See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Nature of Operations
We are an independent energy company primarily engaged in the acquisition, exploitation, development and production of oil and gas in the United States. Our oil and gas assets are located primarily in two operating regions in the United States: the Rocky Mountains and Permian/Delaware Basin.
The terms “Abraxas,” “Abraxas Petroleum,” “we,” “us,” “our” or the “Company” refer to Abraxas Petroleum Corporation and all of its subsidiaries, including Raven Drilling LLC.
Rig Accounting
In accordance with SEC Regulation S-X, no income is recognized in connection with contractual drilling services performed in connection with properties in which the Company or its affiliates holds an ownership, or other economic interest. Any income not recognized as a result of this limitation is credited to the full cost pool and recognized through lower amortization as reserves are produced. During 2021 and 2022, the drilling rig was idle. Accordingly, the cost of maintaining the rig was charged to the statement of operations. The drilling rig was sold in February 2023.
Use of Estimates
The consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates pertain to proved oil, gas and NGL reserves and related cash flow estimates used in impairment tests of oil and gas properties, the fair value of assets and liabilities acquired in business combinations, derivative contracts, the provision for income taxes including uncertain tax positions, stock based compensation, asset retirement obligations, accrued oil and gas revenues and expenses, as well as estimates of expenses related to depreciation, depletion, amortization and accretion. Actual results could differ from those estimates.
The process of estimating oil and gas reserves in accordance with SEC requirements is complex and involves decisions and assumptions in evaluating the available geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future production, oil and gas prices, differentials, revenues, taxes, capital expenditures, operating expenses and quantities of recoverable oil and gas reserves most likely will vary from those estimated. Any significant variance could materially affect the estimated quantities and present value of our reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, our ability to fund estimated development cost, prevailing oil and gas prices and other factors, many of which are beyond our control.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current period presentation. These reclassifications were to share and per share data related to the 1 for 20 reverse stock split effective
October 19, 2020 and had no effect on our previously reported results of operations.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk consist principally of trade receivables and derivative contracts. Accounts receivable are generally from companies with significant oil and gas marketing or operating activities. The Company performs ongoing credit evaluations and, generally, requires no collateral from its customers. The counterparties to our derivative contracts are the same financial institutions from which we have outstanding debt; accordingly, we believe our exposure to credit risk to these counterparties is currently mitigated in part by this, as well as the current overall financial condition of the counterparties.
The Company maintains any cash and cash equivalents in excess of federally insured limits in prominent financial institutions considered by the Company to be of high credit quality.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are reported net of an allowance for doubtful accounts of approximately $0.1 million at December 31, 2021 and 2022. The allowance for doubtful accounts is determined based on the Company’s historical losses, as well as a review of certain accounts. Accounts are charged off when collection efforts have failed and the account is deemed uncollectible.
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Industry Segment and Geographic Information
The Company operates in one industry segment, which is the exploration, development and production of oil and gas with all of the Company’s operational activities being conducted in the U.S. The Company’s current operational activities and the Company’s consolidated revenues are generated from markets exclusively in the U.S., and the Company has no long lived assets located outside the U.S.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas properties. Under this method, certain direct costs and indirect costs associated with acquisition of properties and successful as well as unsuccessful exploration and development activities are capitalized. Depreciation, depletion, and amortization of capitalized oil and gas properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves. Net capitalized costs of oil and gas properties, less related deferred taxes, are limited by country, to the lower of unamortized cost or the cost ceiling, defined as the sum of the present value of estimated future net revenues from proved reserves based on unescalated prices discounted at 10%, plus the cost of properties not being amortized, if any, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any, less related income taxes. Costs in excess of the present value of estimated future net revenues are charged to proved property impairment expense. No gain or loss is recognized upon the sale or disposition of oil and gas properties for full cost accounting companies with proceeds accounted for as an adjustment of capitalized cost. An exception to this rule occurs when the adjustment to the full cost pool results in a significant alteration of the relationship between capitalized cost and proved reserves. The Company applies the full cost ceiling test on a quarterly basis on the date of the latest balance sheet presented. The impairment calculations do not consider the impact of our commodity derivative positions as generally accepted accounting principles only allow the inclusion of derivatives designated as cash flow hedges. As of December 31, 2021 and 2022, our capitalized cost of oil and gas properties did not exceed the future net revenue from our estimated proved reserves.
Other Property and Equipment
Other property and equipment are recorded at cost. Depreciation of other property and equipment is provided over the estimated useful lives using the straight-line method. Major renewals and improvements are recorded as additions to the property and equipment accounts. Repairs that do not improve or extend the useful lives of assets are expensed.
Estimates of Proved Oil and Gas Reserves
Estimates of our proved reserves included in this report are prepared in accordance with GAAP and SEC guidelines. The accuracy of a reserve estimate is a function of:
| • | the quality and quantity of available data; |
| • | the interpretation of that data; |
| • | the accuracy of various mandated economic assumptions; and |
| • | the judgment of the persons preparing the estimate. |
Our proved reserve information included in this report was based on studies performed by our independent petroleum engineers assisted by the engineering and operations departments of Abraxas. Estimates prepared by other third parties may be higher or lower than those included herein. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may cause material revisions to the estimate.
In accordance with SEC requirements, we based the estimated discounted future net cash flows from proved reserves on the average of oil and gas prices based on the unweighted average 12-month first-day-of-month pricing. Future prices and costs may be materially higher or lower than these prices and costs which would impact the estimated value of our reserves.
The estimates of proved reserves materially impact depreciation, depletion and amortization, or DD&A expense. If the estimates of proved reserves decline, the rate at which we record DD&A expense will increase, reducing future net income. Such a decline may result from lower commodity prices, which may make it uneconomic to drill for and produce higher cost fields.
Derivative Instruments and Hedging Activities
All derivative instruments are recorded on the Consolidated Balance Sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. The derivative instruments the Company utilizes are based on index prices that may and often do differ from the actual oil and gas prices realized in its operations. These variations often result in a lack of adequate correlation to enable these derivative instruments to qualify for hedge accounting rules as prescribed by Accounting Standards Codification (“ASC”) 815. Accordingly, the Company does not account for its derivative instruments as cash flow hedges for financial reporting purposes. Therefore, changes in fair value of these derivative instruments are recognized in earnings and included in net gains (losses) on commodity derivative contracts in the Consolidated Statements of Operations.
