful for the company being able to significantly reduce its credit facility debt, but are far from enough to allow it to address its second-lien debt.

(Source: Abraxas Petroleum Q2 2020 10-Q)

Q2 Results

Due to shut-in production and low commodity prices, Abraxas ended up with a pretty minimal amount of revenue during the quarter. Operating revenues ended up at $2 million, down 94% year over year. This came from a -82% decline in total production, combined with an average oil sales price (before the effect of derivatives) of $20.92 per barrel. The 40% of the company’s production that was natural gas and NGLs continued to generate negligible revenue, averaging around $0.40 per BOE during the quarter.

Abraxas’s total production should rebound somewhat now that its shut-ins have largely ended. The lack of capex spending will result in its production continuing to drop after that initial rebound though.

Conclusion

Angelo Gordon appears to be largely in control of Abraxas going forward. The company requires Angelo Gordon’s approval for capital expenditures, and is also limited in how much it can spend in other areas such as G&A. Abraxas should be able to pay down much of its credit facility debt, but that would still leave its second-lien debt, and it appears unlikely to be able to repay its second-lien debt. The common stock remains risky despite now trading at below $0.20 per share. If Abraxas can sell itself for anything that covers its debt, it likely will do so, even if that results in a nominal return (such as 5 or 10 cents per share) for shareholders. Failure to achieve a sale within a couple years would likely result in bankruptcy, with Angelo Gordon taking over the company and leaving nothing (other than potentially a minor amount for releases) for shareholders.

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