Abraxas Petroleum Corp. Annual Report 2013

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2013rTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File Number 001-16071ABRAXAS PETROLEUM CORPORATION(Exact name of Registrant as specified in its charter) Nevada 74-2584033(State or Other Jurisdiction ofIncorporation or Organization) (I.R.S. Employer Identification Number) 18803 Meisner DriveSan Antonio, TX 78258(Address of principal executive offices)(210) 490-4788Registrant’s telephone number, including area codeSECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:Title of each class: Name of each exchange on which registered:Common Stock, par value $.01 per share The NASDAQ Stock Market, LLCPreferred Stock Purchase Rights The NASDAQ Stock Market, LLCSECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:NoneIndicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.Yes ⃞ No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes ⃞ No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes No ⃞Indicate by check mark if the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File requiredto be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes No ⃞Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. Yes x No ⃞Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):Large accelerated filer ⃞Accelerated filer xNon-accelerated filer ⃞ (Do not check if a smaller reporting company)Smaller reporting company ⃞Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ⃞ No As of June 30, 2013, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stockheld by non-affiliates of the registrant was $181,392,208 based on the closing sale price as reported on The NASDAQ Stock Market. As of March 12, 2014, there were 92,932,137 shares of common stock outstanding. Documents Incorporated by Reference:Document Parts Into Which IncorporatedPortions of the registrant’s Proxy Statement relating to the 2014Annual Meeting of Stockholders to be held on May 6, 2014. Part IIIABRAXAS PETROLEUM CORPORATIONFORM 10-KTABLE OF CONTENTS PagePart I Item 1.Business5Item 1A.Risk Factors14Item 1B.Unresolved Staff Comments27Item 2.Properties27Item 3.Legal Proceedings34Item 4.Mine Safety Disclosures34 Part II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities35Item 6.Selected Financial Data36Item 7.Management’s Discussion and Analysis of Financial Condition and Resultsof Operations37Item 7A.Quantitative and Qualitative Disclosure about Market Risk53Item 8.Financial Statements and Supplementary Data54Item 9.Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure54Item 9A.Controls and Procedures54Item 9B.Other Information54 Part III Item 10.Directors, Executive Officers and Corporate Governance55Item 11.Executive Compensation55Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters55Item 13.Certain Relationships and Related Transactions, and Director Independence55Item 14.Principal Accountant Fees and Services55 Part IV Item 15.Exhibits and Financial Statement Schedules56FORWARD-LOOKING INFORMATION We make forward-looking statements throughout this report. Whenever you read a statement that is not simply a statement of historical fact (such asstatements including words like “believe,” “expect,” “anticipate,” “intend,” “will,” “plan,” “seek,” “may,” “estimate,” “could,” “potentially” or similarexpressions), you must remember that these are forward-looking statements, and that our expectations may not be correct, even though we believe they arereasonable. The forward-looking information contained in this report is generally located in the material set forth under the headings “Business,” “RiskFactors,” “Properties,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locationsas well. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon our management’s reasonableestimates of future results or trends. The factors that may affect our expectations regarding our operations include, among others, the following: •the availability of capital;•the prices we receive for our production and the effectiveness of our hedging activities;•our success in development, exploitation and exploration activities;•our ability to procure services and equipment for our drilling and completion activities;•our ability to make planned capital expenditures;•declines in our production of oil and gas;•our restrictive debt covenants;•political and economic conditions in oil producing countries, especially those in the Middle East;•price and availability of alternative fuels;•our acquisition and divestiture activities;•weather conditions and events;•the proximity, capacity, cost and availability of pipelines and other transportation facilities; and•other factors discussed elsewhere in this report.GLOSSARY OF TERMSUnless otherwise indicated in this report, gas volumes are stated at the legal pressure base of the State or area in which the reserves are located at 60degrees Fahrenheit. Oil and gas equivalents are determined using the ratio of six Mcf of gas to one barrel of oil, condensate or natural gas liquids. The following definitions shall apply to the technical terms used in this report. Terms used to describe quantities of oil and gas: “Bbl” – barrel or barrels. “Bcf” – billion cubic feet of gas. “Bcfe” – billion cubic feet of gas equivalent. “Boe” – barrels of oil equivalent.“MBbl” – thousand barrels. “MBoe” – thousand barrels of oil equivalent. “Mcf” – thousand cubic feet of gas. “Mcfe” – thousand cubic feet of gas equivalent. “MMBbl” – million barrels. “MMBoe” – million barrels of oil equivalent. “MMBtu” – million British Thermal Units of gas. “MMcf” – million cubic feet of gas. 2Table of Contents“MMcfe” – million cubic feet of gas equivalent. “NGL” – natural gas liquids measured in barrels. Terms used to describe our interests in wells and acreage: “Developed acreage” means acreage which consists of leased acres spaced or assignable to productive wells. “Development well” is a well drilled within the proved area of an oil or gas reservoir to the depth or stratigraphic horizon (rock layer orformation) noted to be productive for the purpose of extracting reserves. “Dry hole” is an exploratory or development well found to be incapable of producing either oil or gas in sufficient quantities to justifycompletion. “Exploratory well” is a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to beproducing in another reservoir, or to extend a known reservoir. “Gross acres” are the number of acres in which we own a working interest. “Gross well” is a well in which we own an interest. “Net acres” are the sum of fractional ownership working interests in gross acres (e.g., a 50% working interest in a lease covering 320 grossacres is equivalent to 160 net acres). “Net well” is the sum of fractional ownership working interests in gross wells. “Productive well” is an exploratory or a development well that is not a dry hole. “Undeveloped acreage” means those leased acres on which wells have not been drilled or completed to a point that would permit the productionof economic quantities of oil and gas, regardless of whether or not such acreage contains proved reserves. Terms used to assign a present value to or to classify our reserves: “Proved reserves” are those quantities of oil and gas reserves, which, by analysis of geoscience and engineering data, can be estimated withreasonable certainty to be commercially recoverable - from a given date forward, from known reservoirs, and under defined economicconditions, operating methods, and government regulations.“Proved developed reserves” are those quantities of oil and gas reserves that can be expected to be recovered through existing wells with existingequipment and operating methods. Additional reserves expected to be obtained through the application of fluid injection or other improvedrecovery techniques for supplementing the natural forces and mechanisms of primary recovery are included in “proved developed reserves” onlyafter testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recoverywill be achieved.“Proved developed non-producing reserves” are those quantities of oil and gas reserves that are developed behind pipe in an existing wellbore, from a shut-in well bore or that can be recovered through improved recovery only after the necessary equipment has been installed, or whenthe costs to do so are relatively minor. Shut-in reserves are expected to be recovered from (1) completion intervals which are open at the time of theestimate but which have not started producing, (2) wells that were shut-in for market conditions or pipeline connections, or (3) wells not capableof production for mechanical reasons. Behind-pipe reserves are expected to be recovered from zones in existing wells that will require additionalcompletion work or future recompletion prior to the start of production.“Proved undeveloped reserves” or “PUDs” are those quantities of oil and gas reserves that are expected to be recovered from new wells onundrilled acreage or from existing wells where a relatively major expenditure is required for development. Reserves on undrilled acreage arelimited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for otherundrilled units are claimed only where it can be demonstrated with reasonable certainty that there is continuity of production from the existingproductive formation. Estimates for proved undeveloped reserves are not attributed to any acreage for which an application of3Table of Contentsfluid injection or other improved recovery technique is contemplated, unless such techniques have been proven effective by actual tests in thearea and in the same reservoir.“Probable reserves” are those additional reserves which analysis of geoscience and engineering data indicate are less likely to be recovered thanproved reserves but more certain to be recovered than possible reserves. “Possible reserves” are those additional reserves which analysis of geoscience and engineering data suggest are less likely to be recoverable thanprobable reserves. “PV-10” means estimated future net revenue, discounted at a rate of 10% per annum, before income taxes and with no price or cost escalation orde-escalation, calculated in accordance with guidelines promulgated by the Securities and Exchange Commission (“SEC”). “Standardized Measure” means estimated future net revenue, discounted at a rate of 10% per annum, after income taxes and with no price orcost escalation or de-escalation, calculated in accordance with Accounting Standards Codification (“ASC”) 932, “Disclosures About Oil andGas Producing Activities.”4Table of ContentsPart I Information contained in this report represents the operations of Abraxas Petroleum Corporation. The terms “Abraxas,” “we,” “us,”“our,” or the “Company,” refer to Abraxas Petroleum Corporation, together with its consolidated subsidiaries including Raven Drilling, LLC whichis a wholly owned subsidiary that owns a drilling rig. Item 1. Business General We are an independent energy company primarily engaged in the acquisition, exploration, development and production of oil and gas in the United Statesand Canada. At December 31, 2013, our estimated net proved reserves were 31.0 MMBoe, of which 44% were classified as proved developed, 74% were oiland NGL’s and 94% of which (on a PV-10 basis) are operated by us. Our daily net production for the year ended December 31, 2013 was 4,298 Boepd, ofwhich 64% was oil or liquids.Our oil and gas assets are located in three operating regions in the United States, the Rocky Mountain, Permian Basin and onshore Gulf Coast, and in theprovince of Alberta, Canada. The following table sets forth certain information related to our properties as of and for the year ended December 31, 2013: Estimated Net ProvedReserves NetProduction GrossProducingWells AverageWorkingInterest Total Net Acres (MBoe) %Oil/NGL (MBoe) %Oil/NGLRocky Mountain 777 11.69% 51,355 10,682.7 77.7% 708.9 77.9%Mid-Continent (1) — — — — — 16.4 14.5%Permian Basin 212 75.06% 39,909 5,885.6 42.6% 403.8 46.8%Onshore Gulf Coast 61 93.16% 12,177 14,179.4 84.9% 404.1 57.5%Total United States 1,050 29.22% 103,441 30,747.7 74.3% 1,533.2 63.7%Alberta, Canada 9 100.00% 29,440 221.8 48.2% 35.7 63.5%Total 1,059 29.82% 132,881 30,969.5 74.1% 1,568.9 63.7%_____________________(1) All Mid-Continent properties were sold during 2013.Our properties in the Rocky Mountain region are located in the Williston Basin of North Dakota and Montana and in the Green River, Powder River andUnita Basins of Wyoming and Utah. In this region, our wells produce oil and gas from various reservoirs, primarily the Turner, Bakken, Three Forks andRed River formations. Well depths range from 7,000 feet down to 14,000 feet. Our properties in the Permian Basin region are primarily located in two sub-basins, the Delaware Basin and the Eastern Shelf. In the Delaware Basin,our wells are located in Pecos, Reeves, and Ward Counties, Texas and produce oil and gas from multiple stacked formations from the Bell Canyon at 5,000feet down to the Ellenburger at 16,000 feet. In the Eastern Shelf, our wells are principally located in Coke, Scurry, Mitchell and Nolan Counties, Texas andproduce oil and gas from the Strawn Reef formation at 5,000 to 7,500 feet and oil from the shallower Clearfork formation at depths ranging from 2,300 to3,300 feet. Our properties in the onshore Gulf Coast region are located along the Edwards trend in DeWitt and Lavaca Counties, Texas, the Eagle Ford shale inAtascosa and McMullen Counties, Texas and in the Portilla field in San Patricio County, Texas. In the Edwards trend, our wells produce gas from theEdwards formation at a depth of 14,000 feet. In the Eagle Ford, our wells produce from the Eagle Ford shale from 8,000 - 11,000 feet, and in the Portilla field,our wells produce oil and gas from the Frio sands and the deeper Vicksburg from depths of approximately 7,000 to 9,000 feet. Our properties in the province of Alberta, Canada are located in the Pekisko fairway and the Nordegg/Tomahawk area of Central Alberta in addition to theDuvernay Shale in central Alberta. 5Table of ContentsStrategyOur business strategy is to focus our capital and resources on our core operated basins, maintain financial flexibility and profitably grow production andreserves. Key elements of our business strategy include:Focusing our capital and resources on our core operated basins. Our core basins consist of the Williston Basin (Bakken/Three Forks), onshoreGulf Coast (Eagle Ford shale), which primarily produce oil and liquids, and the Permian Basin and Powder River Basin, which primarily producegas. Given the disparity which has existed during the past several years and which continues currently between oil and gas prices, the economics of drillingoil wells is far superior to drilling gas wells. Thus, 94% of our 2014 estimated capital expenditures will be in our two primary oil basins drilling Bakken,Three Forks and Eagle Ford oil wells. The remainder of our capital will be spent on leasehold acquisition in these core basins. As part of our efforts to focusour property portfolio, we are continually marketing assets we have deemed non-core. This includes assets with a low working interest, assets that are non-operated and/or assets that fall outside of our four core basins. Any proceeds from these asset sales will be used to reduce our indebtedness and/or redeployedinto our core operating basins.Maintaining financial flexibility. Our primary sources of capital are availability under our credit facility and cash flow from operations. Beginning inJuly 2012 and continuing through December 2013, we sought to sell our non-core, non-operated properties. This resulted in our receiving net proceeds ofapproximately $149.1 million and allowed us to reduce borrowings under our credit facility from approximately $143.0 million at November 30, 2012 to$33.0 million at December 31, 2013. At December 31, 2013 we had approximately $97.0 million of availability under our credit facility and for the year endedDecember 31, 2013, we generated approximately $51.7 million of cash flow from operations. We seek to reduce the volatility of our cash flow fromoperations by maintaining a significant hedging profile. We plan on deploying our available capital in a cost-effective manner. For example, we exclusivelyutilize PAD development drilling with our drilling rig in the Williston Basin. and we seek to operate a high percentage of our properties which allows us tobetter control costs. At December 31, 2013, we operated properties comprising 94% of our proved developed reserves.Profitably grow production and reserves. We have a substantial low-decline legacy production base as evidenced by our over 21 year reserve life as ofyear-end 2013. Our capital is currently being deployed largely into unconventional oil assets with relatively predictable production profiles, yet steep initialdecline rates. Therefore, the economics of these oil wells are highly dependent on both near term commodity prices and strong operational cost control. Our rigin the Williston Basin, and heightened focus on cost control in all of our operated positions both contribute to our history of adding low cost barrels to ourproduction base. As evidence of production growth not being an objective, but the outcome of sound investment decisions, we achieved 65% liquids growthsince the first quarter of 2010 despite relatively stagnant absolute volume growth. 2014 Budget and Drilling Activities Our capital expenditure budget for 2014 is $125 million. Approximately 94% of the 2014 budget will be spent on unconventional horizontal oil wells inthe Bakken/Three Forks in the Rocky Mountain region and in the Eagle Ford Shale play in South Texas with the remainder being used for leaseholdacquisitions in these core basins. The 2014 capital expenditure budget is subject to change depending upon a number of factors, including the availability ofsufficient capital resources, the availability and costs of drilling and service equipment and crews, economic and industry conditions at the time of drilling,prevailing and anticipated prices for oil and gas, the results of our exploitation efforts, and our ability to obtain permits for drilling locations.Markets and Customers The revenue generated by our operations is highly dependent upon the prices we receive for our oil and gas. Historically, the markets for oil and gas havebeen volatile and are likely to continue to be volatile in the future. The prices we receive for our oil and gas production are subject to wide fluctuations anddepend on numerous factors beyond our control including seasonality, the condition of the United States economy (particularly the manufacturing sector),foreign imports, political conditions in other petroleum producing countries, the actions of the Organization of Petroleum Exporting Countries, domesticregulation, legislation and policies. Decreases in the prices we receive for our oil and gas have had, and could have in the future, an adverse effect on thecarrying value of our proved reserves, our revenue, profitability and cash flow from operations. You should read the discussion under “Risk Factors – RisksRelating to Our Industry — Market conditions6Table of Contentsfor oil and gas, and particularly volatility of prices for oil and gas, could adversely affect our revenue, cash flows, profitability and growth” and“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” for more information relating to theeffects that decreases in oil and gas prices have on us. To help mitigate the impact of commodity price volatility, we hedge a portion of our production throughthe use of fixed price swaps. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General – Commodity Pricesand Hedging Arrangements” and Note 13 of the notes to our consolidated financial statements for more information regarding our derivative activities. Substantially all of our oil and gas is sold at current market prices under short-term arrangements, as is customary in the industry. During the year endedDecember 31, 2012 three purchasers accounted for 39% of our oil and gas sales. During the year ended December 31, 2013, two purchasers accounted forapproximately 49% of our oil and gas sales. We believe that there are numerous other purchasers available to buy our oil and gas and that the loss of any ofthese purchasers would not materially affect our ability to sell our oil and gas. Regulation of Oil and Gas Activities The exploration, production and transportation of all types of hydrocarbons are subject to significant governmental regulations. Our properties areaffected from time to time in varying degrees by political developments and federal, state, provincial and local laws and regulations. In particular, oil and gasproduction operations and economics are, or in the past have been, affected by industry specific price controls, taxes, conservation, safety, environmental andother laws relating to the petroleum industry, and by changes in such laws and by periodically changing administrative regulations. Federal, state, provincial and local laws and regulations govern oil and gas activities. Operators of oil and gas properties are required to have a numberof permits in order to operate such properties, including operator permits and permits to dispose of salt water. We possess all material requisite permitsrequired by the states, provinces and other local authorities in which we operate properties. In addition, under federal and provincial law, operators of oil andgas properties are required to possess certain certificates and permits in order to operate such properties such as hazardous materials certificates, which wehave obtained. Development and Production The operations of our properties are subject to various types of regulation at the federal, provincial, state and local levels. These types of regulationinclude requiring the operator of oil and gas properties to possess permits for the drilling and development of wells, post bonds in connection with varioustypes of activities, and file reports concerning operations. Most provinces, states, and some counties and municipalities in which we operate, regulate one ormore of the following: •the location of wells;•the method of drilling and casing wells;•the method of completing and fracture stimulating wells;•the surface use and restoration of properties upon which wells are drilled;•the plugging and abandoning of wells; and•the notice to surface owners and other third parties.Some provinces and states regulate the size and shape of development and spacing units or proration units for oil and gas properties. Some provincesand states allow forced pooling or unitization of tracts to facilitate exploration while other states/provinces rely on voluntary pooling of lands and leases. Insome instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. In addition,provincial and state conservation laws establish maximum allowable rates of production from oil and gas wells, generally prohibit the venting or flaring of gasand impose requirements regarding the ratability of production. These laws and regulations may limit the amount of oil and gas we can produce from our wellsor limit the number of wells or the locations at which our wells can be drilled. Moreover, each province and state generally imposes a production or severancetax with respect to the production and sale of oil, gas and NGLs within its jurisdiction. Operations on Federal, Provincial or Indian oil and gas leases must comply with numerous regulatory restrictions, including various non-discrimination statutes, and certain of such operations must be conducted pursuant to certain on-site security regulations and other permits issued by variousfederal agencies, including the Bureau of Land Management and7Table of Contentsthe Office of Natural Resources Revenue, which we refer to as ONRR, (formerly Minerals Management Service). ONRR establishes the basis for royaltypayments due under federal oil and gas leases through regulations issued under applicable statutory authority. State regulatory authorities establish similarstandards for royalty payments due under state oil and gas leases. The basis for royalty payments established by ONRR and the state regulatory authorities isgenerally applicable to all federal and state oil and gas leases. Accordingly, we believe that the impact of royalty regulation on the operations of our propertiesshould generally be the same as the impact on our competitors. We believe that the operations of our properties are in material compliance with all applicableregulations as they pertain to Federal or Indian oil and gas leases. The failure to comply with these rules and regulations can result in substantial penalties, including lease suspension or termination in the case offederal or provincial leases. The regulatory burden on the oil and gas industry increases our cost of doing business and, consequently, affects our profitability.Our competitors in the oil and gas industry are subject to the same regulatory requirements and restrictions that affect us. Regulation of Transportation and Sale of Natural Gas in the United States Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938, asamended, which we refer to as NGA, the Natural Gas Policy Act of 1978, as amended, which we refer to as NGPA, and regulations promulgated thereunderby the Federal Energy Regulatory Commission, which we refer to as FERC, and its predecessors. In the past, the federal government has regulated the prices atwhich natural gas could be sold. Deregulation of wellhead natural gas sales began with the enactment of the NGPA. In 1989, Congress enacted the NaturalGas Wellhead Decontrol Act, as amended, which we refer to as the Decontrol Act. The Decontrol Act removed all NGA and NGPA price and non-price controlsaffecting wellhead sales of natural gas effective January 1, 1993. While sales by producers of natural gas can currently be made at unregulated market prices,Congress could reenact price controls in the future. Since 1985, FERC has endeavored to make natural gas transportation more accessible to natural gas buyers and sellers on an open and non-discriminatory basis. FERC has stated that open access policies are necessary to improve the competitive structure of the interstate natural gas pipelineindustry and to create a regulatory framework that will put natural gas sellers into more direct contractual relations with natural gas buyers by, among otherthings, unbundling the sale of natural gas from the sale of transportation and storage services. Beginning in 1992, FERC issued Order No. 636 and a seriesof related orders, which we refer to, collectively, as Order No. 636, to implement its open access policies. As a result of the Order No. 636 program, themarketing and pricing of natural gas have been significantly altered. The interstate pipelines’ traditional role as wholesalers of natural gas has been eliminatedand replaced by a structure under which pipelines provide transportation and storage service on an open access basis to others who buy and sell natural gas.FERC continues to regulate the rates that interstate pipelines may charge for such transportation and storage services. Although FERC’s orders do not directlyregulate natural gas producers, they are intended to foster increased competition within all phases of the natural gas industry. In 2000, FERC issued Order No. 637 and subsequent orders, which we refer to, collectively, as Order No. 637, which imposed a number of additionalreforms designed to enhance competition in natural gas markets. Among other things, Order No. 637 effected changes in FERC regulations relating toscheduling procedures, capacity segmentation, penalties, rights of first refusal and information reporting. Most major aspects of Order No. 637 have beenupheld on judicial review, and most pipelines’ tariff filings to implement the requirements of Order No. 637 have been accepted by the FERC and placed intoeffect. The Energy Policy Act of 2005, which we refer to as EP Act 2005, gave FERC increased oversight and penalty authority regarding marketmanipulation and enforcement. EP Act 2005 amended the NGA to prohibit market manipulation and also amended the NGA and the NGPA to increase civiland criminal penalties for any violations of the NGA, NGPA and any rules, regulations or orders of FERC to up to $1,000,000 per day, per violation. Inaddition, FERC issued a final rule effective January 26, 2006, regarding market manipulation, which makes it unlawful for any entity, in connection withthe purchase or sale of natural gas or transportation service subject to FERC jurisdiction, to defraud, make an untrue statement, or omit a material fact orengage in any practice, act, or course of business that operates or would operate as a fraud. This final rule works together with FERC’s enhanced penaltyauthority to provide increased oversight of the natural gas marketplace.The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approachcurrently pursued by FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way itaffects other natural gas producers, gatherers and marketers. 8Table of ContentsGenerally, intrastate natural gas transportation is subject to regulation by state regulatory agencies, although FERC does regulate the rates, terms, andconditions of service provided by intrastate pipelines that transport natural gas subject to FERC’s NGA jurisdiction pursuant to Section 311 of the NGPA.The basis for state regulation of intrastate natural gas transportation and the degree of regulatory oversight and scrutiny given to intrastate natural gas pipelinerates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers within thestate on a comparable basis, we believe that the regulation of similarly situated intrastate natural gas transportation in any states in which we operate and shipnatural gas on an intrastate basis will not affect the operations of our properties in any way that is materially different from the effect of such regulation on ourcompetitors.Natural Gas Gathering in the United States Section 1(b) of the NGA exempts natural gas gathering facilities from the jurisdiction of the FERC. FERC has developed tests for determining whichfacilities constitute jurisdictional transportation facilities under the NGA and which facilities constitute gathering facilities exempt for FERC’s NGAjurisdiction. From time to time, FERC reconsiders its test for defining non-jurisdictional gathering. FERC has also permitted jurisdictional pipelines to “spindown” exempt gathering facilities into affiliated entities that are not subject to FERC jurisdiction, although FERC continues to examine the circumstances inwhich such a “spin down” is appropriate and whether it should reassert jurisdiction over certain gathering companies and facilities that previously had been“spun down.” We cannot predict the effect that FERC’s activities in this regard may have on the operations of our properties, but we do not expect theseactivities to affect the operations in any way that is materially different from the effect thereof on our competitors. State regulation of gathering facilities generally includes various safety, environmental, and in some circumstances, non-discriminatory take or servicerequirements, but does not generally entail rate regulation. In the United States, gas gathering has received greater regulatory scrutiny at both the state andfederal levels in the wake of the interstate pipeline restructuring under FERC Order 636. For example, the Texas Railroad Commission enacted a Natural GasTransportation Standards and Code of Conduct to provide regulatory support for the state’s more active review of rates, services and practices associated withthe gathering and transportation of gas by an entity that provides such services to others for a fee, in order to prohibit such entities from unduly discriminatingin favor of their affiliates. Regulation of Transportation of Oil in the United States Sales of oil, condensate and natural gas liquids are not currently regulated and are made at negotiated prices. The transportation of oil in commoncarrier pipelines is subject to rate regulation. FERC regulates interstate oil pipeline transportation rates under the Interstate Commerce Act. In general, interstateoil pipeline rates must be cost-based, although settlement rates agreed to by all shippers are permitted and market-based rates may be permitted in certaincircumstances. Effective January 1, 1995, FERC implemented regulations establishing an indexing system (based on inflation) for transportation rates for oilthat allowed for an increase or decrease in the cost of transporting oil to the purchaser. A review of these regulations by FERC in 2000 was successfullychallenged on appeal by an association of oil pipelines. On remand, FERC, in February 2003, increased the index slightly, effective July 2001. Intrastate oilpipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree ofregulatory oversight and scrutiny given to intrastate oil pipeline rates varies from state to state. Insofar as effective interstate and intrastate rates are equallyapplicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect the operations of our properties in any way that ismaterially different from the effect of such regulation on our competitors. Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard,common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity,access is governed by prorationing provisions set forth in the pipelines’ published tariffs. Accordingly, we believe that access to oil pipeline transportationservices generally will be available to us to the same extent as to our competitors.Approximately 15% of our oil production is shipped to market centers using rail transportation facilities owned and operated by third parties. The U.S.Department of Transportation’s (“U.S. DOT”) Pipeline and Hazardous Materials Safety Administration (“PHMSA”) establishes safety regulations relating totransportation of oil by rail transportation. In addition, third party rail operators are subject to the regulatory jurisdiction of the Surface Transportation Boardof the U.S. DOT, the Federal Railroad Administration (“FRA”) of the DOT, OSHA, as well as other federal regulatory agencies. Additionally, various stateand local agencies have jurisdiction over disposal of hazardous waste and seek to regulate movement of hazardous materials in ways not preempted by federallaw.9Table of ContentsIn response to rail accidents occurring between 2002 and 2008, the U.S. Congress passed the Rail Safety and Improvement Act of 2008, whichimplemented regulations governing different areas related to railroad safety. Recently, in response to train derailments occurring in the United States andCanada in 2013, U.S. regulators are implementing or considering new rules to address the safety risks of transporting oil by rail. On January 23, 2014, theNational Transportation Safety Board (“NTSB”) issued a series of recommendations to the FRA and PHMSA to address safety risks, including (i) requiringexpanded hazardous material route planning for railroads to avoid populated and other sensitive areas, (ii) to develop an audit program to ensure rail carriersthat carry petroleum products have adequate response capabilities to address worst-case discharges of the entire quantity of product carried on a train, and (iii)to audit shippers and rail carriers to ensure they are properly classifying hazardous materials in transportation and that they have adequate safety and securityplans in place. Additionally, on February 25, 2014 the DOT issued an emergency order requiring all persons, prior to offering oil into transportation, to ensuresuch product is properly tested and classed and to assure all shipments by rail of oil be handled as a Packing Group I or II hazardous material.We do not currently own or operate rail transportation facilities or rail cars; however, the adoption of any regulations that impact the testing or railtransportation of oil could increase our costs of doing business and limit our ability to transport and sell our oil at favorable prices at market centersthroughout the United States, the consequences of which could have a material adverse effect on our financial condition, results of operations and cash flows.At this time, it is not possible to estimate the potential impact on our business if new federal or state rail transportation regulations are enacted.Environmental Matters Oil and gas operations are subject to numerous federal, provincial, state and local laws and regulations controlling the generation, use, storage anddischarge of materials into the environment or otherwise relating to the protection of the environment. These laws and regulations may: •require the acquisition of a permit or other authorization before construction or drilling commences;•restrict the types, quantities and concentrations of various substances that can be released into the environment in connection with drilling, production,and natural gas processing activities;•suspend, limit or prohibit construction, drilling and other activities in certain lands lying within wilderness, wetlands, and areas inhabited bythreatened or endangered species and other protected areas;•require remedial measures to mitigate pollution from historical and on-going operations such as the use of pits and plugging of abandoned wells;•restrict injection of liquids into subsurface strata that may contaminate groundwater; and•impose substantial penalties for pollution resulting from our operations.Environmental permits that the operators of properties are required to possess may be subject to revocation, modification, and renewal by issuingauthorities. Governmental authorities have the power to enforce compliance with their regulations and permits, and violations are subject to injunction, civilfines, and even criminal penalties. Our management believes that we are in substantial compliance with current environmental laws and regulations, and thatwe will not be required to make material capital expenditures to comply with existing laws. Nevertheless, changes in existing environmental laws andregulations or interpretations thereof could have a significant impact on our operations as well as the oil and gas industry in general, and thus we are unable topredict the ultimate cost and effects of future changes in environmental laws and regulations. We are not currently involved in any administrative, judicial or legal proceedings arising under federal, state, provincial, or local environmentalprotection laws and regulations, or under federal, provincial or state common law, which would have a material adverse effect on our respective financialpositions or results of operations. Moreover, we maintain insurance against the costs of clean-up operations, but we are not fully insured against all suchrisks. A serious incident of pollution may result in the suspension or cessation of operations in the affected area. The following is a discussion of the current relevant environmental laws and regulations that relate to our operations. 