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Fair Value of Financial Instruments
The Company includes fair value information in the notes to consolidated financial statements when the fair value of its financial instruments is materially different from the carrying value. The carrying value of those financial instruments that are classified as current, except for derivative instruments, approximates fair value because of the short maturity of these instruments. For noncurrent financial instruments, the Company uses quoted market prices or, to the extent that there are no available quoted market prices, market prices for similar instruments.
Share-Based Payments
Options granted are valued at the date of grant and expense is recognized over the vesting period. The Company currently utilizes a standard option pricing model (Black-Scholes) to measure the fair value of stock options granted to employees and directors. Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the awardee terminates employment with the Company prior to the lapse of the restrictions. The value of such restricted stock is determined using the market price on the grant date and expense is recorded over the vesting period. For the years ended December 31, 2021 and 2022, stock-based compensation was approximately $0.9 million and $3.3 million, respectively.
Restoration, Removal and Environmental Liabilities
The Company is subject to extensive federal, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed.
Liabilities for expenditures of a noncapital nature are recorded when environmental assessments and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component are fixed or reliably determinable.
The fair value of a liability for an asset’s retirement obligation is recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period and the capitalized cost is depreciated over the estimated useful life of the related asset. For all periods presented, we have included estimated future costs of abandonment and dismantlement in our full cost amortization base and we amortize these costs as a component of our depletion expense in the accompanying consolidated financial statements. Each year, the Company reviews, and to the extent necessary, revises its asset retirement obligation estimates.
The following table (in thousands) summarizes changes in the Company’s future site restoration obligations during the two years ended December 31:
| | 2021 | | | 2022 | |
Beginning future site restoration obligation | | $ | 7,360 | | | $ | 4,708 | |
New wells placed on production and other | | | 1 | | | | - | |
Deletions related to property disposals | | | (2,845 | ) | | | (1,837 | ) |
Deletions related to plugging costs | | | (342 | ) | | | - | |
Accretion expense and other | | | 330 | | | | 170 | |
Revisions and other | | | 204 | | | | - | |
Ending future site restoration obligation | | $ | 4,708 | | | $ | 3,041 | |
Revenue Recognition and Major Purchasers
The Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells, net of royalties, control of the product has transferred to the purchaser and collectability is reasonably assured.
During 2021, four purchasers accounted for 83% of oil and gas revenues. During 2022, three purchasers accounted for 90% of oil and gas revenues.
Deferred Financing Fees
Deferred financing fees are being amortized on the effective yield basis over the term of the related debt.
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Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect with respect to taxable income in the years in which those temporary differences are expected to be recovered or settled. Uncertainties exist as to the future utilization of the operating loss carryforwards. Therefore, we have established a valuation allowance of $73.7 million for deferred tax assets at December 31, 2022.
Accounting for Uncertainty in Income Taxes
Evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent reporting period in which the threshold is no longer met. Penalties and interest are classified as income tax expense. The Company had no uncertain income tax positions as of December 31, 2022.
Adoption of New Accounting Standards
None
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2. Revenue from Contracts with Customers
Revenue Recognition
Sales of oil, gas and NGL are recognized at the point in time when control of the product is transferred to the customer and collectability is reasonably assured. The Company’s contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, physical location, quality of the oil or gas, and prevailing supply and demand conditions. As a result, the price of the oil, gas and NGL fluctuates to remain competitive with other available oil, gas and NGL supplies in the market. The Company believes that the pricing provisions of our oil, gas and NGL contracts are customary in the industry.
Oil sales
The Company’s oil sales contracts are generally structured such that it sells its oil production to a purchaser at a contractually specified delivery point at or near the wellhead. The crude oil production is priced on the delivery date based upon prevailing index prices less certain deductions related to oil quality, physical location and transportation costs incurred by the purchaser subsequent to delivery. The Company recognizes revenue when control transfers to the purchaser upon delivery at or near the wellhead at the net price received from the purchaser. Payment terms are customarily and normally paid on the twentieth day of the month following production.
Gas and NGL Sales
Under the Company’s gas processing contracts, it delivers wet gas to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. There are no performance obligations related to these contracts. The midstream processing entity processes the gas and remits proceeds to the Company based upon either (i) the resulting sales price of NGL and residue gas received by the midstream processing entity from third-party customers or (ii) the prevailing index prices for NGL and residue gas in the month of delivery to the midstream processing entity. Gathering, processing, transportation and other expenses incurred by the midstream processing entity are typically deducted from the proceeds that the Company receives.
In these scenarios, the Company evaluates whether it is the principal or the agent in the transaction. With respect to the Company’s gas purchase contracts, the Company has concluded that it is the agent, and thus, the midstream processing entity is its customer. Accordingly, the Company recognizes revenue upon delivery to the midstream processing entity based on the net amount of the proceeds received from the midstream processing entity.
Imbalances
The Company had no material gas imbalances at December 31, 2021 and 2022.
Disaggregation of Revenue
The Company is focused on the development of oil and natural gas properties primarily located in the following operating regions in the United States: (i) the Permian/Delaware Basin and (ii) Rocky Mountain. Revenue attributable to each of those regions is disaggregated in the table below.
| | Years Ended December 31, | |
| | 2021 | | | 2022 | |
| | Oil | | | Gas | | | NGL | | | Oil | | | Gas | | | NGL | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating Region | | | | | | | | | | | | | | | | | | | | | | | | |
Permian/Delaware Basin | | $ | 32,666 | | | $ | 4,474 | | | $ | 2,181 | | | $ | 39,617 | | | $ | 6,642 | | | $ | 3,456 | |
Rocky Mountain (1) | | $ | 28,562 | | | $ | 4,182 | | | $ | 6,771 | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) All Rocky Mountain assets were sold January 3, 2022.
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Significant Judgments
Principal versus agent
The Company engages in various types of transactions in which midstream entities process the Company's gas and subsequently market resulting NGL and residue gas to third-party customers on behalf of the Company, such as the Company’s percentage-of-proceeds and gas purchase contracts. These types of transactions require judgment to determine whether we are the principal or the agent in the contract and, as a result, whether revenues are recorded gross or net.
Transaction price allocated to remaining performance obligations
A significant number of the Company’s product sales are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC Topic 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
For product sales that have a contract term greater than one year, the Company has utilized the practical expedient in ASC Topic 606-10-50-14(a) which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required.
Contract balances
Under the Company’s product sales contracts, the Company is entitled to payment from purchasers once its performance obligations have been satisfied upon delivery of the product, at which point payment is unconditional. The Company records invoiced amounts as “Accounts receivable - Oil and gas production sales” in the accompanying condensed consolidated balance sheet.
