Clinton Group, Inc. Asks Board of Abraxas Petroleum to Sell Assets,
Reduce Debt, Step-Up Production and Make Additional Disclosures to
Stockholders
NEW YORK, Nov. 27, 2012 /PRNewswire/ -- Clinton Group,
Inc. ("Clinton") announced today that it has sent a letter to the
board of directors of Abraxas Petroleum Corp. (Nasdaq: AXAS)
requesting that the Company divest non-core assets, reduce its
debt, increase production and provide additional information to
stockholders regarding its operating activities. Clinton Group
believes it is one of the top ten owners of Abraxas stock.
The letter notes:
- Abraxas stock has under-performed its peers and is down more
than 30% in the last six months;
- Abraxas is unfocused for a company its size, owning too much
non-operated acreage in too many geographies, leading to capital
and operational inefficiencies;
- Selling non-core assets could reduce the Company's debt
significantly, providing more operating flexibility and the
opportunity to step-up production at its core operated sites;
- Abraxas should focus on increasing its production quickly
rather than deploying large sums of capital into investment
projects (such as Canadian "stealth plays", buying and refurbishing
rigs, inventorying drilling pads and developing water treatment
infrastructure) that are capital intensive and time consuming;
and
- Abraxas should provide stockholders additional production
guidance and real-time results from its drilling activities.
The letter also expresses the Clinton Group's view that the
company is undervalued and that taking the steps outlined in the
letter can help stockholders realize fair value for the stock. The
Clinton Group's sum-of-the-parts and cash flow valuation analyses
concludes that fair value is approximately $4.35 per share.
The letter also notes that the board of directors should "expect
to hear more" from the Clinton Group if action is not taken
soon.
The complete text of the letter sent by Clinton to the board of
directors of Abraxas is attached.
About Clinton Group, Inc.
Clinton Group, Inc. is a diversified asset management firm. The
firm has been investing in global markets since its inception in
1991 with expertise that spans a wide range of investment styles
and asset classes. Clinton Group is a Registered Investment Advisor
based in New York City.
[Clinton Group Letterhead]
November 27, 2012
Board of Directors
Abraxas Petroleum Corp.
18803 Meisner Drive
San Antonio, TX 78258
RE: Maximizing Shareholder Value
Gentlemen:
We write on behalf of Clinton Group, Inc. ("Clinton"), the
investment manager of several funds and accounts which, together,
are a top ten owner of Abraxas Petroleum Corp. ("Abraxas" or the
"Company"). Founded in 1991, Clinton is an SEC Registered
Investment Advisor based in New York.
We have been owners of Abraxas for nearly two years and continue
to buy stock. We believe the Company is undervalued in the stock
market, given its assets and the opportunity to exploit those
assets to generate meaningfully more cash flow and profit.
It is well past time for the management team and Board to use
the assets of the Company optimally to generate value for
stockholders. As discussed more fully below, we believe the Company
is too unfocused, too levered and too sluggish.
For these reasons, the Company's stock has lost significant
value and has performed much worse than the stock of peer companies
over the last six months, one year, three years and five years. In
fact, in the last six months, the Company's stock price is down
32%, which compares very unfavorably to the stock performance of
companies identified by the Company as peers,* which
have increased on average by 30%. To create value for stockholders,
the Board must do something to close this performance gap.
First, we believe the Company is too unfocused. With assets
scattered across a wide range of geographies, the Company is simply
spread too thin, lacking an optimized allocation of human and
financial capital. While such diversity may be fitting for a
Company with significantly greater resources, it is unfit for
Abraxas. In our view, the Company is too small to effectively
support such a highly diversified model, and management must take
steps to consolidate operations and exploit economies of scale by
focusing on development activities in a small number of key
basins.
