TEXT-S&P revises GMX Resources CCR to 'CCC+'
March 27 - Overview -- Oklahoma City-based oil and natural gas company GMX Resources Inc.'s liquidity remains a heightened concern due to the February 2013 maturity of $59.4 million of convertible notes and aggressive capital spending. -- We have revised the corporate credit rating on GMX Resources Inc. to 'CCC+' from 'SD'. -- We have assigned a 'CCC+' rating to GMX's $283.5 senior secured notes due 2017. -- The outlook is developing is based on GMX's ability to resolve the February 2013 maturity of its 5% convertible notes and to maintain sufficient liquidity to fund near-term interest expense and capital spending. Rating Action On March 27, 2012, Standard & Poor's Ratings Services raised its corporate credit rating on GMX Resources Inc. to 'CCC+' from 'SD' (selective default). At the same time, we assigned a 'CCC+' senior secured rating to the company's $283.5 million senior secured notes due 2017, and a recovery rating of '4', indicating expectations for average (30% to 50%) recovery in the event of a payment default. The outlook is developing. As a result of the 2011 exchange offer and subsequent tender of about 99% of the GMX's $200 million senior notes due 2019, we are withdrawing the rating on those notes. Rationale The 'CCC+' corporate credit rating reflects Standard & Poor's continued doubts about GMX's ability to maintain sufficient liquidity during 2012. Planned 2012 capital spending of $97 million, combined with the February 2013 maturity of the remaining $59.4 million of GMX's 5% convertible notes, pose significant obstacles to maintaining sufficient near-term liquidity. We note that we would have viewed recent common stock exchanges for about $13 million of the 2013 convertible notes as a selective default under our criteria. Future distressed exchanges on the 2013 notes will not trigger a selective default, as we incorporated that transaction into the former 'SD' rating. Finally, GMX's Bakken acreage remains highly prospective; only three operated wells were completed as of March 1, 2012. If future drilling results do not meet expectations, liquidity and access to capital markets could be restricted. GMX has undertaken several actions to improve near-term liquidity. These include the December 2011 exchange offer ($100 million raised), hedge monetization ($18.5 million), and volumetric production payment (VPP, $49.7 million). Together, these helped build unrestricted cash on hand of $102 million as of Dec. 31, 2011. Nevertheless, this is overshadowed by the looming maturity of its remaining $59.4 million 5% convertible notes in February 2013. Until a solution to the maturity is found, ratings are not likely to exceed 'CCC+'. We characterize GMX's financial risk profile as "highly leveraged" (per our criteria). Financial performance will be weak, based on our 2012 price assumptions of $3 per mmBtu (million Btu) natural gas and $85 per barrel West Texas Intermediate (WTI) crude oil. We also assumed total production of about 14 billion cubic feet equivalent (bcfe) in 2012 and $97 million capital spending. Given these assumptions, adjusted debt leverage would exceed 10x and adjusted interest coverage could fall to about 1x, under our price assumptions. Due to extremely weak natural gas prices, GMX's near-term dependence on natural gas production from its Haynesville Shale reserves will limit cash flows in 2012 and liquidity entering 2013. We characterize GMX's business risk profile as "vulnerable." In 2011, GMX ceased development and exploratory drilling on its Haynesville Shale assets, to preserve liquidity and focus on its prospective acreage in the Bakken Shale and Niobrara formations. GMX's operating history in these plays remains limited. GMX has participated in nine Bakken wells to date, four operated, with mixed results. Its most recent operated and completed well, the Evoniuk 21-2-1H, 76% working interest, is its best operated well to date, with initial production of 637 barrels of oil equivalent per day. We expect drilling results to remain variable, as GMX continues to evaluate its acreage and drilling techniques in 2012. Another risk to operating performance is the fall in production from its Haynesville Shale reserves, its main source of operating cash flows. The December VVP of a portion of its Haynesville and Bossier shale production resulted in a 9% fall in fourth-quarter 2011 production versus year-ago results. Additionally, we expect that natural production declines in the Haynesville and other regions could further lower production in 2012. Falling production levels and the limited track record in the Bakken Shale acreage will hinder potential ratings improvement in the near term. Liquidity We characterize liquidity as "weak." Key factors and assumptions include: -- $59.4 million 5% convertible notes mature February 2013. -- Dec. 31, 2011 unrestricted cash balance of $102 million. -- 2012 capital spending of $97 million, $85 million net of projected capitalized interest. -- GMX has no credit facility. The looming February 2013 maturity of the 5% notes weighs heavily on our assessment of liquidity. Even if GMX is able to stay within its current liquidity during 2012, we believe the 5% notes are a roadblock to liquidity beyond 2012. Recovery analysis The $283.5 million senior secured notes have been rated "CCC+", same as the corporate credit rating. The recovery rating is '4', indicating expectations for average (30% to 50%) recovery in the event of a payment default. For the full recovery analysis, please see the recovery report on GMX, to be published on RatingsDirect following the release of this report. Outlook The outlook is developing. The developing outlook reflects the potential for both positive and negative rating actions within the next 12 months, depending on GMX's ability to (1) resolve the February 2013 maturity of its 5% convertible notes and (2) to maintain sufficient liquidity to fund near-term interest expense and capital spending. We could lower ratings if GMX can't find a timely solution to refinance its $59.4 million 5% convertible notes and maintain liquidity to cover interest expense and near-term spending needs. We could raise ratings if GMX can maintain $25 million of liquidity entering 2013, refinance the remaining convertible notes due February 2013, and achieve good operating results from its Bakken development drilling during 2012. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009 -- Key Credit Factors: Business And Financial Risks In The Oil And Gas Exploration And Production Industry, Nov. 10, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Upgraded; Outlook Action To From GMX Resources Inc. Corporate Credit Rating CCC+/Developing/-- SD/--/-- New Rating GMX Resources Inc. Senior Secured US$283.475 mil nts due 2017 CCC+ Recovery Rating 4 Not Rated Action To From GMX Resources Inc. Senior Unsecured NR D Recovery Rating NR 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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