To the extent actual volumes and prices of oil and natural gas are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and also recorded as “Accounts receivable - Oil and gas production sales” in the accompanying condensed consolidated balance sheets. In this scenario, payment is also unconditional, as the Company has satisfied its performance obligations through delivery of the relevant product. As a result, the Company has concluded that its product sales do not give rise to contract assets or liabilities under ASU 2014-09. At December 31, 2021 and December 31, 2022, our receivables from contracts with customers were $12.3 million and $4.7 million, respectively.
Prior-period performance obligations
The Company records revenue in the month production is delivered to the purchaser. However, settlement statements for certain gas and NGL sales may not be received for 30 to 60 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production that was delivered to the midstream purchaser and the price that will be received for the sale of the product. Additionally, to the extent actual volumes and prices of oil are unavailable for a given reporting period because of timing or information not received from third-party purchasers, the expected sales volumes and prices for those barrels of oil are also estimated.
The Company records the differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. Any identified differences between its revenue estimates and actual revenue received historically have not been significant. For the year ended December 31, 2022, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.
3. Reverse Stock Split
On October 19, 2020 the Company effected a 1-for-20 reverse stock split of its issued and outstanding shares of common stock, $0.01 par value (the “Reverse Stock Split”). The Company effected the Reverse Stock Split pursuant to the Company’s filing of a Certificate of Change with the Secretary of State of the State of Nevada on September 29, 2020. Under Nevada law, no amendment to the Company’s Articles of Incorporation was required in connection with the Reverse Stock Split. The Company was authorized to issue 400,000,000 shares of Common Stock. As a result of the Reverse Stock Split, the Company was authorized to issue 20,000,000 shares of Common Stock. As a result of the Reverse Stock Split, 168,069,305 outstanding shares of the Company’s common stock were exchanged for approximately 8,453,466 shares of the Company’s common stock (subject to adjustment due to the effect of rounding fractional shares into whole shares). Under the terms of the Reverse Stock Split, fractional shares issuable to stockholders were rounded up to the nearest whole share. The Reverse Stock Split did not have any effect on the stated par value of the Common Stock. All per share amounts and number of shares in the condensed consolidated financial statements and related notes have been retroactively restated to reflect the Reverse Stock Split, resulting in the transfer of $1.6 million from common stock to additional paid in capital.
Additionally on the effective date of the Reverse Stock Split, all options, warrants and other convertible securities of the Company outstanding immediately prior to the Reverse Stock Split were adjusted by dividing the number of shares of common stock into which the options, warrants and other convertible securities are exercisable or convertible by 20, and multiplying the exercise or conversion price thereof by 20, all in accordance with the terms of the plans, agreements or arrangements governing such options, warrants and other convertible securities and subject to rounding to the nearest whole share.
4. Long-Term Debt
The following is a description of the Company’s debt as of December 31, 2021 and 2022:
| | Years ended December 31, | |
| | 2021 | | | 2022 | |
| | (In thousands) | |
First Lien Credit Facility | | $ | 71,400 | | | $ | - | |
Second Lien Credit Facility | | | 134,907 | | | | - | |
Exit fee - Second Lien Credit Facility | | | 10,000 | | | | - | |
Real estate lien note | | | 2,515 | | | | - | |
| | | 218,822 | | | | - | |
Less current maturities | | | (212,688 | ) | | | - | |
| | | 6,134 | | | | - | |
Deferred financing fees and debt issuance cost - net | | | (3,929 | ) | | | - | |
Total long-term debt, net of deferred financing fees and debt issuance costs | | $ | 2,205 | | | $ | - | |
Restructuring
Pursuant to the Exchange Agreement, dated as of January 3, 2022, between Abraxas and AGEF (the “Exchange Agreement”) and certain other agreements entered into by Abraxas on January 3, 2022, we effectuated a restructuring of our then-existing indebtedness through a multi-part interdependent deleveraging transaction consisting of: (i) an Asset Purchase and Sale Agreement pursuant to which Abraxas sold to Lime Rock Resources V-A, L.P. certain oil, gas, and mineral properties in the Williston Basin region of North Dakota and other related assets belonging to the Company and its subsidiaries for $87.2 million in cash less customary closing adjustments, (ii) the pay down of the indebtedness and other obligations of Abraxas and its subsidiaries under the First Lien Credit Facility and (iii), a debt for equity exchange of the indebtedness and other obligations of Abraxas and its subsidiaries under the $100.0 million Second Lien Credit Facility (the “Exchange” and, together with the transactions referred to in clauses (i) and (ii), the “Restructuring”). AGEF was issued 685,505 shares of Series A Preferred Stock of the Company (the "Preferred Shares") in the Exchange, which entitled AGEF to approximately 85% of the voting power of the Company’s then outstanding capital stock.
The Restructuring also involved a change in a majority of the Board’s directors. Pursuant to the Exchange Agreement, immediately prior to the closing of the Restructuring, two former Board members resigned. Immediately after the consummation of the Restructuring, the existing Board members resolved to increase the size of the Board by one member from four to five directors and to appoint three employees of AGEF as members of the Board, one of whom became Chairman of the Board.
Real Estate Lien Note
We had a real estate lien note secured by a first lien deed of trust on the property and improvements. The note was paid in full in August 2022.
5. Property and Equipment
The major components of property and equipment, at cost, are as follows:
| | Estimated | | | December 31, | |
| | Useful life | | | 2021 | | | 2022 | |
| | Years | | | (In thousands) | |
Oil and gas properties (1) | | | - | | | $ | 1,165,707 | | | $ | 1,122,670 | |
Equipment and other | | | 3-39 | | | | 15,257 | | | | 3,386 | |
Drilling rig (1) (2) | | | 15 | | | | 24,080 | | | | - | |
| | | | | | | 1,205,044 | | | | 1,126,056 | |
Accumulated depreciation, depletion, amortization and impairment | | | | | | | (1,099,075 | ) | | | (1,082,069 | ) |
Net property and equipment | | | | | | $ | 105,969 | | | $ | 43,987 | |
(1) Oil and gas properties are amortized utilizing the units of production method.
(2) The Company owned a 2000 HP drilling rig which was sold in February 2023. The drilling rig was impaired during 2022 resulting in a loss of $8,225.
6. Stock-Based Compensation and Option Plans
The Company’s Amended and Restated 2005 Employee Long-Term Equity Incentive Plan reserves 1,683,639 shares of Abraxas common stock, subject to adjustment following certain events. Awards may be in options or shares of restricted stock. Options have a term not to exceed 10 years. Options issued under this plan vest according to a vesting schedule as determined by the compensation committee of the Company’s board of directors. Vesting may occur upon (1) the attainment of one or more performance goals or targets established by the committee, (2) the optionee’s continued employment or service for a specified period of time, (3) the occurrence of any event or the satisfaction of any other condition specified by the committee, or (4) a combination of any of the foregoing.
