After two years of attempting to IPO, San Antonio, Texas-based Abraxas Petroleum Corp. (Nasdaq: AXAS) plans to roll up its 48%-owned MLP Abraxas Energy Partners LP in response to pressure from junior lien holders and unit holders.

Abraxas Petroleum will pay $6 per Abraxas Energy unit in stock, or approximately $1 to $1.41 per Abraxas Petroleum share to be determined based on the 20-day trading average prior to a date that will be decided at a pending special meeting of Abraxas Petroleum stockholders.

“The merger transaction should greatly enhance the value of the combined entity for investors of both Abraxas Petroleum and Abraxas Energy,” says Abraxas president and chief executive Bob Watson. “The merger will allow the combined entity to increase its drilling activity by reinvesting a greater portion of its cash flow into organic growth projects throughout all of our core regions which encompass the entire central portion of the U.S. from North Dakota to the Gulf Coast.”

Abraxas Energy LP was formed in May 2007 with Abraxas Petroleum assets in South and West Texas for some $100 million with estimated proved reserves of 65 billion cubic feet of gas equivalent at year-end 2006. Unit-buyers received some 6 million common units, with Abraxas Petroleum holding a 38.3% limited-partner interest and other unit-holders including Lehman Brothers MLP Opportunity Fund LP, Citigroup Global Markets Inc., Third Point LLC and funds managed by Fiduciary Asset Management LLC, Merrill Lynch Commodity Partners LP and Tortoise Capital Resources Corp.

Abraxas announced an IPO of the master limited partnership in July 2007, which was postponed following an acquisition of producing properties in the Rockies and Midcontinent from St. Mary Land & Exploration Co., Denver, (NYSE: SM) for $140 million. The acquisition included a bridge loan from Société Générale for $40 million that was anticipated being repaid via proceeds from the IPO.

By the time the SEC completed approval of the registration statement, however, the equities and debt markets had evaporated, leaving the bridge loan in limbo and Abraxas unable to IPO or refinance. A registration rights agreement between Abraxas and its unit holders provides the requirement to take public the partnership by a certain date or to convert their limited partnership units into Abraxas common shares. That date following a 60-day extension was coming due end of June.

In a conference call in early May, Watson said the situation was “sad” because “the MLP business has worked, it continues to work and I see no reason why it won’t work going forward. Unfortunately, the financial markets have abandoned support for upstream MLPs and there is no way to know when that support might come back.” He said partnership assets were contributing $40 million to $50 million per year in cash flow. As of year-end 2008, Abraxas Energy proved reserves were 18.4 million barrels of oil equivalent (76% gas; 61% proved developed; 78% operated). In that call, Watson alluded that a vote by Abraxas shareholders to issue new equity for the roll up would be unlikely as it would be “very dilutive.”

Now, Watson says, “We believe that the merger will simplify our organizational structure, reduce general and administrative expenses, provide greater transparency, and create a more attractive investment opportunity with increased liquidity and a larger public float. We have been in discussions with our bank group and we are optimistic that the debt of the combined entity can be re-financed solely with senior debt.”

The board of the combined entity will consist of eight independent directors of Abraxas Petroleum and Abraxas Energy, with Watson remaining as president, chief executive and chairman.

Abraxas Petroleum operates in Texas, the Midcontinent and the Rockies. Abraxas Petroleum, through a wholly-owned subsidiary, owns 48% of Abraxas Energy and manages its day-to-day operations through its 100% ownership of the general partner. Abraxas Energy holds interests in the Rockies, Midcontinent, Permian Basin and Gulf Coast.