MergerMArket : Abraxas likely to become takeover target when daily production hits 10,000 barrels, CEO says
Company will close in on production goal in two years
Selling Canadian assets this year
Next equity raise likely in 12-18 months
Abraxas Petroleum (Nasdaq: AXAS) will likely become a takeover target when it reaches production of about 10,000 barrels a day, anticipated in about two years, Chairman and CEO Bob Watson said.
At that point, “Abraxas would start to look attractive as an acquisition target,” Watson told this news service following his presentation at the IPAA’s Oil and Gas Investor Symposium in Toronto.
Reaching that level of production would make the San Antonio-based Abraxas a “billion-dollar market cap” company. Its current market capitalization is around USD 650m.
After selling approximately USD 200m in noncore assets over the last two years, Abraxas has 10,000 net acres in the Eagle Ford in south Texas and 5,000 acres in the Williston Basin formation of the Bakken play in North Dakota and Montana. It also has assets in the West Texas Permian Basin and Wyoming's Power River Basin as well as in the Duvernay play in central Alberta.
Abraxas announced earlier this month a USD 25m increase to the company’s 2014 capital budget to USD 190m, which will go directly to maintaining a one-rig program for the remainder of 2014 in the Eagle Ford play. This will boost the company’s average daily production to between 5,800 and 6,000 barrels of oil, and a targeted exit rate of 8,000 barrels per day. That’s up from the current level of about 4,200 barrels per day.
To help pay for this expansion, the company recently closed on an offering of 10m shares priced at USD 5, for net proceeds of about USD 47m. Stephens Inc., Canaccord Genuity Inc. and Robert W. Baird & Co. Inc. acted as joint book-runners in the offering.
Abraxas aims to add a second rig for the Eagle Ford play to its capital plans, Watson said, possibly next year, which would bring its expected level of production up to 10,000 barrels a day by end of 2016. “Giving this sort of guidance for the next two years is new to Abraxas, but we feel very comfortable with that number.”
Watson said larger companies who want to either get a foothold in the Eagle Ford or Bakken, or which would like to increase their existing positions in these areas, would likely be interested in acquiring a smaller, focused independent such as Abraxas, which generates a “great rate of return on relatively small acreage”.
Among possible candidates are EOG (NYSE:EOG) and SM Energy (NYSE:SM), larger players active in both the Bakken and Eagle Ford, Watson said.
Alberta assets for sale
Abraxas plans to sell its assets in Alberta, Canada, this year, with marketing efforts to begin by the end of August, Watson said.
Abraxas has about 25,000 net acres in the region and about 60-80 barrels of oil per day in production. Its targets are primarily horizontal drilling opportunities targeting the Duvernay, Pekisko, Nisku and Nordegg areas of central Alberta.
The company is not spending to further develop the Canadian assets this year, Watson said, while noting regulatory issues in Alberta and Canada added to the decision to attempt a Canadian sale.
"Theoretically we are ready to sell now, but our sales agent suggested we wait until the end of summer to increase potential interest.”
Sayer Energy Advisors is acting as marketing agents in selling the Canadian assets.
Abraxas also intents to sell its Canadian corporate entity, called Canadian Abraxas Petroleum. As a result, Watson said, there might be interest from companies which would be interested in the associated tax pools of about CAD 60m.
Watson said a potential buyer, most likely an operator in the region already, could buy Canadian Abraxas for its production value -- perhaps CAD 50,000 to CAD 60,000 for each barrel of daily production. That would net the company somewhere around CAD 5m on that basis alone.
Privately held Forge Petroleum Corporation, Bashaw Oil and Mancal Energy, along with EOG, are just some of the players operating in the area, according to Watson.
Equity more likely to fuel growth
With just more than 100 existing staff, the CEO said Abraxas is capable of executing on a two-rig program and meeting its targets. “Right now we can use our A-team in the field, so they can make those critical decisions,” he said. To add a third rig would require additional investment and staff, Watson said.
He said it costs about USD 84m for each additional rig going, though that outlay is offset by the cash flow the additional production brings in.
While the company recently increased its credit facility to USD 162m from USD 130m, Watson said it is more inclined to raise capital in the future through an equity issue rather than debt.
“We like to keep a conservative balance sheet,” he said, pointing out that Abraxas prefers to have its debt below a multiple of 1x EBITDA.
The company will likely return to the equity markets for more capital within the next year to 18 months, especially if the “markets continue to be frothy” and oil prices stay in the range of USD 100 per barrel.
The company would also like to continue to add bolt-on acquisitions, but Watson acknowledged these would be small buys. “You’re going to find the 400-500 acres, maybe even 1,000 acres of land in the area that would be considered suitable, but you’re not going to find 10,000 acres,” he said. “Also, we’ve shown you don’t need a lot of acreage to get good rates of return on production.”
Watson added he expects to see more smaller holdings come on the market. The big boom in shale plays started in 2008 and 2009, he said, and many of those land tracts with five-year leases will hit their expiry dates.