Stock Options
The Company grants options to its officers, directors, and other employees under various stock option and incentive plans. There were no options granted in 2021 or 2022
The following table is a summary of the Company’s stock option activity for the two years ended December 31:
| | Options | | | Weighted average | | | Weighted average | | | Intrinsic value | |
| | (000s) | | | exercise price | | | remaining life | | | per share | |
Options outstanding December 31, 2020 | | | 196 | | | $ | 49.69 | | | | | | | | | |
Forfeited/Expired | | | (141 | ) | | | 48.11 | | | | | | | | | |
Options outstanding December 31, 2021 | | | 55 | | | $ | 53.79 | | | | | | | | | |
Forfeited/Expired | | | (55 | ) | | | 53.79 | | | | | | | | | |
Options outstanding December 31, 2022 | | | - | | | $ | - | | | | - | | | $ | - | |
Exercisable at end of year | | | - | | | $ | - | | | | - | | | $ | - | |
Restricted Stock Awards
Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the awardee terminates employment with the Company prior to the lapse of the restrictions. The value of such stock is determined using the market price on the grant date. Compensation expense is recorded over the applicable restricted stock vesting periods.
The following table is a summary of the Company’s restricted stock activity for the two years ended December 31, 2022:
| | Number of Shares | | | Weighted average grant date fair value | |
Unvested December 31, 2020 | | | 41 | | | $ | 31.37 | |
Granted | | | (24 | ) | | | 33.23 | |
Vested/Released | | | (3 | ) | | | 32.07 | |
Unvested December 31, 2021 | | | 14 | | | $ | 27.97 | |
Granted | | | 1,650 | | | | 1.25 | |
Vested/Released | | | (1,664 | ) | | | 2.10 | |
Unvested December 31, 2022 | | | - | | | $ | - | |
Performance Based Restricted Stock Awards
Effective on April 1, 2018, the Company issued performance-based shares of restricted stock to certain officers and employees under the Abraxas Petroleum Corporation Amended and Restated 2005 Employee Long-Term Equity Incentive Plan. The shares vested over a three-year period upon the achievement of performance goals based on the Company’s Total Shareholder Return (“TSR”) as compared to a peer group of companies. No shares were vested under this plan due to not achieving the performance goals.
The table below provides a summary of Performance Based Restricted Stock as of the date indicated (shares in thousands):
| | Number of Shares | | | Weighted average grant date fair value | |
Unvested December 31, 2020 | | | 44 | | | $ | 33.73 | |
Granted | | | - | | | | - | |
Vested/Released | | | - | | | | - | |
Forfeited | | | (16 | ) | | | 45.73 | |
Unvested December 31, 2021 | | | 28 | | | $ | 26.80 | |
Granted | | | - | | | | - | |
Vested/Released | | | - | | | | - | |
Forfeited | | | (28 | ) | | | 26.80 | |
Unvested December 31, 2022 | | | - | | | $ | - | |
Compensation expense associated with the performance based restricted stock is based on the grant date fair value of a single share as determined using a Monte Carlo Simulation model which utilizes a stochastic process to create a range of potential future outcomes given a variety of inputs. As the Compensation Committee intends to settle the performance based restricted stock awards with shares of the Company’s common stock, the awards are accounted for as equity awards and the expense is calculated on the grant date assuming a 100% target payout and amortized over the life of the awards.
Director Stock Awards
The 2005 Directors Plan (as amended and restated) reserves 70,000 shares of Abraxas common stock, subject to adjustment following certain events. The 2005 Directors Plan provides that each year, at the first regular meeting of the board of directors immediately following Abraxas’ annual stockholder’s meeting, each non-employee director shall be granted or issued awards restricted stock with a value at the date of the grant of $12,000, for participation in board and committee meetings during the previous calendar year. There were no awards under this plan in 2021 or 2022.
At December 31, 2022, the Company had approximately 418,000 shares reserved, under its Employee and Directors plans, for future issuance for conversion of its stock options, and incentive plans for the Company’s directors, employees and consultants.
All shares reserved under the Employee and Directors plans were cancelled in January 2023.
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7. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets are as follows:
| | As of December 31, | |
| | 2021 | | | 2022 | |
| | (In thousands) | |
Deferred tax liabilities: | | | | | | | | |
Hedge contracts | | $ | - | | | $ | - | |
Other | | | 2,855 | | | | - | |
Total deferred tax liabilities | | | 2,855 | | | | - | |
Deferred tax assets: | | | | | | | | |
US full cost pool | | $ | 24,464 | | | $ | 17,533 | |
Depletion | | | 470 | | | | 452 | |
U.S. net operating loss carryforward | | | 96,120 | | | | 50,103 | |
Alternative minimum tax credit | | | - | | | | - | |
Unrealized losses | | | 100 | | | | 956 | |
Interest disallowed | | | 5,781 | | | | 4,367 | |
Other | | | - | | | | 239 | |
Total deferred tax assets | | | 126,935 | | | | 73,650 | |
Valuation allowance for deferred tax assets | | | (124,080 | ) | | | (73,650 | ) |
Net deferred tax assets | | | 2,855 | | | | - | |
Net deferred tax | | $ | - | | | $ | - | |
At December 31, 2022, the Company had, $20.0 million of pre-2018 NOLs for U.S. tax purposes and $186.7 million of post-2017 NOLs for U.S. tax purposes. Our pre-2018 NOLs will expire in varying amounts through 2037, if not utilized, and can offset 100% of future taxable income for regular tax purposes. Any NOLs arising in 2018, 2019 and 2020 can generally be carried back five years, carried forward indefinitely and can offset 100% of future taxable income for tax years before January 1, 2021, and up to 80% of future taxable income for tax years after December 31, 2020. Any NOLs arising on or after January 1, 2021, cannot be carried back and can generally be carried forward indefinitely and can offset up to 80% of future taxable income for regular tax purposes, (the alternative minimum tax no longer applies to corporations after January 1, 2018).
On October 24, 2022, the Company became a consolidated subsidiary of Biglari Holdings Inc. for tax purposes.
