"GMX Resources (GMXR) Provides an Operational Update"

In a press release today, GMX Resources (GMXR) provides "an operational update, production for Q1, guidance for Q2 and year end 2012 and the Company's election on the semi-annual interest due on its 2017 Senior Secured Notes."

In the "Williston Basin Update", the company repeats the same information about their fourth operated well, the Lange 11-30-1H. This was the well where they announced initial production on April 4, and I pointed out not only could we not determine much without more information, but also there is a well nearby operated by Slawson (with 25% WI to GMX) that seemed to have a ferocious decline rate from initial production.

If they wanted to demonstrate that this well had good economics, they could tell us: how much it cost, what price the produced oil is getting, what the actual time series of production vs time is.

The release mentions that the company's "workover rig arrived in North Dakota on March 23, 2012, and work has been done on the Evoniuk 21-2-1H and the Frank 31-4-1H. The Evoniuk 21-2-1H and the Frank 31-4-1H are both currently on pump and producing oil. The workover rig is next scheduled to work on the Wock 21-2-1H well."

The purpose of the workover rig was to address the actuator balls from the sliding frac sleeve, which had failed to flow back to the surface, and which they said were stuck and restricting production. A competing explanation was that the formation pressure was too low for the balls to flow back, although it was and is unclear what was happening based on the information they gave. Anyway, if the workover had resulted in a substantial increase in production, don't you think they would have announced that in this release?

Their Akovenko 24-34-1H operated well has been drilled and is supposed to be fracked in May. Their Johnston 31-4-1H operated well was just spud. There are a number of other wells where the company is not operating but has varying degrees of working interests: Neil 24-19MBH, with a 4% WI and operated by Burlington; Logan 24-8H, 17% WI, also Burlington; and Pojorlie 21-2-1H, 34% WI, operated by Continental.

Looks like they are still shooting seismic in the Niobrara. It is not clear what ability they would have to develop these even if they found worthwhile targets. They mention a Niobrara well operated by Devon with a 29% WI to GMX; its 30 day rate of production was 10 BBLs/day.

Management's comment (from Michael Rohleder) is that "GMXR and other larger operators have drilled enough wells that our entire acreage footprint has been substantially de-risked," referring to their Bakken acreage.

I don't know about that. What I'm seeing, so far, is some wells that were pretty clearly bad (negative net present value) and one well that is better but which doesn't necessarily have a positive net present value. I'm not sure why they wouldn't publicize the details (actual oil production numbers and well cost) that you would need to estimate the NPV of the wells.

Interestingly, they plan to start gathering the gas being produced by the wells in the Bakken. But, again, it's not clear what the economics of this will be, given the expense of building pipelines for gas that is so cheap. I would like to know what price (basis) they will get for this gas, and what the fixed and variable costs of the gas gathering will be.

The company disclosed some information about the discount between its Bakken oil and the NYMEX price: "basis differential has varied from month to month, ranging from a low of $5.50 in August of 2011 to as high as $25.00 in March of 2012. GMXR's estimated basis differential in April is expected to be $12.00 and is estimated at $10.00 for the remainder of 2012 year."

The company also gave production guidance for 2012, which is estimated to be 354,000 BBLs of oil and 562,000 BBLs of NGLs. That should be about $50 million in total revenue. Meanwhile, they look to have greater than $50 million in preferred coupons and interest expense (assuming they continue to PIK the notes), plus they had projected SG&A expense for 2012 to be $31 million.

There is a glaring omission that they haven't discussed: can they show us a cash flow projection that results in the 2013 notes, currently trading at 77, and the 2015 notes, currently trading at 50, being paid off by maturity? It seems to me that they could better accomplish their goals by deleveraging the capital structure.

Fundamentally, they have not released what I would consider truly useful information about their well performance to date in the Bakken. They also have not addressed the concern about the debt maturities and capital structure. It seems to me that no news is generally bad news in cases like this.