GMX Resources: Stock Offering Painful but Probably Necessary

As you may have read in my previous post, a potential issue with GMXR this year is their covenants. In particular, I mentioned that the covenant of keeping Debt/EBITDA below 4.0x would likely be triggered this year. Surprise, surprise: an offering of 5.75mm shares (5mm +15% over-allotment) puts them below this range, moving my modeled debt to EBITA at year-end from 5.4x to 3.9x.

I don't like this offering. I think GMXR stock is undervalued and that offering over 30% of existing shares is dilutive.

My model suggests this is $5/share dilutive, bringing fair value down from $40 to $35. The offering (assuming it goes through at roughly current levels) does partially alleviate GMXR's liquidity and leverage issues and sets up the Company to up forcasted CapEx in 2010 from the current $75mm.

So I suppose it's like taking the cough syrup as a kid. You never liked taking it but knew it was for your own good.

As mentioned above, I believe GMXR stock to still be undervalued, though not as much as when I wrote my previous post. I would therefore recommend a small position, adding every couple of dollars down with an expectation of hitting $35 in the next two years.

Disclosure: Long GMXR common and GMXR calls

Comments

[Ellito:]

GMXR, great potential no doubt.
Oil is rising up so much lately.
Natural gas should replace oil in the future, soon hopefully.
Gasoline price is rising quite a bit too, who knows if it will hit over $4.00
like last year. Congress should pay attention to this matter before the crisis starts all over again. If it does, many politicians will be down like never before.

Jun 12 03:50 AM