10-Q 1 gmxr-2012331x10q.htm FORM 10-Q GMXR-2012.3.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________ 
FORM 10-Q
 ______________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission File Number 001-32977
 ______________________________________ 
GMX RESOURCES INC.
(Exact name of registrant as specified in its charter)
______________________________________ 
Oklahoma
 
73-1534474
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
One Benham Place, 9400 North Broadway, Suite 600
Oklahoma City, Oklahoma
 
73114
(Address of principal executive offices)
 
(Zip Code)
(Registrants’ telephone number, including area code): (405) 600-0711
______________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
 
o
Accelerated filer
 
x
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  o    No  x
The number of shares outstanding of the registrant’s common stock as of May 9, 2012 was 73,233,096, which included 2,364,375 shares under a share loan which will be returned to the registrant upon conversion of certain outstanding convertible notes.



GMX Resources Inc.
Form 10-Q
For the Quarter Ended March 31, 2012
TABLE OF CONTENTS
 


2


PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements
GMX Resources Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands, except share data)
(Unaudited)
 
March 31, 2012
 
December 31, 2011
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
71,079

 
$
102,493

Restricted cash
4,325

 
4,325

Short-term investments
2,000

 

Accounts receivable – interest owners
7,904

 
8,607

Accounts receivable – oil and natural gas revenues, net
5,695

 
7,082

Derivative instruments
778

 

Inventories
326

 
326

Prepaid expenses and deposits
2,211

 
2,655

Assets held for sale
1,910

 
2,045

Total current assets
96,228

 
127,533

OIL AND NATURAL GAS PROPERTIES, BASED ON THE FULL COST METHOD
 
 
 
Properties being amortized
1,085,361

 
1,062,801

Properties not subject to amortization
153,085

 
147,224

Less accumulated depreciation, depletion, and impairment
(906,232
)
 
(871,346
)
 
332,214

 
338,679

PROPERTY AND EQUIPMENT, AT COST, NET
64,464

 
65,858

DERIVATIVE INSTRUMENTS
500

 

OTHER ASSETS
8,983

 
10,131

TOTAL ASSETS
$
502,389

 
$
542,201

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
12,919

 
$
13,550

Accrued expenses
14,485

 
17,835

Accrued interest
12,557

 
3,256

Revenue distributions payable
5,411

 
5,980

Current maturities of long-term debt
58,151

 
26

Total current liabilities
103,523

 
40,647

LONG-TERM DEBT, LESS CURRENT MATURITIES
356,958

 
426,805

DEFERRED PREMIUMS ON DERIVATIVE INSTRUMENTS
312

 

OTHER LIABILITIES
7,684

 
7,476

EQUITY:
 
 
 
Preferred stock, par value $.001 per share, 10,000,000 shares authorized:
 
 
 
Series A Junior Participating Preferred Stock, 25,000 shares authorized, none issued and outstanding

 

9.25% Series B Cumulative Preferred Stock, 6,000,000 shares authorized, 3,176,734 shares issued and outstanding as of March 31, 2012 and December 31, 2011 (aggregate liquidation preference $79,418 as of March 31, 2012 and December 31, 2011)
3

 
3

Common stock, par value $.001 per share – 100,000,000 shares authorized, 69,272,437 shares issued and outstanding as of March 31, 2012 and 63,085,432 shares issued and outstanding as of December 31, 2011
69

 
63

Additional paid-in capital
702,041

 
690,986

Accumulated deficit
(689,942
)
 
(649,341
)
Accumulated other comprehensive income, net of taxes
10,517

 
14,029

Total GMX Resources’ equity
22,688

 
55,740

Noncontrolling interest
11,224

 
11,533

Total equity
33,912

 
67,273

TOTAL LIABILITIES AND EQUITY
$
502,389

 
$
542,201

See accompanying notes to consolidated financial statements.

3


GMX Resources Inc. and Subsidiaries
Consolidated Statements of Operations
(dollars in thousands, except share and per share data)
(Unaudited)
 
 
Three Months Ended
 
March 31,
 
2012
 
2011
OIL AND GAS SALES, net of gain from ineffectiveness of derivatives of $0 and $408, respectively
$
17,401

 
$
29,376

EXPENSES:
 
 
 
Lease operations
3,108

 
2,898

Production and severance taxes
(237
)
 
383

Depreciation, depletion, and amortization
7,465

 
12,789

Impairment of oil and natural gas properties and assets held for sale
28,999

 
48,320

General and administrative
6,995

 
7,077

Total expenses
46,330

 
71,467

Loss from operations
(28,929
)
 
(42,091
)
NON-OPERATING INCOME (EXPENSES):
 
 
 
Interest expense
(10,702
)
 
(8,022
)
Gain (loss) on conversion/extinguishment of debt
2,781

 
(108
)
Interest and other income
72

 
269

Unrealized gain (loss) on derivatives
790

 
(444
)
Total non-operating expense
(7,059
)
 
(8,305
)
Loss before income taxes
(35,988
)
 
(50,396
)
INCOME TAX PROVISION
(1,887
)
 
(1,432
)
NET LOSS
(37,875
)
 
(51,828
)
Net income attributable to noncontrolling interest
889

 
1,412

NET LOSS APPLICABLE TO GMX RESOURCES
(38,764
)
 
(53,240
)
Preferred stock dividends
1,837

 
1,210

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS
$
(40,601
)
 
$
(54,450
)
LOSS PER SHARE – Basic
$
(0.66
)
 
$
(1.29
)
LOSS PER SHARE – Diluted
$
(0.66
)
 
$
(1.29
)
WEIGHTED AVERAGE COMMON SHARES – Basic
61,672,720

 
42,150,589

WEIGHTED AVERAGE COMMON SHARES – Diluted
61,672,720

 
42,150,589

See accompanying notes to consolidated financial statements.

4


GMX Resources Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(Unaudited)
 
 
Three Months Ended
 
March 31,
 
2012
 
2011
Net loss
$
(37,875
)
 
$
(51,828
)
Other comprehensive loss, net of income tax:
 
 
 
Change in fair value of derivative instruments, net of income tax of $0 and $80, respectively

 
156

Reclassification of gain on settled contracts, net of income taxes of ($1,809) and ($1,511), respectively
(3,512
)
 
(2,934
)
Comprehensive loss
(41,387
)
 
(54,606
)
Comprehensive income attributable to the noncontrolling interest
889

 
1,412

Comprehensive loss attributable to GMX shareholders
$
(42,276
)
 
$
(56,018
)
See accompanying notes to consolidated financial statements.
 