10Table of ContentsComprehensive Environmental Response, Compensation and Liability Act. The Comprehensive Environmental Response, Compensation andLiability Act, also known as Superfund, and which we refer to as CERCLA, and comparable state statutes impose strict, joint, and several liability, withoutregard to fault or legality of conduct, on certain classes of persons who are considered to have contributed to the release of a “hazardous substance” into theenvironment. These persons include the owner or operator of a disposal site or sites where a release occurred and companies that generated, disposed orarranged for the disposal of the hazardous substances released at the site. Under CERCLA, such persons or companies may be retroactively liable for thecosts of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources, and for the costs of certainhealth studies. CERCLA authorizes the EPA, and in some cases third parties, to take actions in response to threats to the public health or the environment andto seek to recover from the responsible classes of persons the costs they incur. In addition, it is not uncommon for neighboring land owners and other thirdparties to file claims for personal injury, property damage, and recovery of response costs allegedly caused by the hazardous substances released into theenvironment. In the course of our ordinary operations, certain wastes may be generated that may fall within CERCLA’s definition of a “hazardous substance.” Wemay be liable under CERCLA or comparable state statutes for all or part of the costs required to clean up sites at which these wastes have been disposed.Although CERCLA currently contains a “petroleum exclusion” from the definition of “hazardous substance,” state laws affecting our operations imposecleanup liability relating to petroleum and petroleum related products, including oil cleanups.We currently own or lease, and have in the past owned or leased, numerous properties that for many years have been used for the exploration andproduction of oil and gas. Although we have utilized standard industry operating and disposal practices at the time, hydrocarbons or other wastes may havebeen disposed of or released on or under the properties we owned or leased or on or under other locations where such wastes have been taken for disposal. Inaddition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not underour control. These properties and the wastes disposed thereon may be subject to CERCLA, RCRA (as defined below), and analogous state laws. Under theselaws, we could be required to remove or remediate previously disposed wastes, including wastes disposed or released by prior owners or operators; to clean upcontaminated property, including contaminated groundwater; or to perform remedial operations to prevent future contamination. Oil Pollution Act of 1990. Federal regulations also require certain owners and operators of facilities that store or otherwise handle oil to prepare andimplement spill response plans relating to the potential discharge of oil into surface waters. The Federal Oil Pollution Act, which we refer to as OPA, andanalogous state laws, contain numerous requirements relating to prevention of, reporting of, and response to oil spills into waters of the United States. Afailure to comply with OPA’s requirements or inadequate cooperation during a spill response action may subject a responsible party to civil or criminalenforcement actions. We are not aware of any action or event that would subject us to liability under OPA, and we believe that compliance with OPA’s financialresponsibility and other operating requirements will not have a material adverse effect on our financial position or results of operations. Resource Conservation Recovery Act. The Resource Conservation and Recovery Act, which we refer to as RCRA, is the principal federal statutegoverning the treatment, storage and disposal of hazardous and non-hazardous solid wastes. RCRA imposes stringent operating requirements and liability forfailure to meet such requirements, on a person who is either a “generator” or “transporter” of hazardous waste or an “owner” or “operator” of a hazardouswaste treatment, storage or disposal facility. Analogous state laws further impose requirements associated with the management of solid wastes. At present,RCRA includes a statutory exemption that allows most oil and gas exploration and production wastes to be classified and regulated as non-hazardous wastes.A similar exemption is contained in many of the state counterparts to RCRA. At various times in the past, proposals have been made to amend RCRA torescind the exemption that excludes oil and gas exploration and production wastes from regulation as hazardous wastes. Repeal or modification of theexemption by administrative, legislative or judicial process, or modification of similar exemptions in applicable state statutes, would increase the volume ofhazardous waste we are required to manage and dispose and would cause us to incur increased operating expenses. Also, in the ordinary course of ouroperations, we generate small amounts of ordinary industrial wastes, such as paint wastes, waste solvents and waste oils that may be regulated as hazardouswastes. We believe that our operations comply in all material respects with the requirements of RCRA and its state counterparts. Naturally Occurring Radioactive Materials, which we refer to as NORM, are materials not covered by the Atomic Energy Act, whose radioactivity isenhanced by technological processing such as mineral extraction or processing through exploration and production conducted by the oil and gas industry.NORM wastes are regulated under the RCRA framework, but primary responsibility for NORM regulation has been a state function. Standards have beendeveloped for worker protection; treatment, storage and disposal of NORM waste; management of waste piles, containers and tanks; and limitations11Table of Contentsupon the release of NORM contaminated land for unrestricted use. We believe that the operations of our properties are in material compliance with allapplicable NORM standards established by the various states in which we operate wells. Clean Water Act. The Clean Water Act, which we refer to as the CWA, and analogous state laws, impose restrictions and controls on the dischargeof pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters isprohibited, except in accordance with the terms of a permit issued by EPA or an analogous state agency. The CWA regulates storm water run-off from oil andnatural gas facilities and requires a storm water discharge permit for certain activities. Such a permit requires the regulated facility to monitor and samplestorm water run-off from its operations. The CWA and regulations implemented thereunder also prohibit discharges of dredged and fill material in wetlandsand other waters of the United States unless authorized by an appropriately issued permit. Spill prevention, control and countermeasure requirements of theCWA require appropriate containment berms and similar structures to help prevent the contamination of waters of the United States in the event of a petroleumhydrocarbon tank spill, rupture or leak. The CWA and comparable state statutes provide for civil, criminal and administrative penalties for unauthorizeddischarges for oil and other pollutants and impose liability on parties responsible for those discharges for the costs of cleaning up any environmental damagecaused by the release and for natural resource damages resulting from the release. We believe that the operations of our properties comply in all materialrespects with the requirements of the CWA and state statutes enacted to control water pollution.Safe Drinking Water Act. Our operations also produce wastewaters that are disposed via underground injection wells. These activities are regulated bythe Safe Drinking Water Act, which we refer to as the SDWA, and analogous state and local laws. Underground injection is the subsurface placement of fluidthrough a well, such as the reinjection of brine produced and separated from oil and gas production. The main goal of the SDWA is the protection of usableaquifers. The primary objective of injection well operating requirements is to ensure the mechanical integrity of the injection apparatus and to prevent migrationof fluids from the injection zone into underground sources of drinking water. Hazardous-waste injection well operations are strictly controlled, and certainwastes, absent an exemption, cannot be injected into underground injection control wells. In most states, no underground injection may take place except asauthorized by permit or rule. We currently own and operate various underground injection wells. Failure to abide by our permits could subject us to civiland/or criminal enforcement. We believe that we are in compliance in all material respects with the requirements of applicable state underground injectioncontrol programs and our permits. Clean Air Act. The Clean Air Act, which we refer to as the CAA, and state air pollution laws and regulations provide a framework for national, stateand local efforts to protect air quality. The operations of our properties utilize equipment that emits air pollutants which may be subject to federal and state airpollution control laws. These laws require utilization of air emissions abatement equipment to achieve prescribed emissions limitations and ambient air qualitystandards, as well as operating permits for existing equipment and construction permits for new and modified equipment. In the past few years, EPA hasadopted new more restrictive regulations governing air emissions from oil and gas operations, including regulations which impose new restrictions on volatileorganic compounds, sulfur dioxide and hazardous air pollutants. Certain of these regulations will become effective in 2014, with the majority of regulatoryrequirements imposing new restrictions on air emissions arising from hydraulic fracturing operations in 2015. Permits and related compliance obligations under the CAA, as well as changes to state implementation plans for controlling air emissions in regionalnon-attainment areas may require oil and natural gas exploration and production operators to incur future capital expenditures in connection with the additionor modification of existing air emission control equipment and strategies. In addition, some oil and natural gas facilities may be included within the categoriesof hazardous air pollutant sources, which are subject to increasing regulation under the CAA. Failure to comply with these requirements could subject aregulated entity to monetary penalties, injunctions, conditions or restrictions on operations and enforcement actions. Oil and natural gas exploration andproduction facilities may be required to incur certain capital expenditures in the future for air pollution control equipment in connection with obtaining andmaintaining operating permits and approvals for air emissions. We believe that we are in compliance in all material respects with the requirements of applicablefederal and state air pollution control laws. Hydraulic Fracturing. Most of our current operations depend on the use of hydraulic fracturing to enhance production from oil and gas wells. Thistechnology involves the injection of fluids—usually consisting mostly of water but typically including small amounts of chemical additives—as well as sand,or other proppants, into a well under high pressure in order to create fractures in the rock that allow oil or gas to flow more freely to the wellbore. Many of ournewer wells would not be economical without the use of hydraulic fracturing to stimulate the formation to enhance production from the well. Hydraulicfracturing operations have historically been overseen by state regulators as part of their oil and gas regulatory programs. However, bills such as the FracturingResponsibility and Awareness of Chemicals (FRAC) Act have been introduced in Congress to subject hydraulic fracturing to federal regulation under lawssuch as the Safe Drinking Water12Table of ContentsAct. If adopted, these bills could result in additional chemical disclosure and permitting requirements for hydraulic fracturing operations as well as variousrestrictions on those operations. These requirements and restrictions could result in delays in operations at existing and new well sites as well as increasedcosts to make our wells productive. Moreover, these bills would require the public disclosure of information regarding the chemical makeup of hydraulicfracturing fluids, many of which are proprietary to the service companies that perform the hydraulic fracturing operations. If enacted, these laws could makeit easier for third parties to initiate litigation against us in the event of perceived problems with drinking water wells in the vicinity of an oil or gas well or otheralleged environmental problems. The EPA has finalized its Plan to Study the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources, whichis expected to result in a final report on the subject with recommendations in 2014. Also, the U.S. Department of the Interior has announced that it intends topropose regulations governing hydraulic fracturing which occurs on federal lands, including requiring chemical disclosure. In addition to these federallegislative and regulatory proposals, some states and local governments have considered imposing, or have adopted various conditions and restrictions onhydraulic fracturing operations, including but not limited to requirements regarding chemical disclosure, casing and cementing of wells, withdrawal of waterfor use in high-volume hydraulic fracturing of horizontal wells, baseline testing of nearby water wells, and restrictions on the type of additives that may beused in hydraulic fracturing operations. If these types of conditions are widely adopted, we could be subject to increased costs and possibly limits on theproductivity of certain wells. Some states in which we operate have implemented disclosure requirements for chemicals used in hydraulic fracturing. Climate change legislation and greenhouse gas regulation. Studies over recent years have indicated that emissions of certain gases may becontributing to warming of the Earth’s atmosphere. In response to these studies, many nations have agreed to limit emissions of “greenhouse gases” or “GHGs”pursuant to the United Nations Framework Convention on Climate Change, and the “Kyoto Protocol.” Methane, a primary component of natural gas, andcarbon dioxide, a byproduct of the burning of oil, natural gas, and refined petroleum products, are considered “greenhouse gases” regulated by the KyotoProtocol. Although the United States is not participating in the Kyoto Protocol, several states have adopted legislation and regulations to reduce emissions ofgreenhouse gases. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect our operations anddemand for our products. As a result of the U.S. Supreme Court decision in Massachusetts, et al. v. EPA, on December 7, 2009, the EPA issued a findingthat serves as the foundation under the Clean Air Act to issue other rules that would result in federal greenhouse gas regulations and emissions limits under theClean Air Act, even without Congressional action. As part of this array of new regulations, the EPA has issued a GHG monitoring and reporting rule thatrequires certain parties, including participants in the oil and natural gas industry, to monitor and report their GHG emissions, including methane and carbondioxide, to the EPA. These regulations may apply to our operations. The EPA has adopted other rules that would regulate GHGs, one of which would regulateGHGs from stationary sources, and may affect sources in the oil and natural gas exploration and production industry and the pipeline industry. The EPA’sfinding, the greenhouse gas reporting rule, and the rules to regulate the emissions of greenhouse gases may affect the cost of our operations and also affect theoutcome of other climate change lawsuits pending in United States federal courts in a manner unfavorable to our industry. Although various climate change legislative measures have been under consideration by the U.S. Congress, it is not possible at this time to predictwhen, or if, Congress will act on climate change legislation, although any major initiatives in this area are unlikely to become law in the near future due toopposition in the U.S. House of Representatives. Finally, some states, either individually or through multi-state regional initiatives, have begun implementinglegal measures to reduce emissions of GHGs, primarily through the planned development of emission inventories or regional greenhouse gas cap and tradeprograms. Depending on the particular jurisdiction of our operations, we could be required to purchase and surrender allowances for GHG emissions resultingfrom our operations. Any of the climate change regulatory and legislative initiatives described above could have a material adverse effect on our business,financial condition, and results of operations. National Environmental Policy Act. Oil and gas exploration and production activities on federal lands are subject to the National EnvironmentalPolicy Act, which we refer to as NEPA. NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions having thepotential to significantly impact the environment. In the course of such evaluations, an agency will prepare an Environmental Assessment that assesses thepotential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed Environmental Impact Statement thatmay be made available for public review and comment. If we were to conduct any exploration and production activities on federal lands in the future, thoseactivities would need to obtain governmental permits that are subject to the requirements of NEPA. This process has the potential to delay the development ofoil and gas projects. Endangered Species Act. The Endangered Species Act, which we refer to as the ESA, restricts activities that may affect endangered or threatenedspecies or their habitats. While some of our properties may be located in areas that may be designated as habitat for endangered or threatened species, webelieve that we are in substantial compliance with the ESA. Looking forward, we expect more listings of such species to occur, in light of consent decreesinvolving the U.S.13Table of ContentsFish and Wildlife Service which require the agency to decide whether or not to list, as endangered or threatened, approximately 251 candidate species by2016. Included in this group are a number of terrestrial species, such as the lesser prairie chicken which, if listed, could include habitat in areas where weoperate or plan to operate. Such listing of additional species, or the discovery of previously unidentified endangered or threatened species, could cause us toincur additional costs or become subject to operating restrictions, construction delays, or bans on operating in the affected areas. Abandonment Costs. All of our oil and gas wells will require proper plugging and abandonment at some time in the future. We have posted bondswith most regulatory agencies to ensure compliance with our plugging responsibility. Plugging and abandonment operations and associated reclamation of thesurface site are important components of our environmental management system. We plan accordingly for the ultimate disposition of properties that are nolonger producing.Title to Properties As is customary in the oil and gas industry, we make only a cursory review of title to undeveloped oil and gas leases at the time we acquire them.However, before drilling commences, we make a thorough title search, and any material defects in title are remedied prior to the time actual drilling of a wellbegins. To the extent title opinions or other investigations reflect title defects, we, rather than the seller/lessor of the undeveloped property, are typically obligatedto cure any title defect at our expense. If we were unable to remedy or cure any title defect of a nature such that it would not be prudent to commence drillingoperations on the property, we could suffer a loss of our entire investment in the property. We believe that we have good title to our properties, some of whichare subject to immaterial encumbrances, easements and restrictions. The oil and gas properties we own are also typically subject to royalty and other similarnon-cost bearing interests customary in the industry. We do not believe that any of these encumbrances or burdens will materially affect our ownership or useof our properties. Competition We operate in a highly competitive environment. The principal resources necessary for the exploration and production of oil and gas are leaseholdprospects under which oil and gas reserves may be discovered, drilling rigs and related equipment and services to explore for such reserves and knowledgeablepersonnel to conduct all phases of oil and gas operations. We must compete for such resources with both major oil and gas companies and independentoperators. Many of these competitors have financial and other resources substantially greater than ours. Although we believe our current operating andfinancial resources are adequate to preclude any significant disruption of our near term operations; however we cannot assure you that such materials andresources will be available to us in the future. Employees As of March 12, 2014, we had 112 full-time employees. We retain independent geological, land and engineering consultants from time to time andexpect to continue to do so in the future.Available Information We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Youmay read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Pleasecall the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet web site that contains annual, quarterly andcurrent reports, proxy statements and other information that issuers (including Abraxas) file electronically with the SEC. The SEC’s web site is www.sec.gov. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and amendments filed with theSEC are available free of charge on our web site at www.abraxaspetroleum.com in the Investor Relations section as soon as practicable after such reports arefiled. Information on our web site is not incorporated by reference into this Form 10-K and should not be considered part of this report or any other filing thatwe make with the SEC. Item 1A. Risk Factors Risks Related to Our Business14Table of ContentsWe may not be able to fund the capital expenditures that will be required for us to increase reserves and production. We must make capital expenditures to develop our existing reserves and to discover new reserves. Historically, we have financed our capital expendituresprimarily with cash flow from operations, borrowings under credit facilities, sales of producing properties, and sales of debt and equity securities and weexpect to continue to do so in the future. We cannot assure you that we will have sufficient capital resources in the future to finance all of our planned capitalexpenditures.Volatility in oil and gas prices, the timing of our drilling programs and drilling results will affect our cash flow from operations. Lower prices and/orlower production could also decrease revenues and cash flow, thus reducing the amount of financial resources available to meet our capital requirements,including reducing the amount available to pursue our drilling opportunities. If our cash flow from operations does not increase as a result of planned capitalexpenditures, a greater percentage of our cash flow from operations will be required for debt service and operating expenses and our planned capitalexpenditures would, by necessity, be decreased.The borrowing base under our credit facility is determined from time to time by the lenders. Reductions in estimates of oil and gas reserves could result ina reduction in the borrowing base, which would reduce the amount of financial resources available under our credit facility to meet our capitalrequirements. Such a reduction could be the result of lower commodity prices and/or production, an inability to drill or unfavorable drilling results, changesin oil and gas reserve engineering, the lenders’ inability to agree to an adequate borrowing base or adverse changes in the lenders’ practices regarding estimationof reserves.If cash flow from operations or our borrowing base decrease for any reason, our ability to undertake exploration and development activities could beadversely affected. As a result, our ability to replace production may be limited. In addition, if the borrowing base under our credit facility is reduced, wecould be required to reduce borrowings under our credit facility so that such borrowings do not exceed the borrowing base. This could further reduce the cashavailable to us for capital spending and, if we did not have sufficient capital to reduce our borrowing level, we may be in default under the credit facility.We have sold producing properties to provide us with liquidity and capital resources in the past and we may continue to do so in the future. After anysuch sale, we would expect to utilize the proceeds to reduce our indebtedness and to drill new wells on our remaining properties. If we cannot replace theproperties sold with production from our remaining properties, our cash flow from operations will likely decrease, which in turn, could decrease the amount ofcash available for additional capital spending.Restrictive debt covenants could limit our growth and our ability to finance our operations, fund our capital needs, respond to changingconditions and engage in other business activities that may be in our best interests. Our credit facility contains a number of significant covenants that, among other things, limit our ability to:•incur or guarantee additional indebtedness and issue certain types of preferred stock or redeemable stock;•transfer or sell assets;•create liens on assets;•pay dividends or make other distributions on capital stock or make other restricted payments, including repurchasing, redeeming or retiring capitalstock or subordinated debt or making certain investments or acquisitions;•engage in transactions with affiliates;•guarantee other indebtedness;•make any change in the principal nature of our business;•permit a change of control; or•consolidate, merge or transfer all or substantially all of our assets.In addition, our credit facility requires us to maintain compliance with specified financial covenants. Our ability to comply with these covenants may beadversely affected by events beyond our control, and we cannot assure you that we can maintain compliance with these covenants. These financial covenantscould limit our ability to obtain future financings, make needed capital15Table of Contentsexpenditures, withstand a future downturn in our business or the economy in general or otherwise conduct necessary or desirable business activities.A breach of any of these covenants could result in a default under our credit facility. A default, if not cured or waived, could result in all of ourindebtedness becoming immediately due and payable. If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinanceit. Even if new financing were then available, it may not be on terms acceptable or favorable to us. We may be unable to acquire or develop additional reserves, in which case our results of operations and financial condition could be adverselyaffected. Our future oil and gas production, and therefore our success, is highly dependent upon our ability to find, acquire and develop additional reserves thatare profitable to produce. The rate of production from our oil and gas properties and our proved reserves will decline as our reserves are produced. Unless weacquire additional properties containing proved reserves, conduct successful development and exploration activities or, through engineering studies, identifyadditional behind-pipe zones or secondary recovery reserves, we cannot assure you that our exploration and development activities will result in increases inour proved reserves. Based on the reserve information set forth in our reserve report as of December 31, 2013, our average annual estimated decline rate forour net proved developed producing reserves is 9% during the first five years, 9% in the next five years, and approximately 9% thereafter. These rates ofdecline are estimates and actual production declines could be materially higher. While we have had some success in finding, acquiring and developingadditional reserves, we have not always been able to fully replace the production volumes lost from natural field declines and prior property sales. As ourproved reserves and consequently our production decline, our cash flow from operations, and the amount that we are able to borrow under our credit facilitycould also decline. In addition, approximately 56% of our total estimated proved reserves at December 31, 2013 were classified as undeveloped. By theirnature, estimates of undeveloped reserves are less certain. Recovery of such reserves will require significant capital expenditures and successful drillingoperations. Even if we are successful in our development efforts, it could take several years for a significant portion of these undeveloped reserves to generatepositive cash flow.We may not find any commercially productive oil and gas reservoirs. Drilling involves numerous risks, including the risk that the new wells we drill will be unproductive or that we will not recover all or any portion of ourcapital investment. Drilling for oil and gas may be unprofitable. Wells that are productive but do not produce sufficient net revenues after drilling, operatingand other costs are unprofitable. The inherent risk of not finding commercially productive reservoirs is compounded by the fact that 56% of our totalestimated proved reserves as of December 31, 2013 were classified as undeveloped. By their nature, estimates of undeveloped reserves are lesscertain. Recovery of such reserves will require significant capital expenditures and successful drilling and completion operations. In addition, our propertiesmay be susceptible to drainage from production by other operations on adjacent properties. If the volume of oil and gas we produce decreases, our cash flowfrom operations may decrease.The results of our drilling in unconventional formations, principally in emerging plays with limited drilling and production history using longlaterals and modern completion techniques, are subject to more uncertainties than our drilling program in the more established plays and may notmeet our expectations for reserves or production. We drill wells in unconventional formations in several emerging plays. Part of our drilling strategy to maximize recoveries from these formations involvesthe drilling of long horizontal laterals and the use of modern completion techniques of multi-stage fracture stimulations that have proven to be successful inother basins. Our experience with horizontal drilling and multi-stage fracture stimulations of these formations to date, as well as the industry’s drilling andproduction history in these formations, is relatively limited. The ultimate success of these drilling and completion strategies and techniques will be betterevaluated over time as more wells are drilled and longer term production profiles are established. In addition, based on reported decline rates in these emergingplays as well as the industry’s experience in these formations, we estimate that the average monthly rates of production may decline as much as 95% duringthe first twelve months of production. Actual decline rates may differ significantly. Accordingly, the results of our drilling in these unconventional formationsare more uncertain than drilling results in other more established plays with longer reserve and production histories.We may not adhere to our proposed drilling schedule. Our final determination of whether to drill any scheduled or budgeted wells will be dependent on a number of factors, including:•the availability and costs of drilling and service equipment and crews;•economic and industry conditions at the time of drilling;16Table of Contents•prevailing and anticipated prices for oil and gas;•the availability of sufficient capital resources;•the results of our exploitation efforts;•the acquisition, review and interpretation of seismic data;•our ability to obtain permits for drilling locations;•lease expirations and continuing drilling locations; and•lease expirations.Although we have identified or budgeted for numerous drilling locations, we may not be able to drill those locations within our expected time frame or atall. In addition, our drilling schedule may vary from our expectations because of future uncertainties.We have indebtedness which may adversely affect our cash flow and business operations. At December 31, 2013, we had a total of $33.0 million of indebtedness under our credit facility. Our indebtedness could have important consequences tous, including:•effecting our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes which maybe impaired or not available on favorable terms;•covenants contained in our credit facility and future debt arrangements will require us to meet financial tests that may affect our flexibility in planningfor and reacting to changes in our business, including future business opportunities;•we may need a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, reducing the fundsthat would otherwise be available for operations and future business opportunities; and•our level of indebtedness will make us more vulnerable to competitive pressures if there is a downturn in our business or the economy in general, thanour competitors with less debt.Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance, which will be affected byprevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are notsufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying capital expenditures, acquisitions and/orselling assets, restructuring or refinancing our indebtedness or seeking additional debt or equity capital or bankruptcy protection. We may not be able to affectany of these remedies on satisfactory terms or at all.A breach of the terms and conditions of our credit facility, including the inability to comply with the required financial covenants, could result in an eventof default. If an event of default occurs (after any applicable notice and cure periods), the lenders would be entitled to terminate any commitment to makefurther extensions of credit under our credit facility and to accelerate the repayment of amounts outstanding (including accrued and unpaid interest andfees). Upon a default under our credit facility, the lenders could also foreclose against any collateral securing such obligations, which may be all orsubstantially all of our assets. If that occurred, we may not be able to continue to operate as a going concern.We cannot control the activities on the properties we do not operate and are unable to ensure their proper operation and profitability. We currently do not operate all of the properties in which we have an interest. As a result, we have limited ability to exercise influence over and control therisks associated with operation of these properties. The failure of an operator to adequately perform operations, an operator’s breach of the applicableagreements or an operator’s failure to act in our best interests could reduce our production and revenues. The success and timing of our drilling anddevelopment activities on properties operated by others therefore depends upon a number of factors outside of our control, including:•the operator could refuse to initiate exploitation or development projects and if we proceed with any of those projects, we may not receive any fundingfrom the operator with respect to that project;•the operator may initiate exploitation or development projects on a different schedule than we would prefer;17Table of Contents•the operator may propose greater capital expenditures than we wish, including expenditures to drill more wells or build more facilities on a project thanwe have funds for, which may mean that we cannot participate in those projects and thus, not participate in the associated revenue stream; and•the operator may not have sufficient expertise or resources.Any of these events could significantly and adversely affect our anticipated exploitation and development activities.Seasonal weather conditions and other factors could adversely affect our ability to conduct drilling activities. Our operations could be adversely affected by weather conditions and wildlife restrictions on federal leases. In the Williston Basin, Powder River Basinand in Canada, drilling and other oil and gas activities cannot be conducted as effectively during the winter and spring months. Winter and severe weatherconditions limit and may temporarily halt the ability to operate during such conditions. These constraints and the resulting shortages or high costs could delayor temporarily halt our oil and gas operations and materially increase our operating and capital costs, which could have a material adverse effect on ourbusiness, financial condition and results of operations.The lack of availability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability toexecute our exploitation and development plans on a timely basis and within our budget. Our industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies, oil field services or qualified personnel. Duringthese periods, the costs and delivery times of rigs, equipment and supplies are substantially greater. In addition, the demand for, and wage rates of, qualifieddrilling rig crews rise as the number of active rigs in service increases. During times and in areas of increased activity, the demand for oilfield services willalso likely rise, and the costs of these services will likely increase, while the quality of these services may suffer. If the lack of availability or high cost ofdrilling rigs, equipment, supplies, oil field services or qualified personnel were particularly severe in any of our areas of operation, we could be materially andadversely affected. Delays could also have an adverse effect on our results of operations, including the timing of the initiation of production from new wells.Our drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors that are beyond our control. Our drilling operations are subject to a number of risks, including:•unexpected drilling conditions;•facility or equipment failure or accidents;•adverse weather conditions;•title problems;•unusual or unexpected geological formations;•fires, blowouts and explosions; and•uncontrollable flows of oil or gas or well fluids.Any of these events could adversely affect our ability to conduct operations or cause substantial losses, including personal injury or loss of life, damageto or destruction of property, natural resources and equipment, pollution or other environmental contamination, loss of wells, regulatory penalties, suspensionof operations, and attorney’s fees and other expenses incurred in the prosecution or defense of litigation.We do not insure against all potential operating risks. We might incur substantial losses from, and be subject to substantial liability claims for,uninsured or underinsured risks related to our oil and gas operations. We do not insure against all risks. Our oil and gas exploitation and production activities are subject to hazards and risks associated with drilling for,producing and transporting oil and gas, and any of these risks can cause substantial losses resulting from:•environmental hazards, such as uncontrollable flows of oil, natural gas, brine, well fluids, toxic gas or other pollution into the environment, includinggroundwater, shoreline contamination, underground migration and surface spills or mishandling of chemical additives;18Table of Contents•abnormally pressured formations;•mechanical difficulties, such as stuck oil field drilling and service tools and casing collapse;•leaks of gas, oil, condensate, natural gas liquids and other hydrocarbons or losses of these hydrocarbons as a result of accidents during drilling andcompletion operations, or in the gathering and transportation of hydrocarbons, malfunctions of pipelines, measurement equipment or processing orother facilities in the Company’s operations or at delivery points to third parties;•fires and explosions;•personal injuries and death;•regulatory investigations and penalties; and•natural disasters.We might elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollutionand environmental risks generally are not fully insurable. Losses and liabilities arising from uninsured and underinsured events or in amounts in excess ofexisting insurance coverage could have a material adverse effect on our business, financial condition or results of operations. Hydraulic fracturing, the process used for extracting oil and gas from shale and other formations, has recently come under increased scrutinyand could be the subject of further regulation that could impact the timing and cost of development. Hydraulic fracturing is the primary completion method used to extract reserves located in many of the unconventional oil and gas plays in the UnitedStates and Canada. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure, usually down tubing or casing that is cementedin the wellbore, into prospective rock formations at depth to stimulate oil and gas production. We use this completion technique on substantially all of ourwells. Depending on the legislation that may ultimately be enacted or the regulations that may be adopted at the federal, state and/or provincial levels,exploration, exploitation and production activities that entail hydraulic fracturing could be subject to additional regulation and permitting requirements. Somestates in which we operate, including Texas, have recently implemented disclosure requirements of chemicals used in hydraulic fracturing, and the U.S.Department of the Interior has proposed regulations governing hydraulic fracturing on federal lands, including requiring chemical disclosure. Individually orcollectively, such existing and new legislation or regulation could lead to operational delays or increased operating costs and could result in additional burdensthat could increase the costs and delay the development of unconventional oil and gas resources from formations which are not commercial without the use ofhydraulic fracturing. This could have an adverse effect on our business, financial condition and results of operations.Hydraulic fracturing is typically regulated by state oil and gas commissions; however, the EPA has asserted federal regulatory authority over hydraulicfracturing involving diesel fuels under the Underground Injection Control Program established under the Safe Drinking Water Act, or SDWA, and publisheddraft permitting guidance in May 2012 addressing the performance of such activities. EPA has announced its intent to initiate rulemaking regulations underthe Toxic Substances Control Act to obtain data on chemical substances and mixtures used in hydraulic fracturing. In August 2012, the EPA published finalrules under the CAA, which became effective October 15, 2012, that, among other things, require producers to reduce volatile organic compound emissionsfrom certain subcategories of fractured and refractured gas wells for which well completion operations are being conducted by routing flowback emissions to agathering line or capturing and combusting flowback emissions using a combustion device, such as a flare, until January 1, 2015 or performing reducedemission completions, also known as “green completions,” with or without combustion devices, on or after January 1, 2015. In addition, the U.S. Congress,from time to time, has considered adopting legislation intended to provide for federal regulation of hydraulic fracturing and to require disclosure of thechemicals used in the hydraulic-fracturing process. In the event that a new federal level of legal restrictions relating to the hydraulic fracturing process isadopted in areas where we currently or in the future plan to operate, we may incur additional costs to comply with such federal requirements that may besignificant in nature, become subject to additional permitting requirements and experience added delays or curtailment in the pursuit of exploration,development or production activities.Certain states in which we operate, including Texas, have adopted, and other states are considering adopting, regulations that could impose new or morestringent permitting, disclosures, and/or well-construction requirements on hydraulic-fracturing operations. For example, Texas adopted a law in June 2011requiring disclosure to the Texas Railroad Commission and the public certain information regarding the components used in the hydraulic-fracturingprocess. In addition to state laws, local land use restrictions, such as city ordinances, may restrict or prohibit drilling in general or hydraulic fracturing inparticular. We believe19Table of Contentsthat we follow applicable standard industry practices and legal requirements for groundwater protection in our hydraulic fracturing activities. Nonetheless, inthe event state or local restrictions are adopted in areas where we are currently conducting, or in the future plan to conduct operations, we may incur additionalcosts to comply with such requirements that may be significant in nature, experience delays or curtailment in the pursuit of exploration, development, orproduction activities, and perhaps be limited or precluded in the drilling of wells or in the amounts that we are ultimately able to produce from our reserves.Certain governmental reviews were recently conducted or are underway that focus on environmental aspects of hydraulic fracturing practices. The WhiteHouse Council on Environmental Quality is coordinating an administration-wide review of hydraulic fracturing practices, and the EPA has commenced astudy of the potential environmental effects of hydraulic fracturing on drinking water and groundwater, with a first progress report released by the agency onDecember 21, 2012 and a final report expected to be available for public comment and peer review by 2014. Moreover, the EPA is developing effluentlimitations for the treatment and discharge of wastewater resulting from hydraulic fracturing activities. Other governmental agencies, including the U.S.Department of Energy and the U.S. Department of the Interior, are evaluating various other aspects of hydraulic fracturing. These studies, or future studies,depending on their degree of pursuit and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA orother regulatory mechanisms. See “Item 1. Business – Environmental Matters – Hydraulic Fracturing ” above for additional discussion related toenvironmental risks associated with our hydraulic fracturing activities.The marketability of our production depends largely upon the availability, proximity and capacity of oil and gas gathering systems, pipelines andprocessing facilities. The marketability of our production depends in part upon processing and transportation facilities. Transportation space on such gathering systems andpipelines is occasionally limited and at times unavailable due to repairs or improvements being made to such facilities or due to such space being utilized byother companies with priority transportation agreements. Our access to transportation options can also be affected by U.S. Federal and state, as well asCanadian provincial, regulation of oil and gas production and transportation, general economic conditions and changes in supply and demand. These factorsand the availability of markets are beyond our control. If our access to these transportation options dramatically changes, the financial impact on us could besubstantial and adversely affect our ability to produce and market our oil and gas. An increase in the differential between NYMEX and the reference or regional index price used to price our oil and gas would reduce our cashflow from operations. Our oil and gas is priced in the local markets where it is produced based on local or regional supply and demand factors. The prices we receive for our oiland gas are typically lower than the relevant benchmark prices, such as NYMEX. The difference between the benchmark price and the price we receive iscalled a differential. Numerous factors may influence local pricing, such as refinery capacity, product quality, pipeline capacity and specifications, upsets inthe midstream or downstream sectors of the industry, trade restrictions and governmental regulations. Additionally, insufficient pipeline capacity, lack ofdemand in any given operating area or other factors may cause the differential to increase in a particular area compared with other producing areas. Forexample, production increases from competing Canadian and Rocky Mountain producers, combined with limited refining and pipeline capacity in the RockyMountain area, have gradually widened differentials in this area.During 2013, differentials averaged $(6.35) per Bbl of oil and $(0.48) per Mcf of gas. Approximately 55% of our oil and NGL production during 2013was from the Rocky Mountain region. Historically, this region has experienced wider differentials than our Permian Basin and Gulf Coast properties. If thepercentage of our production from the Rocky Mountain region continues to increase, we expect that our price differentials will also increase. Increases in thedifferential between the benchmark prices for oil and gas and the realized price we receive could significantly reduce our revenues and our cash flow fromoperations.Our derivative contracts could result in financial losses or could reduce our cash flow. To achieve more predictable cash flow and reduce our exposure to adverse fluctuations in the prices of oil and gas, we enter into derivative contracts,which we sometimes refer to as hedging arrangements, for a significant portion of our oil and gas production that could result in both realized and unrealizedderivative contract losses. We have entered into NYMEX-based fixed price commodity swap arrangements on approximately 67% of the oil production fromour estimated net proved developed producing reserves (as of December 31, 2013) through December 31, 2014, 79% in 2015, 84% for 2016 and 50% for2017. Any new hedging arrangements will be priced at then-current market prices and may be significantly lower than the commodity swaps we currentlyhave in place. The extent of our commodity price exposure will be related largely to the effectiveness and scope of our commodity price derivativecontracts. For example, the prices utilized in our derivative contracts are currently NYMEX-based, which may differ significantly from the actual prices wereceive for oil and gas which are based on the local markets where the oil and gas is produced. The prices that we receive for our oil and gas production aretypically lower than the relevant benchmark prices that are used for calculating commodity derivative positions. The difference between the benchmark priceand the price20Table of Contentswe receive is called a differential, a significant portion of which is based on the delivery location which is called the basis differential. As a result, our cashflow from operations could be affected if the basis differentials widen more than we anticipate. For more information see “—An increase in the differentialbetween NYMEX and the reference or regional index price used to price our oil and gas would reduce our cash flow from operations.” We currently do not haveany basis differential hedging arrangements in place. Our cash flow from operations could also be affected based upon the levels of our production. Ifproduction is higher than we estimate, we will have greater commodity price exposure than we intended. If production is lower than the nominal amount that issubject to our hedging arrangements, we may be forced to satisfy all or a portion of our hedging arrangements without the benefit of the cash flow from our saleof the underlying physical commodity, resulting in a substantial reduction in cash flows.If the prices at which we hedge our oil and gas production are less than current market prices, our cash flow opportunity from operations couldbe adversely affected. When our derivative contract prices are higher than market prices, we will incur realized and unrealized gains on our derivative contracts and conversely,when our contract prices are lower than market prices, we will incur realized and unrealized losses. For the year ended December 31, 2013, we recognized arealized loss on oil and gas derivative contracts of $5.0 million and an unrealized gain of $2.6 million. The realized loss resulted in a decrease in cash flowfrom operations. We expect to continue to enter into similar hedging arrangements in the future to reduce our cash flow volatility.We cannot assure you that the derivative contracts that we have entered into, or will enter into, will adequately protect us from financial loss in the futuredue to circumstances such as:•highly volatile oil and gas prices;•our production being less than expected; or•a counterparty to one of our hedging transactions defaulting on its contractual obligations.The counterparties to our derivative contracts may be unable to perform their obligations to us which could adversely affect our cash flow. At times when market prices are lower than our derivative contract prices, we are entitled to cash payments from the counterparties to our derivativecontracts. Any number of factors may adversely affect the ability of our counterparties to fulfill their contractual obligations to us. If one of our counterpartiesis unable or unwilling to make the required payments to us, it could adversely affect our cash flow.Potential regulations under the Dodd-Frank Act regarding derivatives could adversely impact our ability to engage in commodity price riskmanagement activities. On July 21, 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, which imposes acomprehensive regulatory scheme significantly impacting companies engaged in over-the-counter swap transactions. The Dodd-Frank Act generally applies to“swaps” entered into by “major swap participants” and/or “swap dealers,” each as defined in the Dodd-Frank Act. A swap is very broadly defined in theDodd-Frank Act and includes an energy commodity swap. A swap dealer includes an entity that regularly enters into swaps with counterparties as an“ordinary course of business for its own account.” Furthermore, a person may qualify as a major swap participant if it maintains a “substantial position” inoutstanding swaps, other than swaps used for “hedging or mitigating commercial risk” or whose positions create substantial exposure to its counterparties orthe U.S. financial system. The Dodd-Frank Act subjects swap dealers and major swap participants to substantial supervision and regulation by theCommodity Futures Trading Commission, or the CFTC, including capital standards, margin requirements, business conduct standards, and recordkeepingand reporting requirements. The CFTC recently promulgated regulations to set position limits for certain futures and option contracts in the major energymarkets and for swaps that are their economic equivalents. Certain bona fide hedging transactions or positions would be exempt from these positionlimits. Position limits for spot month limits became effective on October 12, 2012 while non-spot limits for energy-related commodities are not expected to beeffective until mid-to late-2014. The CFTC also has proposed regulations to establish minimum capital and margin requirements, as well as clearing andtrade-execution requirements in connection with certain derivative activities, although it’s not possible at this time to predict whether or when the CFTC willadopt those rules or include comparable provisions in its rulemaking under Dodd Frank. In addition, the CFTC’s regulations adopted pursuant to the Dodd-Frank Act impose certain record keeping and transactional reporting requirements that may be burdensome and costly to us and to the counterparties to ourcommodity derivative contracts. 21Table of ContentsThe new legislation and any new regulations could significantly increase the cost of some commodity derivative contracts (including throughrequirements to post collateral or provide other credit support, which could adversely affect our available liquidity), materially alter the terms of somecommodity derivative contracts, reduce the availability of some derivatives to protect against risks we encounter, reduce our ability to monetize or restructureour existing commodity derivative contracts and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of thenew legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affectour ability to plan for and fund capital expenditures. Increased volatility may make us less attractive to certain types of investors. Finally, the Dodd-FrankAct was intended, in part, to reduce volatility of oil and gas prices, which some legislators attributed to speculative trading in derivatives and commodityinstruments related to oil and gas. If the new legislation and regulations result in lower commodity prices, our revenues could be adversely affected. Any ofthese consequences could adversely affect our business, financial condition and results of operations. Lower oil and gas prices increase the risk of ceiling limitation write-downs. We use the full cost method to account for our oil and gas operations. Accordingly, we capitalize the cost to acquire, explore for and develop our oil andgas properties. Under full cost accounting rules, the net capitalized cost of our oil and gas properties may not exceed a “ceiling limit” which is based upon thepresent value of estimated future net cash flows from our proved reserves, discounted at 10%. If the net capitalized costs of our oil and gas properties exceedthe ceiling limit, we must charge the amount of the excess to earnings. This is called a “ceiling limitation write-down.” This charge does not impact cash flowfrom operating activities, but it does reduce our stockholders’ equity and earnings. The risk that we will be required to write-down the carrying value of ouroil and gas properties increases when oil and gas prices are low, which could be further impacted by the SEC’s modernized oil and gas reporting disclosures,which require us to use an average price over the prior 12-month period, rather than the year-end price, when calculating the PV-10. In addition, write-downsmay occur if we experience substantial downward adjustments to our estimated proved reserves. An expense recorded in one period may not be reversed in asubsequent period even though oil and gas prices may have increased the ceiling applicable in the subsequent period.At December 31, 2012, the net capitalized costs of our United States oil and gas properties did not exceed the present value of our estimated provedreserves; however, the net capitalized costs of our Canadian oil and gas properties exceeded the present value of our estimated proved reserves byapproximately $19.8 million, resulting in a write down of $19.8 million. We had write downs in the second, third and fourth quarters of 2012 of $1.3million, $11.8 million and $6.7 million respectively. At December 31, 2013, the net capitalized costs of our United States oil and gas properties did not exceedthe present value of our estimated proved reserves; however, the net capitalized costs of our Canadian oil and gas properties exceeded the present value of ourestimated proved reserves by approximately $6.0 million, resulting in a write down of $6.0 million. Use of our net operating loss carryforwards may be limited. At December 31, 2013, we had, subject to the limitation discussed below, $141.9 million of net operating loss carryforwards for U.S. tax purposes and$20.5 million for Canadian tax purposes. The U.S. loss carryforwards will expire in varying amounts through 2033, and the Canadian carryforward willexpire in 2033, if not otherwise used.The use of our net operating loss carryforwards may be limited if an “ownership change” of over 50 percentage points occurs during any three-yearperiod. Based on current estimates, we believe that we have not surpassed this threshold. Additionally, uncertainties exist as to the future utilization of the operating loss carryforwards. Therefore, in accordance with Financial AccountingStandards Board (“FASB”) and ASC 740-10, we have established a valuation allowance of $75.6 million at December 31, 2013.Cyber attacks targeting systems and infrastructure used by the oil and gas industry may adversely impact our operations. Our business has become increasingly dependent on digital technologies to conduct certain exploration, development and production activities. We dependon digital technology to estimate quantities of oil and gas reserves, process and record financial and operating data, analyze seismic and drilling information,and communicate with our employees and third-party partners. Unauthorized access to our seismic data, reserves information or other proprietaryinformation could lead to data corruption, communication interruption, or other operational disruptions in our exploration or production operations. Inaddition, computer technology controls nearly all of the oil and gas distribution systems in the United States and abroad, which are necessary to transport ourproduction to market. A cyber attack directed at oil and gas distribution systems could damage critical distribution and storage assets or the environment,delay or prevent delivery of production to markets and make it difficult or impossible to accurately account for production and settle transactions.22Table of ContentsWhile we have not experienced significant cyber attacks, we may suffer such losses in the future. We did have a cyber attack in 2010 relating to electronicbank transfers, although the monetary loss was very minimal, additional procedures were implemented to safeguard against future cyber attacks Further, ascyber attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or toinvestigate and remediate any vulnerability to cyber attacks. We rely on independent experts and technical or operational service providers over whom we may have limited control. We use independent contractors to provide us with certain technical assistance and services. We rely upon the owners and operators of rigs and drillingequipment, and upon providers of field services, to drill and develop our prospects to production. We also rely upon the services of other third parties toexplore and/or analyze our prospects to determine a method in which the prospects may be developed in a cost-effective manner. Our limited control over theactivities and business practices of these service providers, any inability on our part to maintain satisfactory commercial relationships with them or theirfailure to provide quality services could materially adversely affect our business, results of operations and financial condition.We depend on our President, CEO and Chairman of the Board and the loss of his services could have an adverse effect on our operations. We depend to a large extent on Robert L.G. Watson, our President and Chief Executive Officer, for our management and business and financialcontacts. Mr. Watson may terminate his employment agreement with us at any time on 30 days notice, but, if he terminates without cause, he would not beentitled to the severance benefits provided under the terms of that agreement. Mr. Watson is not precluded from working for, with or on behalf of a competitorupon termination of his employment with us. If Mr. Watson were no longer able or willing to act as President, Chief Executive Officer and Chairman of theBoard, the loss of his services could have an adverse effect on our operations.Our financial statements are complex and our control environment cannot completely prevent fraud or human error. Due to the nature of our business, and accounting principles generally accepted in the United States of America, our financial statements are complex,particularly with reference to derivative contracts, asset retirement obligations, deferred taxes and the accounting for our stock-based compensation plans. Weexpect such complexity to continue and possibly increase. Because of these complexities, many of our accounting processes are done manually and aredependent upon individual data input or review. While we continue to automate our processes and enhance our review and put in place controls to reduce thelikelihood for errors, we expect that for the foreseeable future many of our processes will remain manually intensive and thus subject to human error.A control environment, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control environmentare met. Because of the inherent limitations in all control environments, no evaluation of controls can provide absolute assurance that all control issues havebeen detected and misstatements due to error or fraud may occur and not be detected.Risks Related to Our Industry Market conditions for oil and gas, and particularly volatility of prices for oil and gas, could adversely affect our revenue, cash flows, profitabilityand growth. Our revenue, cash flows, profitability and future rate of growth depend substantially upon prevailing prices for oil and gas. Recently low gas pricesaffected us more than oil prices. Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow money or raiseadditional capital. Lower prices may also make it uneconomical for us to increase or even continue current production levels of oil and gas.Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply and demand for oil and gas, marketuncertainty and a variety of other factors beyond our control, including:•changes in foreign and domestic supply and demand for oil and gas;•political stability and economic conditions in oil producing countries, particularly in the Middle East;•weather conditions;•price and level of foreign imports;•terrorist activity;23Table of Contents•availability of pipeline and other secondary capacity;•general economic conditions;•domestic and foreign governmental regulation; and•the price and availability of alternative fuel sources.Estimates of proved reserves and future net revenue are inherently imprecise. The process of estimating oil and gas reserves, in accordance with SEC requirements, is complex and involves decisions and assumptions in evaluatingthe available geological, geophysical, engineering and economic data. Accordingly, these estimates are imprecise. Actual future production, oil and gas prices,revenues, taxes, capital expenditures, operating expenses and quantities of recoverable oil and gas reserves most likely will vary from those estimated. Anysignificant variance could materially affect the estimated quantities and present value of our reserves. In addition, we may adjust estimates of proved reservesto reflect production history, results of exploration and development, prevailing oil and gas prices and other factors, many of which are beyond our control.The estimates of our reserves as of December 31, 2013 are based upon various assumptions about future production levels, prices and costs that may notprove to be correct over time. In particular, estimates of oil and gas reserves, future net revenue from proved reserves and the PV-10 thereof for our oil and gasproperties are based on the assumption that future oil and gas prices remain the same as the twelve month first-day-of-the-month average oil and gas prices forthe year ended December 31, 2013. The average realized sales prices as of such date used for purposes of such estimates were $3.66 per Mcf of gas and$95.89 per Bbl of oil. The December 31, 2013 estimates also assume that we will make future capital expenditures of approximately $467.2 million in theaggregate primarily from 2014 through 2018, which are necessary to develop and realize the value of proved reserves on our properties. In addition,approximately 56% of our total estimated proved reserves as of December 31, 2013 were classified as undeveloped. By their nature, estimates of undevelopedreserves are less certain than proved developed reserves. Any significant variance in actual results from these assumptions could also materially affect theestimated quantity and value of our reserves set forth or incorporated by reference in this report.The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimatedreserves. Any material inaccuracies in our reserve estimates or underlying assumptions will materially affect the quantities and present value ofour reserves, which could adversely affect our business, results of operations and financial condition.As required by SEC regulations, we based the estimated discounted future net cash flows from our proved reserves as of December 31, 2013 on the twelvemonth first-day-of-the-month average oil and gas prices for the year ended December 31, 2013 and costs in effect on December 31, 2013, the date of theestimate. However, actual future net cash flows from our properties will be affected by factors such as:•supply of and demand for our oil and gas; •actual prices we receive for our oil and gas; •our actual operating costs; •the amount and timing of our capital expenditures; •the amount and timing of our actual production; and •changes in governmental regulations or taxation. In addition, the 10% discount factor we use when calculating discounted future net cash flow, which is required by the SEC, may not be the mostappropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and gas industry in general. Any materialinaccuracies in our reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves, which could adverselyaffect our business, results of operations and financial condition. Our operations are subject to the numerous risks of oil and gas drilling and production activities. Our oil and gas drilling and production activities are subject to numerous risks, many of which are beyond our control. These risks include the risk offire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental24Table of Contentshazards. Environmental hazards include oil spills, gas leaks, ruptures, discharges of toxic gases, underground migration and surface spills or mishandlingof any toxic fracture fluids, including chemical additives. In addition, title problems, weather conditions and mechanical difficulties or shortages or delays indelivery of drilling rigs and other equipment could negatively affect our operations. If any of these or other similar industry operating risks occur, we couldhave substantial losses. Substantial losses also may result from injury or loss of life, severe damage to or destruction of property, clean-up responsibilities,environmental damage, regulatory investigation and penalties and suspension of operations. In accordance with industry practice, we maintain insuranceagainst some, but not all, of the risks described above. We cannot assure you that our insurance will be adequate to cover losses or liabilities. Also, wecannot predict the continued availability of insurance at premium levels that justify its purchase.We operate in a highly competitive industry which may adversely affect our operations. We operate in a highly competitive environment. The principal resources necessary for the exploration and production of oil and gas are leaseholdprospects under which oil and gas reserves may be discovered, drilling rigs and related equipment to explore for such reserves and knowledgeable personnel toconduct all phases of operations. We must compete for such resources with both major oil and gas companies and independent operators. Many of thesecompetitors have financial and other resources substantially greater than ours. Although we believe our current operating and financial resources are adequateto preclude any significant disruption of our operations, we cannot assure you that such resources will be available to us in the future.Our oil and gas operations are subject to various U.S. Federal, state, local and Canadian provincial regulations that materially affect ouroperations. In the oil and gas industry, matters regulated include permits for drilling and completion operations, drilling and abandonment bonds, reports concerningoperations, the spacing of wells and unitization and pooling of properties and taxation. At various times, regulatory agencies have imposed price controls andlimitations on production. In order to conserve supplies of oil and gas, these agencies have restricted the rates of flow from oil and gas wells below actualproduction capacity. U.S. Federal, state, local, and Canadian provincial laws regulate production, handling, storage, transportation and disposal of oil andgas by-products and other substances and materials produced or used in connection with oil and gas operations. To date, our expenditures related tocomplying with these laws and for remediation of existing environmental contamination have not been significant. We believe that we are in substantialcompliance with all applicable laws and regulations. However, the requirements of such laws and regulations are frequently changed. We cannot predict theultimate cost of compliance with these requirements or their effect on our operations.Proposed federal legislation concerning tax deductions currently available with respect to oil and gas drilling may adversely affect our netearnings. Congress has recently considered, is considering, and may continue to consider, legislation that, if adopted in its proposed or similar form, woulddeprive some companies involved in oil and natural gas exploration and production activities in certain U.S. federal income tax incentives and deductionscurrently available to such companies. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and natural gasproperties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for certain domesticproduction activities, and (iv) an extension of the amortization period for certain geological and geophysical expenditures.It is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could become effective and whether suchchanges may apply retroactively. Although we are unable to predict whether any of these or other proposals will ultimately be enacted, the passage of anylegislation as a result of these proposals or any other similar changes to U.S. federal income tax laws could eliminate or postpone certain tax deductions that arecurrently available to us, and any such change could negatively affect our financial condition and results of operations.Possible regulation related to global warming and climate change could have an adverse effect on our operations and demand for oil and gas. Studies over recent years have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere. In response to thesestudies, governments have begun adopting domestic and international climate change regulations that requires reporting and reductions of the emission ofgreenhouse gases. Methane, a primary component of natural gas, and carbon dioxide, a by-product of the burning of oil, gas and refined petroleum products,are considered greenhouse gases. Internationally, the United Nations Framework Convention on Climate Change and the Kyoto Protocol address greenhousegas emissions, and several countries including the European Union have established greenhouse gas regulatory systems. In the United States, at the state level,several states, either individually or through multi-state regional initiatives, have begun implementing legal measures to reduce emissions of greenhouse gases,primarily through the planned development of emission inventories or regional greenhouse gas cap and trade programs or have begun considering adoptinggreenhouse gas regulatory programs. At the federal legislative level, various climate change legislative measures have been considered by the U.S. Congress,but it is not25Table of Contentspossible at this time to predict when, or if, Congress will act on climate change legislation, although any major initiatives in this area may unlikely to becomelaw in the near future due to opposition in the U.S. House of Representatives.As a result of the U.S. Supreme Court decision in Massachusetts, et al. v. EPA, on December 7, 2009, the EPA issued a finding that serves as thefoundation under the Clean Air Act to issue other rules that would result in federal greenhouse gas regulations and emissions limits under the Clean Air Act,even without Congressional action. As part of this array of new regulations, the EPA has issued a GHG monitoring and reporting rule that requires certainparties, including participants in the oil and natural gas industry, to monitor and report their GHG emissions, including methane and carbon dioxide, to theEPA. These regulations may apply to our operations. The EPA has adopted other rules that would regulate GHGs, one of which would regulate GHGs fromstationary sources, and may affect sources in the oil and natural gas exploration and production industry and the pipeline industry. The EPA’s finding, thegreenhouse gas reporting rule, and the rules to regulate the emissions of greenhouse gases may affect the cost of our operations and also affect the outcome ofother climate change lawsuits pending in United States federal courts in a manner unfavorable to our industry.Any laws or regulations that may be adopted to restrict or reduce emissions of greenhouse gases could require us to incur increased operating andcompliance costs, and could have an adverse effect on demand for the oil and gas that we produce and as a result, our financial condition and results ofoperations could be adversely affected.Proposed legislation and regulation under consideration regarding rail transportation could increase our operating costs, reduce our liquidity,delay our operations or otherwise alter the way we conduct our business.We presently transport a significant portion of oil production by rail, with approximately 15% of such production being shipped by rail in 2013. Inresponse to recent train derailments occurring in the United States and Canada, U.S. regulators are implementing or considering new rules to address thesafety risks of transporting oil by rail. On January 23, 2014, the NTSB issued a series of recommendations to address safety risks, including (i) requiringexpanded hazardous material route planning for railroads to avoid populated and other sensitive areas, (ii) to develop an audit program to ensure rail carriersthat carry petroleum products have adequate response capabilities to address worst-case discharges of the entire quantity of product carried on a train, and (iii)to audit shippers and rail carriers to ensure they are properly classifying hazardous materials in transportation and that they have adequate safety and securityplans in place. Additionally, on February 25, 2014 the DOT issued an emergency order requiring all persons, prior to offering oil into transportation, to ensuresuch product is properly tested and classed and to assure all shipments by rail of oil be handled as a Packing Group I or II hazardous material. Theintroduction of these or other regulations that result in new requirements addressing the type, design, specifications or construction of rail cars used totransport oil could result in severe transportation capacity constraints during the period in which new rail cars are retrofitted or constructed to meet newspecifications.We do not currently own or operate rail transportation facilities or rail cars; however, the adoption of any regulations that impact the testing or railtransportation of oil could increase our costs of doing business and limit our ability to transport and sell our oil at favorable prices at market centersthroughout the United States, the consequences of which could have a material adverse effect on our financial condition, results of operations and cash flows.Risks Related to Our Common Stock Future issuance of additional shares of common stock could cause dilution of ownership interests and adversely affect our stock price. We are currently authorized to issue 200,000,000 shares of common stock with such rights as determined by our board of directors. We may in the futureissue previously authorized and unissued securities, resulting in the dilution of the ownership interests of current stockholders. The potential issuance of anysuch additional shares of common stock may create downward pressure on the trading price of our common stock. We may also issue additional shares ofcommon stock or other securities that are convertible into or exercisable for common stock for capital raising or other business purposes. Future sales ofsubstantial amounts of common stock, or the perception that sales could occur, could have a material adverse effect on the price of our common stock.We will not pay dividends on our common stock for the foreseeable future. We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cashdividends in the foreseeable future. In addition, our credit facility prohibits us from paying dividends and making other cash distributions.Shares eligible for future sale may depress our stock price.26Table of Contents At December 31, 2013, we had 92,906,049 shares of common stock outstanding of which 6,595,044 shares were held by affiliates and, in addition,5,400,210 shares of common stock were subject to outstanding options granted under stock option plans (of which 3,827,724 shares were vested atDecember 31, 2013).All of the shares of common stock held by affiliates are restricted or control securities under Rule 144 promulgated under the Securities Act. The sharesof common stock issuable upon exercise of stock options have been registered under the Securities Act. Sales of shares of common stock under Rule 144 oranother exemption under the Securities Act or pursuant to a registration statement could have a material adverse effect on the price of our common stock andcould impair our ability to raise additional capital through the sale of equity securities.The price of our common stock has been volatile and could continue to fluctuate substantially. Our common stock is traded on The NASDAQ Stock Market. The market price of our common stock has been volatile and could fluctuatesubstantially based on a variety of factors, including the following:•fluctuations in commodity prices;•variations in results of operations;•legislative or regulatory changes;•general trends in the oil and gas industry;•sales of common stock or other actions by our stockholders;•additions or departures of key management personnel;•commencement of or involvement in litigation;•speculation in the press or investment community regarding our business;•an inability to maintain the listing of our common stock on a national securities exchange;•market conditions; and•analysts’ estimates and other events in the oil and gas industry.We may issue shares of preferred stock with greater rights than our common stock. Subject to the rules of The NASDAQ Stock Market, our articles of incorporation authorize our board of directors to issue one or more series of preferredstock and set the terms of the preferred stock without seeking any further approval from holders of our common stock. Any preferred stock that is issuedmay rank ahead of our common stock in terms of dividends, priority and liquidation premiums and may have greater voting rights than our commonstock. On March 16, 2010, our board of directors adopted a tax benefits preservation plan and declared a dividend of one preferred share purchase right foreach outstanding share of our common stock. These rights are only activated if the plan is triggered by any person or group acquiring 4.9% or more of ouroutstanding common stock without our approval.Anti-takeover provisions could make a third party acquisition of us difficult. Our articles of incorporation and bylaws provide for a classified board of directors, with each member serving a three-year term, and eliminate the abilityof stockholders to call special meetings or take action by written consent. Each of the provisions in our articles of incorporation, bylaws and our tax benefitspreservation plan, could make it more difficult for a third party to acquire us without the approval of our board. In addition, the Nevada corporate statute alsocontains certain provisions that could make an acquisition by a third party more difficult. On March 16, 2010, our board of directors adopted a tax benefitspreservation plan designed to preserve our substantial tax assets. In addition, the plan is intended to act as a deterrent to any person or group acquiring 4.9%or more of our outstanding common stock without our approval.Item 1B. Unresolved Staff Comments None. Item 2. Properties Exploratory and Developmental Acreage Our principal oil and gas properties consist of producing and non-producing oil and gas leases, including reserves of oil and gas in place. The followingtable sets forth our developed and undeveloped acreage and fee mineral acreage as of December 31, 2013. There are no material lease expirations in 2014. DevelopedAcreage Undeveloped Acreage Fee MineralAcreage (1) GrossNetGrossNetGrossNetTotalNet Acres Acres Acres Acres Acres Acres Acres (2)Rocky Mountain 47,700 28,300 54,720 22,167 2,478 888 51,355Permian Basin 20,614 16,480 20,685 18,157 12,008 5,272 39,909Onshore Gulf Coast 6,255 5,678 6,035 5,853 2,670 646 12,177Total United States 74,569 50,458 81,440 46,177 17,156 6,806 103,441Alberta, Canada 2,240 2,240 27,200 27,200 — — 29,440Total 76,809 52,698 108,640 73,377 17,156 6,806 132,881 (1)Fee mineral acreage represents fee simple absolute ownership of the mineral estate or fraction thereof.