Is GMX Resources Worth Investing In?

Will impairment of assets affect the long-term performance of this E&P company?

Isac Simon
Isac Simon
Apr 7, 2011 at 12:00AM

Last week, I spoke about a small-cap exploration and production company, Crimson Exploration (Nasdaq: CXPO), which looks promising in the long run. Today, we'll take a look at another small-cap E&P company: GMX Resources (NYSE: GMXR).

What it does
With a market cap of $334 million, Oklahoma-based GMX Resources is involved in the development of two oil resource plays -- the Williston basin in the Bakken-Three Forks and the DJ basin targeting the Niobrara formation in Wyoming. It also operates in two natural gas resource plays -- the Haynesville/Bossier formation and the Cotton Valley Sand formation in the East Texas basin.

A matter of concern
Things are generally looking good at the company, but estimated reserves have taken a beating since 2008. There has not been any substantial addition to the value of reserves, which for an E&P is obviously a problem. In fact, the present value of the reserves has fallen to $250 million at the end of 2010 from $281 million at the end of 2008. The estimated future net revenues have fallen by more than 31% during the corresponding period to $693 million from a little more than $1 billion. The reason being, while the proven developed gas reserves saw a rise of 2 billion cubic feet equivalent, the proven undeveloped reserves dropped by nearly half -- to 154.9 Bcfe from 303.2 Bcfe in two years. This development has adversely affected the company's bottom line.

Gross margins remained impressive, in the high 80s (something that the company has managed to maintain more or less, over the past five years). However, because of impairment of assets, the losses that the company suffered more than offset the gross profit. Notably, this "impairment trend" has been showing for the past three years. The 2010 impairment charge (amounting to $132.8 million) resulted in a removal of approximately 220 Bcfe of proven reserves from the 2009 estimates -- a substantial amount.

How much can Bakken do?
While the company will be banking on its reserves in the Bakken formation, the other assets, such as the Cotton Valley Sands, will remain untapped for years and will be subject to further impairment writedowns depending on prices of oil and gas. This does not bode well for the company.

The Foolish approach
Bakken reserves might boost fortunes as production increases further. Whether this will offset the impairment of the other assets is anybody's guess. While Bakken does play savior, like it does for Kodiak Oil and Gas (AMEX: KOG), to bank on it solely would imply a waste of other resources and assets that will continue to hamper the company's performance.

It sounds more Foolish to wait and watch this stock, which has been underperforming the overall market for the past year. If you do want to watch this company, we can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.