5


GMX Resources Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited) 
 
Three Months Ended
 
March 31,
 
2012
 
2011
CASH FLOWS DUE TO OPERATING ACTIVITIES
 
 
 
Net loss
$
(37,875
)
 
$
(51,828
)
Depreciation, depletion, and amortization
7,465

 
12,789

Impairment of oil and natural gas properties and assets held for sale
28,999

 
48,320

Deferred income taxes
1,887

 
1,431

Non-cash compensation expense
832

 
1,159

(Gain) loss on conversion/extinguishment of debt
(2,781
)
 
108

Non-cash interest expense
2,115

 
2,403

Non-cash change in fair value of derivative financial instruments
(790
)
 
37

Non-cash derivative gain in oil and gas sales
(5,321
)
 

Other
(28
)
 

Decrease (increase) in:
 
 
 
Accounts receivable
2,090

 
1,613

Inventory and prepaid expenses
770

 
(322
)
Increase (decrease) in:
 
 
 
Accounts payable and accrued liabilities
2,037

 
(155
)
Revenue distributions payable
(574
)
 
992

Net cash (used in) provided by operating activities
(1,174
)
 
16,547

CASH FLOWS DUE TO INVESTING ACTIVITIES
 
 
 
Purchase, exploration and development of oil and natural gas properties
(24,924
)
 
(85,872
)
Proceeds from sale of oil and natural gas properties, property, equipment and assets held for sale
140

 
2,079

Purchase of short term investments
(2,000
)
 

Purchase of property and equipment
(322
)
 
(935
)
Net cash used in investing activities
(27,106
)
 
(84,728
)
CASH FLOWS DUE TO FINANCING ACTIVITIES
 
 
 
Borrowings on revolving bank credit facility

 
18,000

Repayments of long-term debt
(13
)
 
(160,022
)
Proceeds from issuance of long-term debt

 
193,666

Proceeds from sale of common stock

 
105,324

Proceeds from sale of preferred stock

 
6,915

Dividends paid on Series B preferred stock
(1,837
)
 
(1,210
)
Fees paid related to financing activities
(86
)
 
(15,890
)
Contributions from non-controlling interest member

 
60

Distributions to non-controlling interest member
(1,198
)
 
(3,378
)
Net cash (used in) provided by financing activities
(3,134
)
 
143,465

NET (DECREASE) INCREASE IN CASH
(31,414
)
 
75,284

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
102,493

 
2,357

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
71,079

 
$
77,641

SUPPLEMENTAL CASH FLOW DISCLOSURE
 
 
 
CASH PAID DURING THE PERIOD FOR:
 
 
 
INTEREST, Net of amounts capitalized
$
1,368

 
$
4,318

INCOME TAXES, Paid
$

 
$
1

NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Debt extinguished with common stock
$
13,378

 
$

Additions to oil and natural gas properties in exchange for common stock
$

 
$
13,614

Decrease in accounts payable for property additions
$
3,120

 
$
10,624

See accompanying notes to consolidated financial statements.

6


GMX Resources Inc.
Condensed Notes To Interim Financial Statements
Three months ended March 31, 2012 and 2011
(Unaudited)

NOTE A – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
GMX Resources Inc. and its subsidiaries (collectively, “GMX” the “Company”, “we,” “us” and “our”) is an independent oil and natural gas exploration and production company with a portfolio of leasehold acreage in multiple resource plays that allows the Company flexibility to deploy capital based on a variety of economic and technical factors, including commodity prices (including differentials applicable to the basin), well costs, service availability, and take-away capacity.
Prior to 2011, the Company focused on the development of the hydrocarbon formations in East Texas including the Cotton Valley Sands (“CVS”) layer in the Schuler formation and the Upper, Middle and Haynesville/Lower Bossier layers of the Bossier formation (the “Haynesville/Bossier Shale”, or “H/B”), in the Sabine Uplift of the Carthage, North Field primarily located in Harrison and Panola counties of East Texas (previously designated as our “primary development area”).
In late 2010, we made a strategic decision to expand our asset base and development activities into other basins in order to diversify our significant concentration in natural gas to a multiple basin and commodity strategy with more liquid hydrocarbon opportunities. In the first half of 2011, we acquired core positions in over 75,000 undeveloped net acres in two of the leading oil resource plays in the U.S.: the Williston Basin of North Dakota/Montana, targeting the Bakken/ Three Forks Formation; and in the oil window of the Denver Julesburg Basin (the “DJ Basin”) of Wyoming, targeting the emerging Niobrara Formation. We believe the flexibility with the acquisition of the liquids-rich (estimated 90% oil) Bakken and Niobrara acreage will enable us to generate higher cash flow growth to fund our capital expenditure program. The Company is leveraging our expertise in H/B Shale horizontal drilling to successfully develop these newly acquired oil resource plays.
We have three subsidiaries: Diamond Blue Drilling Co. (“Diamond Blue”), which sold its assets in 2011 and is not active, Endeavor Pipeline Inc. (“Endeavor Pipeline”), which operates our water supply and salt water disposal systems in our East Texas development area, and Endeavor Gathering, LLC (“Endeavor Gathering”), which owns the natural gas gathering system and related equipment operated by Endeavor Pipeline. Kinder Morgan Endeavor LLC (“KME”) owns a 40% membership interest in Endeavor Gathering.
Basis of Presentation
The accompanying unaudited consolidated financial statements and condensed notes thereto of GMX have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in GMX’s 2011 Annual Report on Form 10-K (“2011 Form 10-K”).
In the opinion of GMX’s management, all adjustments (all of which are normal and recurring) have been made which are necessary to fairly state the unaudited consolidated balance sheet of GMX as of March 31, 2012, and the results of its operations and cash flows for the three months ended March 31, 2012 and 2011.
Earnings Per Share
Basic earnings (loss) per common share is computed by dividing the net income (loss) applicable to common stock by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share is calculated in the same manner, but also considers the impact to net income (loss) and common shares for the potential dilution from our convertible notes, outstanding stock options and non-vested restricted stock awards. Because the Company was in a loss position for the three months ended March 31, 2012 and 2011, the instruments mentioned above would decrease diluted loss per share, which would result in antidilutive instruments. Therefore, there were no dilutive shares for the three months ended March 31, 2012 and 2011.
Oil and Natural Gas Properties
The Company follows the full cost method of accounting for its oil and natural gas properties and activities. Accordingly, the Company capitalizes all costs incurred in connection with the acquisition, exploration and development of oil and natural gas properties. The Company capitalizes internal costs that can be directly identified with exploration and development activities, but does not include any costs related to production, general corporate overhead, or similar activities. Capitalized

