DALLAS—For Abraxas Petroleum Corp. (NASDAQ: AXAS), failure isn’t an option.

Bob Watson, Abraxas president and CEO, shared at Hart Energy’s A&D Strategies and Opportunities conference in Dallas last week how the San Antonio-based company survived the ups and downs of the business by continually creating shareholder value through transactions.

Watson, who founded the company in 1977, said Abraxas’ strategy has been a simple one—to be rate-of-return focused.

“We won’t make an investment unless we’re sure that we can meet our rate of return targets, which means we look at a lot of deals and opportunities and they don’t go anywhere,” he said.

Abraxas’ approach is to not tie up a bunch of capital in acreage in land grabs. Instead, the company only does deals to maintain its five-year drilling inventory while maximizing return.

“We feel that we’re more capable of generating that maximum rate of return out of the shale plays because our guys have the capability of tweaking things on the fly,” he said.

Currently, the company has a market cap of $550 million and operations mainly in the Bakken, Eagle Ford and Permian Basin. However, a recent snapshot of Abraxas looks quite different from the company almost 10 years ago.

Ups & Downs

In 2007, Abraxas had $140 million high-interest, high-yield debt outstanding.

“We hadn’t gone bankrupt—it was about 13.5% interest—but it was callable,” he said.

At this point, Abraxas decided to form an MLP, Abraxas Energy Partners LP, out of assets in South and West Texas.

In need to settle its debt, Abraxas sold roughly 53% interest in the MLP in a private-placement offering for $100 million in equity. The MLP used the proceeds from the equity offering plus bank debt to buy $140 million worth of properties from Abraxas. The proceeds were then used by Abraxas to pay down all of its debt.

“We ended up being a debt-free entity for the first time in our history, which was a pretty nice feeling,” he said, “Although it didn’t last long.”

Abraxas had promised its private investors that it would improve its liquidity by taking the MLP public. Yet, the company also had the opportunity in late 2007 to acquire properties primarily in the Rockies and Midcontinent from St. Mary Land & Exploration Co. for $140 million.

“We went to our stakeholders and they said by all means let’s do that, let’s double the size of this entity and we’ll put off going public,” he said.

The acquisition closed in January 2008 using 100% bank debt. At the time, the company was headstrong for an IPO and planned to use the offering proceeds to pay down the bank debt, he said.

As 2008 continued, Abraxas refiled for an IPO and received approval from the Securities and Exchange Commission. Yet, the markets were in the midst of the global financial crisis, causing underwriters to start dropping out. By the end of summer 2008, the company was no longer in the position to do an IPO.

Abraxas decided the only solution to make good on its promise to improve liquidity and pay down debt was to merge the MLP back with the corporation.

Big Sale

In 2009, Abraxas moved forward as a merged entity with properties scattered across 15 states. The company had a market cap at the time of $100 million with $150 million in bank debt, he said.

“We looked at the asset base and felt that we only had one thing do—to rationalize the asset base, core it up and use those proceeds to pay down our bank debt and fix our balance sheet,” he said.

Abraxas figured it wouldn’t get full value for its assets if the company tried to market all of them together in one package. Instead, the company sold the assets individually, he said.

During the following three years, the company completely exited nine states and numerous basins in about 20 transactions valued at roughly $200 million.

After examining its portfolio, Abraxas chose to remain in core areas where it was the operator and had a lot of technical capability. The company ended up in three main regions—the Bakken, Eagle Ford and Permian Basin.

During the divestiture program, Abraxas continued to focus on growth. Some of the proceeds were used to bulk up its assets in the company’s core areas. In 2012, it acquired additional Eagle Ford interests and also bought out a partner in West Texas to gain operatorship of its Permian acreage.

Today, Abraxas has a considerably cleaner portfolio with operations in three big plays in the U.S. The company still has assets that it’s holding for trade currency, including a position in the Powder River Basin.

“I think that’s the new way for a small company to make it,” he said. “You don’t need all the capital if you have the good assets and time will tell whether we’re capable of keeping our five-year inventory target doing that.”