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GMXR: Gas Indigestion

posted Dec 16, 2011, 1:47 AM by Jeff Davies   [ updated Dec 17, 2011, 9:19 PM ]
Europe isn't the only one fighting debt problems with more debt.  What do you do in this gas price environment if you are a sub-100 Mcfe/d producer of mostly dry gas with a high all-in cost structure, limited cash flow generation and leverage pushing 5x debt/ebitdax?  Issue more debt of course.  That's what GMXR recently did with its debt exchange.  The coupon bumped down a bit but debt went up by $54mm so bond/pfd interest expense is $8+mm higher.  Liquidity of nearly $80mm at YE12 assumes a $50mm sale of Niobrara acreage which could become difficult with numerous Niobrara sellers.  With or without the sale they appear to have one and a half years tops to make the oil transition work.  

Everyone who has had it knows gas indigestion can be painful.  At 90% gas production, 98% gas reserves, a cash cost structure of around $3.00/Mcfe - about even with spot prices pre-basis, and no remaining hedges, GMXR is in a world of pain.  I understand it gives them more time to attempt a liquids conversion by doing the exchange, but with the variability of results in the Niobrara, recent cost pressures in the Bakken and my expectations of continued pressure on the gas curve, the company may just be whistling past the graveyard.

CHK, APA, REXX, DVN come to mind as current seller of Niobrara acreage.  Outside the Wattenburg area, results have been spotty at best.  Call me a skeptic that GMXR is going to crack the code in this region, or at least can do it before the next liquidity scare.

NFX and QEP - among others - are struggling with controlling well costs in the Bakken.  By all appearances late-comers to the Bakken party are having difficulties matching costs of the early entrants.  GMXR needs to execute on its assumed well costs or returns will quickly get pressured.  The Bakken is the answer for GMXR, its their hail mary from where I sit.  It could happen, look at the success stories of AEZ, BEXP, KOG, etc. in the Bakken.  If they have success out of the gate in the Bakken, I could see some Niobrara capital being shifted.  They need repeatable, fairly quick payout projects to get a return of invested capital as quick as possible otherwise another cash crunch is around the corner.

5% converts due 2013 are trading in the 60s for ~60% yield, with the 4.5% converts due 2015 trading around 50 for ~28% yield.  Inverted curve says market dubious about survival.  9.25% pfd stock trading $14.20 or around 56 cts on dollar.

Looks like there will be ~ $200mm mkt value of converts, pfd and common below the secured notes.  That cushion could quickly get hit if Niobrara sale doesn't happen or play doesn't evolve, if Bakken acreage spotty, or if gas prices continue downward spiral.  Its almost hard for me to imagine a public e&p doing a gas-weighted deal (other than a e&p MLP perhaps) so the floor on gas assets is a moving target with ample sellers and few buyers.