7


costs include geological and geophysical work, 3D seismic, delay rentals, drilling and completing and equipping oil and gas wells, including salaries and benefits and other internal costs directly attributable to these activities. Also included in oil and natural gas properties are tubular and other lease and well equipment of $3.7 million as of March 31, 2012 and $3.8 million as of December 31, 2011, respectively, that have not been placed in service but for which we plan to utilize in our on-going exploration and development activities.
Capitalized costs are subject to a “ceiling test,” which limits the net book value of oil and natural gas properties less related deferred income taxes to the estimated after-tax future net revenues discounted at a 10-percent interest rate. The cost of unproved properties is added to the future net revenues less income tax effects. Future net revenues are calculated using prices that represent the average of the first day of the month price for the 12-month period prior to the end of the period. Such prices are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including the effects of derivatives qualifying as cash flow hedges.
The primary factors impacting the full cost method ceiling test are expenditures added to the full cost pool, reserve levels, value of cash flow hedges and natural gas and oil prices, and their associated impact on the present value of estimated future net revenues. Revisions to estimates of natural gas and oil reserves and/or an increase or decrease in prices can have a material impact on the present value of estimated future net revenues. Any excess of the net book value is generally written off as an expense. Natural gas represents 70% of the Company’s total production for the three months ended March 31, 2012, and as a result, a decrease in natural gas prices can significantly impact the Company’s ceiling test. During the first three months of 2012, the 12-month average of the first day of the month natural gas price decreased 9% from $4.12 per MMbtu at December 31, 2011 to $3.73 per MMbtu at March 31, 2012. As a result of the Company’s quarterly ceiling test, the Company recorded impairment expense related to oil and gas properties of $28.9 million for the three months ended March 31, 2012.
Assets held for sale are carried on the balance sheet at their carrying value or fair value less cost to sell, whichever is less. Subsequent increases in fair value less cost to sell will be recognized as a gain, but not in excess of the cumulative loss previously recognized. For the three months ended March 31, 2012 and 2011, we recognized an impairment loss of $0.1 million and $0.2 million, respectively, related to the assets held for sale. In April 2012, the Company sold a compressor included in assets held for sale as of March 31, 2012, for $1.5 million and no gain or loss was recognized on that sale.
Recent Accounting Standards
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The issuance of ASU 2011-5 is intended to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance in ASU 2011-5 supersedes the presentation options in ASC Topic 220 and facilitates convergence of U.S. generally accepted accounting principles and International Financial Reporting Standards by eliminating the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity and requiring that all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S GAAP and IFRS. This amendment of the FASB Accounting Standards Codification is to ensure that fair value has the same meaning in U.S. GAAP and IFRS and that their respective fair value measurement and disclosure requirements are the same. This guidance is effective during the interim and annual periods beginning after December 15, 2011. The adoption of the guidance did not have any material effect on the Company’s financial statements.


8


NOTE B – LONG-TERM DEBT
The table below presents the carrying amounts and approximate fair values of our debt obligations. The approximate fair values of our convertible and other debt securities are determined based on market quotes from independent third party brokers as they are actively traded in an established market.
 
 
March 31, 2012
 
December 31, 2011
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
(in thousands)
 
 
5.00% Convertible Senior Notes due February 2013
$
58,125

 
$
43,342

 
$
70,757

 
$
46,560

4.50% Convertible Senior Notes due May 2015
78,037

 
41,400

 
77,457

 
41,400

11.375% Senior Notes due February 2019
1,913

 
1,290

 
1,912

 
1,300

Senior Secured Notes due December 2017
275,752

 
240,954

 
275,411

 
283,475

Joint venture financing(1)
1,282

 
1,282

 
1,294

 
1,294

Total
$
415,109

 
$
328,268

 
$
426,831

 
$
374,029

 __________________
(1)
Non-recourse, no interest rate
5.00% Convertible Senior Notes
As of March 31, 2012 and December 31, 2011, the net carrying amount of our 5.00% Convertible Senior Notes (the "5.00% Convertible Notes") was as follows (amounts in thousands):
 
 
March 31, 2012
 
December 31, 2011
Principal amount
$
59,372

 
$
72,750

Less: Unamortized debt discount
(1,247
)
 
(1,993
)
Carrying amount
$
58,125

 
$
70,757

The 5.00% Convertible Notes bear interest at a rate of 5.00% per year, payable semi-annually in arrears on February 1 and August 1 of each year, beginning August 1, 2008. As a result of the amortization of the debt discount through non-cash interest expense, the effective interest rate on the 5.00% Convertible Notes is 5.36% per annum. The amount of the cash interest expense recognized with respect to the 5.00% contractual interest coupon for the three months ended March 31, 2012 was $0.9 million and $1.4 million for the three months ended March 31, 2011. The amount of non-cash interest expense related to the amortization of the debt discount and amortization of the transaction costs for the three months ended March 31, 2012 was $0.6 million and $0.8 million for the three months ended March 31, 2011.
As of March 31, 2012, the unamortized discount is expected to be amortized into earnings over 0.8 years. The carrying value of the equity component of the 5.00% Convertible Notes was $3.9 million as of March 31, 2012. As of December 31, 2011 and March 31, 2012, unamortized debt issue costs were approximately $0.6 million and $0.4 million, respectively, with all costs included in other assets.
As of March 31, 2012, the balance of the 5.00% Convertible Notes was classified as a current liability due to the maturity date of February 1, 2013. During March 2012, we entered into three separate exchange agreements with various holders of our 5.00% Convertible Notes. Pursuant to these agreements, as consideration for the surrender by the holders of $13,378,000 aggregate principal amount of the 5.00% Convertible Notes, we issued to the holders an aggregate of 6,187,005 shares of our common stock. As a result, the Company has recorded a net gain of approximately $2.8 million, including a loss of approximately $9.5 million for the early conversion offer and a gain of approximately $12.3 million for the derecognition of such 5.00% Convertible Notes. See Note I, "Subsequent Events," for an additional exchange. We continue to evaluate additional opportunities to exchange our equity securities for our 5.00% Convertible Notes and other refinancing and repayment options allowed under the Senior Secured Notes and expect to address the 2013 maturity of these notes during 2012.

4.50% Convertible Senior Notes
As of March 31, 2012 and December 31, 2011, the net carrying amount of our 4.50% Convertible Senior Notes due 2015 (the "4.50% Convertible Notes") was as follows (amounts in thousands):


9


 
March 31, 2012
 
December 31, 2011
Principal amount
$
86,250

 
$
86,250

Less: Unamortized debt discount
(8,213
)
 
(8,793
)
Carrying amount
$
78,037

 
$
77,457

The 4.50% Convertible Notes bear interest at a rate of 4.50% per year, payable semiannually in arrears on November 1 and May 1 of each year, beginning May 1, 2010. As a result of the amortization of the debt discount through non-cash interest expense, the effective interest rate on the 4.50% Convertible Notes is 9.09% per annum. The amount of the cash interest expense recognized with respect to the 4.50% contractual interest coupon for the three months ended March 31, 2012 was $1.0 million and $1.0 million for the three months ended March 31, 2011. The amount of non-cash interest expense related to the amortization of the debt discount and transaction costs for the three months ended March 31, 2012 was $0.7 million and $0.7 million for the three months ended March 31, 2011. As of March 31, 2012, the unamortized discount is expected to be amortized into earnings over 3.1 years. The carrying value of the equity component of the 4.50% Convertible Notes was $8.4 million as of March 31, 2012.

11.375% Senior Notes
On February 9, 2011, the Company successfully completed the issuance and sale of $200 million aggregate principal amount of 11.375% Senior Notes due 2019 (the “11.375% Senior Notes”). The 11.375% Senior Notes are jointly and severally, and unconditionally, guaranteed (the “guarantees”) on a senior unsecured basis initially by two of our wholly-owned subsidiaries, and all of our future subsidiaries other than immaterial subsidiaries (such guarantors, the “Guarantors”). The 11.375% senior notes and the guarantees were issued pursuant to an indenture dated as of February 9, 2011 (the “Indenture”), by and among the Company, the Guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., a national banking association, as trustee (the “Trustee”).
In December 2011, the Company entered into an exchange transaction related to the new Senior Secured Notes mentioned below. Approximately $198 million of the 11.375% Senior Notes were exchanged to new Senior Secured Notes. As of March 31, 2012 and December 31, 2011, the net carrying amount of the 11.375% Senior Notes was as follows (amounts in thousands):
 
 
March 31, 2012
 
December 31, 2011
Principal amount
$
1,970

 
$
1,970

Less: Unamortized debt discount
(57
)
 
(58
)
Carrying amount
$
1,913

 
$
1,912

The 11.375% senior notes bear interest at a rate of 11.375% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning August 15, 2011. As a result of the amortization of the debt discount through non-cash interest expense, the effective interest rate on the 11.375% senior notes is 12.00% per annum. The amount of the cash interest expense recognized with respect to the 11.375% contractual interest coupon for the three months ended March 31, 2012 was $0.1 million and $3.3 million for the three months ended March 31, 2011. The amount of non-cash interest expense for the three months ended March 31, 2012 and 2011 related to the amortization of the debt discount and transaction costs was $3.8 thousand and $0.2 million, respectively. As of March 31, 2012, the unamortized discount is expected to be amortized into earnings over 6.9 years.
Material covenants were removed as part of the exchange offer and issuance of the Senior Secured Notes during December 2011.

