TPS Trade Alert – May 10, 2016
Recommendation:
Buy Abraxas Petroleum (NASD: AXAS) up to $1.45
The Opportunity:
What a horrific stretch it’s been for this San Antonio-based energy company.
The crude oil price collapse has shredded healthy balance sheets in hundreds of companies.
Many firms have been forced to sell, or have been driven out of business.
At least 67 U.S. oil and natural gas companies filed for bankruptcy in 2015, according to consulting firm Gavin/Solmonese.
But Abraxas has held on. And now, it’s in an excellent position to deliver strong operating results.
Here’s why we like Abraxas, and why our search for a well-run, well positioned U.S.-based energy firm leads us to this 39 year-old company.
Abraxas is a classic independent. It focuses on the oil and gas business with assets in the Rocky Mountains, the Permian Basin, and onshore along the Gulf Coast.
The firm’s existing reserves are significant. The proved reserves add up to 43.2 million barrels of oil.
And now that oil prices are on their way back up, the Abraxas assets are once again growing in value. But before we rush into the future, we need to understand the firm’s troubled past.
The Numbers Aren’t Pretty
In 2015, Abraxas suffered massive losses… more than $127 million. That came after delivering a profit of $63 million in 2014.
Long-term debt soared from $76.5 million to $138.4 million. At the same time, the value of the firm’s assets plunged from $207 million to $84 million.
Hanging on has clearly been a struggle. The more time you spend reviewing the earnings reports and the balance sheet, the more closely you can see how the oil price plunge has assaulted the Abraxas financials.
The stock price reflects this assault. Less than two years ago, the stock traded at $6.24. The wheels came spinning off in a hurry and the stock swooned to $0.65, par for the course for an energy firm.
But now, we’re starting to see plenty of signs of life for Abraxas. Management at the firm has been revising earnings estimates.
For the current quarter, we expect a significant reduction in losses, perhaps as high as 50%. This would clearly signal a significant shift in momentum.
In fact, we have already seen the stock start to make a move.
But just like in every company, behind the numbers and the performance of the stock, there are people, and the people running Abraxas are clearly committed to winning.
Why We Like The Management Team
Corporate executives usually have a way of making sure they’re handsomely paid, even when revenues tank and stockholders suffer.
At Abraxas, the CEO, the CFO, and three VPs each qualified to receive a bonus last year. Based on the compensation rules, they were each entitled to pocket a six-figure bonus.
But they all decided not to. CEO Bob Watson turned his back and walked away from a $322,000 bonus he was entitled to collect.
This is the kind of leadership that creates confidence.
The Risks:
What kind of a road ahead do we see for Abraxas?
Clearly, the direction is defined by the movement in crude oil prices.
There will always be short-term ups and downs. Last week’s massive forest fires in the Canadian province of Alberta impacted production from the Athabaska tar sands, and pushed oil prices up.
Next week, there could easily be some other event that pushes prices down.
We’re more interested in the long haul. We believe that the internal OPEC squabbling will soon be settled. We figure that a meeting of the minds between the Saudis and the Iranians will set the stage for rising crude oil prices.
If there is not a meaningful and sustained recovery in crude oil prices, Abraxas is stuck. It’s stuck with assets that remain devalued and no workable solution.
Does a rising tide lift all boats? Yes, but some more than others.
We see the tide lifting Abraxas higher than its competitors. That’s because of the quality of the firm’s assets. We also take into account high producing rates for its wells, and its technical skills, with operations such as horizontal drilling and 3-D seismic. Collectively, these factors put Abraxas in a position to rebound more than most.
Potential Returns:
Since January 20th, the stock has more than doubled.
Is it too late? We don’t think so. Abraxas was a six-dollar stock just a few years ago, before oil prices plunged.
We believe this well-managed, focused company can quickly return to profitability, pay down debt, shore up its balance sheet, expand production, and reward investors with exciting returns.
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Category: TPS Trade Alert
