Financially troubled GMX Resources Inc. said it might have to seek bankruptcy protection should management fail to reach a “consensual alternative” with creditors for restructuring its stretched balance sheet.
The Oklahoma-based E&P independent, which entered the Bakken in 2011 with a plan to boost the oil portion of its natural gas-heavy portfolio, conceded unspecified “liquidity” or cash “needs” in a March 18 notice to the U.S. Securities and Exchange Commission, SEC.
“If we are not able to implement a consensual alternative for restructuring our balance sheet, or in order for us to implement a financial alternative, we may voluntarily seek protection under the U.S. Bankruptcy Code,” according to the SEC notice.
GMX also said in the notice that because it was focused on discussions with lenders and finding solutions, it was unable to file its required annual 10-K financial report with the SEC.
That means GMX shareholders have no access to vital financial information detailing how the company performed in the 2012 fourth quarter and how the quarter affected full-year 2012 results.
Hints of trouble ahead
But shareholders did receive a strong hint on March 4 and again on March 11 that GMX was headed into troubled waters.
On March 4, GMX issued a press release saying the New York Stock Exchange had notified the company that it was no longer in compliance with a NYSE listing standard for its stock, because the company’s total market capitalization was less than $50 million over 30 consecutive trading days. Yahoo Finance reported GMX’s market cap at about $16 million on March 26.
GMX said it was given 45 days from receipt of the notice to submit a plan to the NYSE demonstrating how it intends to comply with continued listing standards within 18 months. The NYSE’s Listings and Compliance Committee will then review the business plan for final disposition.
Subject to SEC monitoring
In the event the committee accepts the business plan, GMX will be subject to quarterly monitoring to ensure it’s in compliance with its own plan. The company’s stock would continue to trade on the exchange during the 18 months, provided it complies with listing standards.
“In the event the committee does not accept the business plan, the company will be subject to suspension by NYSE and delisting procedures,” GMX said.
Then on March 11, GMX’s board of directors chose to suspend payment of quarterly dividends on outstanding shares of its 9.25 percent Series B Cumulative Preferred Stock until further notice, including the dividend payable on April 1. Management said it took the action “in order to preserve capital and improve liquidity.”
GMX stock tumbles
Actually, a review of GMX’s quarterly financial reports filed with the SEC last year prior to the fourth quarter clearly shows a company operating on thin ice. And this is reflected in the company’s stock price, which tumbled from around $7 a share in late December to $2.60 a share at market close on March 26.
GMX has reported continuing losses and a rising debt-to-equity ratio on a quarter over quarter basis.
Stockholder equity also has turned negative since the second quarter of 2012, and long-term debt stands at $380 million as of the third quarter of 2012.
Operating cash flow for the first nine months of last year is also eroding the balance sheet, although it turned slightly positive for the 2012 third quarter.
Cash on the decline
Moreover, GMX’s cash resources have declined significantly, dropping from $107 million in the fourth quarter of 2011 down to $18 million in the third quarter of 2012.
Though GMX is actively increasing its oil production, the company’s big natural gas stake, on top of weak gas prices, has certainly contributed to its financial problems. Of the company’s roughly 5,400 barrels of oil equivalent production per day, just 15 percent is oil (liquids) and the rest is natural gas.
GMX should benefit from the recent rise in U.S. natural gas prices, up nearly 20 percent since the 2012 third quarter. And the upward trend is expected to continue, at least in the short term.
“However, this cannot be the solution for GMX’s problems,” market analyst Seeking Alpha wrote in a column about GMX’s financial woes. “The company needs a concrete strategy that will generate cash.”
GMX working with Chatham
It also was announced recently that GMX is working with Chatham Asset Management on restructuring its balance sheet in light of its current liquidity and cash needs.
“This is not the solution for GMX’s problems either,” Seeking Alpha continued. “These treatments are like aspirins to a patient who suffers from cancer.”
Prior to 2011, GMX focused on gas development in East Texas, including the Cotton Valley Sands layer in the Schuler formation and the Upper, Middle and Haynesville-Lower Bossier layers of the Bossier formation, in the Sabine Uplift of the Carthage, North Field primarily located in the Harrison and Panola counties. The company would later sell its Cotton Valley assets.
In 2010, the company said it made a “strategic” decision to expand into basins with liquids potential, in an effort to diversify its significant concentration in natural gas.
In the first half of 2011, GMX acquired positions in over 75,000 undeveloped net acres in the Williston Basin of North Dakota and Montana targeting the Bakken and Three Forks formations, and in the Denver Julesburg Basin of Wyoming targeting the emerging Niobrara formation.
—Ray Tyson