Senior Secured Notes
On December 19, 2011, the Company executed an indenture (the “Senior Secured Notes Indenture”), among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee. The Company issued $283,475,000 aggregate principal amount of Senior Secured Notes due 2017 (the “Senior Secured Notes”) pursuant to the Senior Secured Notes Indenture. The Senior Secured Notes are fully and unconditionally guaranteed (the “Guarantees”), jointly and severally, on a senior secured basis by each of the Company’s existing and future domestic restricted subsidiaries (the “Guarantors”). All of the Company’s existing subsidiaries other than Endeavor Gathering, LLC are domestic restricted subsidiaries and Guarantors. As of March 31, 2012 and December 31, 2011, the net carrying amount of the Senior Secured Notes was as follows (amounts in thousands):


10


 
March 31, 2012
 
December 31, 2011
Principal amount
$
283,475

 
$
283,475

Less: Unamortized debt discount
(7,723
)
 
(8,064
)
Carrying amount
$
275,752

 
$
275,411


The Senior Secured Notes bear interest at a rate of 11.00% per year, payable semiannually on June 1 and December 1 of each year, beginning June 1, 2012. The Indenture for the Senior Secured Notes provide the Company with a PIK option that allows for a 9% cash interest payment along with additional Senior Secured Notes of 4% resulting in an annual interest rate of 13%. As a result of the amortization of the debt discount through non-cash interest expense, the effective interest rate on the Senior Secured Notes is 11.68% per annum if the cash only option is elected. If the PIK option is elected, the effective interest rate on the Senior Secured Notes is 13.52% per annum. The amount of non-cash interest expense for the three months ended March 31, 2012 related to the amortization of the debt discount and transaction costs was $0.6 million. As of March 31, 2012, the unamortized discount is expected to be amortized into earnings over 5.7 years.

NOTE C – DERIVATIVE ACTIVITIES
The Company is subject to price fluctuations for natural gas and crude oil. Prices received for natural gas and crude oil sold on the spot market are volatile due to factors beyond the Company’s control. Reductions in crude oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, capital expenditures and quantities of reserves recoverable on an economic basis. Any reduction in reserves, including reductions due to lower prices, can affect the Company’s liquidity and ability to obtain capital for acquisition and development activities.
To mitigate a portion of its exposure to fluctuations in commodity prices, the Company enters into financial price risk management activities with respect to a portion of projected crude oil and natural gas production through financial price swaps, collars and put spreads (collectively, “derivatives”). Additionally, the Company uses basis protection swaps to reduce basis risk. Basis is the difference between the price of the physical commodity being hedged and the price of the futures contract used for hedging. Basis risk is the risk that an adverse change in the futures market will not be completely offset by an equal and opposite change in the cash price of the commodity being hedged. Basis risk exists in natural gas due to the geographic price differentials between a given cash market location and the futures contract delivery locations. Settlement or expiration of the hedges is designed to coincide as closely as possible with the physical sale of the commodity being hedged—daily for oil and monthly for natural gas—to obtain reasonable assurance that a gain in the cash sale will offset the loss on the hedge and vice versa.
The Company utilizes counterparties that the Company believes are credit-worthy entities at the time the transactions are entered into. The Company closely monitors the credit ratings of these counterparties. Additionally, the Company performs both quantitative and qualitative assessments of these counterparties based on their credit ratings and credit default swap rates where applicable. However, the recent events in the financial markets demonstrate there can be no assurance that a counterparty financial institution will be able to meet its obligations to the Company.
None of the Company’s derivative instruments contain credit-risk-related contingent features. Additionally, the Company has not incurred any credit-related losses associated with derivative activities and believes that its counterparties will continue to be able to meet their obligations under these transactions.
In the first quarter 2012, the Company entered into fixed price natural gas swaps for approximately 65% of the post-processing dry natural gas beginning April 2012 through December 2013. For the last nine months of 2012, the Company swapped 4.03 BCF at $2.60 and for fiscal year 2013 the Company swapped 4.24 BCF at $3.50. In connection with these swaps, the Company also entered into a basis swap in which we locked in a natural gas price differential between the NYMEX and the Houston Ship Channel at a price of $0.08. The combination of these trades effectively locks in a sales price to the Company of $2.52 for 4.03 BCF during the last nine months of 2012, and $3.42 for 4.24 BCF during fiscal year 2013.
In the first quarter 2012, the Company entered into fixed price crude oil swaps beginning April 2012 through December 2013. For the last nine months of 2012, the Company swapped 38,565 barrels of oil at $106.40 and for fiscal year 2013, the Company swapped 42,581 barrels of oil at $106.40. For the fiscal year 2014, the Company entered into a costless three-way collar for 35,528 barrels of oil with a ceiling price of $114.10, a floor price of $100 and a sold put at a price of $80. In addition to the fixed price crude oil swaps and costless three-way collar, we bought $100-$90 put spreads for 19,421 barrels of oil for the last six months of 2012, $100 puts for 26,654 barrels of oil in fiscal year 2013, and $95-$75 put spreads for 19,893 barrels of oil in fiscal year 2014.
As a result of hedging transactions entered into in the first quarter, the Company recorded a net derivative asset. This net

11


derivative asset is being accounted for at fair value with the changes in fair value recorded to the consolidated statement of operations.
The following is a summary of the asset and liability fair values of our derivative contracts:
 
 
 
Asset Fair Value
 
Liability Fair Value
 
Net Derivative Fair Value
  
Balance Sheet Location
 
March 31, 2012
 
December 31, 2011
 
March 31, 2012
 
December 31, 2011
 
March 31, 2012
 
December 31, 2011
 
 
 
(in thousands)
 
(in thousands)
 
(in thousands)
Derivatives not designated as Hedging Instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas
Current derivative asset
 
$
662

 
$

 
$
67

 
$

 
$
595

 
$

Crude oil
Current derivative asset
 
225

 

 
42

 

 
183

 

Natural gas
Other liabilities – non-current
 

 

 
81

 

 
(81
)
 

Crude oil
Derivative instruments – non-current asset
 
1,047

 

 
547

 

 
500

 

 
 
 
$
1,934

 
$

 
$
737

 
$

 
$
1,197

 
$

The following table summarizes the outstanding natural gas and crude oil derivative contracts the Company had in place as of March 31, 2012:
Effective Date
 