(2)Includes 3,981 acres in the Permian Basin region that are included in both developed and undeveloped gross acres.27Table of ContentsProductive Wells The following table sets forth our gross and net productive wells, expressed separately for oil and gas, as of December 31, 2013: Productive Wells Oil Gas Gross Net Gross NetRocky Mountain 339.0 77.8 438.0 13.0Permian Basin 156.0 126.4 56.0 32.7Onshore Gulf Coast 35.5 35.5 25.5 21.3Total United States 530.5 239.7 519.5 67.0Alberta, Canada 9.0 9.0 — —Total 539.5 248.7 519.5 67.0Reserves Information The estimation and disclosure requirements we employ conform to the definition of proved reserves with the Modernization of Oil and Gas Reportingrules, which were issued by the SEC at the end of 2008. This accounting standard requires that the average first-day-of-the-month price during the 12-monthperiod preceding the end of the year be used when estimating reserve quantities and permits the use of reliable technologies to determine proved reserves, ifthose technologies have been demonstrated to result in reliable conclusions about reserves volumes. For the year ended December 31, 2013, DeGolyer and MacNaughton, of Dallas, Texas estimated reserves for Abraxas’ properties comprisingapproximately 99% of the PV-10 of our proved oil and gas reserves. Proved reserves for the remaining 1% of our properties were estimated by Abraxaspersonnel because we determined that it was not practical for DeGoyler and MacNaughton to prepare reserve estimates for these properties as they are located ina widely dispersed geographic area and have relatively low value. DeGolyer and MacNaughton’s reserve report as of December 31, 2013 for Abraxas includeda total of 249 properties and our internal report included 167 properties. The technical personnel responsible for preparing the reserve estimates at DeGolyer and 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 Informationpromulgated by the Society of Petroleum Engineers. DeGolyer and MacNaughton is an independent firm of petroleum engineers, geologists, geophysicists, andpetrophysicists. They do not own an interest in any of our properties and are not employed on a contingent fee basis. All reports by DeGolyer andMacNaughton were developed utilizing their own geological and engineering data, supplemented by data provided by Abraxas. The report of DeGolyer andMacNaughton dated February 13, 2014, which contains further discussions of the reserve estimates and evaluations prepared by DeGolyer and MacNaughtonas well as the qualifications of DeGolyer and MacNaughton’s technical personnel responsible for overseeing such estimates and evaluations is attached asExhibit 99.1 to this report. Estimates of reserves at December 31, 2013 were based on studies performed by the engineering department of Abraxas which is directly responsible forAbraxas’ reserve evaluation process. The Vice President of Engineering manages this department and is the primary technical person responsible for thisprocess. The Vice President of Engineering holds a Bachelor of Science degree in Petroleum Engineering and is a Registered Professional Engineer in the Stateof Texas; he has 35 years of experience in reserve evaluations. The operations department of Abraxas assisted in the process, and consists of three petroleumengineers with Bachelor degrees in Petroleum Engineering, and various other technical professionals. Reserve information as well as models used to estimatesuch reserves are stored on secured databases. Non-technical inputs used in reserve estimation models, include oil and gas prices, production costs, futurecapital expenditures and Abraxas’ net ownership percentages which are obtained from other departments within Abraxas. Oil and gas reserves and the estimates of the present value of future net revenues therefrom were determined based on prices and costs as prescribed bySEC and FASB guidelines. Reserve calculations involve the estimate of future net recoverable reserves of oil and gas and the timing and amount of future netrevenues to be received therefrom. Such estimates are not precise and are based on assumptions regarding a variety of factors, many of which are variable anduncertain. Proved oil and gas reserves are the estimated quantities of oil and gas that geological and engineering data demonstrate with reasonable certainty to berecoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expectedto be recovered through existing wells with existing equipment and operating methods. Proved reserves were estimated in accordance with guidelinesestablished by the SEC and the FASB, which require that reserve estimates be prepared28Table of Contentsunder existing economic and operating conditions with no provision for price and cost escalations or de-escalations except by contractual arrangements. For theyear ended December 31, 2013, commodity prices over the prior 12-month period and year end costs were used in estimating future net cash flows.In addition to proved reserves, we disclose our “probable” and “possible” reserves in this report. Probable reserves are those additional reserves thatare less likely to be recovered than proved reserves. Possible reserves are those additional reserves that are less likely to be recoverable than probablereserves. These estimates of probable and possible reserves are by their very nature more speculative than estimates of proved reserves and accordingly aresubject to substantially greater risk of being actually realized by us. The following table sets forth certain information regarding estimates of our oil and gas reserves as of December 31, 2013. All of our reserves arelocated in the United States (approximately 99%) and Canada. Summary of Oil, NGL and Gas ReservesAs of December 31, 2013 Reserve Category Oil(MBbls) NGL(MBbls) Gas(MMcf) OilEquivalents(MBoe)Proved Developed 6,846.6 1,464.1 31,572.3 13,572.7Undeveloped 14,067.8 572.8 16,537.2 17,396.8Total Proved 20,914.4 2,036.9 48,109.5 30,969.5Probable Developed Non-producing 65.8 — 345.7 123.4Undeveloped 6,987.5 1,866.1 47,624.6 16,791.0Total Probable 7,053.3 1,866.1 47,970.3 16,914.4Possible Undeveloped 7,549.5 736.3 16,824.4 7,595.4Total 35,517.2 4,639.3 112,904.2 55,479.3Our estimates of proved developed reserves, proved undeveloped reserves, and total proved reserves at December 31, 2013, 2012, and 2011, andchanges in proved reserves during the last three years are presented in the Supplemental Oil and Gas Disclosures under Item 8 of this Report. Also presentedin the Supplemental Information are our estimates of future net cash flows and discounted future net cash flows from proved reserves. We have not filed information with a federal authority or agency with respect to our estimated total proved reserves at December 31, 2013. We reportgross proved reserves of operated properties in the United States to the U.S. Department of Energy on an annual basis; these reported reserves are derived fromthe same data used to estimate and report proved reserves in this Report. The process of estimating oil and gas reserves 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, revenues, taxes, capitalexpenditures, operating expenses and quantities of recoverable oil and gas reserves most likely will vary from those estimated. Any significant variance couldmaterially affect the estimated quantities and present value of our reserves set forth or incorporated by reference in this report. We may also adjust estimates ofreserves to reflect production history, results of exploration and development, prevailing oil and gas prices and other factors, many of which are beyond ourcontrol. In particular, estimates of oil and gas reserves, future net revenue from reserves and the PV-10 thereof for the oil and gas properties described in thisreport are based on the assumption that future oil and gas prices remain the same as oil and gas prices utilized in the December 31, 2013 report. The averagerealized sales prices used for purposes of such estimates were $95.90 per Bbl of oil and $3.66 per Mcf of gas. It is also assumed that we will make futurecapital expenditures of approximately $467.2 million in the aggregate primarily in the years 2014 through 2018, which are necessary to develop and realize thevalue of proved reserves on our properties. Any significant variance in actual results from these assumptions could also materially affect the estimatedquantity and value of reserves set forth herein. You should not assume that the present value of future net revenues referred to in this report is the current market value of our estimated oil and gasreserves. In accordance with SEC requirements, the estimated discounted future net cash flows from29Table of Contentsproved reserves is calculated using the average first-day-of-the-month price over the prior 12-month period. Costs used in the estimated discounted future netcash flows are costs as of the end of the period. Because we use the full cost method to account for our oil and gas operations, we are susceptible to significantnon-cash charges during times of volatile commodity prices because the full cost pool may be impaired when prices are low. This is known as a “ceilinglimitation write-down.” This charge does not impact cash flow from operating activities but does reduce our stockholders’ equity and reported earnings. Wehave experienced ceiling limitation write-downs in the past and we cannot assure you that we will not experience additional ceiling limitation write-downs in thefuture. As of December 31, 2013, the Company’s net capitalized costs of oil and gas properties in the United States did not exceed the present value of ourestimated proved reserves. However, the net capitalized costs of oil and gas properties in Canada did exceed the present value of our estimated proved reservesby $6.0 million, resulting in a write down for the year ended December 31, 2013.For more information regarding the full cost method of accounting, you should read the information under “Management’s Discussion and Analysisof Financial Condition and Results of Operations – Critical Accounting Policies.” Actual future prices and costs may be materially higher or lower than the prices and costs used in the estimate. Any changes in consumption by gaspurchasers or in governmental regulations or taxation will also affect actual future net cash flows. The timing of both the production and the expenses from thedevelopment and production of oil and gas properties will affect the timing of actual future net cash flows from proved reserves and their present value. Inaddition, the 10% discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is notnecessarily the most accurate discount factor. Our effective interest rate on borrowings at various times and the risks associated with us or the oil and gasindustry in general will affect the accuracy of the 10% discount factor. Proved Undeveloped Reserves Changes in PUDs. Significant changes to PUDs occurring during 2013 are summarized in the table below. Revisions of prior estimates reflect theaddition of new PUDs associated with current development plans, revisions to prior PUDs, revisions to infill drilling development plans, as well as thetransfer of PUDs to unproved reserve categories due to changes in development plans during the period. Our year-end development plans are consistent withSEC guidelines for PUDs development within five years unless specific circumstances warrant a longer development time horizon. MMBoePUDs at December 31, 201214,633Revisions of prior estimates(370)Extensions, discoveries, and other additions11,058Conversion to developed(666)Sales(7,258)PUDs at December 31, 201317,397 Reconciliation of Standardized Measure to PV-10PV-10 is the estimated present value of the future net revenues from our proved oil and gas reserves before income taxes discounted using a 10%discount rate. PV-10 is considered a non-GAAP financial measure under SEC regulations because it does not include the effects of future income taxes, as isrequired in computing the standardized measure of discounted future net cash flows. We believe that PV-10 is an important measure that can be used toevaluate the relative significance of our oil and gas properties and that PV-10 is widely used by securities analysts and investors when evaluating oil and gascompanies. Because many factors that are unique to each individual company impact the amount of future income taxes to be paid, the use of a pre-taxmeasure provides greater comparability of assets when evaluating companies. We believe that most other companies in the oil and gas industry calculate PV-10on the same basis. PV-10 is computed on the same basis as the standardized measure of discounted future net cash flows but without deducting income taxes. The following table provides a reconciliation of PV-10 to the standardized measure of discounted future net cash flows at December 31, 2012 and 2013:30Table of Contents December 31,(in thousands) 2012 2013PV-10 $316,862 $425,235Present value of future income taxes discounted at 10% (38,717) (84,250)Standardized measure of discounted future net cash flows $278,145 $340,985 Oil and Gas Production, Sales Prices and Production Costs The following table presents our net oil, gas and NGL production, the average sales price per Bbl of oil and NGLs and per Mcf of gas produced and theaverage cost of production per Boe of production sold, for the three years ended December 31:31Table of Contents 2011 2012 2013Oil production (Bbls) Rocky Mountain 310,819 402,869 501,657Permian Basin 113,151 113,691 100,846Onshore Gulf Coast 93,182 86,107 224,625Other (4) 22,738 40,825 22,910Total 539,890 643,492 850,038Gas production (Mcf) Rocky Mountain 474,269 802,001 940,969Permian Basin 1,891,333 1,657,165 1,288,198Onshore Gulf Coast 1,482,260 1,257,124 1,029,346Other (4) 373,970 380,789 162,629Total 4,221,832 4,097,079 3,421,142NGL production (Bbls) Rocky Mountain 11,451 23,468 50,421Permian Basin 15,171 82,200 88,254Onshore Gulf Coast 231 2,036 7,871Other (4) 1,271 3,047 2,132Total 28,124 110,751 148,678Total production (MBoe) (1) 1,272 1,437 1,569Average sales price per Bbl of oil (2) Rocky Mountain $85.73 $81.61 $87.80Permian Basin $91.07 $87.97 $91.72Onshore Gulf Coast $97.09 $100.31 $101.59Other (4) $91.62 $79.66 $80.61Composite $89.06 $85.11 $91.71Average sales price per Mcf of gas (2) Rocky Mountain $3.77 $2.71 $3.33Permian Basin $3.81 $2.45 $3.47Onshore Gulf Coast $3.31 $2.14 $2.99Other (4) $3.28 $2.00 $2.79Composite $3.58 $2.36 $3.25Average sales price per Bbl of NGL Rocky Mountain $49.71 $37.27 $40.59Permian Basin $48.27 $35.45 $32.12Onshore Gulf Coast $45.75 $27.52 $18.96Other (4) $75.69 $67.28 $70.65Composite $50.08 $36.57 $34.85Average sales price per Boe (2) $50.81 $47.67 $60.09Average cost of production per Boe produced (3) Rocky Mountain $19.58 $17.41 $15.98Permian Basin $13.16 $13.11 $15.53Onshore Gulf Coast $7.81 $8.55 $13.10Other (4) $16.89 $18.90 $46.28Composite $16.94 $14.27 $16.13__________________(1)Oil and gas were combined by converting gas to a Boe equivalent on the basis of 6 Mcf of gas to 1 Bbl of oil.(2)Before the impact of hedging activities.(3)Production costs include direct lease operating costs but exclude ad valorem taxes and production taxes.(4)Includes Canada and Mid-Continent comprising approximately 3.0% of total production.32Table of ContentsDrilling Activities The following table sets forth our gross and net working interests in exploratory and development wells drilled during the three years ended December31: 2011 2012 (1) 2013 Gross Net Gross Net Gross Net Exploratory Productive RockyMountain 2.0 1.1 — — — —PermianBasin 1.0 1.0 — — — —Onshore GulfCoast — — — — — —Total 3.0 2.1 — — — —Dry wells PermianBasin 1.0 1.0 1.0 — 2.0 2.0Canada — — — — 1.0 1.0Total 1.0 1.0 1.0 — 3.0 3.0 Development Productive RockyMountain 12.0 1.2 22.0 2.6 31.0 3.1PermianBasin 2.0 2.0 1.0 1.0 1.0 1.0Onshore GulfCoast 7.0 7.0 2.0 0.5 11.0 3.9Other (2) 4.0 4.0 — — — —Total 25.0 14.2 25.0 4.1 43.0 8.0 (1)Excludes 2.0 gross (1.4 net) well drilled by Blue Eagle.(2)Includes drilling activities in Canada and Mid-Continent.In addition to the above drilling activity, as of December 31, 2013 we had 5.0 gross (3.3 net) wells that were at various stages of drilling and/or completion.Present Activities As of March 12, 2014, we had ten gross operated wells in the process of drilling and/or completing. In the following discussion, production rates donot include the impact of NGL production and shrinkage from processing including the flaring of gas. The following provides an overview of our presentactivities by region: Eagle FordAt Abraxas’ Jourdanton prospect in Atascosa County, Texas, the Blue Eyes 1H averaged 405 boepd (383 barrels of oil per day, 134 mcf of natural gasper day) over the well’s first 30 full days of production flowing naturally. Subsequent to this initial 30 day period, the well was placed on submersible pump.Over the following thirty days on submersible pump, the well averaged 527 boepd (494 barrels of oil per day, 194 mcf of natural gas per day) . Total acreageat Jourdanton now consists of approximately 6,150 net acres. Also at Jourdanton, Abraxas recently drilled the Snake Eyes 1H to a total depth of 12,668 feetand the well is scheduled to be fracture stimulated with a 19 stage completion later this week. Abraxas is currently drilling the Spanish Eyes 1H at a depth of7,108 feet and the well is scheduled to be fracture stimulated at the end of March. Next, the company will spud its fourth well at Jourdanton, the Eagle Eyes1H. Abraxas owns a 100% working interest across the Jourdanton prospect.At Abraxas’ Cave prospect, in McMullen County, Texas, we recently completed the Dutch 2H with a 36 stage stimulation. The well has beenflowing to sales at very encouraging rates and a thirty day rate will be provided when available. Abraxas holds a 100% working interest in the Dutch 2H.At Abraxas’ Dilworth East prospect, in McMullen County, Texas, the company plans to complete the R. Henry 2H with a 19 stage fracturestimulation in April. Abraxas holds a 100% working interest in the R. Henry 2H.33Table of ContentsWilliston BasinIn McKenzie County, North Dakota, the Jore 1H, 2H and 4H are now scheduled to be fracture stimulated in early April. With the recentdownspacing success reported by other operators in the Williston Basin, Abraxas elected to change its original plans on the Ravin West pad from two MiddleBakken and two Three Forks wells to four Middle Bakken wells 660 feet apart. Raven Rig #1 has successfully drilled and cased the surface on these fourMiddle Bakken tests, the Ravin 4H, Ravin 5H, Ravin 6H and Ravin 7H. Next, the company will drill the intermediate sections of all four wells. Abraxasowns a working interest of approximately 76% and 51% in the Jore and Ravin West pads, respectively.Divestiture UpdateAbraxas recently closed and/or signed a Purchase and Sale Agreement on several non-core Permian Basin and Gulf Coast properties for combinedproceeds of $2.6 million. The assets sold produced a combined 56 boepd (83% natural gas) of production. Office Facilities Our executive and administrative offices are located at 18803 Meisner Drive, San Antonio, Texas 78258, and consist of approximately 21,000square feet. We own the building which is subject to a real estate lien note. The note bears interest at a fixed rate of 4.25%, and is payable in monthlyinstallments of principal and interest of $34,354. The note matures in July 2023. The note is secured by a first lien deed of trust on the property andimprovements. As of December 31, 2013, $4.6 million was outstanding on the note. We lease office space in Calgary, Alberta for a monthly rental of $3,836.The lease expired on January 31, 2014. The lease was not renewed and is on a month to month basis. We lease office space in Dickinson, North Dakota for amonthly rental of $2,170. The lease expires on August 31, 2014. We also lease office space in Lusk, Wyoming for a monthly rental of $750. The lease expireson December 31, 2016. Other Properties We own 1,769 acres of land, including an office building, workshop, warehouse and house in San Patricio County, Texas, 613 acres of land andan office building in Scurry County, Texas, 50 acres of land in DeWitt County, Texas, 162 acres of land in Coke County, Texas, 582 acres of land inMcKenzie County, North Dakota and 12,817 acres of land in Pecos County, Texas.We own 25 vehicles which are used in the field by employees. We own two workover rigs, which are used for servicing our wells. Raven Drillingowns a 2000 HP drilling rig, primarily to be used for drilling wells in the Williston Basin. We own two condominiums in Dickinson, North Dakota and aman-camp in North Dakota to house rig crews. Item 3. Legal Proceedings From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. At December 31,2013, we were not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our financialcondition. Item 4.Mine Safety Disclosures Not applicable34Table of ContentsPart IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is traded on The NASDAQ Stock Market under the symbol "AXAS." The following table sets forth certain information as tothe high and low sales price quoted for our common stock. Period High Low2012 First Quarter $4.39 $3.03 Second Quarter 3.45 2.49 Third Quarter 3.38 1.91 Fourth Quarter 2.42 1.562013 First Quarter $2.54 $1.93 Second Quarter 2.55 1.99 Third Quarter 2.72 2.01 Fourth Quarter 3.96 2.572014 First Quarter (Through March 12, 2014) $3.49 $2.99Holders As of March 12, 2014, we had 92,932,137 shares of common stock outstanding and approximately 1,118 stockholders of record. Dividends We have not paid any cash dividends on our common stock and it is not presently determinable when, if ever, we will pay cash dividends in thefuture. In addition, our credit facility prohibits the payment of cash dividends on our common stock. Performance GraphSet forth below is a performance graph comparing yearly cumulative total stockholder return on our common stock with (a) the monthly index ofstocks included in the Standard and Poor’s 500 Index and (b) a market capitalization weighted Small Cap Index of onshore, North American (“NAM”)focused, U.S. listed, oil and gas exploration and production companies with a market capitalization of less than $1.0 billion as of December 31, 2013 withfive year performance histories (the “Comparable Companies”). The Comparable Companies are: American Eagle Energy (AMZG), Approach Resources, Inc.(AREX), Callon Petroleum Co. (CPE), Clayton Williams Energy, Inc. (CWEI), Comstock Resources Inc (CRK), Contango Oil and Gas (MCF), CubicEnergy (CBNR), Double Eagle Petroleum Co. (DBLE), Emerald Oil, Inc. (EOX), Enerjex Resources, Inc. (ENRJ), Evolution Petroleum Corp. (EPM),Fieldpoint Petroleum (FPP), Forest Oil Corporation (FST), Gastar Exploration, Ltd. (GST), Goodrich Petroleum Corp. (GDP), Lucas Energy (LEI), NorthernOil and Gas, Inc. (NOG), Panhandle Oil and Gas Inc. (PHX), Penn Virginia Corporation (PVA), PetroQuest Energy Inc. (PQ), Quicksilver Resources, Inc.(KWK), Resolute Energy (REN), Rex Energy Corporation (REXX), Samson Oil and Gas (SSN), Swift Energy Co. (SFY), Synergy Resources (SYRG),Triangle Petroleum Corporation (TPLM), US Energy Corp. (USEG), Warren Resources Inc. (WRES) and ZaZa Energy Corporation (ZAZA). The followingnames were removed from the index versus the 2012 performance graph due to market caps exceeding $1.0 billion as of December 31, 2013, filing forbankruptcy or for various corporate transactions during the year: Bill Barrett Corp (BBG), Carrizo Oil & Gas Inc. (CRZO), Crimson Exploration Inc.(CXPO), Gasco Energy Inc. (GSXN), GMX Resources Inc. (GMXR), Magnum Hunter Resources Corp. (MHR) and PDC Energy, Inc (PDCE). The followingnames were added to the index versus the 2012 performance graph: American Eagle Energy (AMZG), Contango Oil and Gas (MCF), Cubic Energy (CBNR),Fieldpoint Petroleum (FPP), Lucas Energy (LEI), Resolute Energy (REN), Samson Oil and Gas (SSN) and Synergy Resources (SYRG).All of these cumulative total returns are computed assuming the value of the investment in our common stock and each index as $100.00 onDecember 31, 2008, and the reinvestment of dividends at the frequency with which dividends were paid during the applicable years. The years compared are2009, 2010, 2011, 2012 and 2013.35Table of Contents 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013S&P 500$123.45$139.23$139.23$157.89$204.63Small Cap Index$106.43$155.69$128.64$88.69$120.03AXAS$266.67$634.72$458.33$304.17$452.92The information contained above under the caption “Performance Graph” is being “furnished” to the SEC and shall not be deemed to be “solicitingmaterial” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, asamended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such filing.Item 6. Selected Financial Data The following selected financial data is derived from our Consolidated Financial Statements as of and for the years ended December 31, 2009 through2013. The data should be read in conjunction with our Consolidated Financial Statements and Notes thereto and other financial information included herein.See “Financial Statements and Supplementary Data” in Item 8. 36Table of Contents Year Ended December 31, 20092010 2011 2012 2013 (In thousands, except per share data)Total revenue $51,836 $58,060 $64,622 $68,573 $94,331 Net income (loss) $(18,780) $1,766(1) $13,743 $(18,791)(2) $38,647 (3)Net income (loss) per common share – diluted $(0.34) $0.02 $0.15 $(0.20) $0.41 Weighted average shares outstanding – diluted 55,499 77,224 92,244 91,914 93,538 Total assets $176,236 $182,909 $241,150 $240,607 $223,650 Long-term debt, excluding current maturities $143,592 $140,940 $126,258 $124,101 $41,790 Total stockholders’ equity (deficit) $(18,363) $(14,976) $62,651 $46,700 $86,906 ___________________________ (1)Includes proved property impairment of $4.8 million related to our Canadian properties.(2)Includes proved property impairment of $19.8 million related to our Canadian properties.(3)Includes proved property impairment of $6.0 million related to our Canadian properties and a gain on the sale of properties of $33.4 million.Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion of our consolidated financial condition, results of operations, liquidity and capital resources. This discussion excludes theoperations of Blue Eagle, except our equity share of Blue Eagle’s income (loss). The Blue Eagle joint venture was dissolved effective August 31, 2012. Thisdiscussion should be read in conjunction with our Consolidated Financial Statements and the Notes thereto. See “Financial Statements and SupplementaryData” in Item 8. General We are an independent energy company primarily engaged in the acquisition, exploration, exploitation, development and production of oil and gas in theUnited States and Canada. Historically, we have grown through the acquisition and subsequent development and exploitation of producing properties,principally through the redevelopment of old fields utilizing new technologies such as modern log analysis and reservoir modeling techniques as well as 3-Dseismic surveys and horizontal drilling. As a result of these activities, we believe that we have a number of development opportunities on our properties. Inaddition, we intend to expand upon our development activities with complementary acreage acquisitions in our core areas of operation. Success in ourdevelopment and exploration activities is critical in the maintenance and growth of our current production levels and associated reserves. While we have attained positive net income in three of the last five years, there can be no assurance that operating income and net earnings will be achievedin future periods. Our financial results depend upon many factors which significantly affect our results of operations including the following: •commodity prices and the effectiveness of our hedging arrangements;•the level of total sales volumes of oil and gas;•the availability of and our ability to raise additional capital resources and provide liquidity to meet cash flow needs;•the level of and interest rates on borrowings; and•the level and success of exploration and development activity.Commodity Prices and Hedging Arrangements. The results of our operations are highly dependent upon the prices received for our oil and gasproduction. The prices we receive for our production are dependent upon spot market prices, differentials and the effectiveness of our derivative contracts,which we sometimes refer to as hedging arrangements. Substantially all of our sales of oil and gas are made in the spot market, or pursuant to contracts basedon spot market prices, and not pursuant to long-term, fixed-price contracts. Accordingly, the prices received for our oil and gas production are dependent uponnumerous factors beyond our control. Significant declines in prices for oil and gas could have a material adverse effect on our financial condition, results ofoperations, cash flows and quantities of reserves recoverable on an economic basis. 37Table of ContentsDuring 2013, the New York Mercantile Exchange (NYMEX) future price for oil averaged $98.06 per barrel as compared to $94.16 per barrel in2012. During 2013 the NYMEX future spot price for gas averaged $3.73 per MMBtu compared $2.83 per MMBtu in 2012. Prices closed on December 31,2013 at $98.42 per Bbl of oil and $4.23 per MMBtu of gas. If commodity prices decline, our revenue and cash flow from operations will also likelydecline. In addition, lower commodity prices could also reduce the amount of oil and gas that we can produce economically. If gas prices remain depressed oroil prices decline significantly, our revenues, profitability and cash flow from operations may decrease which could cause us to alter our business plans,including reducing our drilling activities. The realized prices that we receive for our production differ from NYMEX futures and spot market prices, principally due to: •basis differentials which are dependent on actual delivery location;•adjustments for BTU content;•quality of the hydrocarbons; and•gathering, processing and transportation costs.The following table sets forth our average differentials for the years ended December 31, 2011, 2012 and 2013: Oil Gas 2011 2012 2013 2011 2012 2013Average realized price $89.06 $85.11 $91.71 $3.58 $2.36 $3.25Average NYMEX price $95.06 $94.16 $98.06 $4.14 $2.83 $3.73Differential $(6.00) $(9.05) $(6.35) $(0.56) $(0.47) $(0.48)Our hedging arrangements equate to approximately 67% of the estimated oil production from our net proved developed producing reserves (as of December31, 2013) through December 31, 2014, 79% in 2015, 84% in 2016 and 50% for 2017. By removing a significant portion of price volatility on our future oiland gas production, we believe we will mitigate, but not eliminate, the potential effects of changing commodity prices on our cash flow from operations forthose periods. However, when prevailing market prices are higher than our contract prices, we will not realize increased cash flow on the portion of theproduction that has been hedged. We have in the past and will in the future sustain realized and unrealized losses on our derivative contracts if market pricesare higher than our contract prices. Conversely, when prevailing market prices are lower than our contract prices, we will sustain realized and unrealized gainson our commodity derivative contracts. In 2011, we incurred a realized gain of $1.7 million and an unrealized gain of $5.7 million. In 2012, we incurred arealized loss of $0.3 million and an unrealized gain of $2.7 million. In 2013 we incurred a realized loss of $5.0 million and an unrealized gain of $2.6million. We have not designated any of these derivative contracts as a hedge as prescribed by applicable accounting rules. The following table sets forth our derivative contracts at December 31, 2013: Oil - WTI (1) Oil - Brent Oil - LLSContract Periods DailyVolume(Bbl) Swap Price(per Bbl) DailyVolume(Bbl) Swap Price(per Bbl) DailyVolume (Bbl) Swap Price (perBbl)2014 687 $94.16 505 $100.56 100 $101.262015 560 $83.03 500 $97.04 — $—2016 963 $84.10 — $— — $—2017 500 $84.18 — $— — $—(1) On March 19, 2013 Abraxas entered Brent vs WTI Spread to better reflect actual realized pricing for the Company's Eagle Ford volumes. Theweighted average price for WTI was calculated by taking the exact volumes of the Brent hedge, starting with the highest WTI swaps.At December 31, 2013, the aggregate fair market value of our commodity derivative contracts was a liability of approximately $4.0 million.Subsequent to December 31, 2013 we entered into the following derivative contracts:38Table of Contents Natural Gas - NYMEXContract Periods DailyVolume(Mcf) Swap Price(Per Mcf)2014 1,597 $4.102015 1,450 $4.22Production Volumes. Our proved reserves will decline as oil and gas is produced, unless we find, acquire or develop additional properties containingproved reserves or conduct successful exploration and development activities. Based on the reserve information set forth in our reserve estimates as ofDecember 31, 2013, our average annual estimated decline rate for net proved developed producing reserves is 9% during the first five years, 9% in the nextfive years, and approximately 9% thereafter. These rates of decline are estimates and actual production declines could be materially higher. While we havehad some success in finding, acquiring and developing additional reserves, we have not always been able to fully replace the production volumes lost fromnatural field declines and property sales. Our ability to acquire or find additional reserves in the future will be dependent, in part, upon the amount ofavailable funds for acquisition, exploration and development projects.We had capital expenditures during 2013 of $95.0 million related to our exploration and development activities. We have a capital expenditure budget for2014 of $125.0 million. Approximately 94% of the 2014 budget will be spent on unconventional horizontal oil wells in the Bakken/Three Forks and EagleFord plays, with the remainder being utilized for leasehold acquisition. The 2014 capital expenditure budget is subject to change depending upon a number offactors, including the availability and costs of drilling and service equipment and crews, economic and industry conditions at the time of drilling, prevailingand anticipated prices for oil and gas, the availability of sufficient capital resources, the results of our exploitation efforts, and our ability to obtain permits fordrilling locations. The following table presents historical net production volumes for the years ended December 31, 2011, 2012 and 2013: Year Ended December 31, 2011 2012 2013Total production (MBoe) 1,272 1,437 1,569Average daily production (Boepd) 3,484 3,926 4,298% Oil/ NGL 45% 52% 64%Availability of Capital. As described more fully under “Liquidity and Capital Resources” below, our sources of capital are cash flow from operatingactivities, borrowings under our credit facility, cash on hand, proceeds from the sale of properties, monetizing of derivative instruments, and if an appropriateopportunity presents itself, the sale of debt or equity securities, although we may not be able to complete any financing on terms acceptable to us, if at all. Asof December 31, 2013, we had approximately $97.0 million of availability under our credit facility. Borrowings and Interest. At December 31, 2013, we had a total of $33.0 million outstanding under our credit facility. If interest expense increases as aresult of higher interest rates or increased borrowings, more cash flow from operations would be used to meet debt service requirements. As a result, we wouldneed to increase our cash flow from operations in order to fund the development of our drilling opportunities which, in turn, will be dependent upon the level ofour production volumes and commodity prices.Exploration and Development Activity. We believe that our high quality asset base, high degree of operational control and inventory of drilling projectsposition us for future growth. At December 31, 2013, we operated properties accounting for approximately 94% of our PV-10, giving us substantial controlover the timing and incurrence of operating and capital expenditures. We have identified numerous additional drilling locations on our existing leaseholds, thesuccessful development of which we believe could significantly increase our production and proved reserves. Over the five years ended December 31, 2013, wedrilled or participated in 142 gross (40.0 net) wells of which 96% were commercially productive. Our future oil and gas production, and therefore our success, is highly dependent upon our ability to find, acquire and develop additional reserves that areprofitable to produce. The rate of production from our oil and gas properties and our proved reserves will decline as our reserves are produced unless weacquire additional properties containing proved reserves, conduct successful development and exploration activities or, through engineering studies, identifyadditional behind-pipe zones or secondary recovery reserves. We cannot assure you that our exploration and development activities will result in increases inour proved reserves. If our proved reserves decline in the future, our production may also decline and, consequently, our cash flow from operations and39Table of Contentsthe amount that we are able to borrow under our credit facility may also decline. In addition, approximately 56% of our estimated proved reserves at December31, 2013 were undeveloped. By their nature, estimates of undeveloped reserves are less certain. Recovery of such reserves will require significant capitalexpenditures and successful drilling operations. We may be unable to acquire or develop additional reserves, in which case our results of operations andfinancial condition could be adversely affected.40Table of Contents Results of OperationsSelected Operating Data. The following table sets forth operating data for the periods presented. Year Ended December 31, (In thousands, except per unit data) 2011 2012 2013Operating revenue (1): Oil sales $48,080 $54,770 $77,959Gas sales 15,127 9,679 11,135NGL sales 1,408 4,050 5,181Total operating revenues $64,615 $68,499 $94,275Operating income (loss) (2) $11,648 $(16,348) $14,927Oil sales (MBbls) 539.9 643.5 850.0Gas sales (MMcf) 4,221.8 4,097.1 3,421.1NGL sales (MBbls) 28.1 110.8 148.7Oil equivalents (MBoe) 1,271.6 1,437.1 1,568.9Average oil sales price (per Bbl)(1) $89.06 $85.11 $91.71Average gas sales price (per Mcf)(1) $3.58 $2.36 $3.25Average NGL sales price (per Bbl) $50.07 $36.57 $34.85Average oil equivalent sales price (Boe) $50.81 $47.67 $60.09___________________(1)Revenue and average sales prices are before the impact of hedging activities.(2)Operating income includes a proved property impairment of $19.8 and $6.0 million in 2012 and 2013, respectively related to our Canadian properties.Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012 Operating Revenue. During the year ended December 31, 2013, operating revenue increased to $94.3 million from $68.5 million 2012. The increase inrevenue was primarily due to a 32% increase in oil sales volumes in 2013 as compared to 2012, as well as an increase in realized oil prices. Gas sales volumeswere down by approximately 16%; however the decrease in gas volumes was offset by higher realized gas prices. We also had a significant increase in NGLsales volumes in 2013 as compared to 2012, which was partially offset by lower realized NGL prices. Increased sales volumes of oil and NGL contributed$20.3 million to operating revenue. Lower gas sales volumes had a negative impact on operating revenue of $2.2 million. Higher realized prices for oil and gascontributed $7.9 million to operating revenue. Oil sales volumes increased to 850.0 MBbls for the year ended December 31, 2013 from 643.5 MBbls for the same period of 2012. The increase in oilsales volumes was due to new production brought on line in 2013. New wells brought onto production in 2013 contributed 264.1 MBbls to production for theyear ended December 31, 2013, offset by natural field declines and property sales. Gas sales volumes decreased to 3,421.1 MMcf for the year endedDecember 31 2013 from 4,097.1 MMcf for the year ended December 31, 2012. The decrease in gas production was due to natural field declines; the timing ofnew wells being brought on line, property sales, as well as our emphasis on drilling oil wells as opposed to gas wells. New wells brought onto productionduring 2013 contributed 178.18 MMcf to production for the year ended December 31, 2013. Due to weak gas prices, our focus during 2013 was primarily onoil and liquids projects. NGL sales increased to 148.7 MBbls for the year ended December 31, 2013 from 110.8 MBbls for the same period of 2012. Theincrease in NGL sales was primarily due to increased gas production in West Texas, Wyoming and North Dakota that has a higher NGL content than ourhistorical gas production. Lease Operating Expenses (“LOE”). LOE for the year ended December 31, 2013 increased to $25.4 million from $24.8 million in 2012. The increasein LOE was primarily due to increased cost of services, and significant non-recurring LOE. The increase was partially offset by sales of producing propertiesin 2013, which had higher operating cost. LOE per Boe for the year ended December 31, 2013 was $16.16 compared to $17.26 for the same period of 2012.The decrease in LOE per Boe was attributable to higher sales volumes in 2013, partially offset by higher costs.41Table of ContentsProduction and Ad Valorem Taxes. Production and ad valorem taxes for the year ended December 31, 2013 increased to $8.5 million from $6.6million in 2012. The increase was primarily due to increased production in 2013 as compared to 2012. Production and ad valorem taxes as a percentage of oiland gas revenue decreased to 9% for the year ended December 31, 2013 from 10% in 2012. General and Administrative (“G&A”) Expense. G&A expense, excluding stock-based compensation, increased to $10.8 million for the year endedDecember 31, 2013 from $8.6 million in 2012. G&A expense per Boe was $6.86 for the year ended December 31, 2013 compared to $6.00 for the sameperiod of 2012. The increase in G&A is primarily due to performance bonuses awarded in 2013 and expenses incurred due to a proxy contest in the firstquarter of 2013. Stock-Based Compensation. Options granted to employees and directors are valued at the date of grant and expense is recognized over the optionsvesting period. In addition to options, restricted shares of common stock have been granted and are valued at the date of grant and expense is recognized overtheir vesting period. Stock-based compensation for the year ended December 31, 2013 and 2012, was $2.1 million for both years. Depreciation, Depletion, and Amortization (“DD&A”) Expenses. DD&A expense increased to $26.6 million for the year ended December 31, 2013from $23.0 million in 2012. Our DD&A rate increased primarily due to higher future development cost in the 2013 year end reserve report. DD&A per Boefor 2013 was $16.98 compared to $16.02 in 2012. The increase in DD&A per BOE was due to higher future development cost offset by higher salesvolumes in 2013 as compared to 2012. Interest Expense. Interest expense decreased to $4.6 million in 2013 from $5.5 million for 2012. The decrease was primarily due to lower levels of debtduring 2013 as compared to 2012.Income Taxes. An income tax expense of $0.7 million was recognized in 2013. Approximately $81,000 was recognized as a result of an audit of our2009 Federal income tax return. We incurred federal income tax of $.50 million and various state income taxes of approximately $68,000 for the year endedDecember 31, 2013, primarily as a result of the gains realized on property sales during the year.Loss (Gain) on Derivative Contracts. Realized derivative gains or losses are determined by actual derivative settlements during the period. Unrealizedgains and losses are based on the periodic mark to market valuation of derivative contracts in place. We have elected not to apply hedge accounting to ourderivative contracts as prescribed by ASC 815; therefore, fluctuations in the market value of the derivative contracts are recognized in earnings during thecurrent period. Our derivative contracts consist of commodity swaps and interest rate swaps. Our interest rate swap expired in August 2012. The net estimatedvalue of our commodity derivative contracts was a liability of approximately $4.0 million as of December 31, 2013. When our derivative contract prices arehigher than prevailing market prices, we incur realized and unrealized gains and conversely, when our derivative contract prices are lower than prevailingmarket prices, we incur realized and unrealized losses. For the year ended December 31, 2013, we realized a loss on our derivative contracts of approximately$5.0 million and had an unrealized gain of $2.6 million. For the year-ended December 31, 2012, we incurred an unrealized gain of $2.7 million on ourcommodity swaps. For the year ended December 31, 2012, we realized a loss on our derivative contracts of approximately $0.5 million, which included arealized loss of approximately $0.3 million on our commodity swaps and a realized loss of approximately $0.2 million on our interest rate swap. Ceiling Limitation Write-Down. We record the carrying value of our oil and gas properties using the full cost method of accounting for oil and gasproperties. Under this method, we capitalize the cost to acquire, explore for and develop oil and gas properties. Under the full cost accounting rules, the netcapitalized cost of oil and gas properties less related deferred taxes, are limited by country, to the lower of the unamortized cost or the cost ceiling, defined asthe sum of the present value of estimated unescalated future net revenues from proved reserves, discounted at 10%, plus the cost of properties not beingamortized, if any, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any, less related incometaxes. If the net capitalized cost of oil and gas properties exceeds the ceiling limit, we are subject to a ceiling limitation write-down to the extent of such excess. Aceiling limitation write-down is a charge to earnings which does not impact cash flow from operating activities. However, such write-downs do impact theamount of our stockholders' equity and reported earnings. As of December 31, 2012, the net capitalized cost of our oil and gas properties in the United Statesdid not exceed the present value of our estimated proved reserves; however in Canada, the net capitalized cost exceeded the present value of our estimatedproved reserves by $19.8 million, resulting in a write down of $19.8 million. There were write downs in the second, third and fourth quarters of 2012 of$1.3 million, $11.8 million and $6.7 million, respectively. As of December 31, 2013, the net capitalized cost of our oil and gas properties in the United Statesdid not exceed the present value of our estimated proved reserves; however, the net capitalized costs of oil and gas properties in Canada did exceed the presentvalue of our estimated proved reserves by $6.0 million, resulting in a write down for the year ended December 31, 2013. There were write downs in thesecond, third and fourth quarters of 2013 of $2.0 million; $0.1 million and $3.9 million, respectively. The year-end amount was calculated in accordancewith SEC rules42Table of Contentsutilizing the twelve month first-day-of-the-month average oil and gas prices for the year ended 2013 which were $97.33 per Bbl for oil and $3.67 per Mcf forgas as adjusted to reflect the expected realized prices for our oil and gas reserves.The risk that we will be required to write-down the carrying value of our oil and gas assets increases when oil and gas prices are depressed or volatile. Inaddition, write-downs may occur if we have substantial downward revisions in our estimated proved reserves. We cannot assure you that we will notexperience additional write-downs in the future. If commodity prices decline or if any of our proved reserves are revised downward, a further write-down of thecarrying value of our oil and gas properties may be required. Earnings from Equity Method Investment. Through August 31, 2012 we accounted for the joint venture under the equity method of accounting. Underthis method, Abraxas’ share of net income (loss) from the joint venture was reflected as an increase (decrease) in its investment account in “Investment injoint venture” and was also recorded as equity investment income (loss) in “Earnings from equity method investment.” The joint venture was dissolvedeffective September 4, 2012, with the assets being distributed to the joint venture partners. For the year ended December 31, 2012, we reported income of $2.2million related to Blue Eagle. See Note 2 of the Notes to Condensed Consolidated Financial Statements.Gain on Sale of Oil and Gas Properties. The divestiture of our oil and gas properties in the Eagle Ford shale during the fourth quarter of 2013 resultedin a $33.4 million gain due to its magnitude. Under Securities and Exchange Regulation S-X, full cost accounting companies generally credit the full cost poolfor proceeds from the sale of oil and gas properties. An exception to this rule occurs when the adjustment to the full cost pool results in a significant alterationof the relationship between capitalized cost and proved reserves. Due to the magnitude of this sale, there was a significant alteration of this relationshipresulting in gain recognition. The basis of the properties sold was determined based on the relative fair value of the assets sold and assets retained.Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011 Operating Revenue. During the year ended December 31, 2012, operating revenue increased to $68.5 million from $64.6 million in 2011. The increasein revenue was due to higher oil and NGL sales volumes in 2012 as compared to 2011, which were partially offset by lower gas sales volumes and lowerrealized commodity prices. Overall BOE sales in 2012 increased approximately 12% as compared to 2011. Increased oil and NGL sales volumes contributed$11.8 million to operating revenue while decreased gas sales volumes had a negative impact of $0.3 million. Lower commodity prices had a negative impact onoperating revenue of $7.7 million. Oil sales volumes increased to 643.5 MBbls for the year ended December 31, 2012 from 539.9 MBbls for the same period of 2011. The increase in oilsales volumes was due to new production brought on line in 2012. New wells brought onto production in 2012 contributed 129.2 MBbls to production for theyear ended December 31, 2012, offset by natural field declines. Gas sales volumes decreased to 4,097.1 MMcf for the year ended December 31 2012 from4,221.8 MMcf for the year ended December 31, 2011. The decrease in gas production was due to natural field declines and the timing of new wells beingbrought on line, as well as our emphasis on drilling oil wells as opposed to gas wells. New wells brought onto production during 2012 contributed 361.7MMcf to production for the year ended December 31, 2012. Due to weak gas prices, our focus was primarily on oil projects during 2012. NGL salesincreased to 110.8 MBbls for the year ended December 31, 2012 from 28.1 MBbls for the same period of 2011. The increase in NGL sales was primarily dueto increased gas production in West Texas, Wyoming and North Dakota that has a higher NGL content than our historical gas production. Lease Operating Expenses (“LOE”). LOE for the year ended December 31, 2012 increased to $24.8 million from $21.6 million in 2011. Theincrease in LOE was primarily due to increased cost of services, and significant non-recurring LOE related to our Canadian operations. LOE per Boe for theyear ended December 31, 2012 was $17.26 compared to $16.97 for the same period of 2011. The increase in LOE per Boe was attributable to higher LOE in2012, partially offset by higher sales volumes in 2012 as compared to 2011. Production and Ad Valorem Taxes. Production and ad valorem taxes for the year ended December 31, 2012 increased to $6.6 million from $5.8million in 2011. The increase was primarily due to increased production, particularly in the Rocky Mountain region where production tax rates are higher.Production and ad valorem taxes as a percentage of oil and gas revenue increased to 10% for the year ended December 31, 2012 from 9% in 2011. General and Administrative (“G&A”) Expense. G&A expense, excluding stock-based compensation, increased to $8.6 million for the year endedDecember 31, 2012 from $7.4 million in 2011. The increase in G&A expense was primarily related to higher salaries and bonuses paid in 2012. G&Aexpense per Boe was $6.00 for the year ended December 31, 2012 compared to $5.85 for the same period of 2011. The increase in G&A expense per Boe wasprimarily due to higher production volumes in 2012 compared to 2011.43Table of Contents Stock-Based Compensation. Options granted to employees and directors are valued at the date of grant and expense is recognized over the optionsvesting period. In addition to options, restricted shares of common stock have been granted and are valued at the date of grant and expense is recognized overtheir vesting period. Stock-based compensation for the year ended December 31, 2012 increased to $2.1 million from $2.0 million in 2011. The increase in2012 as compared to 2011 was due to higher values of grants made during 2012 as compared to 2011, and to additional grants during the third quarter of2012. Depreciation, Depletion, and Amortization (“DD&A”) Expenses. DD&A expense increased to $23.0 million for the year ended December 31, 2012from $16.2 million in 2011. Our DD&A rate increased due to higher future development cost in the 2012 year end reserve report. DD&A per Boe for 2012was $16.02 compared to $12.73 in 2011. The increase in DD&A per BOE was due to higher future development cost offset by higher sales volumes in 2012as compared to 2011. Interest Expense. Interest expense increased to $5.5 million in 2012 from $4.9 million for 2011. The increase was primarily due to higher levels of debtduring 2012 as compared to 2011.Income Taxes. An income tax expense of $0.3 million was recognized in 2012 as a result of an audit of our 2009 Federal income tax return. We appealedthe audit findings and the appeal was settled in 2013.Loss (Gain) on Derivative Contracts. Realized derivative gains or losses are determined by actual derivative settlements during the period. Unrealizedgains and losses are based on the periodic mark to market valuation of derivative contracts in place. We have elected not to apply hedge accounting to ourderivative contracts as prescribed by ASC 815; therefore, fluctuations in the market value of the derivative contracts are recognized in earnings during thecurrent period. Our derivative contracts consist of commodity swaps and interest rate swaps. The net estimated value of our commodity derivative contractswas a liability of approximately $6.4 million as of December 31, 2012. When our derivative contract prices are higher than prevailing market prices, we incurrealized and unrealized gains and conversely, when our derivative contract prices are lower than prevailing market prices, we incur realized and unrealizedlosses. For the year ended December 31, 2012, we realized a loss on our derivative contracts of approximately $0.5 million, which included a realized loss ofapproximately $0.3 million on our commodity swaps and a realized loss of approximately $0.2 million on our interest rate swap. For the year-ended December31, 2012, we incurred an unrealized gain of $2.7 million on our commodity swaps. We monetized our gas derivative contracts in March 2012 for $12.4million. Our interest rate swap expired in August 2012. The estimated value of our derivative contracts was an asset of approximately $1.9 million as ofDecember 31, 2011. For the year ended December 31, 2011, we realized a loss on our derivative contracts of approximately $0.7 million, which included arealized gain of $1.7 million on our commodity swaps and a realized loss of $2.4 million on our interest rate swap. For the year-ended December 31, 2011, weincurred an unrealized gain of $7.5 million on our derivative contracts, which included an unrealized gain of $5.7 million on our commodity swaps and $1.8million on our interest rate swap. Ceiling Limitation Write-Down. We record the carrying value of our oil and gas properties using the full cost method of accounting for oil and gasproperties. Under this method, we capitalize the cost to acquire, explore for and develop oil and gas properties. Under the full cost accounting rules, the netcapitalized cost of oil and gas properties less related deferred taxes, are limited by country, to the lower of the unamortized cost or the cost ceiling, defined asthe sum of the present value of estimated unescalated future net revenues from proved reserves, discounted at 10%, plus the cost of properties not beingamortized, if any, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any, less related incometaxes. If the net capitalized cost of oil and gas properties exceeds the ceiling limit, we are subject to a ceiling limitation write-down to the extent of such excess. Aceiling limitation write-down is a charge to earnings which does not impact cash flow from operating activities. However, such write-downs do impact theamount of our stockholders' equity and reported earnings. As of December 31, 2011, our net capitalized costs of oil and gas properties in the United Statesand Canada did not exceed the present value of our estimated proved reserves. As of December 31, 2012, the net capitalized cost of our oil and gas properties inthe United States did not exceed the present value of our estimated proved reserves, however in Canada, the net capitalized cost exceeded the present value ofour estimated proved reserves by $19.8 million, resulting in a write down of $19.8 million. There were write downs in the second, third and fourth quartersof 2012 of $1.3 million, $11.8 million and $6.7 million, respectively. The year-end amount was calculated in accordance with SEC rules utilizing the twelvemonth first-day-of-the-month average oil and gas prices for the year ended 2012 which were $95.14 per Bbl for oil and $2.86 per Mcf for gas as adjusted toreflect the expected realized prices for our oil and gas reserves.The risk that we will be required to write-down the carrying value of our oil and gas assets increases when oil and gas prices are depressed or volatile. Inaddition, write-downs may occur if we have substantial downward revisions in our estimated proved reserves. We cannot assure you that we will notexperience additional write-downs in the future. If commodity prices decline or if any of our proved reserves are revised downward, a further write-down of thecarrying value of our oil and gas properties may be required.44Table of Contents Earnings from Equity Method Investment. We accounted for Blue Eagle under the equity method of accounting. Under this method, Abraxas’ share of netincome (loss) from the joint venture was reflected as an increase (decrease) in its investment account in “Investment in joint venture” and is also recorded asequity investment income (loss) in “Earnings from equity method investment.” For the year ended December 31, 2011, our net share of the joint venture’sincome was $2.2 million. The joint venture was dissolved on September 4, 2012, effective August 31, 2012, with the assets being distributed to the jointventure partners. The dissolution of the joint venture was accounted for with the net investment in the joint venture being added to our full cost pool. For theyear ended December 31, 2012 (through August 31, 2012), we reported income of $2.2 million related to Blue Eagle. See Note 2 of the Notes to ConsolidatedFinancial Statements.Liquidity and Capital ResourcesGeneral. The oil and gas industry is a highly capital intensive and cyclical business. Our capital requirements are driven principally by our obligationsto service debt and to fund the following:•the development and exploration of existing properties, including drilling and completion costs of wells;•acquisition of interests in additional oil and gas properties; and•production and transportation facilities.The amount of capital expenditures we are able to make has a direct impact on our ability to increase cash flow from operations and, thereby, will directlyaffect our ability to service our debt obligations and to grow the business through the development of existing properties and the acquisition of new properties. Our principal sources of capital are cash flow from operations, borrowings under our credit facility, cash on hand, proceeds from the sale of properties,and if an opportunity presents itself, the sale of debt or equity securities, although we may not be able to complete any financings on terms acceptable to us, ifat all. Working Capital (Deficit). At December 31, 2013, our current liabilities of $82.7 million exceeded our current assets of $39.5 million resulting in aworking capital deficit of $43.2 million. This compares to a working capital deficit of $31.5 million at December 31, 2012. Current assets at December 31,2013 primarily consist of cash of $5.2 million, and accounts receivable of $33.6 million. Current liabilities at December 31, 2013 primarily consist of tradepayables of $52.8 million, revenues due third parties of $23.8 million, current maturities of long-term debt of $2.1 million and the current portion ofderivative liabilities of $2.7 million. Capital Expenditures. Capital expenditures in 2011, 2012 and 2013 were $79.0 million, $68.6 million, and $95.0 million, respectively. The tablebelow sets forth the components of these capital expenditures: Year Ended December 31, 2011 2012 2013 (In thousands)Expenditure category: Acquisition of producing properties $— $7,200 $—Exploration/Development 56,245 57,307 93,878Facilities and other 22,767 4,045 1,165Total $79,012 $68,552 $95,043During 2011, capital expenditures were for the development of our existing properties, the purchase and refurbishment of a drilling rig, and the purchaseof 1,769 acres of land (surface only) in our Portilla field in San Patricio County, Texas. During 2012 our expenditures were primarily for development of ourexisting properties, the acquisition of producing properties in West Texas and the completion of the refurbishment of our drilling rig. During 2013, capitalexpenditures were primarily for development of our existing properties, and acquisition of leaseholds. We anticipate making capital expenditures in 2014 of $125.0 million. The 2014 capital expenditure budget is subject to change depending upon a numberof factors, including the availability and costs of drilling and service equipment and crews, economic and industry conditions at the time of drilling,prevailing and anticipated prices for oil and gas, the availability of sufficient capital resources, and our ability to obtain permits for drilling locations. Ourcapital expenditures could also include expenditures for the acquisition of producing properties, if such opportunities arise. Additionally, the level of capitalexpenditures will vary during45Table of Contentsfuture periods depending on economic and industry conditions and commodity prices. Should the prices of oil and gas decline and if our costs of operationsincrease or if our production volumes decrease, our cash flows will decrease which may result in a reduction of the capital expenditure budget. If we decreaseour capital expenditure budget, we may not be able to offset oil and gas production decreases caused by natural field declines.Sources of Capital. The net funds provided by and/or used in each of the operating, investing and financing activities are summarized in the followingtable and discussed in further detail below: Year Ended December 31, 2011 2012 2013 (In thousands)Net cash provided by operating activities $24,495 $51,375 $51,654Net cash (used in) provided by investing activities (70,555) (47,003) 32,486Net cash provided by (used in) financing activities 45,966 (2,311) (81,014)Total $(94) $2,061 $3,126 Operating activities for the year ended December 31, 2013 provided $51.7 million in cash. Non-cash expense items, net changes in operating assets andliabilities accounted for most of these funds. Investing activities provided $32.5 million. Proceeds from the sale oil and gas properties provided $127.5 millionwhich was offset by expenditures for the development of our oil and gas properties and leasehold acquisitions. Financing activities used $81.0 millionprimarily for the reduction of long-term debt.Operating activities for the year ended December 31, 2012 provided $51.4 million in cash. Non-cash expense items, net changes in operating assets andliabilities, including the non-cash property impairment of $19.8 million, and the monetization of our gas derivatives accounted for most of these funds.Investing activities used $47.0 million, primarily for the development of our oil and gas properties, acquisition of producing properties, and the completion ofthe refurbishment of our drilling rig offset by the sale of producing properties. Financing activities used $2.3 million primarily for the reduction of long-termdebt. Operating activities for the year ended December 31, 2011 provided $24.5 million in cash. Net income plus non-cash expense items and net changes inoperating assets and liabilities accounted for most of these funds. Financing activities provided $46.0 million for the year ended December 31, 2011 whichwas primarily from the net proceeds from our equity offering in February 2011 of $62.3 million offset by a net reduction in our long term debt. Investingactivities used $70.6 million in 2011 for the development of our oil and gas properties, the purchase and reconditioning of a drilling rig and the purchase of1,769 acres of land (surface only) in our Portilla field in San Patricio County, Texas. Future Capital Resources. Our principal sources of capital going forward are cash flow from operations, borrowings under our credit facility, cash onhand, proceeds from the sale of properties, and if an opportunity presents itself, the sale of debt or equity securities, although we may not be able to completefinancing on terms acceptable to us, if at all. Cash from operating activities is dependent upon commodity prices and production volumes. A decrease in commodity prices from current levels couldreduce our cash flows from operations. This could cause us to alter our business plans, including reducing our exploration and development plans. Unlesswe otherwise expand and develop reserves, our production volumes may decline as reserves are produced. In the future we may continue to sell producingproperties, which could further reduce our production volumes. To offset the loss in production volumes resulting from natural field declines and sales ofproducing properties, we must conduct successful exploration and development activities, acquire additional producing properties or identify and developadditional behind-pipe zones or secondary recovery reserves. We believe our numerous drilling opportunities will allow us to increase our production volumes;however, our drilling activities are subject to numerous risks, including the risk that no commercially productive oil and gas reservoirs will be found. If ourproved reserves decline in the future, our production will also decline and, consequently, our cash flow from operations and the amount that we are able toborrow under our credit facility will also decline. The risk of not finding commercially productive reservoirs will be compounded by the fact that 56% of ourtotal estimated proved reserves at December 31, 2013 were classified as undeveloped. We have in the past, and may in the future, sell producing properties. Most recently, beginning in the third quarter of 2012 and continuing through2013, we sold certain non-core assets for combined net proceeds of approximately $149.1 million. The net proceeds were used to repay outstandingindebtedness under our credit facility.We have also sold debt and equity securities in the past when the opportunity has presented itself. On February 1, 2011, we closed a public offering of23.6 million shares of common stock (of which 8.5 million shares were sold by certain selling46Table of Contentsstockholders) at a public offering price of $4.40 per share for total net proceeds to us of approximately $62.2 million, after fees and expenses.Contractual Obligations. We are committed to making cash payments in the future on the following types of agreements:•Long-term debt, and•Operating leases for office facilities.Below is a schedule of the future payments that we are obligated to make based on agreements in place as of December 31, 2013: Payments due in twelve month periods ending:Contractual Obligations(In thousands) Total December 31, 2014 December 31,2015-2016 December 31,2017-2018 ThereafterLong-term debt (1) $43,932 $2,142 $37,568 $870 $3,352Interest on long-term debt (2) 3,240 1,307 1,010 313 610Lease obligations (3) 50 32 18 — —Total $47,222 $3,481 $38,596 $1,183 $3,962___________________________(1)These amounts represent the balances outstanding under our credit facility, the rig loan agreement and the real estate lien note. These payments assumethat we will not borrow additional funds.(2)Interest expense assumes the balances of long-term debt at the end of the period and current effective interest rates.(3)Lease on office space in Calgary, Alberta, which expired on January 31, 2014, office space in Dickinson, North Dakota, which expires on August 31,2014 and office space in Lusk Wyoming, which will expire on December 31, 2016.We maintain a reserve for costs associated with the retirement of tangible long-lived assets. At December 31, 2013, our reserve for these obligationstotaled $9.9 million for which no contractual commitments exist. For additional information relating to this obligation, see Note 1 of the Notes to ConsolidatedFinancial Statements. Off-Balance Sheet Arrangements. At December 31, 2013, we had no existing off-balance sheet arrangements, as defined under SEC regulations,that have, or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that are material to investors. Contingencies. From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. AtDecember 31, 2013, we were not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on us. Other obligations. We make and will continue to make substantial capital expenditures for the acquisition, exploration, development andproduction of oil and gas. In the past, we have funded our operations and capital expenditures primarily through cash flow from operations, borrowings underour credit facility, cash on hand, proceeds from the sale of properties, sales of debt and equity securities and other sources. Given our high degree of operatingcontrol, the timing and incurrence of operating and capital expenditures is largely within our discretion.Long-Term Indebtedness. Long-term debt consisted of the following: December 31, 2012 December 31, 2013 (In thousands)Credit facility $113,000 $33,000Rig loan agreement 7,000 6,378Real estate lien note 4,758 4,554 124,758 43,932Less current maturities (657) (2,142) $124,101 $41,79047Table of Contents Credit Facility We have a senior secured credit facility with Société Générale, as administrative agent and issuing lender, and certain other lenders, which we refer to asthe credit facility. As of December 31, 2013, $33.0 million was outstanding under the credit facility.The credit facility has a maximum commitment of $300.0 million and availability is subject to a borrowing base. At December 31, 2013 we had aborrowing base of $130.0 million. This amount will remain in effect until the next redetermination of the borrowing base which is scheduled to be completedin April 2014. The borrowing base is determined semi-annually by the lenders based upon our reserve reports, one of which must be prepared by ourindependent petroleum engineers and one of which may be prepared internally. The amount of the borrowing base is calculated by the lenders based upon theirvaluation of our Proved reserves securing the facility utilizing these reserve reports and their own internal decisions. In addition, the lenders, in their solediscretion, are able to make one additional borrowing base redetermination during any six-month period between scheduled redeterminations and we are able torequest one redetermination during any six-month period between scheduled redeterminations. The borrowing base will be automatically reduced in connectionwith any sales of producing properties with a market value of 5% or more of our then-current borrowing base and in connection with any hedge terminationwhich could reduce the collateral value by 5% or more. Our borrowing base can never exceed the $300.0 million maximum commitment amount. Outstandingamounts under the credit facility bear interest at (a) the greater of (1) the reference rate announced from time to time by Société Générale, (2) the Federal FundsRate plus 0.5%, and (3) a rate determined by Société Générale as the daily one-month LIBOR plus, in each case, (b) 1.25—2.25%, depending on theutilization of the borrowing base, or, if we elect LIBOR plus 2.25%—3.25%, depending on the utilization of the borrowing base. At December 31, 2013, theinterest rate on the credit facility was 2.67% based on 1-month LIBOR borrowings and the level of utilization.Subject to earlier termination rights and events of default, the stated maturity date of the credit facility is June 30, 2015. Interest is payable quarterly onreference rate advances and not less than quarterly on LIBOR advances. We are permitted to terminate the credit facility and are able, from time to time, topermanently reduce the lenders’ aggregate commitment under the credit facility in compliance with certain notice and dollar increment requirements.Each of our subsidiaries has guaranteed our obligations under the credit facility on a senior secured basis. Obligations under the credit facility are securedby a first priority perfected security interest, subject to certain permitted encumbrances, in all of our and our subsidiary guarantors’ material property andassets, other than Raven Drilling.Under the credit facility, we are subject to customary covenants, including certain financial covenants and reporting requirements. We are required tomaintain a current ratio, as of the last day of each quarter of not less than 1.00 to 1.00 and an interest coverage ratio of not less than 2.50 to 1.00. We are alsorequired as of the last day of each quarter to maintain a debt to EBITDAX ratio as of the last day of each quarter of not more than 4.00 to 1.00. The currentratio is defined as the ratio of consolidated current assets to consolidated current liabilities. For the purposes of this calculation, current assets include theportion of the borrowing base which is undrawn but excludes any cash deposited with a counter-party to a hedging arrangement and any assets representing avaluation account arising from the application of ASC 815 and ASC 410-20 and current liabilities exclude the current portion of long-term debt and anyliabilities representing a valuation account arising from the application of ASC 815 and ASC 410-20. The interest coverage ratio is defined as the ratio ofconsolidated EBITDAX to consolidated interest expense for the four fiscal quarters ended on the calculation date. For the purposes of this calculation,EBITDAX is defined as the sum of consolidated net income plus interest expense, oil and gas exploration expenses, income, franchise or margin taxes,depreciation, amortization, depletion and other non-cash charges including non-cash charges resulting from the application of ASC 718, ASC 815 and ASC410-20 plus all realized net cash proceeds arising from the settlement or monetization of any hedge contracts minus all non-cash items of income which wereincluded in determining consolidated net income, including all non-cash items resulting from the application of ASC 815 and ASC 410-20. Interest expenseincludes total interest, letter of credit fees and other fees and expenses incurred in connection with any debt. The total debt to EBITDAX ratio is defined as theratio of total debt to consolidated EBITDAX for the four fiscal quarters ended on the calculation date. For the purposes of this calculation, total debt is theoutstanding principal amount of debt, excluding debt associated with the office building, Raven Drilling’s rig loan and obligations with respect to suretybonds and derivative contracts.At December 31, 2013, we were in compliance with all of our debt covenants. As of December 31, 2013, the interest coverage ratio was 11.20 to 1.00, thetotal debt to EBITDAX ratio was 0.76 to 1.00, and our current ratio was 1.75 to 1.00.The credit facility contains a number of covenants that, among other things, restrict our ability to: •incur or guarantee additional indebtedness;•transfer or sell assets;48Table of Contents•create liens on assets;•engage in transactions with affiliates other than on an “arm’s length” basis;•make any change in the principal nature of our business; and•permit a change of control.The credit facility also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default andcross acceleration to certain other indebtedness, bankruptcy and material judgments and liabilities. Rig Loan Agreement On September 19, 2011, Raven Drilling entered into a rig loan agreement with RBS Asset Finance, Inc. to finance the costs of purchasing andrefurbishing an Oilwell 2000 HP diesel electric drilling rig (the “Collateral”). The rig loan agreement provided for interim borrowings payable to Raven Drillinguntil the final amount of the loan was determined. On February 14, 2012, Raven Drilling finalized the note with respect to the rig loan agreement. The principal amount of the note is $7.0 million and bearsinterest at 4.26%. Interest only was due for the first 18-months of the note and thereafter, the note will amortize in full over the remaining life of thenote. Interest and principal, when required, is payable monthly. Subject to earlier prepayment provisions and events of default, the stated maturity date of thenote is February 14, 2017. As of December 31, 2013, $6.4 million was outstanding under the rig loan agreement.The Company has guaranteed Raven Drilling’s obligations under the rig loan agreement and associated note. Obligations under the rig loan agreement aresecured by a first priority perfected security interest, subject to certain permitted encumbrances, in the Collateral.Real Estate Lien Note On May 9, 2008, the Company entered into an advancing line of credit in the amount of $5.4 million for the purchase and finish out of a building toserve as its corporate headquarters. The note was modified on April 4, 2013, reducing the interest to a fixed rate of 4.0%, effective March 13, 2013 and waspayable in monthly installments of principal and interest of $33,763 based on a twenty year amortization. This note was modified on July 20, 2013 to extendthe maturity date to July 20, 2023. The note will bear interest for five years at a fixed rate of 4.25% and is payable in monthly installments of $34,354.Beginning August 20, 2018, the interest rate will adjust to the current bank prime rate plus 1.00% with a maximum rate of 7.25%. The note is secured by afirst lien deed of trust on the property and improvements. As of December 31, 2012 and 2013, $4.8 million and $4.6 million, was outstanding on the note,respectively. The building appraised at $6.1 million in July 2013. Hedging ActivitiesOur results of operations are significantly affected by fluctuations in commodity prices and we seek to reduce our exposure to price volatility by hedgingour production through swaps, options and other commodity derivative instruments. We have entered into commodity swaps on approximately 67% of ourestimated oil production from our net proved developed producing reserves (as of December 31, 2013) through December 31, 2014, 79% for 2015, 84% for2016 and 50% for 2017.The following table sets forth the summary position of our derivative contracts as of December 31, 2013: Oil - WTI (1) Oil - Brent Oil - LLSContract Periods DailyVolume(Bbl) SwapPrice (perBbl) DailyVolume(Bbl) Swap Price(per Bbl) DailyVolume (Bbl) SwapPrice (perBbl)2014 687 $94.16 505 $100.56 100 $101.262015 560 $83.03 500 $97.04 — $—2016 963 $84.10 — $— — $—2017 500 $84.18 — $— — $—_______________________(1) On March 19, 2013 Abraxas entered Brent vs WTI Spread to better reflect actual realized pricing for the Company's Eagle Ford volumes. Theweighted average price for WTI was calculated by taking the exact volumes of the Brent hedge, starting with the highest WTI swaps.49Table of ContentsBy removing a significant portion of price volatility on our future oil and gas production, we believe that we will mitigate, but not eliminate, the potentialeffects of changing commodity prices on our cash flow from operations. However, when prevailing market prices are higher than our contract prices, we willnot realize increased cash flow on the portion of the production that has been hedged. We have sustained, and in the future will sustain, realized andunrealized losses on our derivative contracts when market prices are higher than our contract prices. Conversely, when prevailing market prices are lower thanour contract prices, we will sustain realized and unrealized gains on our commodity derivative contracts. For the year ended December 31, 2013, we incurred arealized loss of $5.0 million and an unrealized gain of $2.6 million on our commodity derivative contracts. For the year ended December 31, 2012, weincurred a realized loss of $0.3 million and an unrealized gain of $2.7 million on our commodity derivative contracts. For the year ended December 31, 2011,we incurred a realized gain of $1.7 million and an unrealized gain of $5.7 million on our commodity derivative contracts. If the disparity between ourcontract prices and market prices continues, we will sustain realized and unrealized gains or losses on our derivative contracts. While unrealized gains andlosses do not impact our cash flow from operations, realized gains and losses do impact our cash flow from operations. In addition, as our derivativecontracts expire over time, we expect to enter into new derivative contracts at then-current market prices. If the prices at which we hedge future production aresignificantly lower than our existing derivative contracts, our future cash flow from operations would likely be materially lower. In addition, borrowings underour credit facility bear interest at floating rates. If interest expense increases as a result of higher interest rates or increased borrowings, more cash flow fromoperations would be used to meet debt service requirements. As a result, we would need to increase our cash flow from operations in order to fund thedevelopment of our drilling opportunities which, in turn, will be dependent upon the level of our production volumes and commodity prices.See “—Quantitative and Qualitative Disclosures about Market Risk—Hedging Sensitivity” for further information.Net Operating Loss CarryforwardsAt December 31, 2013, we had, subject to the limitation discussed below, $141.9 million of net operating loss carryforwards for U.S. tax purposes and$20.5 million for Canadian tax purposes. The U.S. loss carryforwards will expire through 2033 and the Canadian carryforward will expire in 2033, if notutilized. Uncertainties exist as to the future utilization of the operating loss carryforwards under the criteria set forth under ASC 740-10 “Income Taxes”. Therefore,we have established a valuation allowance of $75.6 million for deferred tax assets at December 31, 2013. We account for uncertain tax positions under the provisions of ASC 740-10. ASC 740-10 did not have any effect on the Company’s financial position orresults of operations for the year ended December 31, 2013 or for the year ended December 31, 2012. The Company recognizes interest and penalties related touncertain tax positions in income tax expense. As of December 31, 2013, the Company did not have any accrued interest or penalties related to uncertain taxpositions. The tax years from 2001 through 2011 remain open to examination by the tax jurisdictions to which the Company is subject. The Company andAbraxas Energy Partners, L.P., which was merged into a wholly owned subsidiary of Abraxas, have undergone an audit of their 2009 Federal income taxreturns. The audit of the Federal income tax return of Abraxas Energy Partners, L.P. was completed with no changes. The audit of Abraxas PetroleumCorporation resulted in a notice of proposed adjustment of $619,000. For the year ended December 31, 2012, the Company accrued $310,000 in income taxexpense related to the audit of its 2009 Federal tax return. This amount was determined by an analysis of what the amount that is greater than 50% likely to bepaid upon final settlement. On July 23, 2013, we settled the assessment for $391,000 resulting in $81,000 being recognized as expense in 2013.Related Party TransactionsWe have adopted a policy that transactions between us and our officers, directors, principal stockholders, or affiliates of any of them, will be on terms noless favorable to us than can be obtained on an arm’s length basis in transactions with third parties and must be approved by our audit committee. During2012, we purchased equipment from an officer of our wholly-owned subsidiary Raven Drilling, LLC for total consideration of $195,000. The purchase pricewas based on an appraisal and was at fair market value. The transaction was approved by the audit committee. There were no related party transactions in2013. Environmental Regulations Various federal, provincial, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to theprotection of the environment, affect our operations and costs as a result of their effect on oil and gas exploration, development and production operations.These laws and regulations could cause us to