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
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:
oAbraxas stock has under-performed its peers and is down more than 30% in
the last six months;
oAbraxas is unfocused for a company its size, owning too much non-operated
acreage in too many geographies, leading to capital and operational
oSelling 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;
oAbraxas 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
oAbraxas 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 inNew 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
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 Total
Powder River Basin Niobrara 17,800 $2,500 $44,500,000
Western Alberta Pekisko 6,880 $2,500 $17,200,000
Permian Basin - Strawn / Frio / Yates 2,900 $5,500 $15,950,000
Permian Basin - 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
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
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 Total
Williston Bakken / Three 23,300 $7,500 $174,750,000
Onshore Gulf Coast Eagle Ford 7,300 $12,500 $91,250,000
Permian Basin - Strawn / Frio / 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 2,200 53% $60,000 $132,000,000
Gas production 11,700 47% $6,000 $70,200,000
Net Debt ($143,190,000)
Net Asset Value (NAV) $589,014,500
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
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
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 18^th in the league
tables for book-running oil and gas deals during the first nine months of
SOURCE Clinton Group, Inc.
Contact: Connie Laux, +1-212-825-0400
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