Maturity Date
 
Notional
Amount
Per
Month
 
Remaining
Notional
Amount as
of March 31, 2012
 
Additional
Put
Options
 
Floor
 
Ceiling
 
Designation under
ASC 815
Natural Gas (MMBtu):














4/1/2012

12/31/2012

447,919

4,031,268



$2.60

$2.60

Not designated
1/1/2013

12/31/2013

353,555

4,242,662



$3.50

$3.50

Not designated
Crude Oil (Bbls):














4/1/2012

12/31/2013

3,864

81,146



$106.40

$106.40

Not designated
7/1/2012

12/31/2012

3,237

19,421

$90.00

$100.00



Not designated
1/1/2013

12/31/2013

2,221

26,654



$100.00



Not designated
1/1/2014

12/31/2014

2,961

35,528

$80.00

$100.00

$114.10

Not designated
1/1/2014

12/31/2014

1,658

19,893

$75.00

$95.00



Not designated
All of the above natural gas contracts are settled against NYMEX, and all oil contracts are settled against NYMEX Light Sweet Crude. The NYMEX and NYMEX Light Sweet Crude have historically had a high degree of correlation with the actual prices received by the Company.
Effects of derivative instruments on the Consolidated Statement of Operations
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
In December 2011, the Company settled its entire hedge portfolio. Under ASC 815-30-40, the Company is required to recognize the balance of the cumulative gain, recorded in accumulated other comprehensive income in the previous periods, over the life of the remaining contractual life of the original hedged transaction. For the three months ended March 31, 2012,

12


the Company recognized $5.3 million of the cumulative gain in oil and gas sales on the consolidated statement of operations. As of March 31, 2012, the balance of the Company's cumulative gain, net of taxes, recorded in accumulated other comprehensive income was $10.5 million, of which $7.5 million will be recognized into earnings through December 31, 2012, with the remainder recognized in 2013.
There were no oil or gas derivatives classified as hedges for the three months ended March 31, 2012. A summary of the effect of the natural gas derivatives qualifying for hedges as of March 31, 2011 is as follows:
 
Location of
Amounts
 
Natural Gas Derivatives
Qualifying as Hedges
 
 
 
 
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
OCI
 
236

Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)
Oil and Gas
Sales
 
4,445

Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Oil and Gas
Sales
 
408

For derivative instruments that do not qualify as hedges pursuant to ASC 815, changes in the fair value of these derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are recognized in current earnings. A summary of the effect of the derivatives not qualifying for hedges is as follows:
 
 
Location of Gain (Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in
Income on Derivative
 
 
 
Three Months Ended
March 31,
 
 
 
2012
 
2011
 
 
 
(in thousands)
Realized
 
 
 
 
 
Crude oil
Oil and gas sales
 
$

 
$

Unrealized
 
 
 
 
 
Natural gas
Unrealized gain or (loss)on derivatives
 
276

 

Crude oil
Unrealized gain or (loss)on derivatives
 
514

 
(444
)
 
 
 
$
790

 
$
(444
)
The valuation of our derivative instruments are based on industry standard models that primarily rely on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. The Company categorizes these measurements as Level 2. The following table sets forth by level within the fair value hierarchy our derivative instruments, which are our only financial assets and liabilities that were accounted for at fair value on a recurring basis, as of March 31, 2012 and December 31, 2011:
 
As of March 31, 2012
 
As of December 31, 2011
 
Quoted
Prices  in
Active
Markets
(Level  1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Quoted
Prices  in
Active
Markets
(Level  1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(in thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Natural gas derivative instruments
$

 
$
514

 
$

 
$

 
$

 
$

Crude oil derivative instruments
$

 
$
683

 
$

 
$

 
$

 
$


13


NOTE D – STOCK COMPENSATION PLANS
We recognized $0.9 million and $1.2 million of stock compensation expense for the three months ended March 31, 2012 and 2011, respectively. These non-cash expenses are reflected as a component of the Company’s general and administrative expense. To the extent recognized compensation costs relates to employees directly involved in exploration and development activities, such amounts are capitalized to oil and natural gas properties. Stock based compensation capitalized as part of oil and natural gas properties was $0.1 million and $0.1 million for the three months ended March 31, 2012 and 2011, respectively.
Restricted Stock
A summary of the status of our unvested shares of restricted stock and the changes for the year ended December 31, 2011 and the three months ended March 31, 2012 is presented below:
 
 
Number of
unvested
restricted shares
 
Weighted
average  grant-
date fair value
per share
Unvested shares as of December 31, 2010
691,996

 
$
13.47

Granted
807,848

 
$
4.79

Vested
(245,924
)
 
$
16.46

Forfeited
(5,521
)
 
$
19.42

Unvested shares as of December 31, 2011
1,248,399

 
$
7.24

Forfeited
(1,824
)
 
$
18.48

Unvested shares as of March 31, 2012
1,246,575

 
$
7.23

As of March 31, 2012, there was $6.2 million of unrecognized compensation expense related to non-vested restricted stock grants. This unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.39 years.

NOTE E – CAPITAL STOCK
Share Lending Arrangement
In February 2008, in connection with the offer and sale of the 5.00% Convertible Notes, we entered into a share lending agreement (the “Share Lending Agreement”). Under this agreement, we loaned to the share borrower up to the maximum number of shares of our common stock underlying the 5.00% Convertible Notes. As of March 31, 2012 there were 2,364,375 shares of our outstanding common stock subject to loans to the share borrower under the Share Lending Agreement.
Sale/Issuance of Common and Preferred Stock
During the three months ended March 31, 2012, the Company converted $13.4 million aggregate principal amount of its 5.00% Convertible Notes to 6,187,005 shares of common stock. See Note B, Long-Term Debt.

NOTE F – INCOME TAXES
We recorded tax provisions of $1.9 million and 1.4 million for the three months ended March 31, 2012 and 2011, respectively, due to changes in the valuation allowance on deferred tax assets.  The valuation allowance was adjusted due to increases or decreases in offsetting deferred tax liabilities, primarily as a result of unrealized gains or losses on derivative instruments that qualify for hedge accounting. In determining the carrying value of a deferred tax asset, accounting standards provide for the weighing of evidence in estimating whether and how much of a deferred tax asset may be recoverable. As the Company has incurred net operating losses in prior years, relevant accounting guidance suggests that cumulative losses in recent years constitute significant negative evidence, and that future expectations about income are insufficient to overcome a history of such losses. In 2008, the Company reduced the carrying value of its net deferred tax asset to zero and maintained that position as of March 31, 2012 and December 31, 2011.  The valuation allowance has no impact on our net operating loss (“NOL”) position for tax purposes, and if the Company generates taxable income in future periods, the Company will be able to use its NOLs to offset taxes due at that time. The Company will continue to assess the valuation allowance against deferred tax assets considering all available evidence obtained in future reporting periods.