incur remediation or other corrective action costs in connection with a release of regulated substances, includingoil, into the environment. In addition, we50Table of Contentshave acquired certain oil and gas properties from third parties whose actions with respect to the management and disposal or release of hydrocarbons or otherwastes were not under our control, and under environmental laws and regulations, we could be required to remove or remediate wastes disposed of or releasedby prior owners or operators. We also could incur costs related to the clean-up of sites to which we sent regulated substances for disposal or to which we sentequipment for cleaning, and for damages to natural resources or other claims related to releases of regulated substances at such sites. In addition, we could beresponsible under environmental laws and regulations for oil and gas properties in which we own an interest but are not the operator. Moreover, we are subjectto the EPA’s rule requiring annual reporting of GHG emissions. Compliance with such laws and regulations increases our overall cost of business, but has not had, to date, a material adverse effect on our operations,financial condition, results of operations or competitive position. It is not anticipated, based on current laws and regulations, that we will be required in thenear future to expend amounts (whether for environmental control facilities or otherwise) that are material in relation to our total exploration and developmentexpenditure program in order to comply with such laws and regulations, but, inasmuch as such laws and regulations are frequently changed, we are unable topredict the ultimate cost of compliance or the effect on our operations, financial condition, results of operations and competitive position.We are aware of the increasing focus of local, state, national and international regulatory bodies on GHG emissions and climate change issues. In additionto the EPA's rule requiring annual reporting of GHG emissions, we are also aware of legislation proposed by United States lawmakers to reduce GHGemissions. We are unable to predict the timing, scope and effect of any such proposed laws, regulations and treaties, but the direct and indirect costs of suchlaws, regulations and treaties (if enacted) could materially and adversely affect our business, results of operations, financial condition and competitiveposition. We strive to reduce GHG emissions throughout our operations which is in the best interest of the environment and a generally good business practice. Wewill continue to review the risks to our business and operations associated with all environmental matters, including climate change. In addition, we willcontinue to monitor and assess any new policies, legislation or regulations in the areas where we operate to determine the impact on our operations and takeappropriate actions, where necessary. Critical Accounting Policies The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires that management applyaccounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financialstatements. The following represents those policies that management believes are particularly important to the financial statements and that require the use ofestimates and assumptions to describe matters that are inherently uncertain. Full Cost Method of Accounting for Oil and Gas Activities. SEC Regulation S-X defines the financial accounting and reporting standards forcompanies engaged in oil and gas activities. Two methods are prescribed: the successful efforts method and the full cost method. We have chosen to follow thefull cost method under which all costs associated with property acquisition, exploration and development are capitalized. We also capitalize internal costs thatcan be directly identified with our acquisition, exploration and development activities but do not include any costs related to production, general corporateoverhead or similar activities. Under the successful efforts method, geological and geophysical costs and costs of carrying and retaining undevelopedproperties are charged to expense as incurred. Costs of drilling exploratory wells that do not result in proved reserves are charged to expense. Depreciation,depletion, amortization and impairment of oil and gas properties are generally calculated on a well by well or lease or field basis versus the “full cost” poolbasis. Additionally, gain or loss is generally recognized on all sales of oil and gas properties under the successful efforts method. As a result, our financialstatements will differ from companies that apply the successful efforts method since we will generally reflect a higher level of capitalized costs as well as ahigher depreciation, depletion and amortization rate on our oil and gas properties. At the time it was adopted, management believed that the full cost method would be preferable, as earnings tend to be less volatile than under thesuccessful efforts method. However, the full cost method makes us susceptible to significant non-cash charges during times of volatile commodity pricesbecause the full cost pool may be impaired when prices are low. These charges are not recoverable when prices return to higher levels. We have experienced thissituation several times over the years, most recently in the third quarter of 2013, relating to our proved oil and gas properties in Canada. Our oil and gasreserves have a relatively long life. However, temporary drops in commodity prices can have a material impact on our business including impact fromimpairment testing procedures associated with the full cost method of accounting as discussed below. Under full cost accounting rules, the net capitalized cost of oil and gas properties, less related deferred taxes, may not exceed a “ceiling limit” which isbased upon the present value of estimated future net cash flows from proved reserves on a pool by pool basis, discounted at 10%, plus the lower of cost or fairmarket value of unproved properties and the cost of properties not being amortized, less income taxes. If net capitalized costs of oil and gas properties exceedthe ceiling limit, we must charge the amount51Table of Contentsof the excess to earnings. This is called a “ceiling limitation write-down.” This charge does not impact cash flow from operating activities, but does reduce ourstockholders’ equity and reported earnings. The risk that we will be required to write down the carrying value of oil and gas properties increases when oil andgas prices are depressed. In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves. An expenserecorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to thesubsequent period. We apply the full cost ceiling test on a quarterly basis on the date of the latest balance sheet presented.Estimates of Proved Oil and Gas Reserves. Estimates of our proved reserves included in this report are prepared in accordance with GAAP and SECguidelines. 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 engineeringand operations departments of Abraxas. Reserve estimates were made by our independent petroleum engineers. Estimates prepared by other third parties may behigher or lower than those included herein. Because these estimates depend on many assumptions, all of which may substantially differ from future actualresults, reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and productionafter the date of an estimate may justify material revisions to the estimate. You should not assume that the present value of future net cash flows is the current market value of our estimated proved reserves. In accordance withSEC requirements, we based the estimated discounted future net cash flows from proved reserves on costs on the date of the estimate and for the years endedDecember 31, 2011, 2012 and 2013, oil and gas prices were based on the average 12-month first-day-of-the-month pricing as compared to end of period pricesutilized in prior years. Actual future prices and costs may be materially higher or lower than the prices and costs used in the estimate. The estimates of proved reserves materially impact DD&A expense. If the estimates of proved reserves decline, the rate at which we record DD&A expensewill increase, reducing future net income. Such a decline may result from lower market prices, which may make it uneconomic to drill for and produce highercost fields. Asset Retirement Obligations. The estimated costs of restoration and removal of facilities are accrued. The fair value of a liability for an asset’sretirement obligation is recorded in the period in which it is incurred and the corresponding cost is capitalized by increasing the carrying amount of the relatedlong-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Forall periods presented, we have included estimated future costs of abandonment and dismantlement in our full cost amortization base and we amortize thesecosts as a component of our depletion expense. Accounting for Derivatives. Realized derivative gains or losses are determined by actual derivative settlements during the period. Unrealized gains andlosses are based on the periodic mark to market valuation of derivative contracts in place. The derivative instruments we utilize are based on index prices thatmay and often do differ from the actual oil and gas prices realized in our operations. We have elected not to apply hedge accounting to our derivative contractsas prescribed by ASC 815; as a result, fluctuations in the market value of the derivative contract are recognized in earnings during the current period. Ourderivative contracts consist of commodity swaps and interest rate swaps. Due to the volatility of oil and gas prices and, to a lesser extent, interest rates, ourfinancial condition and results of operations can be significantly impacted by changes in the market value of our derivative instruments. As of December 31,2012 and 2013, the net market value of our commodity derivatives was a net liability of $6.4 million and $4.0 million, respectively.Share-Based Payments. We currently utilize a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted toemployees and directors. Additional information about management’s assumptions can be found in Note 6 to the consolidated financial statements. Optionsgranted to employees and directors are valued at the date of grant and expense is recognized over the options vesting period. Restricted stock awards are awardsof 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 thelapse of the restrictions. The value of such stock is determined using the market price on the grant date and expense is recognized over the52Table of Contentsvesting period. For the years ended December 31, 2011, 2012 and 2013, stock-based compensation was approximately $2.0 million, $2.1 million, and $2.1million, respectively.Equity Method Investment. Our investment in an unconsolidated joint venture, in which we did not have a majority interest, was accounted for underthe equity method. Under the equity method of accounting, our share of net income (loss) from our equity investment was reflected as an increase (decrease) inour investment account “Investment in joint venture” and was also recorded as “Earnings from equity method investment ” in “Other (income) expense.” Thejoint venture was dissolved effective August 31, 2012. Item 7A. Quantitative and Qualitative Disclosures about Market RiskCommodity Price Risk As an independent oil and gas producer, our revenue, cash flow from operations, other income and profitability, reserve values, access to capital andfuture rate of growth are substantially dependent upon the prevailing prices of oil and gas. Declines in commodity prices will adversely affect our financialcondition, liquidity, ability to obtain financing and operating results. Lower commodity prices may reduce the amount of oil and gas that we can produceeconomically. Prevailing prices for such commodities are subject to wide fluctuation in response to relatively minor changes in supply and demand and avariety of additional factors beyond our control, such as global, political and economic conditions. Historically, prices received for our oil and gas productionhave been volatile and unpredictable, and such volatility is expected to continue. Most of our production is sold at market prices. Generally, if the commodityindices fall, the price that we receive for our production will also decline. Therefore, the amount of revenue that we realize is partially determined by factorsbeyond our control. Assuming the production levels we attained during the year ended December 31, 2013, a 10% decline in oil and gas prices would havereduced our operating revenue and cash flow by approximately $9.4 million for the year; however, due to the derivative contracts that we have in place, it isunlikely that a 10% decline in commodity prices from their current levels would significantly impact our operating revenue, cash flow and net income. Derivative Instrument Sensitivity We account for our derivative contracts in accordance with ASC 815. The derivative instruments we utilize are based on index prices that may and oftendo differ from the actual oil and gas prices realized in our operations. We have elected not to apply hedge accounting to our derivative contracts as prescribedby ASC 815; as a result, fluctuations in the market value of the derivative contract are recognized in earnings during the current period.The following table sets forth the summary position of our derivative contracts as of December 31, 2013: Oil - WTI Oil - Brent Oil - LLSContract Periods DailyVolume(Bbl) Swap Price(per Bbl) DailyVolume(Bbl) Swap Price(per Bbl) DailyVolume(Bbl) Swap Price(per Bbl)2014 687 $94.16 505 $100.56 100 $101.262015 560 $83.03 500 $97.04 — $—2016 963 $84.10 — $— — $—2017 500 $84.18 — $— — $— At December 31, 2013, the aggregate fair market value of our commodity derivative contracts was a liability of approximately $4.0 million. For the year ended December 31, 2013, we recognized a realized loss of $5.0 million and an unrealized gain of $2.6 million on our commodity derivativecontracts.Interest Rate Risk We are subject to interest rate risk associated with borrowings under our credit facility. As of December 31, 2013, we had $33.0 million of outstandingindebtedness under our credit facility. Outstanding amounts under the credit facility bear interest at (a) the greater of (1) the reference rate announced from timeto time by Société Générale, (2) the Federal Funds Rate plus 0.5%, and (3) a rate determined by Société Générale as the daily one-month LIBOR plus, in eachcase, (b) 1.25%—2.25%, depending on the utilization of the borrowing base, or, if we elect, LIBOR plus 2.25%—3.25%, depending on the utilization of theborrowing b53Table of Contentsase. At December 31, 2013, the interest rate on the credit facility was 2.67%. For every percentage point that the LIBOR rate rises, our interest expense wouldincrease by approximately $0.3 million on an annual basis, based on our outstanding indebtedness as of December 31, 2013. Item 8. Financial Statements and Supplementary Data For the financial statements and supplementary data required by this Item 8, see the Index to Consolidated Financial Statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and ProceduresUnder the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our ChiefFinancial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e)and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and ourChief Financial Officer believe that the disclosure controls and procedures as of December 31, 2013 were effective to ensure that information we are required todisclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC’s rules and forms and are effective to ensure that information required to be disclosed by us is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reportingis a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and implemented by the Company’sBoard of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directorsof the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of theCompany’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting maynot prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — IntegratedFramework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our managementconcluded that our internal control over financial reporting was effective as of December 31, 2013.The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by BDO USA, LLP, an independent registeredpublic accounting firm, as stated in their report which is included herein. Changes in Internal Controls There were no changes in our internal control over financial reporting during the quarter ended December 31, 2013 that materially affected, or arereasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information54Table of Contents NonePART IIIItem10. Directors, Executive Officers and Corporate Governance There is incorporated in this Item 10 by reference to that portion of our definitive proxy statement for the 2014 Annual Meeting of Stockholders whichappears therein under the caption “Election of Directors – Board of Directors and Executive Officers,” “– Code of Ethics” and “– Committees of the Board ofDirectors.” Audit Committee and Audit Committee Financial Expert The Audit Committee of our board of directors consists of Brian L. Melton., W. Dean Karrash, Paul A. Powell, Jr. and Jerry J. Langdon. The board ofdirectors has determined that each of the members of the Audit Committee is independent as determined in accordance with the listing standards of TheNASDAQ Stock Market and Item 407(a) of Regulation S-K. In addition, the board of directors has determined that Brian L. Melton, as defined by SECrules, is an audit committee financial expert. Section 16(a) Compliance Section 16(a) of the Exchange Act requires our directors and executive officers and persons who own more than 10% of a registered class of Abraxasequity securities to file with the SEC and The NASDAQ initial reports of ownership and reports of changes in ownership of Abraxas commonstock. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all such forms they file. Basedsolely on a review of the copies of such reports furnished to us and written representations that no other reports were required, we believe that all our directorsand executive officers complied on a timely basis with all applicable filing requirements under Section 16(a) of the Exchange Act during 2013. Item 11. Executive Compensation There is incorporated in this Item 11 by reference that portion of our definitive proxy statement for the 2014 Annual Meeting of Stockholders whichappears therein under the captions “Election of Directors – Committees of the Board of Directors” and “Executive Compensation.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters There is incorporated in this Item 12 by reference that portion of our definitive proxy statement for the 2014 Annual Meeting of Stockholders whichappears therein under the caption “Securities Holdings of Principal Stockholders, Directors, Nominees and Officers.”Item 13. Certain Relationships and Related Transactions, and Director Independence There is incorporated in this Item 13 by reference that portion of our definitive proxy statement for the 2014 Annual Meeting of Stockholders whichappears therein under the captions “Certain Transactions” and “Election of Directors – Director Independence.” Item 14. Principal Accountant Fees and Services There is incorporated in this Item 14 by reference that portion of our definitive proxy statement for the 2014 Annual Meeting of Stockholders whichappears therein under the caption “Principal Auditor Fees and Services.”55Table of ContentsPART IV Item 15. Exhibits and Financial Statement Schedules (a)1. Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements F-2 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting F-3 Consolidated Balance Sheets at December 31, 2012 and 2013 F-4 Consolidated Statements of Operations for the years ended December 31, 2011, 2012 and 2013 F-6 Consolidated Statements of Other Comprehensive Income (Loss) for the years endedDecember 31, 2011, 2012 and 2013 F-7 Consolidated Statements of Stockholders’ Equity (Deficit) for the years endedDecember 31, 2011, 2012 and 2013 F-8 Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013 F-9 Notes to Consolidated Financial Statements F-11 (a)2. Financial Statement Schedules All schedules have been omitted because they are not required, not applicable, or the information required is included in the Consolidated FinancialStatements or related notes thereto. (a)3. Exhibits The following Exhibits have previously been filed by the Registrant or are included following the Index to Exhibits. Exhibit Number Description 3.1Articles of Incorporation of Abraxas dated August 30, 1990. (Filed as Exhibit 3.1 to our Registration Statement on Form S-4, No. 33-36565. (the “S-4 Registration Statement”)). 3.2Articles of Amendment to the Articles of Incorporation of Abraxas dated October 22, 1990. (Filed as Exhibit 3.3 to the S-4 Registration Statement). 3.3Articles of Amendment to the Articles of Incorporation of Abraxas dated December 18, 1990. (Filed as Exhibit 3.4 to the S-4 Registration Statement). 3.4Articles of Amendment to the Articles of Incorporation of Abraxas dated June 8, 1995. (Filed as Exhibit 3.4 to our Registration Statement on Form S-3, No. 333-00398). 3.5Articles of Amendment to the Articles of Incorporation of Abraxas dated as of August 12, 2000. (Filed as Exhibit 3.5 to our Annual Report on Form10-K filed on April 2, 2001). 3.6Certificate of Correction dated February 24, 2011 (Filed herewith).3.7Amended and Restated Bylaws of Abraxas. (Filed as Exhibit 3.1 to our Current Report on Form 8-K filed on November 17, 2008). 3.8Certificate of Designation of Series 2010 Junior Participating Preferred Stock. (Filed as Exhibit 3.1 to our Current Report on Form 8-K filed on March17, 2010). 4.1Specimen Common Stock Certificate of Abraxas. (Filed as Exhibit 4.1 to the S-4 Registration Statement). 56Table of Contents4.2Specimen Preferred Stock Certificate of Abraxas. (Filed as Exhibit 4.2 to our Annual Report on Form 10-K filed on March 31, 1995). 4.3Rights Agreement, dated March 17, 2010 by and between Abraxas and American Stock Transfer and Trust Company. (Filed as Exhibit 4.1 to ourRegistration Statement on Form 8-A filed on March 17, 2010). *10.1Abraxas Petroleum Corporation 401(k) Profit Sharing Plan. (Filed as Exhibit 10.4 to our Registration Statement on Form S-4, No. 333-18673 filed onDecember 24, 1996).*10.2Abraxas Petroleum Corporation Amended and Restated 1994 Long Term Incentive Plan. (Filed as Exhibit 10.4 to our Registration Statement on FormS-4, No. 333-120989 filed on January 12, 2005). *10.3Form of Indemnity Agreement between Abraxas and each of its directors and officers. (Filed as Exhibit 10.4 to our Annual Report on Form 10-K filedMarch 14, 2007). *10.4Employment Agreement between Abraxas and Robert L. G. Watson. (Filed as Exhibit 10.19 to the Registration Statement on Form S-1, No. 333-95281 filed on January 24, 2000 (the “2000 S-1 Registration Statement”)). *10.5Employment Agreement between Abraxas and Stephen T. Wendel. (Filed as Exhibit 10.26 to the Registration Statement on Form S-3, No. 333-127480filed on September 16, 2005 (the “S-3 Registration Statement”)). *10.6Employment Agreement between Abraxas and William H. Wallace. (Filed as Exhibit 10.27 to the S-3 Registration Statement). *10.7Employment Agreement between Abraxas and Lee T. Billingsley. (Filed as Exhibit 10.28 to the S-3 Registration Statement). *10.8Employment Agreement between Abraxas and G. William Krog, Jr. (Filed as Exhibit 10.9 to our Annual Report on Form 10-K filed March 15,2012). *10.9Employment Agreement between Abraxas and Geoffrey R. King (Filed as Exhibit 10.9 to our Annual Report on Form 10-K filed March 18, 2013) *10.10Abraxas Petroleum Corporation 2005 Non-Employee Directors Long-Term Equity Incentive Plan. (Filed as Appendix A to our Proxy Statement filedon April 15, 2010). *10.11Form of Stock Option Agreement under the Abraxas Petroleum Corporation 2005 Non-Employee Directors Long-Term Equity Incentive Plan. (Filedas Exhibit 10.2 to our Current Report on Form 8-K filed June 6, 2005). *10.12Abraxas Petroleum Corporation Senior Management Incentive Bonus Plan 2006. (Filed as Exhibit 10.17 to our Annual Report on Form 10-K filedMarch 23, 2006). *10.13Abraxas Petroleum Corporation 2005 Employee Long-Term Equity Incentive Plan. (Filed as Annex E to our Proxy Statement filed on September 8,2009). *10.14Form of Employee Stock Option Agreement under the Abraxas 2005 Employee Long-Term Equity Incentive Plan. (Filed as Exhibit 10.2 to ourCurrent Report on Form 8-K filed August 26, 2006). 10.15Amended and Restated Credit Agreement dated as of June 30, 2011 among Abraxas Petroleum, as Borrower, the lenders party thereto and SociétéGénérale, as Administrative Agent and as Issuing Lender. (Filed as Exhibit 10.1 to our Current Report on Form 8-K filed on July 6, 2011). 10.16Amendment No. 2 to Second Amended and Restated Credit Agreement dated as of June 29, 2012 among Abraxas, the guarantors named therein, thelenders named therein and Société Générale, as administrative agent (Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on August 9,2012). 10.17Loan Agreement dated as of September 19, 2011 between Raven Drilling, LLC, as Borrower, and RBS Asset Finance, Inc., as Lender. (Filed asExhibit 10.1 to our Current Report on Form 8-K filed on September 23, 2011). 57Table of Contents14.1Abraxas Petroleum Corporation Code of Business Conduct and Ethics. (Filed as Exhibit 14.1 to our Annual Report on Form 10-K filed March 22,2006). 21.1Subsidiaries of Abraxas. (Filed as Exhibit 21.1 to our Annual Report on Form 10-K filed on March 15, 2012).23.1Consent of BDO USA, LLP. (Filed herewith). 23.2Consent of DeGolyer and MacNaughton. (Filed herewith). 31.1Certification – Chief Executive Officer. (Filed herewith). 31.2Certification – Chief Financial Officer. (Filed herewith). 32.1Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002. (Filed herewith).32.2Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002. (Filed herewith). 99.1 Report of DeGolyer and MacNaughton with respect to oil and reserves of Abraxas Petroleum. (Filed herewith). *Management Compensatory Plan or Agreement.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. ABRAXAS PETROLEUM CORPORATIONBy:/s/Robert L.G. Watson By:/s/Geoffrey R. KingBy:/s/ G. William Krog, Jr. President and Principal ExecutiveOfficer Vice President and Principal FinancialOfficer Principal Accounting OfficerDATED:March 17, 2014Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the date indicated.58Table of ContentsSignature Name and Title Date/s/ Robert L.G. WatsonRobert L.G. Watson Chairman of the Board, President (Principal ExecutiveOfficer) and Director March 17, 2014/s/ Geoffrey R. KingGeoffrey R. King Vice President, CFO (Principal Financial Officer) March 17, 2014/s/ G. William Krog, Jr.G. William Krog, Jr. Chief Accounting Officer (Principal Accounting Officer) March 17, 2014/s/ Harold D. CarterHarold D. Carter Director March 17, 2014/s/ Ralph F. CoxRalph F. Cox Director March 17, 2014/s/ W. Dean KarrashW. Dean Karrash Director March 17, 2014/s/ Jerry J. LangdonJerry J. Langdon Director March 17, 2014/s/ Dennis E. LogueDennis E. Logue Director March 17, 2014/s/ Brian L. MeltonBrian L. Melton Director March 17, 2014/s/ Paul A. Powell, Jr.Paul A. Powell, Jr. Director March 17, 2014/s/ Katherine T. Richard.Katherine T. Richard Director March 17, 2014/s/ Edward P. RussellEdward P. Russell Director March 17, 201459Table of ContentsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Abraxas Petroleum Corporation and Subsidiaries Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements F-2 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting F-3 Consolidated Balance Sheets at December 31, 2012 and2013 F-4 Consolidated Statements of Operations for the years ended December 31, 2011, 2012 and 2013 F-6 Consolidated Statements of Other Comprehensive Income (Loss) for the years ended December 31, 2011,2012 and 2013 F-7 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2011,2012 and 2013 F-8 Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013 F-9 Notes to Consolidated Financial Statements F-11 All schedules are omitted because they are not required, are not applicable or the information required is included in the Consolidated Financial Statements orthe related notes thereto.F-1Table of ContentsReport of Independent Registered Public Accounting Firm Board of Directors and StockholdersAbraxas Petroleum CorporationSan Antonio, TexasWe have audited the accompanying consolidated balance sheets of Abraxas Petroleum Corporation as of December 31, 2012 and 2013 and the relatedconsolidated statements of operations and other comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the three years in theperiod ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinionon these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Abraxas PetroleumCorporation at December 31, 2012 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31,2013, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Abraxas Petroleum Corporation'sinternal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 17, 2014 expressed an unqualified opinionthereon./s/ BDO USA, LLPDallas, TexasMarch 17, 2014F-2Table of ContentsReport of Independent Registered Public Accounting Firm Board of Directors and StockholdersAbraxas Petroleum CorporationSan Antonio, TexasWe have audited Abraxas Petroleum Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in InternalControl – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AbraxasPetroleum Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectivenessof internal control over financial reporting, included in the accompanying Item 9A, “Management’s Report on Internal Control Over Financial Reporting”. Ourresponsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.In our opinion, Abraxas Petroleum Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof Abraxas Petroleum Corporation as of December 31, 2012 and 2013, and the related consolidated statements of operations and other comprehensive income(loss), stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2013 and our report dated March 17, 2014expressed an unqualified opinion thereon. /s/ BDO USA, LLP Dallas, TexasMarch 17, 2014F-3Table of ContentsABRAXAS PETROLEUM CORPORATIONCONSOLIDATED BALANCE SHEETSASSETS December 31, 2012 2013 (In thousands)Current assets: Cash and cash equivalents $2,061 $5,205Accounts receivable: Joint owners 8,883 15,493Oil and gas production sales 10,887 16,625Other 661 1,497 20,431 33,615 Derivative asset 41 85Other current assets 488 644Total current assets 23,021 39,549 Property and equipment: Oil and gas properties, full cost method of accounting: Proved 563,317 564,755Unproved properties excluded from depletion 2,089 —Other property and equipment 37,833 38,959Total 603,239 603,714Less accumulated depreciation, depletion, and amortization (390,407) (423,069)Total property and equipment, net 212,832 180,645 Deferred financing fees, net 3,397 2,140Derivative asset 594 925Other assets 763 391Total assets $240,607 $223,650See accompanying notes to consolidated financial statementsF-4Table of ContentsABRAXAS PETROLEUM CORPORATIONCONSOLIDATED BALANCE SHEETS (CONTINUED)LIABILITIES AND STOCKHOLDERS’ EQUITY December 31, 2012 2013 (In thousands, except number ofshares)Current liabilities: Accounts payable $42,387 $52,793Joint interest oil and gas production payable 6,947 23,810Accrued interest 75 31Other accrued expenses 962 1,231Derivative liability 3,462 2,728Current maturities of long-term debt 657 2,142Total current liabilities 54,490 82,735 Long-term debt – less current maturities 124,101 41,790Other liabilities 367 57Derivative liability 3,568 2,274Future site restoration 11,381 9,888Total liabilities 193,907 136,744 Commitments and contingencies (Note 8) — — Stockholders’ Equity: Preferred stock, par value $.01 per share – authorized 1,000,000 shares; -0- shares issued and outstanding — —Common stock, par value $.01 per share – authorized 200,000,000 shares; issued and outstanding 92,733,448and 92,906,049 927 929Additional paid-in capital 250,998 253,193Accumulated deficit (205,256) (166,609)Accumulated other comprehensive income (loss) 31 (607)Total stockholders’ equity 46,700 86,906Total liabilities and stockholders’ equity $240,607 $223,650See accompanying notes to consolidated financial statementsF-5Table of ContentsABRAXAS PETROLEUM CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2011 2012 2013 (In thousands except per share data)Revenues: Oil and gas production revenues $64,615 $68,499 $94,275Other 7 74 56 64,622 68,573 94,331Operating costs and expenses: Lease operating 21,581 24,806 25,361Production taxes 5,766 6,613 8,510Depreciation, depletion, and amortization 16,194 23,016 26,632Impairment — 19,774 6,025General and administrative (including stock-based compensation of $1,987, $2,091 and$2,114, respectively) 9,433 10,712 12,876 52,974 84,921 79,404Operating income (loss) 11,648 (16,348) 14,927 Other (income) expense: Interest income (7) (4) (3)Interest expense 4,898 5,520 4,580Amortization of deferred financing fees 1,762 937 1,367Gain on sale of properties — — (33,377)Loss on derivative contracts - realized 676 459 5,035Gain on derivative contracts - unrealized (7,476) (2,669) (2,561)Earnings from equity method investment (2,187) (2,207) —Other 316 97 539 (2,018) 2,133 (24,420)Income (loss) before income tax 13,666 (18,481) 39,347Income tax benefit (expense) 77 (310) (700)Net income (loss) $13,743 $(18,791) $38,647 Net income (loss) - per common share - basic $0.15 $(0.20) $0.42 Net income (loss) - per common share - diluted $0.15 $(0.20) $0.41See accompanying notes to consolidated financial statementsF-6Table of ContentsABRAXAS PETROLEUM CORPORATIONCONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS) Years Ended December 31, 2011 2012 2013 (In thousands)Consolidated net income (loss) $13,743 $(18,791) $38,647Other comprehensive income (loss): Change in unrealized value of investments (76) (25) (79)Foreign currency translation adjustment (456) 343 (559)Other comprehensive income (loss) (532) 318 (638)Comprehensive income (loss) $13,211 $(18,473) $38,009 See accompanying notes to consolidated financial statementsF-7Table of ContentsABRAXAS PETROLEUM CORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands except number of shares) Common Stock Shares Amount AdditionalPaid inCapital AccumulatedDeficit Accumulated OtherComprehensiveIncome (Loss) TotalBalance at December 31, 201076,427,561 $764 $184,223 $(200,208) $245 $(14,976)Net income— — — 13,743 — 13,743Change in unrealized gain (loss) on fair valueof investments— — — — (76) (76)Foreign currency translation adjustment— — — — (456) (456)Stock-based compensation— — 1,987 — — 1,987Shares issued for compensation15,075,502 151 62,195 — — 62,346Stock options exercised371,632 4 79 — — 83Restricted stock issued, net of cancellations386,362 4 (4) — — —Balance at December 31, 201192,261,057 923 248,480 (186,465) (287) 62,651Net income— — — (18,791) — (18,791)Change in unrealized gain (loss) on fair valueof investments— — — — (25) (25)Foreign currency translation adjustment— — — — 343 343Stock-based compensation— — 2,091 — — 2,091Stock options exercised390,957 4 427 — — 431Restricted stock issued, net of cancellations81,434 — — — — —Balance at December 31, 201292,733,448 927 250,998 (205,256) 31 46,700Net income— — — 38,647 — 38,647Change in unrealized gain (loss) on fair valueof investments— — — — (79) (79)Foreign currency translation adjustment— — — — (559) (559)Stock-based compensation— — 2,114 — — 2,114Stock options exercised129,686 2 81 — — 83Restricted stock issued, net of cancellations42,915 — — — — —Balance at December 31, 201392,906,049 $929 $253,193 $(166,609) $(607) $86,906See accompanying notes to consolidated financial statementsF-8Table of ContentsABRAXAS PETROLEUM CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2011 2012 2013 (In thousands)Operating Activities Net income (loss) $13,743 $(18,791) $38,647Adjustments to reconcile net income (loss) to net cash provided by operating activities: Earnings from equity method investment (2,187) (2,207) —Gain on sale of properties — — (33,377)Change in derivative fair value (7,680) (4,088) (2,403)Monetization of derivative contracts — 12,364 —Depreciation, depletion, and amortization 16,194 23,016 26,632Impairment — 19,774 6,025Accretion of future site restoration 452 474 638Amortization of deferred financing fees 1,762 937 1,367Stock-based compensation 1,987 2,091 2,114Changes in operating assets and liabilities: Accounts receivable (182) (7,506) (13,215)Other assets and liabilities (17) 250 (176)Accounts payable 756 22,024 27,294Accrued expenses (333) 3,037 (1,892)Net cash provided by operating activities 24,495 51,375 51,654 Investing Activities Capital expenditures, including purchasesand development of properties (79,012) (68,552) (95,043)Proceeds from the sale of oil and gas properties 8,457 21,549 127,529Net cash (used in) provided by investing activities (70,555) (47,003) 32,486 Financing Activities Proceeds from exercise of stock options and warrants 83 431 83Proceeds from issuance of common stock, net of offering costs 62,346 — —Proceeds from long-term borrowings 50,500 30,500 42,000Payments on long-term borrowings (65,153) (32,181) (122,826)Deferred financing fees (1,758) (844) (110)Other (52) (217) (161)Net cash provided by (used in) financing activities 45,966 (2,311) (81,014)Effect of exchange rate changes on cash (5) — 18(Decrease) increase in cash (99) 2,061 3,144Cash at beginning of year 99 — 2,061Cash at end of year $— $2,061 $5,205See accompanying notes to consolidated financial statementsF-9Table of ContentsABRAXAS PETROLEUM CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(CONTINUED) Years Ended December 31, 2011 2012 2013 (In thousands)Supplemental disclosures of cash flow information: Interest paid $4,514 $5,180 $3,986 Income taxes paid $(77) $— $391Non-Cash Investing Activities: Asset retirement obligation cost and liabilities $(8) $2,588 $138Non-cash transfer of investment in joint venture $— $28,531 $—Asset retirement obligations associated with property acquisitions and dispositions $306 $324 $(1,890) See accompanying notes to consolidated financial statementsF-10Table of ContentsABRAXAS PETROLEUM CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Organization and Significant Accounting PoliciesNature of OperationsWe are an independent energy company primarily engaged in the acquisition, exploitation, development and production of oil and gas in the UnitedStates and Canada. Our oil and gas assets are located in three operating regions in the United States, the Rocky Mountain, Permian Basin and onshore GulfCoast, and in the province of Alberta, Canada.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 (“Raven Drilling”) and its wholly-owned foreign subsidiary, Canadian Abraxas Petroleum, ULC (“Canadian Abraxas”). Theterm “Partnership” refers only to Abraxas Energy Partners, L.P.Canadian Abraxas’ assets and liabilities are translated to U.S. dollars at period-end exchange rates. Income and expense items are translated at averagerates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of stockholders’ equity. Rig Accounting In accordance with SEC Regulation S-X, no income is recognized in connection with contractual drilling services performed in connection withproperties in which the Company or its affiliates holds an ownership, or other economic interest. Any income not recognized as a result of this limitation iscredited to the full cost pool and recognized through lower amortization as reserves are produced. Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.Concentration of Credit RiskFinancial instruments which potentially expose the Company to credit risk consist principally of trade receivables and derivativecontracts. Accounts receivable are generally from companies with significant oil and gas marketing activities. The Company performs ongoing creditevaluations and, generally, requires no collateral from its customers. The counterparties to our derivative contracts are the same financial institutions fromwhich 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 thecurrent 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 theCompany to be of high credit quality.Cash and EquivalentsCash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of three months or less. Accounts ReceivableAccounts receivable are reported net of an allowance for doubtful accounts of approximately $105,000 and $407,000 at December 31, 2012 and2013, respectively. 