Because the Company is inefficient in exploiting its highly
diversified holdings, the Company trades at a distinct discount to
its peers on a net asset value basis. To correct this, the Board
should immediately focus the Company's management and capital
resources exclusively on the Company's operated assets that have
high net working interests, such as in the Bakken, Eagleford and
Permian Basin. The non-operating assets and undeveloped acreage
should be swiftly sold or swapped for working interests in the
Company's core operated plays, at fair prices. By our math,
outright sales of non-core acreage should yield the Company nearly
$160 million, in addition to the
$22 million in proceeds that are
expected from the Nordheim and
Alberta Basin deals already
announced. Our math follows:
|
Name
|
Formation
|
Est.
Acres
|
Est.
Price Per
|
Total
|
|
|
|
|
|
|
|
|
|
|
Powder
River Basin
|
Niobrara
|
17,800
|
$2,500
|
$44,500,000
|
|
|
Western
Alberta
|
Pekisko
|
6,880
|
$2,500
|
$17,200,000
|
|
|
Permian
Basin - Reeves
|
Strawn /
Frio / Yates
|
2,900
|
$5,500
|
$15,950,000
|
|
|
Permian
Basin - Other
|
Strawn /
Frio / Yates
|
32,631
|
$2,500
|
$81,577,500
|
|
|
Total
|
|
60,211
|
|
$159,227,500
|
|
Selling these non-core assets would enable the Company to
significantly cut its debt and provide capital to deploy for
increasing production, goals we think are both appropriate and
achievable quickly. And while we applaud management's belated
recognition of the leverage issue, we believe more needs to be
done, quickly, to refocus the Company on its operated assets with
high working interests and to de-lever to provide more flexibility
and stability.
Indeed, with less leverage, the Company would have significantly
more operating flexibility, and the ability to draw capital from
its bank credit facility to increase production from its core
producing assets. Moreover, with less leverage, the Company could
consider an entirely new bank credit facility (preferably with a
lead lender and syndicate agent more seasoned in oil and gas
exploration facilities)** to provide additional
flexibility and soften the restrictive utilization covenants that
have introduced so much uncertainly for the Company and its
stockholders.
Right sizing the Company's asset base and borrowing will go a
long way to creating value for stockholders. Those steps are
obvious. The fact that they have not already been taken is, in our
view, symptomatic of the Company's larger ill: Abraxas is being
operated as if its pace does not matter and as if stockholders
should, and will, be patient. But operational pace does matter and
stockholders – at least this one – will not be patient for
long.
It is time for the Company to be operated with a sense of
urgency. We do not have the luxury of buying, refurbishing and
moving our own rigs, at the expense of significant operational
delays in the Williston Basin. Like other industry participants the
size of Abraxas, we should be leasing them. Nor can we afford the
time and upfront capital to develop a large inventory of drilling
pads that await future drilling; instead, we should be operating a
just-in-time drilling program aimed at achieving a high, near-term
cash flow return on our capital. Similarly, we should be handling
water disposal through third-party vendors, not by building
elaborate infrastructure that is time and capital intensive.
These activities reflect a sub-optimal allocation of human and
financial capital, when compared to the returns earned on operated
wells in the Williston Basin, Eagleford and Permian Basin. While we
appreciate the long-term benefit of owning such infrastructure,
given the abundant availability of third-party service providers,
this vertically integrated approach is not necessary or appropriate
for a company the size of Abraxas. We strongly recommend the
company not pursue further vertical expansion. At this point in the
Company's life cycle, the exigency is for production, not planning
and preparation.
We feel the same way about the Company's recently announced
"stealth play" in Canada. We are
concerned that efforts to de-risk such projects, even for the
purpose of future sale, will take away from the resources needed to
develop the existing core operated plays. Management needs to
focus on growing production and proved reserves within its existing
premier core operated plays. We strongly believe that the pursuit
of "stealth plays" creates significant uncertainty and concern
among stockholders and has contributed to the underperformance of
the stock. Management should clearly articulate the
operational requirements, costs and timelines surrounding the
disposition of this asset.
We also believe stockholders would benefit from greater
transparency on the rest of the asset base. While we appreciate
today's operational update, the Company's continuing refusal to
provide stockholders with 24-hour flow rates, year-end production
rates or projections of future production is both off-market and
off-putting for investors. We urge the Board and management team to
rethink the Company's disclosure and guidance practices and provide
stockholders with the information they need to make informed
decisions about the value of the Company.