NOTE G – COMMITMENTS AND CONTINGENCIES
Litigation

14


A putative class action lawsuit was filed by the Northumberland County Retirement System and Oklahoma Law Enforcement Retirement System in the District Court in Oklahoma County, Oklahoma, purportedly on March 10, 2011, against the Company and certain of its officers along with certain underwriters of the Company's July 2008, May 2009 and October 2009 public offerings. Discovery requests and summons were filed and issued in late April 2011. The complaint alleges that the registration statement and the prospectus for contained material misstatements and omissions and seeks damages under Sections 11, 12 and 15 of the Securities Act of 1933 of an unspecified equitable relief. Defendants removed the case to federal court on May 12, 2011 and filed motions to dismiss on June 20, 2011. Plaintiffs filed a motion to remand the case to state court on June 10, 2011, and Defendants filed an opposition to that motion. By order dated November 16, 2011, the court denied Plaintiffs' motion to remand. On February 3, 2012, Plaintiffs moved to be appointed lead plaintiff under the Private Securities Litigation Reform Act. After the appointment of lead plaintiff, Plaintiffs are expected to file an amended complaint, with Defendants' responses thereto expected to be filed later in 2012. We are currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with the securities class action case, which is at an early stage.
On August 5, 2011, an individual filed a shareholders' derivative action in the United States District Court for the Western District of Oklahoma, for the Company's benefit, as nominal defendant, against the Company's Chief Executive Officer, President, Chief Financial Officer, and certain members of the Company's board of directors. The complaint alleges breaches of fiduciary duty, waste of corporate assets, and unjust enrichment on the part of each of the named defendants and is premised on substantially the same facts alleged in the above-described securities lawsuit. The complaint seeks unspecified amounts of compensatory damages, implementation of certain corporate governance changes, and disgorgement of compensation and trading profits from the individual defendants, as well as interest and costs, including legal fees from the defendants. The Company is a nominal defendant, and the complaint does not seek any damages against the Company; however, the Company may have indemnification obligations to one or more of the defendants under the Company's organizational documents. On October 17, 2011, the individual defendants and the Company as nominal defendant filed motions to dismiss the complaint for failure to make demand, or in the alternative, to stay the derivative action pending the outcome of the securities lawsuit. The case is currently stayed pending the outcome of the motions to dismiss that are expected to be filed with respect to the securities lawsuit described above. On March 23, 2012, an additional plaintiff filed a similar derivative action in the United States District Court for the Western District of Oklahoma. The parties have agreed that this case will be consolidated with the existing federal court derivative action, and papers to this effect are expected to be filed in the near term. We are currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this case.
On February 7 and 9, 2012, two individuals filed separate shareholder derivative actions in the District Court of Oklahoma County, in the State of Oklahoma, for the Company's benefit, as nominal defendant, against the Company's Chief Executive Officer, President, Chief Financial Officer, and each member of the Company's board of directors. The petitions assert claims and seek relief similar to those asserted and sought in the federal court derivative action described above. Plaintiffs recently filed a motion to consolidate the two state court derivative actions, and the court consolidated the two actions. The parties have agreed that plaintiffs will file an amended and consolidated petition after the plaintiffs in the federal securities action described above file their amended complaint. On April 9, 2012, defendants filed a motion to dismiss, a motion to stay, and a motion for protection from discovery. The motions are expected to be fully briefed by early May 2012, with a hearing on the motions expected be scheduled thereafter. We are currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this case.
The Company is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, the Company's estimates of the outcomes of such matters, and its experience in contesting, litigating, and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to the Company's financial position or results of operations after consideration of recorded accruals.
Insurance Matters
The Company maintains property damage, business interruption and other insurance coverage, the scope and amounts of which we believe are customary and prudent for the nature and extent of our operations. The Company also believes its deductibles are consistent with customary and prudent industry practices and does not expect that the payment of any deductibles would have a material adverse effect on the Company's financial condition or results of operations. While we believe the Company maintains adequate insurance coverage, insurance may not fully cover every type of damage, interruption or other loss that might occur.  If we were to incur a significant loss for which we were not fully insured, it could have a material impact on our financial position, results of operations and cash flows.  In addition, there may be a timing difference between amounts we are required to pay in connection with a loss and amounts we receive from insurance as reimbursement. Any event that materially interrupts the revenues generated by our consolidated operations, or other losses that require us to make material expenditures not covered by insurance, could adversely affect our cash flows and financial condition and, accordingly, adversely affect the market price of our securities.

15


NOTE H – CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Shown below are condensed consolidating financial statements for GMX Resources Inc. on a stand-alone, unconsolidated basis, its combined guarantor subsidiaries and its non-guarantor subsidiary as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiaries operated as independent entities.

Condensed Consolidating Balance Sheets
 
March 31, 2012
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
(In thousands)
 
 
 
 
ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and cash equivalents
$
67,088

 
$
3,268

 
$
723

 
$

 
$
71,079

Restricted cash
4,325

 

 

 

 
4,325

Short term investments
2,000

 

 

 

 
2,000

Accounts receivable – interest owners
7,904

 

 

 

 
7,904

Accounts receivable – oil and natural gas revenues, net
8,398

 
198

 

 
(2,901
)
 
5,695

Accounts receivable - intercompany
18,153

 
13,144

 
922

 
(32,219
)
 

Derivative instruments
778

 

 

 

 
778

Inventories
326

 

 

 

 
326

Prepaid expenses and deposits
2,156

 
2

 
53

 

 
2,211

Assets held for sale
1,910

 

 

 

 
1,910

Total current assets
113,038

 
16,612

 
1,698

 
(35,120
)
 
96,228

OIL AND NATURAL GAS PROPERTIES, BASED ON THE FULL COST METHOD

 

 

 


 

Properties being amortized
1,084,521

 
713

 
127

 

 
1,085,361

Properties not subject to amortization
153,085

 

 

 

 
153,085

Less accumulated depreciation, depletion, and impairment
(906,232
)
 

 

 

 
(906,232
)

331,374

 
713

 
127

 

 
332,214

PROPERTY AND EQUIPMENT, AT COST, NET
14,881

 
5,095

 
44,488

 

 
64,464

DERIVATIVE INSTRUMENTS
500

 

 

 

 
500

OTHER ASSETS
8,983

 

 

 

 
8,983

INVESTMENT IN SUBSIDIARIES
35,313

 

 

 
(35,313
)
 

TOTAL ASSETS
$
504,089

 
$
22,420

 
$
46,313

 
$
(70,433
)
 
$
502,389

LIABILITIES AND EQUITY

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts payable
12,883

 

 
36

 

 
12,919

Accounts payable - intercompany
13,365

 
18,726

 
128

 
(32,219
)
 

Accrued expenses
14,080

 
3,046

 
260

 
(2,901
)
 
14,485

Accrued interest
12,557

 

 

 

 
12,557

Revenue distributions payable
5,411

 

 

 

 
5,411

Current maturities of long-term debt
58,151

 

 

 

 
58,151

Total current liabilities
116,447

 
21,772

 
424

 
(35,120
)
 
103,523

LONG-TERM DEBT, LESS CURRENT MATURITIES
356,958

 

 

 

 
356,958

DEFERRED PREMIUMS ON DERIVATIVE INSTRUMENTS
312

 

 

 

 
312

OTHER LIABILITIES
7,684

 

 

 

 
7,684

EQUITY


 


 


 


 


Total GMX equity
22,688

 
648

 
45,889

 
(46,537
)
 
22,688

Noncontrolling interest

 

 

