Saltstone Capital Management Presses for Immediate Change at Abraxas Petroleum Corporation

Releases Four-point Plan to Restore Shareholder Value Decimated by Decades of Management Paralysis

The Time for Action Is Now

DALLAS–(BUSINESS WIRE)–Saltstone Capital Management, LLC, a Dallas-based investor in energy equities, released a letter sent yesterday to the Board of Directors of Abraxas Petroleum Corporation (NASDAQ:AXAS) pressing for immediate change to unlock shareholder value. In this letter, Saltstone unveiled its four-point plan designed to reverse decades of devastating value destruction by the current management team and Board of Directors.

The letter in its entirety follows:

Board of Directors                                                                                                                                                                                   July 17, 2019

Abraxas Petroleum Corporation

18803 Meisner Drive

San Antonio, Texas 78258

Dear Members of the Board,

It has been a month since my initial letter requesting a swift implementation of our four-step process to unlock significant shareholder value at Abraxas (AXAS). As a top ten shareholder of the company – and an owner of more shares than any single member of management or the Board – I am discouraged by the lack of response and most importantly – lack of action. Saltstone’s investors expect us to generate a return and we expect nothing less from the management teams of our portfolio companies. Utilizing our base case scenario, we think AXAS is worth ~150% more than where it is currently trading, and we believe our plan can bridge this vast disconnect. As shareholders representing 2,420,000 shares, or 558,515 more than the CEO, it is paramount that a well-defined strategic shift to AXAS’s business model occurs immediately. The best time to proceed along this path was 19 months ago, and the second-best time is today. For your convenience, I have re-summarized our plan below.

  1. Significantly curtail capital expenditures by focusing solely on drilling Permian lease commitment wells
  2. Continue to pursue a partial or complete Bakken divestiture and revisit any previously discussed offers
  3. Immediately begin a marketing process for the Permian Basin
  4. Divest all non-core assets including but not limited to, the Raven Drilling Rig

Callon Petroleum’s (CPE) acquisition of Carrizo Oil & Gas (CRZO) completely removed any naysayer’s ability to claim this market is not transacting. The merits of this merger were based on acreage and balance sheet scale. Since AXAS’s capital structure does not allow for proper asset capitalization, we believe that every incremental well drilled is dilutive. It is in shareholders’ best interests for AXAS to preserve undeveloped value for an acquirer by ceasing drilling activities and selling. We applaud CRZO’s management team and think they did the appropriate thing for their investors by working tirelessly to consummate a deal. As shareholders of AXAS, what we found encouraging about the merger is:

  • The market continues to transact on core Permian acres
  • CPE paid an implied ~$26,000 per net core Permian acrei
  • CRZO was able to sell despite being a multi-basin company
  • CRZO’s core acreage is in the Delaware Basin and has similar geologic characteristics

It is inexcusable for AXAS to trade at -$3,600 per net Permian acre, considering their footprint has better economics than CRZO’s core acreage and AXAS’s balance sheet metrics are more compelling.ii Since going public in 1991, AXAS has spent ~$1.8 billion in capital expenditures and ~$185 million in SG&A to build a company that currently has an enterprise value of ~$340 million. The company is worth 17 cents for each dollar it has invested in capital expenditures or paid the management team, despite WTI spot prices appreciating from an average of $21.54 in 1991 to $56.55 or 163%.iii The share count has increased from 978,979 on December 31, 1991 to 166,934,860 on December 31, 2018, growing at a CAGR of 21.0%. The management team has perpetually diluted shareholders to finance investments that fail to generate a positive return. Given the previously discussed track record, we are worried Bob Watson might issue a dilutive instrument to solve the liquidity crunch as opposed to enacting our plan. Our concern stems from Bob’s limited investment in the company he founded over four decades ago. His misalignment with investors creates the potential desire for him to attempt a job preserving “Hail Mary” rather than act in shareholders’ best interests given his annual cash compensation of $737,799 is very material relative to his $1,768,411 investment in the company.iv As supporting shareholders, we are adamant that the only route this company can take is by utilizing our four-step process and dissolving itself. I cannot stress enough how detrimental it would be if management transacted on a preferred equity deal (or something similar), creating a “loan-to-own” structure. This type of scenario has played out too many times in our sector, and given AXAS’s premier asset base, I want equity holders to be assured it does not happen here. I have expressed my distaste for financial engineering to Bob over the past three years and wanted to inform you too. Thankfully, for all shareholders, AXAS does not need to desperately seek an alternative measure with two great assets. Our plan assures this is avoided and positions AXAS with the best path forward. It is our goal to make sure all shareholders are put first.

Once again, I look forward to assisting in these efforts, at no benefit to myself or Saltstone Capital Management other than stock appreciation. As management already knows, I can be reached 24/7 via email at or the office at 214-258-5639.


William (Billy) R. Bailey

Founder & Portfolio Manager

i Defined as purchase price less the PDP value of the company’s current production less $3,200 per net Eagle Ford Acre divided by net Permian acres located in CRZO’s core “Phantom” area. PDP value calculated utilizing the most recently reported production number and allocating $35,000 per barrel of oil equivalent per day (boepd) of production. Notably, we believe this Eagle Ford acreage multiple is aggressive compared to recent acquisitions.

ii Defined as enterprise value less the PDP value of the company’s current production divided by net Permian acres. PDP value calculated utilizing the most recently reported production number and allocating $35,000 per boepd of production. Better economics defined by AXAS’s acreage producing a higher percentage of oil, a higher working interest (calculated by dividing CRZO’s “Phantom” area type curve’s net EUR by the gross EUR), and burdened by a lower royalty rate than CRZO’s position. As of March 31, 2019, AXAS had 2.3x net debt to trailing twelve months EBITDA relative to CRZO at 2.7x (inclusive of preferred equity).

iii Average 1991 WTI price based on the average monthly spot prices published on the EIA’s website. Current spot price based on WTI’s closing price on July 17, 2019.

iv Per AXAS’s definition of cash compensation used to establish the CEO to Median Employee Pay Ratio in the 2019 Proxy Statement. Inclusive of Bob Watson’s Base Salary, Non-Equity Incentive Plan Compensation, Discretionary Bonus, and All Other Compensation. His personal investment is based on AXAS’s closing price of $0.95 on July 17, 2019.



Elliot Sloane



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