Our NOL was reduced as a result of the ownership change that occurred in 2022. The use of our NOLs will be further limited if there is an additional “ownership change” in our common stock, generally a cumulative ownership change exceeding 50% during a three year period, as determined under Section 382 of the Internal Revenue Code. Given historical losses, uncertainties exist as to the future utilization of the NOL carryforwards, therefore, the Company has established a valuation allowance of $124.1 million at December 31, 2021 and $73.7 million at December 31, 2022.
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense is:
| | Years Ended December 31, | |
| | 2021 | | | 2022 | |
| | (in thousands) | |
| | | | | | | | |
Tax benefit at U.S. Statutory rates | | $ | 9,359 | | | $ | (7,839 | ) |
Change in deferred tax asset valuation allowance | | | (7,007 | ) | | | 50,431 | |
Alternative minimum tax expense | | | - | | | | - | |
Adjustment to deferred tax assets | | | (3,421 | ) | | | (307 | ) |
Permanent differences | | | 368 | | | | 692 | |
Reduction to NOL due to ownership change limitation | | | - | | | | (41,160 | ) |
Return to provision estimated revision | | | - | | | | (2,070 | ) |
State income taxes, net of federal effect | | | 688 | | | | 253 | |
Other | | | 13 | | | | - | |
| | $ | - | | | $ | - | |
As of December 31, 2021 and 2022, the Company did not have any accrued interest or penalties related to uncertain tax positions. The tax years 2015 through 2022 remain open to examination by the tax jurisdictions to which the Company is subject.
New tax legislation, commonly referred to as the Tax Cuts and Jobs Act (H.R. 1), was enacted on December 22, 2017. Since our federal deferred tax asset was fully offset by a valuation allowance, the reduction in the U.S. corporate income tax rate to 21% did not materially affect the Company’s financial statements. Significant provisions that may impact income taxes in future years include: the repeal of the corporate Alternative Minimum Tax, the limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable income for levered balance sheets, (for tax years 2019 and 2020, the CARES Act temporarily adjusted the limitation in excess of 50% of adjusted taxable income for levered balance sheets at the taxpayer’s discretionary election), a limitation on utilization of net operating losses generated after tax year 2017 to 80% of taxable income, the unlimited carryforward of net operating losses generated after tax year 2017, temporary 100% expensing of certain business assets, additional limitations on certain general and administrative expenses, and changes in determining the excessive compensation limitation. Currently, we do not anticipate paying cash federal income taxes in the near term due to any of the legislative changes, primarily due to the availability of our net operating loss carryforwards. Future interpretations relating to the recently enacted U.S. federal income tax legislation which vary from our current interpretation and possible changes to state tax laws in response to the recently enacted federal legislation may have a significant effect on this projection.
8. Commitments and Contingencies
Litigation and Contingencies
From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. At December 31, 2022, the Company was not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company.
9. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
| | Years Ended December 31, | |
| | 2021 | | | 2022 | |
| | | | | | | | |
Numerator: | | | | | | | | |
Net (loss) income | | $ | (44,567 | ) | | $ | 37,328 | |
| | | | | | | | |
Denominator for basic earnings per share - weighted-average common shares outstanding | | | 8,408 | | | | 25,868 | |
Effect of dilutive securities: Stock options, restricted shares and performance based shares | | | - | | | | - | |
Denominator for diluted earnings per share - adjusted weighted-average shares and assumed exercise of options, restricted shares and performance based shares | | | 8,408 | | | | 25,868 | |
| | | | | | | | |
| | | | | | | | |
Net (loss) income per common share - basic | | $ | (5.30 | ) | | $ | 1.44 | |
| | | | | | | | |
Net (loss) income per common share - diluted | | $ | (5.30 | ) | | $ | 1.44 | |
Basic earnings per share, excluding any dilutive effects of stock options and unvested restricted stock, is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is computed similar to basic; however diluted income (loss) per share reflects the assumed conversion of all potentially dilutive securities.
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10. Benefit Plans
The Company had a defined contribution plan (401(k) plan) covering all eligible employees. For 2021, in accordance with the safe harbor provisions of the Plan, the Company contributed $125,276. The Company contributed $85,516 to the plan for 2022, and contributed an additional $29,541 in 2023 for 2022. The Company adopted the safe harbor provisions which requires it to contribute a fixed match to each participating employee’s contribution to the plan. The fixed match is set at the rate of dollar for dollar on the first 1% of eligible pay contributed, then 50 cents on the dollar for each additional percentage point of eligible pay contributed, up to 5%. Each employee’s eligible pay with respect to calculating the fixed match is limited by IRS regulations. In addition, the Board of Directors, at its sole discretion, may authorize the Company to make additional contributions to each participating employee. The employee contribution limit for 2021 was $19,500 for employees under the age of 50 and $26,000 for employees 50 years of age or older. For 2022 the employee contribution limit was $20,500 for employees under the age of 50 and $27,000 for employees 50 years of age or older.
11. Hedging Program and Derivatives and Financial Instruments
As of December 31, 2022 the Company is not party to any hedge agreements. The liability as of December 31, 2021 relates to the December 2021 contract settlement paid in January 2022.
The following table illustrates the impact of derivative contracts on the Company’s balance sheet:
Fair Value Financial Instruments as of December 31, 2021 | |
| | Asset | | Liability | |
| | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | |
Commodity price derivatives | | Derivatives - current | | $ | - | | Derivatives - current | | $ | 442 | |
| | | | $ | - | | | | $ | 442 | |
Fair Value of Investments as of December 31, 2022 | |
| | Asset | |
| | Balance Sheet Location | | Fair Value | |
Financial instruments | | Investments - long term | | $ | 15,091 | |
| | | | $ | 15,091 | |
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12. Financial Instruments and Investment in Partnership.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company is further required to assess the creditworthiness of the counter-party to the derivative contract. The results of the assessment of non-performance risk, based on the counter-party’s credit risk, could result in an adjustment of the carrying value of the derivative instrument.
The following tables sets forth information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2022, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance as of December 31, 2021 | |
Liabilities: | | | | | | | | | | | | | | | | |
NYMEX fixed price derivative contracts | | $ | - | | | $ | 442 | | | $ | - | | | $ | 442 | |
Total Liabilities | | $ | - | | | $ | 442 | | | $ | - | | | $ | 442 | |
The Company’s derivative contracts for the year ended December 31, 2021 consisted of a NYMEX-based fixed price commodity swap. The NYMEX-based fixed price derivative contracts were indexed to NYMEX futures contracts, which are actively traded, for the underlying commodity and are commonly used in the energy industry. A number of financial institutions and large energy companies act as counter-parties to these type of derivative contracts. As the fair value of these derivative contracts is based on a number of inputs, including contractual volumes and prices stated in each derivative contract, current and future NYMEX commodity prices, and quantitative models that are based upon readily observable market parameters that are actively quoted and can be validated through external sources, we have characterized these derivative contracts as Level 2.