 
11,224

 
11,224

Total equity
22,688

 
648

 
45,889

 
(35,313
)
 
33,912

TOTAL LIABILITIES AND EQUITY
$
504,089

 
$
22,420

 
$
46,313

 
$
(70,433
)
 
$
502,389

 
 
 
 
 
 
 
 
 
 

16



 
December 31, 2011
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
(In thousands)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
98,118

 
$
3,672

 
$
703

 
$

 
$
102,493

Restricted cash
4,325

 

 

 

 
4,325

Accounts receivable – interest owners
8,607

 

 

 

 
8,607

Accounts receivable – oil and natural gas revenues, net
12,564

 
295

 

 
(5,777
)
 
7,082

Accounts receivable - intercompany
15,205

 
13,033

 
790

 
(29,028
)
 

Derivative instruments

 

 

 

 

Inventories
326

 

 

 

 
326

Prepaid expenses and deposits
2,574

 
2

 
79

 

 
2,655

Assets held for sale
1,999

 
46

 

 

 
2,045

Total current assets
143,718

 
17,048

 
1,572

 
(34,805
)
 
127,533

OIL AND NATURAL GAS PROPERTIES, BASED ON THE FULL COST METHOD

 

 

 


 

Properties being amortized
1,061,961

 
713

 
127

 

 
1,062,801

Properties not subject to amortization
147,224

 

 

 

 
147,224

Less accumulated depreciation, depletion, and impairment
(871,346
)
 

 

 

 
(871,346
)

337,839

 
713

 
127

 

 
338,679

PROPERTY AND EQUIPMENT, AT COST, NET
15,531

 
5,216

 
45,111

 

 
65,858

DERIVATIVE INSTRUMENTS

 

 

 

 

OTHER ASSETS
10,131

 

 

 

 
10,131

INVESTMENT IN SUBSIDIARIES
35,980

 

 

 
(35,980
)
 

TOTAL ASSETS
$
543,199

 
$
22,977

 
$
46,810

 
$
(70,785
)
 
$
542,201

LIABILITIES AND EQUITY

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts payable
13,527

 

 
23

 

 
13,550

Accounts payable - intercompany
13,126

 
15,684

 
218

 
(29,028
)
 

Accrued expenses
17,263

 
6,056

 
293

 
(5,777
)
 
17,835

Accrued interest
3,256

 

 

 

 
3,256

Revenue distributions payable
5,980

 

 

 

 
5,980

Current maturities of long-term debt
26

 

 

 

 
26

Total current liabilities
53,178

 
21,740

 
534

 
(34,805
)
 
40,647

LONG-TERM DEBT, LESS CURRENT MATURITIES
426,805

 

 

 

 
426,805

DEFERRED PREMIUMS ON DERIVATIVE INSTRUMENTS

 

 

 

 

OTHER LIABILITIES
7,476

 

 

 

 
7,476

EQUITY


 


 


 


 


Total GMX equity
55,740

 
1,237

 
46,276

 
(47,513
)
 
55,740

Noncontrolling interest

 

 

 
11,533

 
11,533

Total equity
55,740

 
1,237

 
46,276

 
(35,980
)
 
67,273

TOTAL LIABILITIES AND EQUITY
$
543,199

 
$
22,977

 
$
46,810

 
$
(70,785
)
 
$
542,201

 
 
 
 
 
 
 
 
 
 

17



Condensed Consolidating Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
(In thousands)
 
 
 
 
Three Months Ended March 31, 2012
 
 
 
 
 
 
 
 
 
TOTAL REVENUES
$
17,132

 
$
427

 
$
2,202

 
$
(2,360
)
 
$
17,401

COSTS AND EXPENSES

 

 

 

 

Lease operating
4,530

 
477

 
393

 
(2,292
)
 
3,108

Production taxes
(237
)
 

 

 

 
(237
)
Depreciation, depletion, and amortization
6,660

 
178

 
627

 

 
7,465

Impairment of oil and natural gas properties and assets held for sale
28,999

 

 

 

 
28,999

General and administrative
6,631

 
361

 
71

 
(68
)
 
6,995

Total expenses
46,583

 
1,016

 
1,091

 
(2,360
)
 
46,330

Income (loss) from operations
(29,451
)
 
(589
)
 
1,111

 

 
(28,929
)
NON-OPERATING INCOME (EXPENSE)

 

 

 

 

Interest expense
(10,702
)
 

 

 

 
(10,702
)
Gain (loss) on conversion/extinguishment of debt
2,781

 

 

 

 
2,781

Interest and other income
72

 

 

 

 
72

Unrealized gains (losses) on derivatives
790

 

 

 

 
790

Equity income (loss) of subsidiaries
(367
)
 

 

 
367

 

Total non-operating expense
(7,426
)
 

 

 
367

 
(7,059
)
Income (loss) before income taxes
(36,877
)
 
(589
)
 
1,111

 
367

 
(35,988
)
INCOME PROVISION BENEFIT
(1,887
)
 

 

 

 
(1,887
)
NET INCOME (LOSS)
(38,764
)
 
(589
)
 
1,111

 
367

 
(37,875
)
Net income attributable to noncontrolling interest

 

 

 
889

 
889

NET (LOSS) INCOME APPLICABLE TO GMX RESOURCES
(38,764
)
 
(589
)
 
1,111

 
(522
)
 
(38,764
)
Preferred stock dividends
1,837

 

 

 

 
1,837

NET (LOSS) INCOME APPLICABLE TO COMMON SHAREHOLDERS
$
(40,601
)
 
$
(589
)
 
$
1,111

 
$
(522
)
 
$
(40,601
)


 

 

 

 


18



 
 
 
 
 
 
 
 
 
 
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
(In thousands)
 
 
 
 
Three Months Ended March 31, 2011
 
 
 
 
 
 
 
 
 
TOTAL REVENUES
$
28,897

 
$
691

 
$
2,910

 
$
(3,122
)
 
$
29,376

COSTS AND EXPENSES

 

 

 

 

Lease operating
4,525

 
837

 
463

 
(2,927
)
 
2,898

Production taxes
383

 

 

 

 
383

Depreciation, depletion, and amortization
11,985

 
186

 
618

 

 
12,789

Impairment of oil and natural gas properties and assets held for sale
48,230

 
(4
)
 
94

 

 
48,320

General and administrative
6,644

 
564

 
64

 
(195
)
 
7,077

Total expenses
71,767

 
1,583

 
1,239

 
(3,122
)
 
71,467

Income (loss) from operations
(42,870
)
 
(892
)
 
1,671

 

 
(42,091
)
NON-OPERATING INCOME (EXPENSE)

 

 

 

 

Interest expense
(8,022
)
 

 

 

 
(8,022
)
Gain (loss) on conversion/extinguishment of debt
(108
)
 

 

 

 
(108
)
Interest and other income
123

 
58

 
88

 

 
269

Unrealized gains (losses) on derivatives
(444
)
 

 

 

 
(444
)
Equity income (loss) of subsidiaries
(487
)
 

 

 
487

 

Total non-operating expense
(8,938
)
 
58

 
88

 
487

 
(8,305
)
Income (loss) before income taxes
(51,808
)
 
(834
)
 
