TWST: What should investors be paying special attention to?
JS: I would also be focused towards the core part of the Haynesville Shale in Northern Louisiana that now extends southeast into Texas.
Yesterday we highlighted Fidelity Southern Corp. (LION), a company beaten down by the markets yet ripe with insider buying. And today it looks like the street is starting to take notice. It’s up almost 3% as of this writing. Today we’re looking at a company beaten down in an entirely different way.
Here’s a look at a pure natural gas play that the shorts shouldn’t be able to hold back on much longer.
Obama’s shocking drilling addendum onto his energy bill took a lot of Democrats and Republicans by surprise on Wednesday. If passed, it will open up millions of domestic offshore acres for drilling exploration.
But, regardless how you feel about these new areas being explored for oil, it will take many years before we see substantial product hitting our gas tanks. The smart money sees those areas as a play for later down the line – especially when we have huge reserves of easily accessible natural gas that aren’t being utilized.
Natural gas prices have been low, and many shorts have taken advantage of this, preying on companies with high costs of production. But, unlike it’s competitors, we’ve found one that has a low cost of production and one of the highest net revenues in its group.
GMX Resources (GMXR) is an independent oil and natural gas exploration company that represents on of the best ways own a pure energy play on natural gas and oil. Like many companies that hedged their bets on long term natural gas prices, GMX has been suffering through the hangover of the post natural gas party. But its headache has been caused by its earnings weakness and buildup of capacity.
But these issues will pass as our economy turns the corner.
The main focus of GMX consists of the notorious Haynesville and Bossier Shale formation in East Texas. As of the 2009 Year-end, they reported 355 Bcfe in proved reserves. And they hold leases on another 3.4 trillion cfe in unproven reserves that should keep their development and expansion pipeline healthy for years to come.
GMX is one of the largest players in the Haynesville Shale formation. But what makes it so special. Well for one, it’s a huge formation of untapped oil and natural gas reserves that easy to get at and, with new drilling technologies, has been made much more productive. It’s no surprise that most domestic energy experts are familiar with it.
From The Wall Street Transcript, a recent interview with Josh Silverstein, Director of Energy research at FIG Partners, caught our eye.
Silverstein gives us another reason that we should be focused on Haynesville: “We are seeing a rapid increase in the Haynesville and Marcellus Shale because these plays are economic down to lower prices.”
While the average analyst recommendation targets GMXR’s price at $14.95, the stock has been banging around at just over $8 for the last week or so. And the answer seems to be shorts. They’ve taken advantage of the sector’s weakness and driven this one into the ground.
Right now the short interest sits around 27% – 33% of the float. That’s a massive amount of shorting going on – shorts that will have to cover eventually. And if the stock start moving back upwards you can bet this stock will take a big bounce over the next few months.
It’s why we’re taking a long position in this natural gas producer under $8.
Disclosure: Author has a long position in GMXR, No Position In LION