During November and December 2022, the Company invested $19,500 in the Lion Fund II, L.P. as a limited partner. The Lion Fund II, L.P. is an investment partnership affiliated with Sardar Biglari, a director of Abraxas and Biglari Holdings Inc.
The fair value of the Company’s investment in the Lion Fund II, L.P. at, December 31, 2022, was $15,091 Fair value has been determined utilizing the net asset value as a practical expedient pursuant to US GAAP.
A Limited Partner may withdraw all or any portion of its capital account attributable to a particular capital contribution as of the March 31 of the fifth year after the year in which such Limited Partner made such contribution, and every March 31 occurring every five years thereafter.
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Nonrecurring Fair Value Measurements
Non-financial assets and liabilities measured at fair value on a nonrecurring basis included certain non-financial assets and liabilities as may be acquired in a business combination and thereby measured at fair value and the initial recognition of asset retirement obligations for which fair value is used. The assessment considers the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of proved reserves, the economic viability of development if proved reserves were assigned and other current market conditions. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to amortization.
The asset retirement obligation estimates are derived from historical costs as well as management’s expectation of future cost environments. As there is no corroborating market activity to support the assumptions used, the Company has designated these liabilities as Level 3. A reconciliation of the beginning and ending balances of the Company’s asset retirement obligation is presented in Note 1.
Other Financial Instruments
The carrying amounts of our cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. The carrying value of our debt approximates fair value as the interest rates are market rates and this debt is considered Level 2.
13. Lease Accounting Standard
Nature of Leases
We lease certain real estate, field equipment and other equipment under cancelable and non-cancelable leases to support our operations. A more detailed description of our significant lease types is included below.
Real Estate Leases
We rented a residence in North Dakota from a third party for living accommodations for certain field employees. Our real estate lease was non-cancelable with a term of five years, through August 31, 2024. We have concluded our real estate agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreements subsequent to the primary term. The North Dakota residential lease was assigned to a third-party on January 3, 2022. See Note 14 “Subsequent Events.”
Field Equipment
We rent compressors and coolers from third parties in order to facilitate the downstream movement of our production from our drilling operations to market. Our compressor and cooler arrangements are typically structured with a non-cancelable primary term of one year and continue thereafter on a month-to-month basis subject to termination by either party with thirty days’ notice. These leases are considered short term and are not capitalized. We have a small number of compressor leases that are longer than twelve months. We have concluded that our compressor and cooler rental agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. Upon completion of the primary term, both parties have substantive rights to terminate the lease. As a result, enforceable rights and obligations do not exist under the rental agreement subsequent to the primary term. We enter into daywork contracts for drilling rigs with third parties to support our drilling activities. Our drilling rig arrangements are typically structured with a term that is in effect until drilling operations are completed on a contractually specified well or well pad. Upon mutual agreement with the contractor, we typically have the option to extend the contract term for additional wells or well pads by providing thirty days’ notice prior to the end of the original contract term.
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Practical Expedients and Accounting Policy Elections
Certain of our lease agreements include lease and non-lease components. For all existing asset classes with multiple component types, we have utilized the practical expedient that exempts us from separating lease components from non-lease components. Accordingly, we account for the lease and non-lease components in an arrangement as a single lease component. In addition, for all of our existing asset classes, we have made an accounting policy election not to apply the lease recognition requirements to our short-term leases (that is, a lease that, at commencement, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that we are reasonably certain to exercise). Accordingly, we recognize lease payments related to our short-term leases in our statement of operations on a straight-line basis over the lease term which has not changed from our prior recognition. To the extent that there are variable lease payments, we recognize those payments in our statement of operations in the period in which the obligation for those payments is incurred. None of our current leases contain variable payments. Refer to “Nature of Leases” above for further information regarding those asset classes that include material short-term leases.
The components of our total lease expense for the years ended December 31, 2021 and December 31, 2022, the majority of which is included in lease operating expense, are as follows:
| | For the Year Ended December 31, | |
| | 2021 | | | 2022 | |
| | (in thousands) | |
Operating lease cost | | $ | 65 | | | $ | 11 | |
Short-term lease expense (1) | | | 1,913 | | | | 578 | |
Total lease expense | | $ | 1,978 | | | $ | 589 | |
| | | | | | | | |
Short-term lease costs (2) | | $ | - | | | $ | - | |
| (1) | Short-term lease expense represents expense related to leases with a contract term of 12 months or less. |
| (2) | These short-term lease costs are related to leases with a contract term of 12 months or less which are related to drilling rigs and are capitalized as part of natural gas and oil properties on our balance sheet. |
Supplemental balance sheet information related to our operating leases is included in the table below:
| | For the Year Ended December 31, | |
| | 2021 | | | 2022 | |
| | (in thousands) | |
Operating lease Right of Use asset | | $ | 173 | | | $ | 1 | |
Operating lease liability - current | | $ | 40 | | | $ | 1 | |
Operating lease liabilities - long-term | | $ | 110 | | | $ | - | |
Our weighted average remaining lease term and weighted average discount rate for our operating leases are as follows:
| | For the Year Ended December 31, | |
| | 2021 | | | 2022 | |
| | (in thousands) | |
Weighted Average Remaining Lease Term (in years) | | | 12.46 | | | | 0.08 | |
Weighted Average Discount Rate | | | 6 | % | | | 6 | % |
Our lease liabilities with enforceable contract terms that are greater than one year mature as follows:
| | Operating Leases | |
| | (in thousands) | |
| | | | |
2023 | | | 1 | |
2024 | | | - | |
2025 | | | - | |
2026 | | | - | |
2027 | | | - | |
Thereafter | | | - | |
Total lease payments | | | 1 | |
Less imputed interest | | | - | |
Total lease liability | | $ | 1 | |
Supplemental cash flow information related to our operating leases is included in the table below:
| | For the Year Ended December 31, | |
| | 2021 | | | 2022 | |
| | (in thousands) | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 65 | | | $ | 11 | |
Right of Use assets added in exchange for lease obligations (since adoption) | | $ | - | | | $ | - | |
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14. Restructuring
Pursuant to the Exchange Agreement, dated as of January 3, 2022, between the Company and AG Energy Funding, LLC (“AGEF”) and certain other agreements entered into by the Company on January 3, 2022, the Company effectuated a restructuring of the Company’s then-existing indebtedness through a multi-part interdependent deleveraging transaction consisting of: (i) an Asset Purchase and Sale Agreement pursuant to which the Company sold to Lime Rock Resources V-A, L.P. certain oil, gas, and mineral properties in the Williston Basin region of North Dakota and other related assets belonging to the Company and its subsidiaries for $87.2 million in cash ($73.3 million after customary closing adjustments), (the “Sale”), (ii) the pay down of the indebtedness and other obligations of the Company and its subsidiaries under the First Lien Credit Facility; and (iii), a debt for equity exchange of the indebtedness and other obligations of the Company and its subsidiaries under the $100.0 million Second Lien Credit Facility, and all related loan and security documents (the “Exchange” and, together with the transactions referred to in clauses (i) and (ii), the “Restructuring”).