1,759

 
487

 
(50,396
)
INCOME PROVISION BENEFIT
(1,432
)
 

 

 

 
(1,432
)
NET INCOME (LOSS)
(53,240
)
 
(834
)
 
1,759

 
487

 
(51,828
)
Net income attributable to noncontrolling interest

 

 

 
1,412

 
1,412

NET (LOSS) INCOME APPLICABLE TO GMX RESOURCES
(53,240
)
 
(834
)
 
1,759

 
(925
)
 
(53,240
)
Preferred stock dividends
1,210

 

 

 


 
1,210

NET (LOSS) INCOME APPLICABLE TO COMMON SHAREHOLDERS
$
(54,450
)
 
$
(834
)
 
$
1,759

 
$
(925
)
 
$
(54,450
)


 

 

 

 


19




Condensed Consolidating Statements of Cash Flows
 
 
 
 
 
 
 
 
 
 
 
Parent
 
Guarantors
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
(In thousands)
 
 
 
 
Three Months Ended March 31, 2012
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(2,297
)
 
$
(397
)
 
$
1,520

 
$

 
$
(1,174
)
Net cash provided by (used in) investing activities
(27,096
)
 
(7
)
 
(3
)
 

 
(27,106
)
Net cash provided by (used in) financing activities
(1,637
)
 

 
(1,497
)
 

 
(3,134
)
Net decrease in cash
(31,030
)
 
(404
)
 
20

 

 
(31,414
)
Cash and cash equivalents at beginning of period
98,118

 
3,672

 
703

 

 
102,493

Cash and cash equivalents at end of period
$
67,088

 
$
3,268

 
$
723

 
$

 
$
71,079

 

 

 

 

 

Three Months Ended March 31, 2011
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
5,485

 
$
8,277

 
$
2,785

 
$

 
$
16,547

Net cash provided by (used in) investing activities
(86,525
)
 
(38
)
 
1,835

 

 
(84,728
)
Net cash provided by (used in) financing activities
147,537

 

 
(4,072
)
 

 
143,465

Net decrease in cash
66,497

 
8,239

 
548

 

 
75,284

Cash and cash equivalents at beginning of period
1,468

 
564

 
325

 

 
2,357

Cash and cash equivalents at end of period
$
67,965

 
$
8,803

 
$
873

 
$

 
$
77,641

 

 

 

 

 


NOTE I – SUBSEQUENT EVENTS
On April 25, 2012, the Company entered into an exchange agreement with an investment manager on behalf of two holders of its 5.00% Convertible Notes. Pursuant to this agreement, as consideration for the surrender by the holders of $4.7 million aggregate principal amount of the 5.00% Convertible Notes, the Company issued to the holders an aggregate of 2,714,084 shares of common stock, along with cash consideration relating to accrued and unpaid interest, resulting in a net gain of approximately $0.7 million.


20


ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following information should be read in conjunction with our unaudited consolidated financial statements and the condensed notes thereto included in this quarterly report on Form 10-Q. The following information and such unaudited consolidated financial statements should also be read in conjunction with the financial statements and related notes thereto, together with our discussion and analysis of our financial position and results of operations, included in our annual report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”). Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Company” are intended to mean the business and operations of GMX Resources Inc. and its consolidated subsidiaries.
In addition, various statements contained in or incorporated by reference into this document that express a belief, expectation, or intention, or that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking statements are subject to numerous assumptions and risks, including risks described in our 2011 Form 10-K and in this document. Please read “Forward-Looking Statements” below.
General
We are an independent oil and gas company currently focused on development acreage in two oil shale resource plays in the Williston Basin (North Dakota/Montana), targeting the Bakken and Sanish-Three Forks Formations, and the DJ Basin (Wyoming), targeting the Niobrara Formation. Both resource plays are estimated to be 90% oil. Our natural gas resources are located in the East Texas Basin, in the Haynesville/Bossier ("H/B") gas shale and the Cotton Valley Sand Formation, where the majority of our acreage is contiguous and held by production. We believe these oil and natural gas resource plays provide a substantial inventory of operated, high probability, repeatable, organic growth opportunities. The Bakken properties cover approximately 35,000 net acres including 43 potential operated 1,280-acre units and a minimum of 197 operated locations, with between 45% and 100% working interest. The Niobrara properties cover more than 40,000 net acres including 95 potential operated 640-acre units and approximately 380 operated locations, with an average working interest of 70%. The H/B and the Cotton Valley Sand locations include 253 net H/B horizontal locations, and 83 net Cotton Valley Sand 7,500-foot horizontal locations. The Company believes multiple basins and both oil and natural gas resource choices provide us with flexibility to allocate capital to achieve the highest risk-adjusted rate of return on our portfolio. We also intend to convert our unproved reserves in these areas into proved reserves. We may selectively acquire additional acreage in these project areas in the normal course of business.
Our current focus is on increasing oil production and focusing our operations in McKenzie and Billings Counties, North Dakota, where we are currently operating four wells, have one rig operating, one well waiting on completion and took delivery of a workover rig on March 23, 2012. We also have non-operating interests in four additional wells in this area.
In Wyoming, our Niobrara development has begun with two seismic shoots encompassing 135 and 204 square miles. Our first shoot is complete and we are evaluating the results. Our second shoot is expected to be completed in July 2012.
We plan to commit almost all of our total capital expenditures in 2012 to our oil resources development. We expect that increasing the oil percentage of our production will have positive economic benefits created by the current price gap that exists between oil and natural gas. We plan to continue to use hedging to mitigate commodity price risks for our oil and gas production.
The table below summarizes information concerning our operating activities in the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

21


Summary Operating Data
 
 
Three Months Ended
 
March 31,
 
2012 (1)
 
2011
Production:
 
 
 
Oil (MBbls)
31

 
22

Natural gas (MMcf)
2,517

 
5,515

Natural gas liquids (MBbls)
146

 
66

Gas equivalent production (MMcfe)
3,576

 
6,040

Natural gas VPP volumes (MMcfe)
1,183

 

Gas equivalent production including VPP volumes (MMcfe)
4,759

 
6,040

Average daily production excluding VPP volumes (MMcfe)
39.3

 
67.1

Average daily production including VPP volumes (MMcfe)
52.3

 
67.1

Average Sales Price:
 
 
 
Oil (per Bbl)
 
 
 
Wellhead price
$
93.97

 
$
92.34

Effect of hedges, excluding gain or loss from ineffectiveness of derivatives

 

Total
$
93.97

 
$
92.34

Natural gas liquids (per Bbl)
 
 
 
Sales price
$
34.91

 
$
35.68

Effect of hedges, excluding gain or loss from ineffectiveness of derivatives

 

Total
$
34.91

 
$
35.68

Natural gas (per Mcf)
 
 
 
Wellhead price
$
1.62

 
$
3.67

Effect of hedges, excluding gain or loss from ineffectiveness of derivatives
2.11

 
0.80

Total
$
3.73

 
$
4.47

Average sales price, excluding gain or loss from ineffectiveness of derivatives (per Mcfe)
$
4.87

 
$
4.80

Operating and Overhead Costs (per Mcfe):
 
 
 
Lease operating expenses including VPP volumes
$
0.65

 
$
0.48

Effect of excluding VPP volumes on lease operating expenses
0.22