Now is a good time to check on how the stocks in your portfolio might shape up next year. A good knowledge of the opportunities and the challenges ahead for the company should help you make better investing decisions regarding its stock. Let's take a look into what the next 12 months hold for GMX Resources (NYSE: GMXR).
Fundamentally flawed
Revenues rose marginally this year only to be beaten down by operating costs. Operating income for the third quarter stood at a pathetic $1.9 million, easily making this the worst quarter of the year. The exploration and production company's entry into the lucrative Bakken and Niobrara shale plays hasn't really translated into something big yet.
In April, the company acquired 7,600 net acres in McKenzie and Dunn Counties with an 87% working interest. While all this looks good on paper, GMX has leveraged heavily in order to fund its acquisitions and development. So much so that rating agency Moody's has now downgraded its unsecured notes by a notch, to Ca.
Earlier this year, I had expressed hope that natural gas demand should fuel this company forward. Back then, production costs were less than selling costs, and we hoped that the company could maintain this. Unfortunately, that wasn't the case. A 19% drop in natural gas prices compared to 2010 spelled doom. Still, for the record, natural gas production rose 68% in the first nine months compared to 2009. But right now, that's not something I'm too impressed with.
Additionally, an 8% drop in oil production ensured that GMX couldn't take advantage of a 24% increase in oil prices. Still, what is surprising is the fact that management couldn't develop its Bakken resources at a faster pace. In fact, Kodiak Oil & Gas (NYSE: KOG) and Brigham Exploration, now taken over by Statoil (NYSE: STO), grew at a phenomenal pace this year only due to their Bakken properties.
Foolish bottom line
In short, the whole idea is this: It isn't really worth investing in lucrative hot plays unless you have the cash to dig out the resources beneath. With current debt-to-equity at 260%, GMX has a lot of catching up to do in 2012. Again, with an EBITDA/interest expense at just two times, the interest coverage isn't too appealing. To stay up to speed on the top news and analysis on GMX Resources, you can start here by adding the company to your watchlist.