AGEF was issued 685,505 shares of Series A Preferred Stock of the Company (the "Preferred Shares") in the Exchange. The Series A Preferred Stock has the terms set forth in the Company’s filed Preferred Stock Certificate of Designation (the “Certificate). The shares of Series A Preferred Stock vote together as a single class with the Company’s common stock, and each share of Series A Preferred Stock entitles the holder thereof to 69 votes. Accordingly, AGEF’s ownership of the Series A Preferred Stock entitled it to approximately 85% of the voting power of the Company’s then-outstanding capital stock.
On September 13, 2022, AGEF and Biglari Holdings Inc. ("Biglari Holdings") entered into a preferred stock purchase agreement (the "Preferred Purchase Agreement") and an assignment and assumption agreement pursuant to which AGEF agreed to sell and assign to Biglari Holdings (the "Sales and Assignment Agreement"), and Biglari Holdings agreed to purchase, acquire, and assume from AGEF, the Preferred Shares and all of AGEF’s rights, title, and interests in, and duties and obligations under, the Exchange Agreement. Following Biglari Holdings’ acquisition of the Preferred Shares, a change in control of the Company occurred. Biglari Holdings’ ownership of the Preferred Shares resulted in its beneficial ownership, both directly and indirectly, of the approximately 85% of the Company’s voting securities.
In connection with the transactions contemplated by the Preferred Purchase Agreement, the four directors of the Company appointed by AGEF resigned from the Board. Also, in accordance with the terms of the Preferred Purchase Agreement, on September 13, 2022, the Board voted to appoint Messrs. Sardar Biglari, Philip Cooley, and Bruce Lewis as members of the Board to fill three of the vacancies created by the resignations of the AGEF appointed directors. All three newly appointed members of the Board are affiliated with Biglari Holdings.
Subsequent to the Sale and Assignment, Biglari Holdings proposed an exchange of the Preferred Shares for shares of the Company’s common stock pursuant to which the Company would issue Biglari Holdings 90,631,287 shares of the Company’s common stock (the “Stock Consideration”) in exchange for the Preferred Shares (such transaction, the “Second Exchange”).
To issue the Stock Consideration to Biglari Holdings as contemplated by the Second Exchange, an amendment to Articles of Incorporation, as amended, was needed to increase the number of shares of common stock authorized for issuance from 20,000,000 shares to 150,000,000 shares (the “Amendment”).
On September 23, 2022, the Board approved the Company’s entry into an exchange agreement with Biglari Holdings that defines the terms of the Second Exchange (the “Second Exchange Agreement”). The Company and Biglari Holdings entered into the Second Exchange Agreement on September 27, 2022, with the consummation of the Second Exchange subject to the approval by the Company’s stockholders of the Amendment and the acceptance of the Amendment by the Nevada Secretary of State.
On October 24, 2022, the Company’s stockholders approved the Amendment, and the Company caused the Amendment to be filed with the Nevada Secretary of State that same day. The Nevada Secretary of State accepted the Amendment on October 25, 2022, and on October 26, 2022, the Second Exchange Agreement was consummated by the following transactions: (i) the Company caused 90,631,287 shares of common stock to be registered in the name of Biglari Holdings with the Company’s transfer agent in book-entry form, and (ii) Biglari Holdings assigned and transferred the Preferred Shares to the Company, constituting all of the Preferred Shares of the Company then outstanding, by delivering a Stock Power and Assignment to the Company. The Company cancelled the Series A Preferred Stock and the Preferred Stock Certificate of Designation, such that only common stock of the Company remains outstanding. The foregoing description of the Second Exchange and the Second Exchange Agreement is a summary only, does not purport to be complete, and is qualified in its entirety by reference to the complete text of the Second Exchange Agreement, which is filed as Exhibit 10.1 on Form 8-K filed on October 3, 2022, and is incorporated by reference herein.
As a result of the Sale and Assignment and Second Exchange, the Company is a consolidated subsidiary of Biglari Holdings, and Biglari Holdings has the power to exert significant control over the Company by controlling both 90% of the voting power of the Company’s outstanding capital stock and a majority of the Company’s Board.
15. Subsequent Events
On February 1, 2023, the Company filed Form 15 with the Securities and Exchange Commission. The purpose of this filing is to give notice of termination of registration under Section 12(g) of the Securities and Exchange Act of 1934, as amend (the "Exchange Act" and suspension of duty to file reports under Sections 13 and 15(d) of the Exchange Act The Form 15 does not become effective until 90 days after its filing (unless the SEC allows it to become effective earlier).
Robert L.G.Watson, the Company's President and Principal Executive Officer, resigned from his position effective March 1, 2023.
16. Supplemental Oil and Gas Disclosures (Unaudited)
The accompanying tables present information concerning the Company’s oil and gas producing activities “Disclosures about Oil and Gas Producing Activities.” Capitalized costs relating to oil and gas producing activities are as follows as of December 31, 2021 and 2022:
| | Years Ended December 31, | |
| | (in thousands) | |
| | 2021 | | | 2022 | |
Proved oil and gas properties | | $ | 1,165,707 | | | $ | 1,122,670 | |
Unproved properties | | | - | | | | - | |
Total | | | 1,165,707 | | | | 1,122,670 | |
Accumulated depreciation, depletion, amortization and impairment | | | (1,074,144 | ) | | | (1,078,865 | ) |
Net capitalized costs | | $ | 91,563 | | | $ | 43,805 | |
Cost incurred in oil and gas property acquisition and development activities were as follows for the years ended December 31, 2021 and 2022 (in thousands):
| | 2021 | | | 2022 | |
Development costs | | $ | 1,145 | | | $ | 1,509 | |
Exploration costs | | | - | | | | - | |
Property acquisition costs | | | - | | | | - | |
| | $ | 1,145 | | | $ | 1,509 | |
Results of operations from oil and gas producing activities were as follows for the years ended December 31, 2021 and 2022:
| | 2021 | | | 2022 | |
Revenues | | $ | 78,836 | | | $ | 49,715 | |
Production costs | | | (24,137 | ) | | | (14,562 | ) |
Depreciation, depletion and amortization | | | (13,495 | ) | | | (4,720 | ) |
Accretion of future site restoration | | | (330 | ) | | | (170 | ) |
Results of operations from oil and gas producing activities (excluding corporate overhead and interest costs) | | $ | 40,874 | | | $ | 30,263 | |
| | | | | | | | |
Depletion rate per barrel of oil equivalent | | $ | 6.67 | | | $ | 5.80 | |
Estimated Quantities of Proved Oil and Gas Reserves
Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. The estimates have been predominately prepared by independent petroleum reserve engineers. Proved oil and gas reserves are the estimated quantities of oil and gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. All of the Company’s proved reserves are located in the continental United States.