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.Oil and Gas PropertiesF-11Table of ContentsThe Company follows the full cost method of accounting for oil and gas properties. Under this method, all direct costs and certain indirect costsassociated 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 ofunamortized cost or the cost ceiling, defined as the sum of the present value of estimated future net revenues from proved reserves based on unescalated pricesdiscounted at 10 percent, plus the cost of properties not being amortized, if any, plus the lower of cost or estimated fair value of unproved properties includedin 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 provedproperty impairment expense. No gain or loss is recognized upon sale or disposition of oil and gas properties for full cost accounting companies with proceedsaccounted 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 ofthe relationship between capitalized cost and proved reserves. We apply the full cost ceiling test on a quarterly basis on the date of the latest balance sheetpresented. As of December 31, 2011, our net capitalized costs of oil and gas properties in the United States and Canada did not exceed the present value of ourestimated proved reserves. As of December 31, 2012, net capitalized costs of oil and gas properties in the United States did not exceed the present value of ourestimated proved reserves; however, the net capitalized costs of oil and gas properties in Canada exceeded the present value of our estimated proved reserves by$19.8 million resulting in a write down for the year ended December 31, 2012. Write downs of $1.3 million, $11.8 million and $6.7 million were taken inthe second, third and fourth quarters of 2012, respectively. As of December 31, 2013, net capitalized costs of oil and gas properties in the United States didnot exceed the present value of our estimated proved reserves; however, the net capitalized costs of oil and gas properties in Canada exceeded the present valueof our estimated proved reserves by $6.0 million resulting in a write down for the year ended December 31, 2013. There were write downs in the second, thirdand fourth quarters of 2013 of $2.0 million; $0.1 million and $3.9 million, respectively.Other Property and EquipmentOther property and equipment are recorded on the basis of cost. Depreciation of other property and equipment is provided over the estimated usefullives using the straight-line method. Major renewals and improvements are recorded as additions to the property and equipment accounts. Repairs that do notimprove 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 reserveestimate 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 theEngineering and Operations departments of Abraxas. Estimates prepared by other third parties may be higher or lower than those included herein. Becausethese estimates depend on many assumptions, all of which may substantially differ from future actual results, reserve estimates will be different from thequantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may cause materialrevisions 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 gasprices based on the average 12 month first-day-of-month pricing for the years ended December 31, 2012 and 2013, and costs as of December 31, 2012 and2013. 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 reservesdecline, the rate at which we record DD&A expense will increase, reducing future net income. Such a decline may result from lower commodity prices, whichmay make it uneconomic to drill for and produce higher cost fields. Derivative Instruments and Hedging ActivitiesF-12Table of ContentsThe Company enters into agreements to hedge the risk of future oil and gas price fluctuations. Such agreements are in the form of fixed price swaps,which limit the impact of price fluctuations with respect to the Company’s sale of oil and gas. The Company does not enter into speculative hedges.The Company accounts for derivative gains and losses based on realized and unrealized amounts. The realized derivative gains or losses aredetermined by actual derivative settlements during the period. Unrealized gains and losses are based on the periodic mark to market valuation of derivativecontracts in place. The derivative instruments we utilize are based on index prices that may and often do differ from the actual oil and gas prices realized inour operations. These variations often result in a lack of adequate correlation to enable these derivative instruments to qualify for hedge accounting rules asprescribed by Accounting Standards Codification (“ASC”) 815. Accordingly, we do not account for our derivative instruments as cash flow hedges forfinancial reporting purposes and instead record their fair value on the balance sheet with adjustments to the carrying value of the instruments being recognizedas a gain or loss in the current period.Fair Value of Financial InstrumentsThe Company includes fair value information in the notes to consolidated financial statements when the fair value of its financial instruments ismaterially different from the carrying value. The carrying value of those financial instruments that are classified as current approximates fair value because ofthe short maturity of these instruments. For noncurrent financial instruments, the Company uses quoted market prices or, to the extent that there are noavailable quoted market prices, market prices for similar instruments.Share-Based Payments The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employeesand directors. Options granted are valued at the date of grant and expense is recognized over the vesting period. Restricted stock awards are awards of commonstock 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 therestrictions. 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 theyears ended December 31, 2011, 2012 and 2013, stock-based compensation was approximately $2.0 million, $2.1 million and $2.1 million, respectively. Foradditional information regarding share-based payments, refer to Note 6, “Stock-Based Compensation, Option Plans and Warrants.” Restoration, Removal and Environmental LiabilitiesThe Company is subject to extensive Federal, provincial, state and local environmental laws and regulations. These laws regulate the discharge ofmaterials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum substancesat various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existingcondition 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 bereasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component are fixed or reliablydeterminable.The Company accounts for asset retirement obligations based on the guidance of ASC 410 which addresses accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associated asset retirement costs. ASC 410 requires that the fair value of a liability for anasset's retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of therelated 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 therelated asset. For all periods presented, we have included estimated future costs of abandonment and dismantlement in our full cost amortization base and weamortize these costs as a component of our depletion expense in the accompanying consolidated financial statements.The following table summarizes the Company’s asset retirement obligations during the two years ended December 31: F-13Table of Contents 2012 2013 Beginning asset retirement obligation $8,412 $11,381New wells placed on production and other 330 222Deletions related to property disposals and plugging costs (423) (2,491)Accretion expense 474 638Revisions 2,588 138Ending asset retirement obligation $11,381 $9,888Revenue Recognition and Major PurchasersThe Company recognizes oil and gas revenue from its interest in producing wells as oil and gas is sold from those wells, net of royalties. TheCompany utilizes the sales method to account for gas production imbalances. Under this method, income is recorded based on the Company’s net revenueinterest in production taken for delivery. The Company had no material gas imbalances at December 31, 2012 and 2013.During 2011, two purchasers accounted for 28% of oil and gas revenues. During 2012, three purchasers accounted for 39% of oil and gas revenues.During 2013, two customers accounted for 49% of our oil and gas revenues.Deferred Financing FeesDeferred financing fees are being amortized on the effective yield basis over the term of the related debt arrangements.Income TaxesThe Company records deferred income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis andoperating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect to taxable income inthe years in which those temporary differences are expected to be recovered or settled. Uncertainties exist as to the future utilization of the operating losscarryforwards under the criteria set forth under ASC 740-10. Therefore, we have established a valuation allowance of $75.6 million for deferred tax assets atDecember 31, 2013. Accounting for Uncertainty in Income Taxes ASC 740 provides guidance on accounting for uncertainty in income taxes. ASC 740 is intended to clarify the accounting for uncertainty in incometaxes recognized in a company’s financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a taxreturn. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. Under ASC 740, 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 positionwill be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second stepis 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 taxposition 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 inwhich the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the firstsubsequent reporting period in which the threshold is no longer met. Penalties and interest are classified as income tax expense.Other Comprehensive Income (Loss)ASC 220 requires disclosure of comprehensive income (loss), which includes reported net income (loss) as adjusted for other comprehensive income(loss). Other Comprehensive income (loss) for the Company is the change in the unrealized value of investments and foreign currency translation adjustments.2. Joint VentureOn August 18, 2010, Abraxas Petroleum and its wholly-owned subsidiary, Abraxas Operating, LLC, contributed 8,333 net acres in the Eagle Ford Shaleplay to Blue Eagle Energy, LLC (“Blue Eagle”) and received a $25.0 million equity interest in Blue Eagle pursuant to the terms of the Subscription andContribution Agreement among Abraxas Petroleum, Abraxas Operating, Blue Eagle and Rock Oil Company, LLC (“Rock Oil”) formerly known as Blue StoneOil & Gas, LLC. Simultaneously, Rock Oil contributed $25.0 million in cash to Blue Eagle for a $25.0 million equity interest. Blue Eagle was dissolvedeffective August 31, 2012. F-14Table of ContentsThrough August 31, 2012 we accounted for the joint venture under the equity method of accounting in accordance with ASC 323. Under this method,Abraxas’ share of net income (loss) from the joint venture is reflected as an increase (decrease) in its investment account in “Investment in joint venture” andwas also recorded as equity investment income (loss) in “Earnings from equity method investment.” For the years ended December 31, 2011 and 2012 wereported income of $2.2 million and $2.2 million, respectively, related to Blue Eagle.The following is condensed financial data from Blue Eagle’s August 31, 2012 (date of dissolution) and December 31, 2011 financial statements: Balance Sheets: As ofAugust 31,2012 Assets: Current assets $7,921 Oil and gas properties 75,741 Other assets 30 Total assets $83,692 Liabilities and Members’ Capital: Current liabilities $1,474 Other liabilities 48 Members’ capital 82,170 Total liabilities and members’ capital $83,692 Statement of Operations: Year Ended December 31,2011 Year Ended December 31,2012 (1) (In thousands)Revenue $12,579 $12,106 Operating expenses 7,138 7,144Other income (11) (4)Net income $5,452 $4,966(1) Through August 31, 20123. Divestiture of PropertiesBeginning in the third quarter of 2012 and continuing throughout 2013, the Company's business plan has been to divest various propertiesconsidered non core, and primarily non-operated to focus on its core basins in the Eagle Ford, Bakken, Powder River Basin and Permian Basin.In the third quarter of 2012 we sold certain non-core assets for combined net proceeds of approximately $21.5 million. Properties sold includedcertain properties received upon the dissolution of the Blue Eagle joint venture. During 2013 the Company sold various non-operated properties through theauction process. Total proceeds from these auctions were approximately $6.6 million. In addition to the auctions, the Company completed three othersignificant dispositions. The Company monetized the Bakken and Three Forks rights on the Company’s Fairview Prospect in Richland County, Montanaand McKenzie County, North Dakota for $10.6 million. The sale consisted of approximately 2,563 net acres and did not have any associated production. InAugust 2013 the Company's non-operated properties in the Bakken were monetized for net proceeds of $38.3 million. In December 2013, the Company closedon the divestiture of its non-operated position in the Wycross area of the Eagle Ford for net proceeds of $71.4 million. Other property sales during the yearnetted $0.6 million.The net proceeds were used to repay outstanding indebtedness under our credit facility, for capital expenditures and general corporate purposes.Proceeds from these sales, except for the Wycross sale, were credited to the full cost pool as theseF-15Table of Contentssales were not significant under full cost accounting rules. Due to the magnitude of the Wycross sale and its impact on the relationship of capitalized costs andreserves, a gain of $33.4 million was recognized on this sale. 4. Long-Term DebtThe following is a description of the Company’s debt as of December 31, 2012 and 2013, respectively: December 31, 2012 December 31, 2013 (In thousands)Senior secured credit facility $113,000 $33,000Rig loan agreement 7,000 6,378Real estate lien note 4,758 4,554 124,758 43,932Less current maturities (657) (2,142) $124,101 $41,790Maturities of long-term debt are as follows:Year ending December 31, (In thousands) 2014$2,142201535,23520162,33220176082018262Thereafter 3,353 $43,932 Credit Facility We have a senior secured credit facility with Société Générale, as administrative agent and issuing lender, and certain other lenders, which we refer to asthe credit facility. As of December 31, 2013, $33.0 million was outstanding under the credit facility.The credit facility has a maximum commitment of $300.0 million and availability is subject to a borrowing base. At December 31, 2013, we had aborrowing base of $130.0 million. This amount will remain in effect until the next redetermination of the borrowing base which is scheduled to be completed inApril 2014. The borrowing base is determined semi-annually by the lenders based upon our reserve reports, one of which must be prepared by ourindependent petroleum engineers and one of which may be prepared internally. The amount of the borrowing base is calculated by the lenders based upon theirvaluation of our proved reserves securing the facility utilizing these reserve reports and their own internal decisions. In addition, the lenders, in their solediscretion, are able to make one additional borrowing base redetermination during any six-month period between scheduled redeterminations and we are able torequest one redetermination during any six-month period between scheduled redeterminations. The borrowing base will be automatically reduced in connectionwith any sales of producing properties with a market value of 5% or more of our then-current borrowing base and in connection with any hedge terminationwhich could reduce the collateral value by 5% or more. Our borrowing base can never exceed the $300.0 million maximum commitment amount. Outstandingamounts under the credit facility bear interest at (a) the greater of (1) the reference rate announced from time to time by Société Générale, (2) the Federal FundsRate plus 0.5%, and (3) a rate determined by Société Générale as the daily one-month LIBOR plus, in each case, (b) 1.25%—2.25%, depending on theutilization of the borrowing base, or, if we elect LIBOR plus 2.25%—3.25%, depending on the utilization of the borrowing base. At December 31, 2013, theinterest rate on the credit facility was 2.67% based on 1-month LIBOR borrowings and level of utilization.Subject to earlier termination rights and events of default, the stated maturity date of the credit facility is June 30, 2015. Interest is payable quarterly onreference rate advances and not less than quarterly on LIBOR advances. We are permitted to terminate the credit facility and are able, from time to time, topermanently reduce the lenders’ aggregate commitment under the credit facility in compliance with certain notice and dollar increment requirements.F-16Table of ContentsEach of our subsidiaries has guaranteed our obligations under the credit facility on a senior secured basis. Obligations under the credit facility are securedby a first priority perfected security interest, subject to certain permitted encumbrances, in all of our and our subsidiary guarantors’ material property andassets, other than Raven Drilling.Under the credit facility, we are subject to customary covenants, including certain financial covenants and reporting requirements. We are required tomaintain a current ratio, as of the last day of each quarter of not less than 1.00 to 1.00 and an interest coverage ratio of not less than 2.50 to 1.00. We are alsorequired as of the last day of each quarter to maintain a total debt to EBITDAX ratio of not more than 4.00 to 1.00.The current ratio is defined as the ratio ofconsolidated current assets to consolidated current liabilities. For the purposes of this calculation, current assets include the portion of the borrowing basewhich is undrawn but excludes any cash deposited with a counter-party to a hedging arrangement and any assets representing a valuation account arising fromthe application of ASC 815 and ASC 410-20 and current liabilities exclude the current portion of long-term debt and any liabilities representing a valuationaccount arising from the application of ASC 815 and ASC 410-20. The interest coverage ratio is defined as the ratio of consolidated EBITDAX toconsolidated interest expense for the four fiscal quarters ended on the calculation date. For the purposes of this calculation, EBITDAX is defined as the sum ofconsolidated net income plus interest expense, oil and gas exploration expenses, income, franchise or margin taxes, depreciation, amortization, depletion andother non-cash charges including non-cash charges resulting from the application of ASC 718, ASC 815 and ASC 410-20 plus all realized net cash proceedsarising from the settlement or monetization of any hedge contracts minus all non-cash items of income which were included in determining consolidated netincome, including all non-cash items resulting from the application of ASC 815 and ASC 410-20. Interest expense includes total interest, letter of credit feesand other fees and expenses incurred in connection with any debt. The total debt to EBITDAX ratio is defined as the ratio of total debt to consolidatedEBITDAX for the four fiscal quarters ended on the calculation date. For the purposes of this calculation, total debt is the outstanding principal amount ofdebt, excluding debt associated with the office building, Raven Drilling’s rig loan and obligations with respect to surety bonds and derivative contracts.At December 31, 2013 we were in compliance with all of our debt covenants. As of December 31, 2013, the interest coverage ratio was 11.20 to 1.00, thetotal debt to EBITDAX ratio was 0.76 to 1.00, and our current ratio was 1.75 to 1.00.The credit facility contains a number of covenants that, among other things, restrict our ability to: •incur or guarantee additional indebtedness;•transfer or sell assets;•create liens on assets;•engage in transactions with affiliates other than on an “arm’s length” basis;•make any change in the principal nature of our business; and•permit a change of control.The credit facility also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default andcross acceleration to certain other indebtedness, bankruptcy and material judgments and liabilities. Rig Loan Agreement On September 19, 2011, Raven Drilling entered into a rig loan agreement with RBS Asset Finance, Inc. to finance the costs of purchasing andrefurbishing an Oilwell 2000 HP diesel electric drilling rig (the “Collateral”). The rig loan agreement provided for interim borrowings payable to Raven Drillinguntil the final amount of the loan was determined. On February 14, 2012, Raven Drilling finalized the note with respect to the rig loan agreement. The principal amount of the note is $7.0 million andbears interest at 4.26%. Interest only was due for the first 18-months of the note and thereafter, the note will amortize in full over the remaining life of thenote. Interest and principal, when required, is payable monthly. Subject to earlier prepayment provisions and events of default, the stated maturity date of thenote is February 14, 2017. As of December 31, 2012 and 2013, $7.0 million and $6.4 million, respectively, were outstanding under the rig loan agreement.The Company has guaranteed Raven Drilling’s obligations under the rig loan agreement and associated note. Obligations under the rig loan agreement aresecured by a first priority perfected security interest, subject to certain permitted encumbrances, in the Collateral.Real Estate Lien Note On May 9, 2008, the Company entered into an advancing line of credit in the amount of $5.4 million for the purchase and finish out of a building toserve as its corporate headquarters. The note was modified on April 4, 2013, reducing the interest to aF-17Table of Contentsfixed rate of 4.0%, effective March 13, 2013 and was payable in monthly installments of principal and interest of $33,763 based on a twenty yearamortization. This note was modified on July 20, 2013 to extend the maturity date to July 20, 2023. The note will bear interest for five years at a fixed rate of4.25% and is payable in monthly installments of $34,354. Beginning August 20, 2018, the interest rate will adjust to the current bank prime rate plus 1.00%with a maximum rate of 7.25%. The note is secured by a first lien deed of trust on the property and improvements. As of December 31, 2012 and 2013, $4.8million and $4.6 million, respectively, were outstanding on the note. 5. Property and EquipmentThe major components of property and equipment, at cost, are as follows: EstimatedUseful Life December 31, 2012 2013 Years (In thousands)Oil and gas properties — $565,406 $564,755Equipment and other 3-39 19,052 17,237Drilling rig 15 18,781 21,722 $603,239 $603,7146. Stock-Based Compensation and Option PlansStock Options The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employeesand directors. The fair value for these options was estimated at the date of grant using the following weighted average assumptions for 2011, 2012 and 2013: 2011 2012 2013Weighted average value per option granted during the period $3.11 $2.17 $1.73Assumptions: (1)(2) Expected dividend yield —% —% —%Volatility 80.0% 81.4% 81.2%Risk free interest rate 2.21% 1.19% 1.24%Expected life (years) 6.4 6.7 6.5Fair value of options granted (in thousands) $2,506 $1,324 $1,444(1) The estimated future forfeiture rate is based on the Company’s historical forfeiture rate.(2) The Company does not pay dividends on its common stock.The Company grants options to its officers, directors, and other employees under various stock option and incentive plans.The Company’s 2005 Employee Long-Term Equity Incentive Plan has authorized the grant of up to 5.2 million awards to management andemployees, including options. Options have a term not to exceed 10 years. Options issued under this plan vest according to a vesting schedule as determinedby the compensation committee of the Company’s board of directors. Vesting may occur upon (1) the attainment of one or more performance goals or targetsestablished by the committee, (2) the optionee’s continued employment or service for a specified period of time, (3) the occurrence of any event or thesatisfaction of any other condition specified by the committee, or (4) a combination of any of the foregoing.The following table is a summary of the Company’s stock option activity for the three years ended December 31: F-18Table of Contents Options(000s) Weighted averageexercise price Weighted average remaining life Intrinsicvalueper shareOptions outstanding December 31, 2010 4,820 $2.23 Granted 807 4.37 Exercised (530) 1.54 Forfeited/Expired (341) 3.01 Options outstanding December 31, 2011 4,756 $2.61 Granted 610 3.01 Exercised (391) 1.11 Forfeited/Expired (214) 2.80 Options outstanding December 31, 2012 4,761 $2.77 Granted 836 $2.43 Exercised (166) 1.18 Forfeited/Expired (31) 2.58 Options outstanding December 31, 2013 5,400 $2.77 6.2 $1.98Exercisable at end of year 3,828 $1.93 5.3 $1.93Other information pertaining to the Company’s stock option activity for the three years ended December 31: 2011 2012 2013Weighted average grant date fair value of stock options granted (per share) $3.11 $2.17 $1.73Total fair value of options vested (000’s) $1,230 $1,497 $1,670Total intrinsic value of options exercised (000’s) $1,584 $414 $275As of December 31, 2013, the total compensation cost related to non-vested awards not yet recognized was approximately $2.2 million, which will berecognized in 2014 through 2017. For the years ended December 31, 2011, 2012 and 2013, we recognized $1.5 million, $1.6 million and $1.7 millionrespectively, in stock-based compensation expense relating to options. The following table represents the range of stock option prices and the weighted average remaining life of outstanding options as of December 31: Options outstanding Exercisable Numberoutstanding Weightedaverageremaininglife Weightedaverageexerciseprice Numberexercisable Weightedaverageremaininglife Weightedaverageexerciseprice0.68 – 0.99 627,450 5.21 $0.99 627,450 5.21 $0.991.00 – 1.99 1,114,672 6.28 $1.75 964,672 5.91 $1.712.00 – 2.99 1,670,025 7.66 $2.32 816,925 6.57 $2.313.00 – 3.99 745,563 6.73 $3.64 399,427 5.49 $3.624.00 – 4.99 1,168,500 4.47 $4.58 945,250 3.83 $4.555.00 – 6.05 74,000 2.15 $6.05 74,000 2.15 $6.05 5,400,210 3,827,724 Restricted Stock AwardsRestricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the awardee terminatesemployment 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.F-19Table of ContentsAs of December 31, 2013, the total compensation cost related to non-vested awards not yet recognized was approximately $0.8 million, which will berecognized in 2014 through 2017. For the years ended December 31, 2011, 2012 and 2013, we recognized $0.5 million, $0.5 million and $0.4 million,respectively, in stock-based compensation expense related to restricted stock awards.The following table is a summary of the Company’s restricted stock activity for the three years ended December 31: NumberofShares Weightedaveragegrant datefair valueUnvested December 31, 2010 400,295 $2.02Granted 408,676 3.67Vested/Released (156,890) 2.24Forfeited (22,310) 2.27Unvested December 31, 2011 629,771 $3.03Granted 89,860 2.12Vested/Released (229,172) 2.57Forfeited (8,434) 2.42Unvested December 31, 2012 482,025 $3.09Granted 48,222 2.69Vested/Released (169,700) 2.66Forfeited (5,307) 3.08Unvested December 31, 2013 355,240 $3.24 Director Stock Awards Shares Reserved and Awards. The 2005 Directors Plan (as amended) reserves 1.5 million shares of Abraxas common stock, subject toadjustment following certain events. The 2005 Directors Plan provides that each year, at the first regular meeting of the board of directors immediatelyfollowing Abraxas’ annual stockholder’s meeting, each non-employee director shall be granted or issued awards of 12,000 shares of Abraxas common stock,for participation in board and committee meetings during the previous calendar year. The maximum annual award for any one person is 100,000 shares ofAbraxas common stock or options for common stock. If options, as opposed to shares, are awarded, the exercise price shall be no less than 100% of the fairmarket value on the date of the award while the option terms and vesting schedules are at the discretion of the committee. In addition to the 12,000 shares oroptions, between April 2010 and April 2011, directors were compensated for their annual retainer fee of $26,000 in cash, which increased to $27,500 in April2011 and to $40,000 in April 2012. The retainer fee remained at $40,000 during 2013. At December 31, 2013, the Company had approximately 9.0 million shares reserved for future issuance for conversion of its stock options,warrants, and incentive plans for the Company’s directors, employees and consultants. 7. Income TaxesDeferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets are as follows:F-20Table of Contents Years Ended December 31, 2011 2012 2013 (In thousands)Deferred tax liabilities: Marketable securities $36 $28 $—Canada full cost pool 377 — —Investment in Blue Eagle 7,527 — —Hedge contracts 345 — —Other — — 3,152Total deferred tax liabilities 8,285 28 3,152Deferred tax assets: U.S. full cost pool 29,976 13,837 11,725Canada full cost pool — 3,720 4,081Depletion carryforward 4,842 4,930 4,743U.S. net operating loss carryforward 52,564 59,362 49,667Canada net operating loss carryforward 2,151 4,196 5,736Alternative minimum tax credit 422 422 1,369Hedge contracts — 2,231 1,397Other 1,811 1,042 —Total deferred tax assets 91,766 89,740 78,718Valuation allowance for deferred tax assets (83,481) (89,712) (75,566)Net deferred tax assets 8,285 28 3,152Net deferred tax $— $— $—Significant components of the provision (benefit) for income taxes are as follows: Years ended December 31, 2011 2012 2013 (In thousands)Current: Federal $(77) $310 $632State — — 68Foreign — — — $(77) $310 $700Deferred: Federal $— $— $—Foreign — — — $— $— $—At December 31, 2013, the Company had, subject to the limitation discussed below, $141.9 million of net operating loss carryforwards for U.S. taxpurposes, and $20.5 million of net operating loss carryforwards for Canadian tax purposes. The U.S. loss carryforward will expire in varying amountsthrough 2033 and the Canadian loss carryforward will expire in 2033, if not utilized. The use of our net operating loss carryforwards will be limited if there is an "ownership change" in our common stock, generally a cumulativeownership change exceeding 50% during a three year period, as determined under Section 382 of the Internal Revenue Code. As of December 31, 2013, we havenot had an ownership change as defined by Section 382. In addition to any Section 382 limitations, uncertainties exist as to the future utilization of theoperating loss carryforwards under the criteria set forth under ASC 740-10. Therefore, the Company has established a valuation allowance of $83.5 million atDecember 31, 2011, $89.7 million at December 31, 2012 and $75.6 million at December 31, 2013.The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense is:F-21Table of Contents Years ended December 31, 2011 2012 2013 (In thousands)Tax (expense) benefit at U.S. statutory rates (35%) $(4,809) $6,468 $(13,771)(Increase) decrease in deferred tax asset valuation allowance 5,408 (6,231) 14,146Rate differential for non U.S. income (46) (1,533) (574)State income taxes — — (47)Accrual of prior year federal taxes (2009) — (310) (81)Permanent differences (533) (732) (743)Increase in asset for partnership distribution — 1,945 —Other 57 83 370 $77 $(310) $(700)During 2013, the Company reduced deferred tax assets by $11.0 million related to the full cost pool assets and the net operating loss carryforward. Thedeferred tax assets were fully offset by a valuation allowance which was reduced at the same time. There were no deferred income tax expense or benefit due tolosses and/or loss carryforwards and valuation allowances which have been recorded against such benefits. The Company accounts for uncertain tax positions under provisions ASC 740-10. The Company recognizes interest and penalties related to uncertain taxpositions in income tax expense. As of December 31, 2013 and 2012, the Company did not have any accrued interest or penalties related to uncertain taxpositions. The tax years 2003 through 2013 remain open to examination by the tax jurisdictions to which the Company is subject. The Company and AbraxasEnergy Partners, L.P., which was merged into a wholly owned subsidiary of Abraxas, have undergone audits of their 2009 Federal income tax returns. Theaudit of the Federal income tax return of Abraxas Energy Partners, L.P. was completed with no changes. The audit of Abraxas Petroleum Corporation resultedin a notice of a proposed adjustment of $619,000. For the year ended December 31, 2012, the Company accrued $310,000 in income tax expense related to theaudit of its 2009 Federal tax return. This amount was determined by an analysis of what the amount that is greater than 50% likely to be paid upon finalsettlement. On July 23, 2013, we settled the assessment for $391,000 resulting in $81,000 being recognized as expense in 2013. 8. Commitments and ContingenciesOperating LeasesThe Company leased office space in Calgary, Alberta. During 2011, 2012 and 2013, rent expense of $121,500 ;$112,276 and $107,619 ,respectively, was incurred related to this lease. In July 2011, the Company leased office space in Dickinson, North Dakota. During 2011, 2012 and 2013,rent expense of $9,250; $23,800, and $26,073, respectively was incurred related to this lease. This lease expires on August 31, 2014. The Company leasesoffice space in Lusk, Wyoming. For each of the years 2011, 2012 and 2013, rent expense of $9,000 was incurred on this lease. The lease expires on December31, 2016.Litigation and ContingenciesFrom time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. AtDecember 31, 2013, the Company was not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effecton the Company.9. Earnings per ShareF-22Table of ContentsThe following table sets forth the computation of basic and diluted earnings per share: Years ended December 31: 2011 2012 2013 (In thousands, except per share data)Numerator: Net income (loss) $13,743 $(18,791) $38,647Denominator: Denominator for basic earnings per share – weighted-average common shares outstanding 90,151 91,914 92,451Effect of dilutive securities:Stock options, restricted shares and warrants 2,093 — 1,087Denominator for diluted earnings per share – adjusted weighted-average shares and assumedexercise of options, restricted shares and warrants 92,244 91,914 93,538 Net income (loss) per common share – basic $0.15 $(0.20) $0.42 Net income (loss) per common share – diluted $0.15 $(0.20) $0.41 Basic earnings per share, excluding any dilutive effects of stock options, warrants 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 computedsimilar to basic; however diluted income (loss) per share reflects the assumed conversion of all potentially dilutive securities. For the year ended December 31,2012, 1,349 potential shares relating to stock options and unvested restricted shares were excluded from the calculation of diluted income (loss) per share sincetheir inclusion would have been anti-dilutive due to the loss incurred in the period. None of the dilutive shares were excluded for the years ended December 31,2011 and 2013.10. Quarterly Results of Operations (Unaudited) Selected results of operations for each of the fiscal quarters during the years ended December 31, 2012 and 2013 are as follows: 1stQuarter 2ndQuarter 3rdQuarter 4thQuarter (In thousands, except per share data)Year Ended December 31, 2012 Net revenue $16,396 $15,938 $17,170 $19,069Operating income $2,224 $(23) $(11,359) $(7,190)Net (loss) income $817 $10,903 $(18,644) $(11,867) Net (loss) income per common share – basic $0.01 $0.12 $(0.20) $(0.13)Net (loss) income per common share – diluted $0.01 $0.12 $(0.20) $(0.13) Year Ended December 31, 2013 Net revenue $21,196 $21,494 $29,095 $22,546Operating income (loss) $3,768 $2,867 $11,161 $(2,869)Net income (loss) income $595 $7,866 $3,190 $26,996 Net income (loss) per common share – basic $0.01 $0.09 $0.03 $0.29Net income (loss) per common share – diluted $0.01 $0.08 $0.03 $0.2911. Benefit PlansF-23Table of ContentsThe Company has a defined contribution plan (401(k) plan) covering all eligible employees. In 2011, 2012 and 2013, in accordance with the safeharbor provisions of the plan, the Company contributed $226,377, $267,289 and $284,865, respectively, to the plan. The Company adopted the safeharbor provisions for its 401(k) plan which requires us to contribute a fixed match to each participating employee’s contribution to the plan. The fixed matchis 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 paycontributed, up to 5%. Employee’s eligible pay with respect to calculating the fixed match is limited by IRS regulations. In addition, the Board of Directors, atits sole discretion, may authorize the Company to make additional contributions to each participating employee’s plan. The employee contribution limit for2011 was $16,500 for employees under the age of 50 and $22,000 for employees 50 years of age or older and 2012 was $17,000 for employees under the ageof 50 and $22,500 for employees 50 years of age or older. For 2013 the employee contribution limit was $17,500 for employees under the age of 50 and$23,000 for employees 50 years of age or older.12. Business Segments The Company has operations in only one industry segment, the oil and gas exploration and production industry; however, beginning in 2010, theCompany was organizationally structured along geographic operating segments or regions. The Company has reportable operations in the United States andCanada.In 2011, three customers accounted for approximately 28% of our consolidated oil and gas revenue. Two customers accounted for approximately26% of United States revenue and one customer accounted for 100% of revenue in Canada. In 2012, four customers accounted for approximately 31% of ourconsolidated oil and gas revenue. Three customers accounted for approximately 28% of United States revenue and one customer accounted for 100% ofrevenue in Canada. In 2013, three customers accounted for approximately 50% of our consolidated oil and gas revenue. Two customers accounted forapproximately 49% of United States revenue and one customer accounted for 100% of revenue in Canada. The following tables provide the Company’s geographic operating segment data as of and for the year ended December 31, 2011, 2012 and 2013: Year Ended December 31, 2011 U.S. Canada Corporate Total (In thousands)Revenues: Oil and gas production $63,105 $1,510 $— $64,615Other — — 7 7 63,105 1,510 7 64,622Costs and expenses: Lease operating 20,788 793 — 21,581Production taxes 5,764 2 — 5,766Depreciation, depletion and amortization 15,236 709 249 16,194Impairment — — — —General and administrative 1,698 654 7,081 9,433Net interest 448 4 4,439 4,891Amortization of deferred financing fees — — 1,762 1,762Loss on derivative contracts - realized — — 676 676Gain on derivative contracts - unrealized — — (7,476) (7,476)Earnings from equity method investment — — (2,187) (2,187)Other — — 316 316Income tax — — (77) (77)Income (loss) $19,171 $(652) $(4,776) $13,743F-24Table of Contents Year Ended December 31, 2012 U.S. Canada Corporate Total (In thousands)Revenues: Oil and gas production $65,590 $2,909 $— $68,499Other — — 74 74 65,590 2,909 74 68,573Costs and expenses: Lease operating 22,578 2,228 — 24,806Production taxes 6,588 25 — 6,613Depreciation, depletion and amortization 20,704 2,063 249 23,016Impairment — 19,774 — 19,774General and administrative 1,980 699 8,033 10,712Net interest 457 17 5,042 5,516Amortization of deferred financing fees — — 937 937Loss on derivative contracts - realized — — 459 459Gain on derivative contracts - unrealized — — (2,669) (2,669)Earnings from equity method investment — — (2,207) (2,207)Income tax expense — — 310 310Other — — 97 97Income (loss) $13,283 $(21,897) $(10,177) $(18,791) Year Ended December 31, 2013 U.S. Canada Corporate Total (In thousands)Revenues: Oil and gas production $92,268 $2,007 $— $94,275Other — — 56 56 92,268 2,007 56 94,331Costs and expenses: Lease operating 23,205 2,156 — 25,361Production taxes 8,437 73 — 8,510Depreciation, depletion and amortization 25,338 1,045 249 26,632Impairment — 6,025 — 6,025General and administrative 2,471 879 9,526 12,876Net interest 615 23 3,939 4,577Amortization of deferred financing fees — — 1,367 1,367Gain on sale of properties — — (33,377) (33,377)Loss on derivative contracts - realized — — 5,035 5,035Gain on derivative contracts - unrealized — — (2,561) (2,561)Income tax — — 700 700Other — — 539 539Income (loss) $32,202 $(8,194) $14,639 $38,647The following table provides the Company’s geographic asset data as of December 31, 2012 and December 31, 2013:F-25Table of ContentsSegment Assets: December 31, 2012 December 31, 2013 (In thousands)United States $223,253 $213,212Canada 7,053 1,640Corporate 10,301 8,798 $240,607 $223,65013. Hedging Program and DerivativesThe derivative instruments we utilize are based on index prices that may and often do differ from the actual oil and gas prices realized in our operations. Ourderivative contracts do not qualify for hedge accounting as prescribed by ASC 815; therefore, fluctuations in the market value of the derivative contracts arerecognized in earnings during the current period.The following table sets forth the summary position of our derivative contracts as of December 31, 2013: Oil - WTI Oil - Brent Oil - LLSContract Periods Daily Volume(Bbl) Swap Price(per Bbl) Daily Volume(Bbl) Swap Price(per Bbl) Daily Volume(Bbl) Swap Price(per Bbl)2014 687 $94.16 505 $100.56 100 $101.262015 560 $83.03 500 $97.04 — $—2016 963 $84.10 — $— — $—2017 500 $84.18 — $— — $— Subsequent to December 31, 2013 we entered into the following derivative contracts: Natural Gas - NYMEXContract Periods DailyVolume(Mcf) Swap Price(Per Mcf)2014 1,597 $4.102015 1,450 $4.22 The following table illustrates the impact of derivative contracts on the Company’s balance sheet:Fair Value of Derivative Instruments as of December 31, 2012 Asset Derivatives Liability DerivativesDerivatives not designated as hedginginstruments Balance Sheet Location Fair Value Balance Sheet Location Fair ValueCommodity price derivatives Derivatives – current $41 Derivatives – current $3,462Commodity price derivatives Derivatives – long-term 594 Derivatives – long-term 3,568 $635 $7,030Fair Value of Derivative Instruments as of December 31, 2013 Asset Derivatives Liability DerivativesDerivatives not designated as hedginginstruments Balance Sheet Location Fair Value Balance Sheet Location Fair ValueCommodity price derivatives Derivatives – current $85 Derivatives – current $2,728Commodity price derivatives Derivatives – long-term 925 Derivatives – long-term 2,274 $1,010 $5,002 Gains and losses from derivative activities are reflected as “Loss (gain) on derivative contracts” in the accompanying Consolidated Statements ofOperations.F-26Table of Contents14. Financial InstrumentsThe Company applies ASC 820-10 which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchybased on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.Fair Value Hierarchy—ASC 820-10 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchycategorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in themeasurement. The three levels are defined as follows:•Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.•Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that areobservable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.•Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair valuemeasurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment andconsiders 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 thederivative instrument. The following tables sets forth information about the Company’s assets and liabilities measured at fair value on a recurring basis as ofDecember 31, 2012 and 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (inthousands): Quoted Prices in ActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs (Level 2) SignificantUnobservableInputs (Level 3) Balance as ofDecember 31,2012Assets: Investment in common stock $78 $— $— $78NYMEX Fixed Price Derivative contracts — 635 — 635Total Assets $78 $635 $— $713Liabilities: NYMEX Fixed Price Derivative contracts $— $7,030 $— $7,030Total Liabilities $— $7,030 $— $7,030 Quoted Prices in ActiveMarkets forIdenticalAssets(Level 1) SignificantOtherObservableInputs (Level 2) SignificantUnobservableInputs (Level 3) Balance as ofDecember 31,2013Assets: NYMEX Fixed Price Derivative contracts $— $1,010 $— $1,010Total Assets $— $1,010 $— $1,010Liabilities: NYMEX Fixed Price Derivative contracts $— $5,002 $— $5,002Total Liabilities $— $5,002 $— $5,002The Company had an investment in Insignia Energy Ltd, the surviving entity in the merger with a former subsidiary, consisting of shares of commonstock. The stock was actively traded on the Toronto Stock Exchange. This investment was valued at its quoted price as of December 31, 2012 in U.S.dollars. Accordingly, this investment is characterized as Level 1. On May 6, 2013, Insignia Energy Ltd, announced plans to privatize the company wherebyall shareholders would receive C$1.35 per share. On July 19, 2013F-27Table of ContentsInsignia announced that it had completed the plan. On August 12, 2013 the Company received $133,592 cash consideration for its shares.The Company’s derivative contracts consist of NYMEX-based fixed price commodity swaps. The NYMEX-based fixed price derivative contractsare indexed to NYMEX futures contracts, which are actively traded, for the underlying commodity and are commonly used in the energy industry. A numberof financial institutions and large energy companies act as counter-parties to these type of derivative contracts. As the fair value of these derivative contracts isbased on a number of inputs, including contractual volumes and prices stated in each derivative contract, current and future NYMEX commodity prices, andquantitative models that are based upon readily observable market parameters that are actively quoted and can be validated through external sources, we havecharacterized these derivative contracts as Level 2. In order to verify the third party valuation, we enter the various inputs into a model and compare our resultsto the third party for reasonableness. Other Financial Instruments The carrying amounts of our cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate fairvalue 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 theinterest rates are market rates and this debt is considered Level 2.F-28Table of Contents15. Supplemental Oil and Gas Disclosures (Unaudited)The accompanying table presents information concerning the Company’s oil and gas producing activities as required by ASC 932-235,“Disclosures about Oil and Gas Producing Activities.” Capitalized costs relating to oil and gas producing activities are as follows: Years Ended December 31 2012 2013 Total U.S. Canada Total U.S. Canada (In thousands)Proved oil and gas properties $563,317 $531,971 $31,346 $564,755 $530,996 $33,759Unproved properties 2,089 — 2,089 — — —Total 565,406 531,971 33,435 564,755 530,996 33,759Accumulated depreciation,depletion, amortization andimpairment (383,469) (356,255) (27,214) (413,704) (381,283) (32,421)Net capitalized costs $181,937 $175,716 $6,221 $151,051 $149,713 $1,338Cost incurred in oil and gas property acquisition and development activities are as follows: Years Ended December 31 2011 2012 2013 Total U.S. Canada Total U.S. Canada Total U.S. Canada (In thousands)Development costs $46,735 $32,471 $14,264 $56,318 $48,283 $8,035 $93,878 $91,325 $2,553Exploration costs 8,410 8,410 — — — — — — —Property acquisition costs — — — 7,200 7,200 — — — —Unproved 1,100 — 1,100 989 — 989 — — — $56,245 $40,881 $15,364 $64,507 $55,483 $9,024 $93,878 $91,325 $2,553F-29Table of ContentsThe results of operations for oil and gas producing activities for the three years ended December 31, 2011, 2012 and 2013 are as follows: Years Ended December 31, 2011 2012 2013 Total U.S. Canada Total U.S. Canada Total U.S. Canada (In thousands)Revenues $64,615 $63,105 $1,510 $68,499 $65,590 $2,909 $94,275 $92,268 $2,007Production costs (27,347) (26,552) (795) (31,419) (29,166) (2,253) (33,871) (31,642) (2,229)Depreciation, depletion, andamortization (15,595) (14,914) (681) (22,767) (20,704) (2,063) (26,072) (25,028) (1,044)Proved property impairment — — — (19,774) — (19,774) (6,025) — (6,025)General and administrative (2,352) (1,698) (654) (2,679) (1,980) (699) (3,350) (2,471) (879)Results of operations from oil and gasproducing activities (excluding corporateoverhead and interest costs) $19,321 $19,941 $(620) $(8,140) $13,740 $(21,880) $24,957 $33,127 $(8,170)Depletion rate per barrel of oil equivalent $12.26 $11.96 $27.58 $15.59 $14.74 $37.48 $16.59 $16.32 $27.37Estimated Quantities of Proved Oil and Gas ReservesThe following table presents the Company’s estimate of its net proved oil and gas reserves as of December 31, 2011, 2012, and 2013. TheCompany’s management emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those ofproducing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. The estimates have beenpredominately prepared by independent petroleum reserve engineers. Proved oil and gas reserves are the estimated quantities of oil and gas that geological andengineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operatingconditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. Allof the Company’s proved reserves are located in the continental United States and Canada.Proved reserves were estimated in accordance with guidelines established by the SEC and the FASB, which require that reserve estimates be preparedunder existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements; therefore, the averageprior 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 periodspresented. F-30Table of Contents Total United States Canada Oil/NGL Gas OilEquivalents Oil/NGL Gas OilEquivalents Oil/NGL Gas OilEquivalents (MBbl) (MMcf) (MBoe) (MBbl) (MMcf) (MBoe) (MBbl) (MMcf) (MBoe) (In thousands)Proved developed and undevelopedreserves: Balance at December 31, 2010 9,794 84,913 23,947 9,718 84,523 23,806 76 390 141Revisions of previous estimates 2,290 (13,009) 122 2,290 (13,009) 122 — — —Extensions and discoveries 2,703 4,393 3,435 2,326 1,837 2,632 377 2,556 803Sales of minerals in place — — — — — — — — —Production (568) (4,222) (1,272) (554) (4,160) (1,247) (14) (62) (25)Balance at December 31, 2011 14,219 72,075 26,232 13,780 69,191 25,313 439 2,884 919Revisions of previous estimates 1,574 (7,470) 328 1,774 (5,786) 809 (200) (1,684) (481)Extensions and discoveries 5,809 6,983 6,973 5,809 6,983 6,973 — — —Purchases of minerals in place 1 69 13 1 69 13 — — —Sales of minerals in place (850) (6,376) (1,913) (850) (6,376) (1,913) — — —Production (797) (4,097) (1,481) (763) (3,982) (1,427) (34) (115) (54)Balance at December 31, 2012 19,956 61,184 30,152 19,751 60,099 29,768 205 1,085 384Revisions of previous estimates 999 (5,123) 145 1,073 (4,804) 270 (74) (319) (125)Extensions and discoveries 10,746 3,610 11,348 10,746 3,610 11,348 — — —Purchases of minerals in place — — — — — — — — —Sales of minerals in place (7,748) (8,141) (9,105) (7,748) (8,141) (9,105) — — —Production (1,000) (3,421) (1,570) (976) (3,343) (1,533) (24) (78) (37)Balance at December 31, 2013 22,953 48,109 30,970 22,846 47,421 30,748 107 688 222F-31Table of Contents Total United States Canada Oil/NGL Gas OilEquivalents Oil/NGL Gas OilEquivalents Oil/NGL Gas OilEquivalents (MBbl) (MMcf) (MBoe) (MBbl) (MMcf) (MBoe) (MBbl) (MMcf) (MBoe) (In thousands)Proved Developed Reserves: December 31, 2011 7,761 42,582 14,858 7,433 40,451 14,175 328 2,131 683December 31, 2012 8,650 41,220 15,520 8,531 40,723 15,318 119 497 202December 31, 2013 8,310 31,572 13,572 8,284 31,424 13,521 26 148 51Proved Undeveloped Reserves: December 31, 2011 6,460 29,493 11,376 6,348 28,740 11,138 112 753 238December 31, 2012 11,306 19,964 14,634 11,220 19,376 14,450 86 588 184December 31, 2013 14,640 16,537 17,397 14,560 15,996 17,226 80 541 171Standardized 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 Company with the assistance of an independent petroleum engineering firm(DeGolyer & MacNaughton) as of December 31, 2011, 2012 and 2013. The following information has been prepared in accordance with SEC rules andaccounting standards based on the 12-month first-day-of-the-month average prices in accordance with provisions of the FASB’s Accounting Standards UpdateNo. 2010-03, “Extractive Activities—Oil and Gas (Topic 932).” Future cash inflows were reduced by estimated future production and development costsbased on year-end costs to determine pre-tax cash inflows. Future net cash flows have not been adjusted for commodity derivative contracts outstanding at theend 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 operatinglosses associated with the properties. Since prices used in the calculation are average prices for 2013, the standardized measure could vary significantly fromyear to year based on the market conditions that occurred during a given year. The technical personnel responsible for preparing the reserve estimates at DeGolyer and 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 Informationpromulgated by the Society of Petroleum Engineers. DeGolyer and MacNaughton is an independent firm of petroleum engineers, geologists, geophysicists, andpetrophysicists; they do not own an interest in our properties and are not employed on a contingent fee basis. All reports by DeGolyer and MacNaughtonwere developed utilizing studies performed by DeGolyer and MacNaughton and assisted by the Engineering and Operations departments of Abraxas. Reservesare estimated by independent petroleum engineers. The report of DeGolyer and MacNaughton dated February 13, 2014, which contains further discussions ofthe reserve estimates and evaluations prepared by DeGolyer and MacNaughton as well as the qualifications of DeGolyer and MacNaughton’s technicalpersonnel responsible for overseeing such estimates and evaluations is attached as Exhibit 99.1 to this report. Estimates of proved reserves at December 31, 2011, 2012 and 2013 were based on studies performed by our independent petroleum engineers assistedby the Engineering and Operations departments of Abraxas. The Engineering department is directly responsible for Abraxas’ reserve evaluation process. TheVice President of Engineering is the manager of this department and is the primary technical person responsible for this process. The Vice President ofEngineering holds a Bachelor of Science degree in Petroleum Engineering and has 35 years of experience in reserve evaluations. The Vice President ofEngineering is a Registered Professional Engineer in the State of Texas. The operations department of Abraxas assisted in the process, and consists of fourpetroleum engineers with Bachelor degrees in Petroleum Engineering, and various other technical professionals.F-32Table of ContentsThe projections should not be viewed as realistic estimates of future cash flows, nor should the “standardized measure” be interpreted to represent thefair 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, therecovery of reserves not classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value ofmoney 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 belowsets forth the Standardized Measure of our proved oil and gas reserves for the three years ended December 31, 2011, 2012 and 2013: Years Ended December 31, 2011 2012 2013 Total U.S. Canada Total U.S. Canada Total U.S. Canada (In thousands)Future cash inflows $1,471,352 $1,420,013 $51,339 $1,784,920 $1,766,515 $18,405 $2,244,846 $2,234,632 $10,214Future production costs (544,970) (532,056) (12,914) (642,706) (634,903) (7,803) (754,722) (751,058) (3,664)Future development costs (228,804) (224,254) (4,550) (328,554) (324,704) (3,850) (467,206) (463,456) (3,750)Future income tax expense (106,839) (104,279) (2,560) (149,625) (149,625) — (244,394) (244,394) —Future net cash flows 590,739 559,424 31,315 664,035 657,283 6,752 778,524 775,724 2,800Discount (321,657) (310,516) (11,141) (385,890) (383,271) (2,619) (437,539) (436,077) (1,462)Standardized Measure ofdiscounted future net cashrelating to proved reserves $269,082 $248,908 $20,174 $278,145 $274,012 $4,133 $340,985 $339,647 $1,338F-33Table of ContentsChanges in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas ReservesThe following is an analysis of the changes in the Standardized Measure: Year Ended December 31, 2011 2012 2013 (In thousands)Standardized Measure, beginning of year $196,993 $269,082 $278,145Sales and transfers of oil and gas produced, net of production costs (37,171) (37,080) (60,403)Net change in prices and development and production costs from prioryear 92,886 60,710 169,969Extensions, discoveries, and improved recovery, less related costs 47,765 73,236 156,456Sales of minerals in place — (20,089) (125,533)Purchased of minerals in place — 131 —Revisions of previous quantity estimates 1,329 3,355 2,930Change in timing and other (23,501) (88,309) (62,861)Change in future income tax expense (28,918) (9,799) (45,532)Accretion of discount 19,699 26,908 27,814Standardized Measure, end of year $269,082 $278,145 $340,985The standardized measure is based on the following oil and gas prices over the life of the properties as of the following dates: Year Ended December 31, 2011 2012 2013Oil (per Bbl) (1) $96.19 $95.14 $97.33Gas (per MMbtu) (2) $4.16 $2.86 $3.67Oil (per Bbl) (3) $88.58 $88.26 $95.90Gas (per MMBtu) (4) $3.73 $2.61 $3.65NGL’s (per Bbl) (5) $50.21 $36.76 $31.98_____________________(1)The quoted oil price for the year ended December 31, 2011, 2012 and 2013 is the 12-month average first-day-of-the-month West Texas Intermediate spotprice for each month of 2011, 2012 and 2013.(2)The quoted gas price for the year ended December 31, 2011, 2012 and 2013 is the 12-month average first-day-of-the-month Henry Hub spot price foreach month of 2011, 2012 and 2013.(3)The oil price is the realized price at the wellhead as of December 31 of each year after the appropriate differentials have been applied.(4)The gas price is the realized price at the wellhead as of December 31 of each year after the appropriate differentials have been applied.(5)The NGL price is the realized price as of December 31 of each year after the appropriate differentials have been applied.F-34Table of ContentsExhibit Index23.1Consent of BDO USA, LLP. (Filed herewith).23.2Consent of DeGolyer & MacNaughton. (Filed herewith).31.1Certification – Chief Executive Officer. (Filed herewith).31.2Certification – Chief Financial Officer. (Filed herewith).32.1Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002. (Filed herewith).32.2Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002. (Filed herewith).99.1Report of DeGolyer and MacNaughton with respect to oil and reserves of Abraxas Petroleum. (Filed herewith).35Exhibit 23.1Consent of Independent Registered Public Accounting FirmAbraxas Petroleum CorporationSan Antonio, TexasWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (333-188110) and Form S-8 (No. 333-17375, 333-17377, 033-81416, 333-55691, 333-74614, 333-74592, 333-135032, 333-153635, 333-162358, 333-168022, and 333-188117) of Abraxas Petroleum Corporation of ourreports dated March 17, 2014, relating to the consolidated financial statements, and the effectiveness of Abraxas Petroleum Corporation’s internal control overfinancial reporting, which appears in this Form 10-K./s/ BDO USA, LLPDallas, TexasMarch 17, 2014R-221 (4/11)Exhibit 23.2DEGOLYER AND MACNAUGHTON5001 SPRING VALLEY ROADSUITE 800 EASTDALLAS, TEXAS 75244March 14, 2014Abraxas Petroleum Corporation18803 Meisner DriveSan Antonio, Texas 78258Ladies and Gentlemen:We consent to the use of the name DeGolyer and MacNaughton, to references to DeGolyer and MacNaughton, and to theinclusion of information taken from our “Appraisal Report as of December 31, 2013 on Certain Properties owned by Abraxas PetroleumCorporation,” “Appraisal Report as of December 31, 2012 on Certain Properties owned by Abraxas Petroleum Corporation,” “AppraisalReport as of December 31, 2011 on Certain Properties owned by Abraxas Petroleum Corporation,” and “Appraisal Report as ofDecember 31, 2011 on Certain Properties owned by Blue Eagle Energy, LLC” (our Reports) under the sections “Item 1-BusinessGeneral”, “Item 2-Properties”, “Primary Operating Areas”, and “Reserves Information” in the Abraxas Petroleum Corporation AnnualReport on Form 10–K for the year ended December 31, 2013. We also consent to the inclusion of our letter report dated February 13,2014 in the Annual Report on Form 10-K of Abraxas Petroleum Corporation as Exhibit 99.1. We further consent to the incorporation byreference in the Registration Statements on Form S-3 (333-188110) and Form S-8 (No. 333-17375, 333-17377, 033-81416, 333-55691, 333-74592, 333-74614, 333-135032, 333-153635, 333-162358, 333-168022, and 333-188117) of information fromour Reports.Very truly yours,DeGOLYER and MacNAUGHTONTexas Registered Engineering Firm F-716Exhibit 31.1CERTIFICATIONSI, Robert L. G. Watson, certify that: 1.I have reviewed this annual report on Form 10-K of Abraxas Petroleum Corporation.2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport.3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscalquarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: March 17, 2014/s/ Robert L.G. WatsonRobert L.G. WatsonChairman of the Board, President andPrincipal Executive OfficerExhibit 31.2CERTIFICATIONSI, Geoffrey R. King, certify that: 1.I have reviewed this annual report on Form 10-K of Abraxas Petroleum Corporation.2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport.3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscalquarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: March 17, 2014/s/ Geoffrey R. KingGeoffrey R. KingVice President andPrincipal Financial OfficerExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Abraxas Petroleum Corporation (the “Company”) on Form 10-K for the year ended December 31, 2013 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Robert L.G. Watson, Chairman of the Board, President and Chief ExecutiveOfficer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/ Robert L.G. WatsonRobert L.G. WatsonChairman of the Board, President and Chief Executive OfficerMarch 17, 2014This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by theSarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished tothe Securities and Exchange Commission or its staff upon request.Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Abraxas Petroleum Corporation (the “Company”) on Form 10-K for the year ended December 31, 2013 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Geoffrey R. King, Vice President and Chief Financial Officer of the Company,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/Geoffrey R. KingGeoffrey R. KingVice President and Chief Financial OfficerMarch 17, 2014This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by theSarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished tothe Securities and Exchange Commission or its staff upon request.Exhibit 99.1DeGolyer and MacNaughton5001 Spring Valley RoadSuite 800 EastDallas, Texas 75244February 13, 2014Abraxas Petroleum Corporation18803 Meisner DriveSan Antonio, Texas 78258Ladies and Gentlemen:Pursuant to your request, we have prepared estimates of the extent and value of the net proved, probable, and possible crude oil, condensate,natural gas liquids (NGL), and natural gas reserves, as of December 31, 2013, of certain selected properties that Abraxas Petroleum Corporation(Abraxas) has represented that it owns. This evaluation was completed on February 13, 2014. Abraxas has represented that these properties accountfor 98.9 percent on a net equivalent barrel basis of Abraxas’ net proved reserves as of December 31, 2013. The properties appraised are located inthe states of Montana, North Dakota, South Dakota, Texas, Utah, and Wyoming. The net proved, probable, and possible reserves estimates preparedby us have been prepared in accordance with the reserves definitions of Rules 4-10(a) (1)-(32) of Regulation S-X of the Securities and ExchangeCommission (SEC) of the United States. This report was prepared in accordance with guidelines specified in Item 1202 (a)(8) of Regulation S-Kand is to be used for inclusion in certain SEC filings by Abraxas.Reserves included herein are expressed as net reserves. Gross reserves are defined as the total estimated petroleum to be produced from theseproperties after December 31, 2013. Net reserves are defined as that portion of the gross reserves attributable to the interests owned by Abraxas afterdeducting all interests owned by others.Estimates of oil, condensate, NGL, and natural gas reserves and future net revenue should be regarded only as estimates that may change as furtherproduction history and additional information become available. Not only are such reserves and revenue estimates based on that information which iscurrently available, but such2DeGolyer and MacNaughtonestimates are also subject to the uncertainties inherent in the application of judgmental factors in interpreting such information.Data used in this evaluation were obtained from reviews with Abraxas personnel, Abraxas files, from records on file with the appropriateregulatory agencies, and from public sources. In the preparation of this report we have relied, without independent verification, upon suchinformation furnished by Abraxas with respect to property interests, production from such properties, current costs of operation and development,current prices for production, agreements relating to current and future operations and sale of production, and various other information and data thatwere accepted as represented. A field examination of the properties was not considered necessary for the purposes of this report.Methodology and ProceduresEstimates of reserves were prepared by the use of appropriate geologic, petroleum engineering, and evaluation principles and techniques thatare in accordance with practices generally recognized by the petroleum industry as presented in the publication of the Society of Petroleum Engineersentitled “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information (Revision as of February 19, 2007).” The methodor combination of methods used in the analysis of each reservoir was tempered by experience with similar reservoirs, stage of development, qualityand completeness of basic data, and production history.An analysis of reservoir performance, including production rate, reservoir pressure, and gas-oil ratio behavior, was used in the estimation ofreserves. Most of the undeveloped reserves were estimated by analogy to similar wells or offset wells.For depletion-type reservoirs or those whose performance disclosed a reliable decline in producing-rate trends or other diagnosticcharacteristics, reserves were estimated by the application of appropriate decline curves or other performance relationships. In the analyses ofproduction‑decline curves, reserves were estimated only to the limits of economic production or to the limit of the production licenses as appropriate.Gas quantities estimated herein are expressed as sales gas. Sales gas is defined as that portion of the total gasto be delivered into a gas pipeline for sale after separation, processing, fuel use, and flare. Gas reserves are expressed at a temperature base of 60degrees Fahrenheit (°F) and at the legal pressure base of the state in which the interest is located. Condensate reserves estimated herein are those to berecovered by conventional lease separation. NGL reserves are those attributed to the leasehold interests according to processing agreements.Definition of ReservesPetroleum reserves estimated by us included in this report are classified as proved, probable, and possible. Reserves classifications used byus in this report are in accordance with the reserves definitions of Rules 4-10(a) (1)-(32) of Regulation S-X of the SEC. Reserves are judged to beeconomically producible in future years from known reservoirs under existing economic and operating conditions and assuming continuation ofcurrent regulatory practices using conventional production methods and equipment. In the analyses of production-decline curves, reserves wereestimated only to the limit of economic rates of production under existing economic and operating conditions using prices and costs consistent withthe effective date of this report, including consideration of changes in existing prices provided only by contractual arrangements but not includingescalations based upon future conditions. The petroleum reserves are classified as follows:Proved oil and gas reserves - Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience andengineering data, can be estimated with reasonable certainty to be economically producible-from a given date forward, from knownreservoirs, and under existing economic conditions, operating methods, and government regulations-prior to the time at which contractsproviding the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic orprobabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must bereasonably certain that it will commence the project within a reasonable time.(i) The area of the reservoir considered as proved includes:(A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can,with reasonable certainty, be judged to becontinuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) asseen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact withreasonable certainty.(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for anassociated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience,engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to,fluid injection) are included in the proved classification when:(A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, theoperation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes thereasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved fordevelopment by all necessary parties and entities, including governmental entities.(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. Theprice shall be the average price during the 12‑month period prior to the ending date of the period covered by the report, determined as anunweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined bycontractual arrangements, excluding escalations based upon future conditions.Probable oil and gas reserves - Probable reserves are those additional reserves that are less certain to be recovered than proved reservesbut which, together with proved reserves, are as likely as not to be recovered.(i) When deterministic methods are used, it is as likely as not that actual remaining quantities recovered will exceed the sum of estimatedproved plus probable reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual quantitiesrecovered will equal or exceed the proved plus probable reserves estimates.(ii) Probable reserves may be assigned to areas of a reservoir adjacent to proved reserves where data control or interpretations of availabledata are less certain, even if the interpreted reservoir continuity of structure or productivity does not meet the reasonable certaintycriterion. Probable reserves may be assigned to areas that are structurally higher than the proved area if these areas are in communicationwith the proved reservoir.(iii) Probable reserves estimates also include potential incremental quantities associated with a greater percentage recovery of thehydrocarbons in place than assumed for proved reserves.(iv) See also guidelines in paragraphs (iv) and (vi) of the definition of possible reserves.Possible oil and gas reserves - Possible reserves are those additional reserves that are less certain to be recovered than probable reserves.(i) When deterministic methods are used, the total quantities ultimately recovered from a project have a low probability of exceedingproved plus probable plus possible reserves. When probabilistic methods are used, there should be at least a 10% probability that the totalquantities ultimately recovered will equal or exceed the proved plus probable plus possible reserves estimates.(ii) Possible reserves may be assigned to areas of a reservoir adjacent to probable reserves where data control and interpretations ofavailable data are progressively less certain. Frequently, this will be in areas where geoscience and engineering data are unable to defineclearly the area and vertical limits of commercial production from the reservoir by a defined project.(iii) Possible reserves also include incremental quantities associated with a greater percentage recovery of the hydrocarbons in place thanthe recovery quantities assumed for probable reserves.(iv) The proved plus probable and proved plus probable plus possible reserves estimates must be based on reasonable alternativetechnical and commercial interpretations within the reservoir or subject project that are clearly documented, including comparisons toresults in successful similar projects.(v) Possible reserves may be assigned where geoscience and engineering data identify directly adjacent portions of a reservoir within thesame accumulation that may be separated from proved areas by faults with displacement less than formation thickness or other geologicaldiscontinuities and that have not been penetrated by a wellbore, and the registrant believes that such adjacent portions are incommunication with the known (proved) reservoir. Possible reserves may be assigned to areas that are structurally higher or lower thanthe proved area if these areas are in communication with the proved reservoir.(vi) Pursuant to paragraph (iii) of the proved oil and gas definition, where direct observation has defined a highest known oil (HKO)elevation and the potential exists for an associated gas cap, proved oil reserves should be assigned in the structurally higher portions ofthe reservoir above the HKO only if the higher contact can be established with reasonable certainty through reliable technology. Portionsof the reservoir that do not meet this reasonable certainty criterion may be assigned as probable and possible oil or gas based on reservoirfluid properties and pressure gradient interpretations.Developed oil and gas reserves - Developed oil and gas reserves are reserves of any category that can be expected to be recovered:(i) Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relativelyminor compared to the cost of a new well; and(ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by meansnot involving a well.Undeveloped oil and gas reserves - Undeveloped oil and gas reserves are reserves of any category that are expected to be recoveredfrom new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.(i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain ofproduction when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibilityat greater distances.(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that theyare scheduled to be drilled within five years, unless the specific circumstances justify a longer time.(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluidinjection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects inthe same reservoir or an analogous reservoir, as defined in [section 210.4-10 (a) Definitions], or by other evidence using reliabletechnology establishing reasonable certainty.The extent to which probable and possible reserves ultimately may be recategorized as proved reserves is dependent upon future drilling,testing, and well performance. The degree of risk to be applied in evaluating probable and possible reserves is influenced by economic andtechnological factors as well as the time element. Probable and possible reserves in this report have not been adjusted in consideration of theseadditional risks and therefore are not comparable with proved reserves.The development status shown herein represents the status applicable on December 31, 2013. In the preparation of this report, data availablefrom wells drilled on the appraised properties through December 31, 2013, were used in estimating gross ultimate recovery. When applicable, grossproduction estimated to December 31, 2013, was deducted from gross ultimate recovery to arrive at the estimates of gross reserves as of December31, 2013. Production data through October 2013 were available for most properties.Our estimates of Abraxas’ net proved, probable, and possible reserves attributable to the reviewed properties are based on the definitions ofreserves of the SEC and are as follows, expressed in thousands of barrels (Mbbl), millions of cubic feet (MMcf), and thousands of barrels of oilequivalent (Mboe): Net ReservesEstimated byDeGolyer and MacNaughtonas of December 31, 2013 Oil andCondensate(Mbbl) NGL(Mbbl) SalesGas(MMcf) OilEquivalent(Mboe) Proved Developed Producing 6,414 1,427 30,072 12,853 Developed Nonproducing 380 29 870 554 Undeveloped 13,997 563 15,997 17,226 Total Proved 20,791 2,019 46,939 30,633Probable Developed Nonproducing 66 0 346 124 Undeveloped 6,987 1,866 47,624 16,790 Total Probable 7,053 1,866 47,970 16,914Possible Undeveloped 7,550 736 15,258 10,829 Total Possible 7,550 736 15,258 10,829 Notes:1. Probable and possible reserves have not been risk adjusted to make them comparable to proved reserves.2. Gas is converted to oil equivalent using a factor of 6,000 cubic feet of gas per 1 barrel of oil equivalent.Primary Economic AssumptionsRevenue values in this report are expressed in terms of estimated future gross revenue, future net revenue, and present worth of future netrevenue. Future gross revenue is defined as that revenue to be realized from the productionand sale of the estimated net reserves. Future net revenue is calculated by deducting estimated production taxes, ad valorem taxes, operating,gathering, processing expenses, and capital costs from the future gross revenue. Present worth of future net revenue is calculated by discounting thefuture net revenue at the arbitrary rate of 10 percent per year compounded monthly over the expected period of realization.Revenue values in this report were estimated using the initial prices and expenses provided by Abraxas. Future prices were estimated usingguidelines established by the SEC and the Financial Accounting Standards Board (FASB). The prices used in this report are based on SECguidelines. The following economic assumptions were used for estimating existing and future prices and costs:Oil, Condensate, and NGL PricesAbraxas has represented that the oil, condensate, and NGL prices were based on a reference price, calculated as the unweightedarithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reportingperiod, unless prices are defined by contractual arrangements. Abraxas supplied differentials to a West Texas Intermediate referenceprice of $97.33 per barrel and the prices were held constant thereafter. The volume-weighted average price attributable to estimatedproved reserves was $95.90 per barrel.NGL prices were provided by Abraxas for each property using the first-day-of-the-month prices and were held constant thereafter. Thevolume-weighted average price attributable to estimated proved reserves was $31.98 per barrel.Natural Gas PricesAbraxas has represented that the natural gas prices were based on a reference price, calculated as the unweighted arithmetic average ofthe first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices aredefined my contractual arrangements. The gas prices were calculated for each property using differentials to the reference price of$3.67 per million British thermal units furnished by Abraxas and held constant thereafter. The volume-weighted average priceattributable to estimated proved reserves was $3.654 per thousand cubic feet.Operating Expenses and Capital CostsOperating expenses and capital costs, based on information provided by Abraxas, were used in estimating future costs required tooperate the properties. In certain cases, future costs, either higher or lower than existing costs, may have been used because ofanticipated changes in operating conditions. These costs were not escalated for inflation.The estimated future revenue and expenditures attributable to the production and sale of Abraxas’ net proved, probable, and possible reservesof the properties appraised, as of December 31, 2013, is summarized in thousands of dollars (M$) as follows: Proved DevelopedProducing DevelopedNonproducing Undeveloped TotalProved Future Gross Revenue, M$ 734,719 40,134 1,455,193 2,230,046Production and Ad Valorem Taxes, M$ 68,965 3,724 131,815 204,504Operating Expenses, M$ 268,156 4,394 270,583 543,133Capital Costs, M$ 250 1,629 460,089 461,968Abandonment Costs, M$ 1,284 0 38 1,322Future Net Revenue, M$ 396,064 30,387 592,668 1,019,119Present Worth at 10 Percent, M$ 206,985 16,988 199,926 423,899 Note: Future income taxes have not been taken into account in the preparation of these estimates. Probable DevelopedNonproducing Undeveloped TotalProbable Future Gross Revenue, M$ 7,895 915,854 923,749Production and Ad Valorem Taxes, M$ 688 90,807 91,495Operating Expenses, M$ 441 129,705 130,146Capital Costs, M$ 560 270,465 271,025Abandonment Costs, M$ 0 87 87Future Net Revenue, M$ 6,206 424,790 430,996Present Worth at 10 Percent, M$ 4,319 128,306 132,625 Notes:1. Future income taxes have not been taken into account in the preparation of these estimates.2. Values for probable reserves have not been risk adjusted to make them comparable to values for proved reserves. PossibleUndeveloped TotalPossible Future Gross Revenue, M$ 752,991 752,991Production and Ad Valorem Taxes, M$ 76,483 76,483Operating Expenses, M$ 138,577 138,577Capital Costs, M$ 285,896 285,896Abandonment Costs, M$ 0 0Future Net Revenue, M$ 252,035 252,035Present Worth at 10 Percent, M$ 45,703 45,703 Notes:1. Future income taxes have not been taken into account in the preparation of these estimates.2. Values for possible reserves have not been risk adjusted to make them comparable to values forproved reserves.While the oil and gas industry may be subject to regulatory changes from time to time that could affect an industry participant’s ability torecover its oil and gas reserves, we are not aware of any such governmental actions which would restrict the recovery of the December 31, 2013,estimated oil and gas reserves. The reserves estimated in this report can be produced under current regulatory guidelines.In our opinion, the information relating to estimated proved, probable, and possible reserves, estimated future net revenue from proved,probable, and possible reserves, and present worth of estimated future net revenue from proved, probable, and possible reserves of oil, condensate,natural gas liquids, and gas contained in this report has been prepared in accordance with Paragraphs 932-235-50-4, 932-235-50-6, 932-235-50-7, 932-235-50-9, 932-235-50-30, and 932-235-50-31(a), (b), and (e) of the Accounting Standards Update 932-235-50, ExtractiveIndustries - Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures (January 2010) of the Financial AccountingStandards Board and Rules 4-10(a) (1)-(32) of Regulation S-X and Rules 302(b), 1201, 1202(a) (1), (2), (3), (4), (5), (8), and 1203(a) ofRegulation S-K of the Securities and Exchange Commission; provided, however, that (i) future income tax expenses have not been taken intoaccount in estimating the future net revenue and present worth values set forth herein and (ii) estimates of the proved developed and provedundeveloped reserves are not presented at the beginning of the year.To the extent the above-enumerated rules, regulations, and statements require determinations of an accounting or legal nature, we, asengineers, are necessarily unable to express an opinion as to whether the above-described information is in accordance therewith or sufficienttherefor.DeGolyer and MacNaughton is an independent petroleum engineering consulting firm that has been providing petroleum consulting servicesthroughout the world since 1936. DeGolyer and MacNaughton does not have any financial interest, including stock ownership, in Abraxas. Our feeswere not contingent on the results of our evaluation. This letter report has been prepared at the request of Abraxas. DeGolyer and MacNaughton hasused all assumptions, data, procedures, and methods that it considers necessary and appropriate to prepare this report.Submitted,/s/ DeGolyer and MacNaughtonDeGOLYER and MacNAUGHTON Texas Registered Engineering FirmF-716/s/ Paul J. Szatkowski, P.E.Paul J. Szatkowski, P.E.[SEAL] Senior Vice PresidentDeGolyer and MacNaughtonCERTIFICATE of QUALIFICATIONI, Paul J. Szatkowski, Petroleum Engineer with DeGolyer and MacNaughton, 5001 Spring Valley Road, Suite 800 East, Dallas, Texas, 75244U.S.A., hereby certify:1.That I am a Senior Vice President with DeGolyer and MacNaughton, which company did prepare the letter report addressed to Abraxas datedFebruary 13, 2014, and that I, as Senior Vice President, was responsible for the preparation of this report.2.That I attended Texas A&M University, and that I graduated with a Bachelor of Science degree in Petroleum Engineering in the year 1974;that I am a Registered Professional Engineer in the State of Texas; that I am a member of the International Society of Petroleum Engineersand the American Association of Petroleum Geologists; and that I have in excess of 39 years of experience in oil and gas reservoir studiesand reserves evaluations.

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