"GMX's Caa1 CFR reflects its small size, limited diversification, production that is 97% natural gas in a low gas price environment, high leverage on production and reserves, and the risks inherent in developing its newly acquired oil focused Bakken and Niobrara acreage while outspending cash flow," commented Jonathan Kalmanoff , Moody's Analyst. "The rating also considers the potential for improvement in both profitability and diversification if GMX is successful in developing its newly acquired acreage, the pre-funding of the majority of 2011 capital spending through both debt and equity offerings, a lack of required drilling to hold acreage in the company's East Texas properties, and hedges in place which add support to realized prices for gas production through 2012."
At December 31, 2010 , pro-forma, debt / average daily production was $42,623 /boe and debt / proven developed reserves was $14.94 /boe. In assessing leverage, Moody's views 75% of GMX's 9.25% Series B Cumulative Preferred Stock as debt.
The SGL-3 liquidity rating reflects adequate liquidity through 2011. At the closing of its debt and equity offerings, the company will have $60 million of availability under its undrawn borrowing base credit facility and $107 million of cash. Capital expenditures are expected to exceed cash flow during 2011. The credit facility, which is being amended concurrently with the notes offering, has a $100 million commitment with an initial borrowing base of $60 million . The borrowing base is re-determined semi-annually with the next re-determination scheduled for October 1, 2011 . Financial covenants under the facility are Senior Secured Debt / EBITDA of not more than 2.5x, EBITDA / interest of not less than 2.5x, and a current ratio of not less than 1.0x. There are no debt maturities until 2013. Substantially all of GMX's oil and gas reserves are pledged as security under the credit facility which limits the extent to which asset sales could provide a source of additional liquidity; however, the company would be able to sell drilling rig and midstream assets held in its subsidiaries to raise additional liquidity if needed.
The Caa2 senior unsecured note rating reflects both the overall probability of default of GMX, to which Moody's assigns a PDR of Caa1, and a loss given default of LGD4-58%. The size of the senior secured revolver's potential priority claim relative to the senior unsecured notes results in the notes being rated one notch beneath the Caa1 CFR under Moody's Loss Given Default Methodology.
The stable outlook reflects our expectation that GMX will maintain adequate liquidity as it outspends cash flow to develop its properties. Negative ratings action could result if liquidity were to tighten due to unexpected production declines relative to debt funded capital spending, a reduction in availability under the company's borrowing base credit facility, or reduced cash flow due to uneconomic realized prices for natural gas production. Positive ratings action could result if GMX were to meet its forecasts for production growth in the Bakken and Niobrara leading to daily production over 15,000 boe with debt / average daily production of less than $25,000 /boe and trending downward.
The principal methodology used in rating GMX was Moody's Independent Exploration and Production (E&P) Industry published in December 2008 .