Williston Basin producer GMX Resources Inc., unable to generate enough cash to meet its financial requirements has filed for Chapter 11 bankruptcy protection, blaming weak natural gas prices for its liquidity problems.
The Oklahoma-based E&P independent said it’s now “pursuing” an agreement with holders of its senior secured notes due 2017 for them to acquire substantially all its operating assets and undeveloped acreage.
The agreement would represent a baseline offer for GMX’s assets, which would be subject to a public auction and receipt of competing, and potentially higher and better offers. The plan needs approval from the U.S. Bankruptcy Court, Western District of Oklahoma, where GMX filed its Chapter 11 petition April 1.
Gas prices tumble
Natural gas-weighted GMX mentioned weak gas prices as a primary cause of its financial problems. Prices have dropped sharply as record production from U.S. shale fields created a glut. Natural gas prices were as high as $14 per million British thermal units, Btu, in 2005, compared with slightly below $4 per million Btu just recently.
GMX like others has been trying to increase its oil output which accounted for only 11 percent of total net production in the third quarter, the company’s last reported quarter. The company produces roughly 5,400 barrels of oil equivalent per day.
Over the past year, the company said, it attempted various “strategic initiatives” to increase oil production, improve supply chain and production efficiencies, and reduce costs to increase cash flow.
“While these operating initiatives resulted in some success, natural gas commodity prices have remained low,” GMX said, noting that the company’s operations require ongoing additional capital expenditures. To meet these cash requirements, GMX said it sought financing alternatives to solve its liquidity needs.
“The company has been unsuccessful in finding any viable funding solution to meet its long-term liquidity needs,” the company said.
Reasons behind Chapter 11
Based on discussions with its creditor groups and company advisors, GMX added:
“The company believes that the rights and protections afforded under a court-supervised reorganization process, including access to financing and a proposed sale of the company assets, will provide the company the ability to meet its immediate financial needs to preserve the value of assets and to provide for the greatest recovery to its shareholders.”
Two GMX units — Diamond Blue Drilling Co. and Endeavor Pipeline Inc. — also filed for bankruptcy protection.
Diamond Blue has minimal assets, while Endeavor Pipeline operates a natural gas gathering system in the East Texas Basin. GMX also has a 60 percent stake in Endeavor Gathering, which owns the natural gas gathering system and related equipment operated by Endeavor Pipeline. GMX did not include Endeavor Gathering in the filing.
GMX wants to continue operations
GMX said it has obtained a commitment for “debtor-in-possession,” DIP, financing, which would provide up to $50 million of additional financing to fund the company’s operating expenses. Upon approval by the court, the new financing and cash generated from the company’s ongoing operations will be used to support its business and the company’s efforts to negotiate and implement the sale of its assets.
GMX filed various “first day” motions with the court seeking authority to continue operations without interruption. The requests include authority to honor royalty obligations, pay salaries and provide benefits to employees, and pay ongoing disputed obligations to vendors and suppliers, and to approve the DIP financing.
The company said it also has notified the New York Stock Exchange of its Chapter 11 filing and anticipates delisting procedures to begin, which it will not contest.
GMX has reported losses for the last eight quarters. It had total assets of $281.1 million and liabilities of $458.5 million as of Dec. 1, according to court documents. Moreover, cash resources declined significantly, dropping from $107 million in the fourth quarter of 2011 down to $18 million in the third quarter of 2012.
GMX’s stock price tumbled from around $7 a share in late December, to about $2.60 a share in late March, to less than 50 cents a share post bankruptcy filing.
In March, the company suspended payment of quarterly dividends on its preferred stock. Later that month, it missed an interest payment on senior secured notes due 2018. It said on March 4 that it had to make the payment within 30 days to avoid defaulting on the debt.
The company’s financial advisor on the Chapter 11 restructuring is Jefferies LLC, and its legal advisor is Andrews Kurth LLP.
GMX’s strategic move
In 2010, GMX made a strategic decision to expand from East Texas into basins with oil potential, in an effort to diversify its significant concentration in natural gas.
In the first half of 2011, the company acquired positions in more than 75,000 undeveloped net acres in the Williston Basin of North Dakota and Montana targeting the Bakken and Three Forks formation, and in the Denver Julesburg Basin of Wyoming targeting the emerging Niobrara play.
—Ray Tyson