We note that Wall Street sell-side analysts appear ever more
pessimistic about the Company's production capabilities and cash
flow. At the beginning of 2012, consensus 2013 EBITDA projections
were more than $80 million, according
to Bloomberg. After operational missteps and a loss of focus, the
Company is now expected by analysts to do just $54 million in EBITDA in 2013. We are convinced
that the Company can do more, if management would only focus on
core assets and execute well.
For that reason and others, we are convinced the Company is
seriously undervalued. Indeed, we believe the value of the
Company's assets far exceeds the market's recognition and that,
with a little focus and urgency, production (and EBITDA) could be
stepped up to far exceed analysts' current expectations.
Our view of the Company's assets and their value is as
follows:
|
Name
|
Formation
|
Est.
Acres
|
Est.
Price Per
|
Total
|
|
|
|
|
|
|
|
|
Williston
|
Bakken /
Three Forks
|
23,300
|
$7,500
|
$174,750,000
|
|
Onshore
Gulf Coast
|
Eagle
Ford
|
7,300
|
$12,500
|
$91,250,000
|
|
Permian
Basin - Spires
|
Strawn /
Frio / Yates
|
5,600
|
$4,000
|
$22,400,000
|
|
Canadian
Stealth
|
TBD
|
20,000
|
$3,000
|
$60,000,000
|
|
Assets to
be Sold*
|
|
|
|
$181,604,500
|
|
Total
|
|
56,200
|
|
$530,004,500
|
|
|
|
|
|
|
|
|
Metric
|
Production
|
Split
|
Price
Per
|
Implied
Value
|
|
|
|
|
|
|
|
|
Liquids
production (boe/d)
|
2,200
|
53%
|
$60,000
|
$132,000,000
|
|
Gas
production (mcfe/d)
|
11,700
|
47%
|
$6,000
|
$70,200,000
|
|
Net
Debt
|
|
|
|
($143,190,000)
|
|
|
|
|
|
|
|
|
Net Asset
Value (NAV)
|
|
|
|
$589,014,500
|
|
|
Applied
Discount
|
|
|
|
30%
|
|
Adjusted
NAV
|
|
|
|
$412,310,150
|
|
Per
Share
|
|
|
|
$4.42
|
|
|
|
|
|
|
|
|
*Includes
Nordheim ($20 mm), Alberta Basin ($2.85 mm) and other assets
(see above) for $159.3 mm.
|
|
NB:
Company had $150.2mm in NOLs as of 12/31/11.
|
|
|
|
We also believe that with the Company's level of capital
expenditures and core operated drilling program, the Company should
be able to achieve 2013 EBITDA well in excess of the current
consensus number. Based on our own assumptions of keeping 2012
exit-rate production flat, combined with the production growth
opportunities from the core operated assets, we believe the Company
could generate more than $65 million
in 2013 EBITDA. At that level, with a market multiple of 6.25x, the
equity should be worth at least $4.35
per share.
Thus, with the sale of the non-core assets and improved
execution on the rest, we believe the Company can deliver
significant value to stockholders. We urge you to take action
immediately on the sale of these properties and to ensure
management is working with a fevered pace to execute on the
Company's terrific opportunities.
In the event we do not see near-term improvements on these two
fronts, you should expect to hear more from us as we aim to protect
and grow our investment in Abraxas through all means available to
stockholders. We would be pleased to discuss our views at any time.
You can reach us at (212) 825-0400.
Sincerely yours,
//s//
Robert Wenzel
Senior Portfolio Manager
//s//
Gregory P. Taxin
Managing Director
Footnotes:
* The Company's 10-K lists the following peers: Double Eagle
Petroleum, Endeavor International, Evolution Petroleum,
Gulfport Energy, GMX Resources, Petroleum Development (PDC Energy),
PetroQuest Energy, and Warren Resources.
** According to Thomson-Reuters, Societe Generale ranked
18th in the league tables for book-running oil and gas
deals during the first nine months of 2012.
SOURCE Clinton Group, Inc.