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Lenders to credit-bid in GMX bankruptcy

by Aviva Gat | Published April 2, 2013 at 10:25 AM

GMX Resources Inc. on Monday filed for Chapter 11 bankruptcy protection to sell its assets at an auction led by its senior lenders.

The oil and gas exploration and production company and subsidiaries Diamond Blue Drilling Co. and Endeavor Pipeline Inc. filed petitions in the U.S. Bankruptcy Court for the Western District of Oklahoma in Oklahoma City. Judge Sarah A. Hall granted the debtors joint administration of their cases on Monday.

Joint venture Endeavor Gathering LLC, 60% owned by GMX, did not file a petition. Kinder Morgan Endeavor LLC owns the other 40% of the JV.

In a Monday statement, GMX said it sought bankruptcy protection after reaching a deal for the holders of its senior secured notes due 2017 to acquire substantially all of its operating assets and undeveloped acreage for a credit bid. The amount of the credit bid is still under negotiation, according to debtor counsel David A. Zdunkewicz of Andrews Kurth LLP. GMX owes $324.34 million on the senior secured notes.

The lenders also will provide a $50 million debtor-in-possession loan, but GMX had yet to file a motion for the loan as of midday Monday. Zdunkewicz said the DIP is all new money and would not roll up any prepetition debt.

Zdunkewicz continued that the interim hearing on the DIP and other first-day motions would likely be on Wednesday.

Chatham Asset Management LLC, GSO Capital Partners, Omega Advisors Inc. and Whitebox Advisors LLC, which hold 80% of the senior notes, are backstopping the DIP.

GMX needs to use $20 million of the DIP with interim approval, according to a declaration by GMX president Michael Rohleder.

Under the DIP, GMX would have to file a sale motion by April 21 and win sale approval 55 days thereafter, Rohleder said in documents.

The senior secured debt comes from a December 2011 offering of $283.5 million in senior secured notes due Dec. 1, 2017. GMX added $30 million in Series B notes the following year, and it also owes $11.9 million in unpaid interest on the notes. GMX also will be liable for a $72 million make-whole payment triggered on acceleration of payment.

GMX's bankruptcy filing stems from the effects of a drop in natural gas prices. Most recently, GMX missed a $2.1 million interest payment due March 4 to its senior secured second-priority lenders. GMX owes $51.5 million on 9% second-priority notes due March 2, 2018. U.S. Bank NA is the indenture trustee and collateral agent on the notes, issued in September.

The March 4 missed interest payment did not constitute a default on the notes, but it did start a 30-day grace period for GMX to make the payment before it would be considered a default.

The missed payment did, however, constitute a default on GMX's 4.5% convertible notes.

GMX issued $86.3 million in 4.5% unsecured convertible notes issued in October 2009 and due 2015.

In September, GMX exchanged about $38 million of the notes for $26.5 million in second-priority notes. As of Feb. 11, GMX owed $48.3 million on the convertible notes.

The Oklahoma City company also on March 11 announced it was suspending payments of quarterly dividends on its 9.25% Series B cumulative preferred stock until further notice. A dividend was due on Monday.

GMX, founded in 1998, has two main oil projects, its Williston Basin in North Dakota and Montana and its DJ Basin in Wyoming. The company also has two natural gas projects in Texas.

Before 2011, GMX focused on the development of its hydrocarbon formations in Texas. It has a working interest in 70 wells in Texas and a royalty interest in eight others. It also has a working interest in nine Louisiana wells and a royalty interest in four Louisiana wells.

In 2010, GMX sought to expand and diversify, and the following year it acquired core positions in more than 75,000 undeveloped net acres in oil projects. GMX shifted its focus from its Texas development to the new oil projects.

GMX now owns a working interest in 25 North Dakota wells and one well in Wyoming. It also has a royalty interest in three Kansas wells and 10 Oklahoma wells.

GMX's business is heavily dependent on liquidity and the availability of capital to acquire, develop and exploit oil and natural gas properties, Rohleder said. GMX, though, has been struggling due to a drop in natural gas prices over the past few years caused by excess production and stagnant demand. GMX therefore determined it had to file for Chapter 11 to preserve its business.

As of the petition date, GMX's long-term debt totaled $427.4 million and its annual bond debt interest payments totaled $43 million.

Before entering bankruptcy, GMX sought to raise capital through debt and equity. In January, GMX retained Credit Suisse Group to raise $75 million in stock and $75 million in convertible notes. About 14 of 30 potential investors signed nondisclosure agreements, but there was insufficient interest to consummate any deals.

GMX then retained Jefferies LLC on Feb. 8 to raise $25 million in stock and $75 million in convertible notes. Jefferies also was unsuccessful in its efforts.

In its petition, GMX pegged its assets at $281.1 million and its liabilities at $458.5 million.

Aside from the above mentioned debt, GMX also issued $200 million in 11.375% unsecured senior notes due 2019 in February 2011. In December 2011, 99% of the notes were exchanged for new senior secured notes, so GMX now owes only $1.97 million on the notes.

In 2004, Penn Virginia Oil & Gas LP lent GMX $2.8 million for its share of the cost of four wells drilled by Penn under a joint venture deal. Penn is repayable only from 75% of the production revenue.

GMX also has open hedge contracts for natural gas through 2015 and crude oil through 2014 with EDF Trading North America LLC. Based on current commodity prices, GMX estimates the value of the open hedges to be a liability of $1.5 million.

GMX's stock has been publicly traded since 2001. The New York Stock Exchange on Feb. 26 notified the company that its stock was not in compliance with its standards and on Monday suspended trading. GMX's stock closed at $2.19 per share on March 28.

Along with Zdunkewicz, Timothy A. Davidson of Andrews Kurth is debtor counsel. William H. Hoch of Crowe & Dunlevy is debtor co-counsel.

Steven W. Bugg of McAfee & Taft PC represents the senior lenders.

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