GMX Resources (ticker: GMXR) entered into a definitive purchase and sale agreement with a private third party to sell certain interests in specified operated and non-operated properties in East Texas and Louisiana assets for approximately $69.0 million. The assets include primarily Cotton Valley Sands and shallow rights.
GMXR will retain its entire Haynesville/Bossier (H/Bz) resource base, as well as Cotton Valley Sands and shallow rights across approximately 13,130 net acres that include 10 producing wells and 28 undeveloped horizontal locations within its East Texas core position.
OAG360 Comments
Amidst GMXR’s transition from a pure-play East Texas natural gas player to a company generating revenues primarily from oil and natural gas liquids, the company faces the dual challenge of cleaning up its balance sheet and funding its ongoing Bakken drilling program. Despite some market skepticism, GMXR management is finding solutions to these dual challenges by creating additional liquidity. GMXR’s objective for the second half of 2012 is to increase its liquidity to fund 2013 oil drilling programs and to retire its near-term debt obligations and the Cotton Valley sale appears to be a large step forward in addressing its drilling funding requirements.
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Valuation:
The $69.0 million purchase price implies a proved reserves valuation of $1.00 per Mcfe. Given that GMXR was in the late innings to divest assets in order to improve liquidity, the company was able to sell its Cotton Valley Sands assets at a 14% premium to the Q2’12 proved reserves associate with the sale of 68.7 Bcfe.
Liquidity:
The theme of liquidity and how to fund its capital program is a recurring element to the GMXR story. Over the last half of 2011, GMXR raised approximately $183 million, and retired its bank facility. To date, the company has additionally retired $31.4 million in debt, moved $25 million of 2013 notes and $26 million of 2015 notes to 2018 (which can be paid in cash or stock). The remaining balance on the 2013 notes is $27.1 million, a portion of which GMXR may be able to address using a portion of proceeds from assets sales. We note that 2017 bond covenants limit the use of cash or proceeds from asset sales to a reduce debt to a maximum of $10 million, which would leave $17.1 million outstanding on the 2013 notes.
The remaining balance of proceeds from the Cotton Valley asset sale, approximately $59.0 million (assuming the company will use maximum $10 million) could be used primarily for its drilling program in the Bakken during 2012 and into 2013. In its Q2’12 earnings, GMXR said current and expected 2012 capital expenditures are in-line with its $97 million CAPEX budget announced earlier in the year.
Production:
Over the last 15 months, GMXR started drilling and participating in successful oil and liquids-rich wells in the Bakken that jump-started revenues from oil and NGLs. Since its entry into Bakken, GMXR has drilled eight horizontal wells, and recently spud its ninth horizontal well in the Williston Basin of North Dakota. At year-end 2012, GMXR expects 70% of its revenues to be driven from oil and natural gas liquids. Its other near-term production goals include increasing its oil production by 200% in 2012, 200% in 2013, all of which would lead to 90% of its 2014 revenues to be driven from oil production.
Pro Forma Look at GMXR:
Below, we provide a pro forma look at GMXR’s acreage profile. We will point out that more than half of GMXR’s acreage is currently associated with oil and liquids rich plays. Don’t forget, GMXR retained its H/Bz shale upside where the company reports 163 net locations and 8.7 Bcfe EURs which equates to a resource base exceeding 1 Tcfe. It’s safe to say that if gas prices make a nominal comeback ($5.00 per Mcfe), GMXR will be in the position to capitalize on such a rally in the gas market.
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