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TEXT-S&P revises GMX Resources CCR to 'CCC+'
March 27, 2012 / 7:15 PM / 6 years ago

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. Use the Ratings search box located in the left 	
column.

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