We believe market (stock) sentiment should be evaluated two to three days after an announcement has been made to appropriately measure the response. GMX Resources (NYSE: GMXR) provided an operations update on the company’s Williston Basin and Niobrara operations after the market close on April 16, 2012. When the market opened on April 17, 2012, GMXR shares increased 5.5% to hit an intra-day high of $1.52 per share. At the time of writing this article, shares of GMXR were trading at $1.38, below the share price at the time of announcement. So what exactly is happening at GMX Resources, and how are their oil-weighted operations proceeding to create long-term shareholder value?

Many investors are familiar with the company’s operational transition from the gassy Haynesville shale to the Bakken and Niobrara oil/liquids formations over the past year. We believe investors want to see positive results not just hear about a transition – translation: investors want to see consistently big well results out of the Williston Basin (both Bakken and Three Forks formations), or at least well results more consistent with others in the play. GMXR’s oil production alone is expected to grow 168% sequentially this quarter – primarily driven from North Dakota wells. Clearly GMXR is accelerating its oil activity since the company has only grown oil production 43% from Q1’11 to Q1’12. The Niobrara is still a science project for GMX Resources as they are new to the play; however, the formation could hold additional oil and liquids potential in the future, but the company’s core focus is the Bakken for the foreseeable future.

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In the Williston Basin, the company’s first two operated wells, Wock 21-2-1H (100% WI) and Frank 31-4-1H (52% WI), were both in Stark County, North Dakota, and underperformed market expectations with IP rates of 450 BOEPD gross and 240 BOEPD gross. The company achieved stronger completions on its first two non-operated Bakken wells, Marsh 21-16TFH (Whiting-operated; 2% WI) and Taboo 1-25-36H (Slawson-operated; 25% WI), which flowed back at average IP rates of 2,694 BOEPD gross and 1,436 BOEPD gross, respectively.

However, in the most recent news release dated April 16, 2012, the company reported positive results on its fourth operated well, the Lange 11-30-1H (89% WI) in McKenzie County, North Dakota, which achieved a peak production rate of 2,549 BOEPD. The fifth and sixth operated wells have spud and are awaiting completion. GMXR said in the news release that the company believes GMXR and other large operators have largely de-risked its focus area in Williston Basin, and the company can now focus on improving well economics, and addressing service costs over the following months.

In a recent presentation, GMX Resources’ President Michael Rohleder reminded listeners that DeGolyer and McNaughton assigned an estimated ultimate recovery (EUR) of 493,000 barrels to the Taboo Well (IP rate of 1,436 BOEPD gross) which is a direct offset to the Lange well. The Lange well recorded GMXR’s highest IP rate to date (2,549 BOED gross) so the company believes that the potential for larger EURs is as close as direct offsets.

Final Thoughts on GMXR:

We believe the company is putting the necessary steps in place to grow its Bakken/Three Forks, and later its Niobrara operations, both of which will have to contribute meaningfully to the company’s bottom line given that the bulk of its current production is still gas. The transition to oil, along with the associated increases in oil-weighted production and reserves, has to be successfully executed by GMXR given the general consensus that gas prices will remain subdued for some time. GMXR will soon be capturing Williston Basin NGLs that are currently being flared in the natural gas stream through its contract with ONEOK Partners (NYSE: OKE) adding to the company’s profitability and cost efficiencies in the area. Oil and NGLs are estimated to be 39% of total 2012 production and 76% of total 2012 revenues, excluding income from hedges, as oil and NGL production ramps up in the Williston Basin and NGL recoveries increase from the East Texas natural gas production. More importantly, GMXR is forecasting 277% growth in oil production in 2012 compared to 2011. GMXR had to make a quick sprint to oil from its natural gas assets in 2011 when natural gas prices fell well below profitable levels. They were a late-comer to the Williston Basin; but, they are on the right track to significantly build out a drilling inventory of oil-weighted projects in the Williston Basin and Niobrara. With more results expected during Q2’12, current investor sentiment could turn out to be true.

OAG360 notes the investment community is often much too impatient with transitions on the order of what GMXR is trying to achieve; finding acreage and drilling producing oil wells in the small cap space takes time, but we believe investors should focus squarely on the resource, rather than the timeline. In GMXR’s case, questions are still in the air regarding the company’s acreage quality and its ability to fund its future wells at a drilling pace required to address capital issues in 2013 and beyond. Given recent results, GMX Resources is making progress in the right direction. In the NFL, an effective running game which moves the ball downfield can often be just as successful as the quick-paced aerial passing attack in terms of delivering wins, although one may produce more compelling plays for the spectator. We’ll just have to wait and see how effectively GMXR continues to move the ball downfield.

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