Change is occurring at GMX Resources (Nasdaq: GMXR ) . For a company where natural gas accounts for almost 98% of net proved reserves, and doing pretty well, investors are noticing a bold venture into oil plays.
A couple of weeks back, the company announced it had begun drilling its first well in the Williston Basin of North Dakota. Although merely a baby step into the hugely promising oil reserves of the Bakken, this should be good news for investors.
Solid operations
Despite the ugly market for natural gas, GMX has managed to keep its production costs well below trading levels. Production costs now stand at $3.59/Mcfe, while natural gas is trading at $4.36. And with increased production, things have slowly but steadily started to look up.
Cash from operations have shown a steady increase. Bear in mind, it's not an easy task to maintain top-line sales growth despite falling natural gas prices. And GMX has registered a growth in revenues in the past six years, all except for 2009. That speaks a lot for the company.
With GMX expecting to finish drilling the first well in the Bakken by the third quarter, the company should see even more strength in its business. Higher demand coupled with higher oil prices should only increase sales substantially.
Not a huge concern
At an unenviable 176%, debt-to-equity is, however, on the dangerous side. But given the expansion phase the company is in, I'm willing to allow a little leeway in this department. Interest coverage stands at a comfortable 2.4 times. The company is generating enough cash to meet its interest expenses.
How is the stock valued?
This is how GMX stacks up when compared with its peers:
|
Company
|
TEV/EBITDA
(TTM)
|
P/B
|
Forward P/E
|
TEV/DFCF
|
| GMX Resources |
13.5 |
1.52 |
21.3 |
2.25 |
|
Northern Oil & Gas
(AMEX: NOG )
|
50.2 |
3.74 |
25.3 |
6.55 |
|
Crimson Exploration
(Nasdaq: CXPO )
|
7.5 |
0.97 |
NM |
1.43 |
|
Panhandle Oil & Gas
(NYSE: PHX )
|
8.7 |
3.27 |
NM |
3.95 |
|
Delta Petroleum
(Nasdaq: DPTRD )
|
17.7 |
0.50 |
NM |
2.55 |
Sources: Company filings and Capital IQ, a Standard & Poor's company. TTM = trailing 12 months.
The numbers above make GMX look pretty impressive. The company's stock looks pretty cheap when compared against its operational earnings (EBITDA). Additionally, while Crimson's future looks dicey, GMX looks solid in terms of future growth. A price-to-book a little higher than 1.5 makes me feel the stock is undervalued. Future growth prospects back that up.
With regards to future cash flows, GMX looks the cheapest if we leave Crimson out from the equation. Future cash flows look promising, and the market has yet to factor in this advantage.
Foolish bottom line
Management seems to know what it is doing. Its timing in entering the crude oil market could be nothing less than perfect. Consolidating growth via shale oil should serve the company well for a long time to come. Also, with long-term bullish sentiments for the natural gas market, I believe GMX will be well placed to exploit the imminent boom in natural gas demand. Foolish investors should see merit in this stock.
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