Proved reserves were estimated in accordance with guidelines established by the SEC and the FASB, which require that reserve estimates be prepared under existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements; therefore, the unweighted average prior 12-month first-day-of-the-month commodity prices and year-end costs were used in estimating reserve volumes and future net cash flows for the periods presented.
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The following table presents the Company’s estimate of its net proved developed and undeveloped oil and gas reserves as of December 31, 2021 and 2022:
| | Total | |
| | | | | | | | | | | | | | Oil | |
| | Oil | | | NGL | | | Gas | | | Equivalents | |
| | (MBbl) | | | (MBbl) | | | (MMcf) | | | (Mboe) | |
Proved Developed Reserves: | | | | | | | | | | | | | | | | |
December 31, 2021 | | | 6,883 | | | | 2,914 | | | | 30,158 | | | | 14,823 | |
December 31, 2022 | | | 3,300 | | | | 1,508 | | | | 18,847 | | | | 7,949 | |
| | | | | | | | | | | | | | | | |
Proved Undeveloped Reserves: | | | | | | | | | | | | | | | | |
December 31, 2021 | | | - | | | | - | | | | - | | | | - | |
December 31, 2022 | | | - | | | | - | | | | - | | | | - | |
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
The Company’s proved oil and gas reserves have been estimated by the independent petroleum engineering firm, Netherland Sewell & Associates Inc., assisted by the engineering and operations departments of the Company as of December 31, 2022 and by DeGolyer & MacNaughton, assisted by the engineering and operations departments of the Company, as of December 31, 2021. The following information has been prepared in accordance with SEC rules and accounting standards based on the 12-month first-day-of-the-month unweighted average prices in accordance with provisions of the FASB’s Accounting Standards Update No. 2010-03, “Extractive Activities—Oil and Gas (Topic 932).” Future cash inflows were reduced by estimated future production and development costs based on year-end costs to determine pre-tax cash inflows. Future net cash flows have not been adjusted for commodity derivative contracts outstanding at the end of each year. Future income taxes were computed by applying the statutory tax rate to the excess of pre-tax cash inflows over the tax basis and net operating losses associated with the properties. Since prices used in the calculation are average prices for 2021, and 2022, the standardized measure could vary significantly from year to year based on the market conditions that occurred during a given year.
The technical personnel responsible for preparing the reserve estimates at Netherland Sewell & Associates Inc. meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Netherland Sewell & Associates Inc. is an independent firm of petroleum engineers, geologists, geophysicists, and petrophysicists; they do not own an interest in our properties and are not employed on a contingent fee basis. All reports by Netherland Sewell & Associates Inc. were developed utilizing studies performed by Netherland Sewell & Associates Inc. and assisted by the Engineering and Operations departments of Abraxas. Reserves are estimated by independent petroleum engineers. The report of Netherland Sewell & Associates Inc. dated February 10, 2023, contains further discussions of the reserve estimates and evaluations prepared by Netherland Sewell & Associates Inc. as well as the qualifications of Netherland Sewell & Associates Inc's. technical personnel responsible for overseeing such estimates and evaluations is attached as Exhibit 99.1 to this report.
The technical personnel responsible for preparing the reserve estimates at DeGolyer & MacNaughton meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. DeGolyer & MacNaughton is an independent firm of petroleum engineers, geologists, geophysicists, and petrophysicists; they do not own an interest in our properties and are not employed on a contingent fee basis. All reports by DeGolyer & MacNaughton were developed utilizing studies performed by DeGolyer & MacNaughton and assisted by the Engineering and Operations departments of Abraxas. Reserves are estimated by independent petroleum engineers. The report of DeGolyer & MacNaughton dated February 4, 2022, contains further discussions of the reserve estimates and evaluations prepared by DeGolyer & MacNaughton as well as the qualifications of DeGolyer & MacNaughton's technical personnel responsible for overseeing such estimates and evaluations is was filed as Exhibit 99.2 to this report.
Estimates of proved reserves at December 31, 2021 and 2022 were based on studies performed by our independent petroleum engineers assisted by the Engineering and Operations departments of Abraxas. The Engineering department is directly responsible for Abraxas’ reserve evaluation process. The Vice President of Engineering is the manager of this department and is the primary technical person responsible for this process. The Vice President of Engineering holds a Bachelor of Science degree in Petroleum Engineering and has 43 years of experience in reserve evaluations. The Vice President of Engineering is a Registered Professional Engineer in the State of Texas. The operations department of Abraxas assisted in the process.
The projections should not be viewed as realistic estimates of future cash flows, nor should the “standardized measure” be interpreted to represent the fair market value of the Company’s proved oil and gas reserves. An estimate of fair market value would also take into account, among other factors, the recovery of reserves not classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates.
Future net cash inflows after income taxes were discounted using a 10% annual discount rate to arrive at the Standardized Measure. The table below sets forth the Standardized Measure of our proved oil and gas reserves for the years ended December 31, 2021 and 2022 :
| | Years Ended December 31, | |
| | (in thousands) | |
| | 2021 | | | 2022 | |
| | | | | | | | |
Future cash inflows | | $ | 485,982 | | | $ | 431,728 | |
Future production costs | | | (222,309 | ) | | | (192,611 | ) |
Future development costs | | | (5,623 | ) | | | (4,728 | ) |
Future income tax expense | | | - | | | | - | |
Future net cash flows | | | 258,050 | | | | 234,389 | |
Discount | | $ | (104,775 | ) | | $ | (100,511 | ) |
Standardized Measure of discounted future net cash relating to proved reserves | | $ | 153,275 | | | $ | 133,878 | |