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
-- 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.
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
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
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
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
-- 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
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.
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
Upgraded; Outlook Action
GMX Resources Inc.
Corporate Credit Rating CCC+/Developing/-- SD/--/--
GMX Resources Inc.
US$283.475 mil nts due 2017 CCC+
Recovery Rating 4
Not Rated Action
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