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
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:
Est. Price Per
Powder River Basin
Permian Basin - Reeves
Strawn / Frio / Yates
Permian Basin - Other
Strawn / Frio / Yates
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:
Est. Price Per
Bakken / Three Forks
Onshore Gulf Coast
Permian Basin - Spires
Strawn / Frio / Yates
Assets to be Sold*
Liquids production (boe/d)
Gas production (mcfe/d)
Net Asset Value (NAV)
*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.
Senior Portfolio Manager
Gregory P. Taxin
* 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.