GMX Resources (NYSE: GMXR) reported a net loss in Q3’11 of $68.9 million, or $1.21 per share, compared to Q3’10 net income of $2.2 million, or $0.08 per share. Total Q3’11 revenues net of hedging were $28.4 million, a 15% increase over Q3’10 earnings of $24.8 million. GMXR’s Q3’11 production was 6.1 Bcfe, a 32% increase over the same period in 2010.
For the first nine months of 2011, GMXR reported a net loss of $138.8 million, or $2.69 per share, compared to net income of $3.0 million, or $0.11 per share during the same period in 2010. Total revenues net of hedging for the first nine months of 2011 were $90.6 million, a 31% increase over the same period in 2010. For the first nine months of 2011, the company reported production of 18.7 Bcfe, a 54% increase over the same period in 2010.
OAG360 Comments
Bakken Update: GMXR’s first Bakken well, Wock 21-1-1H (100% WI), was completed during Q2’11 in the Three Forks formation at a cost of $9.5 million. The well, completed with a 10,281 foot lateral and 40-stage frac, had a 24-hour IP rate of 450 BOEPD; GMXR’s EUR projection for this well is 400 MBOE. Even with a well cost $1.5 million higher than GMXR’s expected average Bakken well cost, the company asserts it will achieve a 20% IRR at current WTI prices and resource recovery estimates.
In its Q3’11 conference call, GMXR explained Wock’s higher well cost was due to the drilling of a pilot well, longer drill time than anticipated and challenges in obtaining white sand for the frac (resin coated sand costs $0.5 million more). OAG 360 notes these services challenges are common in the Bakken, as regular readers of OAG 360 are well aware.
The company currently has 17 wells either drilling or permitted in the Bakken, with working interests ranging from less than 1% to 100%. Over the near-term, GMXR plans to drill on its Billings and McKenzie County acreage where it has 128 potential well sites. The first of these wells, Evoniuk 21-2-1H (83% WI), spudded in late October; GMXR expects to complete this well within 33 days (14 days less than Wock). The company has allocated 72% ($68 million) of its 2012 CapEx to Bakken production, targeting its most economic acreage, with projected EURs ranging from 500 MBOE to 600 MBOE. These EURs translate to 25-30% IRRs using a price deck of WTI minus $7.
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Niobrara Update:
GMXR has 251 drilling locations in the Niobrara with 58 MMBbls of resource potential. The company is currently awaiting completion results (estimated late November) from the Newton Ranches 14-3444H well (29.2% non-operated WI) in Goshen County, WY which is operated by Devon Energy (NYSE: DVN). GMXR projects its CapEx in the Niobrara to be $11 million (13% of 2012 CapEx), which it will use (in part) to participate in six non-operated Niobrara wells already permitted and begin drilling its operated acreage in Q1’12.
Liquidity Update:
The market has been concerned about GMXR’s liquidity position for some time. In its Q3 news release and conference call, GMXR announced plans which, when executed, should provide liquidity of $114 million and $76 million at December 31, 2011 and December 31 2012 respectively by selling $100 million in new senior notes in a fully-backed stock bond exchange. Additionally, GMXR plans to monetize $17 million in commodity hedges, sell equipment for $1 million and sell a volumetric production payment (VPP) relating to Cotton Valley overriding royalty interests for $55 million. The company no longer plans to sell acreage in either the Cotton Valley or Bakken, however it still plans to sell a “checkerboard” of interests in the Niobrara. The change in strategy with respect to the company’s Cotton Valley acreage was prompted by horizontal oil drilling opportunities in the play, notably in the Taylor Sands.
OAG360 notes two main points of significance for the “liquidity solutions” announced by GMXR. First, the 2012 capex program to fund drilling plans hinges on the closing of either the VPP or issuance of up to $100 million of senior secured notes. Second, upon closing either of the announced transactions, GMXR appears to intend for a portion of those proceeds to pay off its existing bank debt and effectively eliminate its existing bank credit facility entirely. OAG 360 believes that GMXR, in answering market concerns about liquidity through these two transactions, may have created another set of questions in terms of future capital availability which may weigh on investors’ minds. Does the company intend to re-establish a bank credit facility/reserves based lending facility in 2012 folllowing its Bakken results? Or, will GMXR’s only viable capital source be another equity raise? Obviously this will depend upon successful execution of operations plans in 2012 which, given recent turmoil in the energy markets, may or may not translate into market recognition of this success via a higher share price in 2012.
