Friday, February 6, 2009
(Cont'd from above)...

Jim (cont'd):

What are we looking for specifically in these kind of companies… we want stocks that are trading at discounts to the companies… what is known as net asset value… that is the value of all their assets minus their liabilities… their debt… for GMX Resources the net asset value estimates of the companies proved reserves range between $20 and $57... proved reserved… that means what they own… but the stock… remember the low end is $20... the stock is at $23.84 a share… that is a huge discount to the average net asset value which I calculate to be $38.50... so it is cheap… in fact, while I don’t count in Steph… or even Grand Theft Auto Four… although I am a rock band fan… I would call this one a steal… and remember these estimates don’t include the value of provable reserves… the additional reserves that GMXR can book… if it keeps drilling… and finding more gas… which it is doing.

The estimates have put the value of this companies provable reserves at between… and this is where you really get the very, very big disparity between the stock price and where it is… between $60 and $85 a share… so to me it looks like there is a major speculative upside in this name… you know what we should think of this not as a Jumping Jack Flash song… but this is kind of like there will be blood kind of stock… with a share price so low relative to the value of its assets… that buying it is practically an old fashioned land swindle… hey, how about the pin action at the end of there will be blood… obscure reference… okay, think of it like this… the value of the land that GMXR owns and all the natural gas that sits under it… if they just sold it all it could be worth 2, 3, 4 times what the company is valued at now… the company is worth more dead than alive… or certainly worth more to another company that needs the assets… a lot of natural gas exploration companies are in this position… because their stocks have sold off viciously courtesy of the collapse in Natural Gas prices… and the hedge funds gone wild… because a lot of them own these things.

Now, I think that they and GMX Resources Inc. (GMXR) in particular could come back… because they are at levels where value investors and speculators would be crazy not to buy them hand over fist… now, GMXR is focused on drilling and in what is know as the Haynesville Shale… it has 435 billion cubic feet in proved reserves… 3.2 trillion cubic feet in total reserves… 94% of its production is in natural gas… 32 years of reserve life… now the company is cutting back… it has cut its budget from $400 million to $220 million… scaling back production in order to reduce the financial pressure it is under… it has $50 in cash and $206 million in debt… that is a lot of debt… that is speculative… that is what makes it speculative… so the budget cuts will still make it fine… and even with the budget cuts the company still expects to increase production by 93% over 2008 levels this year… that is good… it is also one of the lowest cost operators in the game… with finding and development costs running at .80 cents per 1000 cubic feet.. that is really cheap… remember the medium cost for the industry is a little less than $3 bucks… their operating costs and production tax come to $1.54 for a 1000 cubic feet, $1.95 for the rest of the group… now a lot of this has to do with the fact that GMXR is concentrated in one area that makes production less expensive… so even when you have Natural Gas at $4.63 per 1000... remember last year it had gone as high as $13... their making plenty of money from their production… and if Natural Gas prices go higher.. that is just money straight to the bottom line.

Now, you often hear me talk about Anadarko Petroleum (APC) and Chesapeake Energy Corp. (CHK)… how does it stack up against them… alright, in terms of size well these companies they dwarf GMX Resources… but despite what some say, size isn’t everything… they are also diversified among many regions… while GMXR is basically dependent on the Haynesville Shale… that again is what makes it more speculative… it is tied to the success of just one region… but in the terms of evaluation how the share price compares to the companies net asset value… GMXR actually has something more in common with Chesapeake if no with Anadarko, which trades closer to the value of it properties… the net asset values estimates of Chesapeake range from $20 to $32... while the stock trades at just $17... that is one of the reasons we like Chesapeake here… but Chesapeake is also more highly dependent on higher natural gas prices than GMX Resources is… because of GMXR’s low production costs… okay, now remember this is speculation Friday… you have got to use limit orders… you have got to buy in small increments… because if the stock spikes I am guaranteeing that you will lose money… you can wait five days… because there is nothing going to happen next week that is going to propel this stock… other than your foolish buying if you use market orders.

Here is the bottom line…

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The Bottom Line!:     Josh from Texas has horse sense… I am warming up to some speculative exploration production plays here after getting pancaked last summer… and GMX Resources Inc. (GMXR) is a low cost operator with great production growth that is trading at an absurd discount to its net asset value… once again a caller has come up with a great idea… we do research on it… and I think it is a buy.

Thanks to a viewer, I think GMXR could be one deeply undervalued spec play...     I am giving a big Booyah to Josh in Texas for asking about GMXR… because I had an epiphany over the weekend while drinking some cheap Scotch… that Josh has horse sense.
 

[verbatim recap]

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Jim went on after this segment to take questions from callers, and responded with his comments...

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Q:    You did a beat down on Atlas Energy Resources LLC (ATN) earlier this week, well they have increased their dividend 5 times in the last two years, they have basically hedged their production for the next two years, 80% and 65% at production $9 natural gas, and $90 oil. So I don’t see their dividend being in any danger, so do you care to reconsider?

Jim:    Well, I think that what I have decided to do with this group… you know there is a tremendous amount of criticism that I endure on this show… tremendous amount… I get a huge amount of negative feedback.. I have a lot of people who are all over me in the press all the time.. so I look at a stock like this and I say you know what I have to pull my horns… because all I do no matter how good I try to be… most people just want to accentuate the negative of what I pick… this one has been down a lot… I think it is probably fine.. but I have decided to circle the wagons around Anadarko Petroleum (APC) and around BP plc (BP*)… because it has got that good yield… and around ConocoPhillips (COP*)… I have to be more conservative… only because I just can’t keep taking the bullets when I go out on a limb… I think your stock is a good one… but I just cannot be out there recommending too many of these without people just saying… he is not doing a good job.

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Q:    Natural gas, I rode the train down with Chesapeake Energy Corp. (CHK), I am wondering if you would stay with it or switch to something like Southwestern Energy Co. (SWN) or maybe go to BP Prudhoe Bay Royalty Trust (BPT)?

Jim:    I am sticking with… BPT, I think that one is actually done going down… I have switched… I say listen, Anadarko Petroleum (APC), if you want natural gas… for ActionAlertsPlus.com, my charitable trust I have decided to go only with dividend yielding natural gas plays and my favorite one was ConocoPhillips (COP*) which was yielding 4% at the opening today… and I like BP plc (BP*) which is up from $39 earlier this week… to $44, $45... I think Anadarko is the best run natural gas company… but it does not have a yield… and remember how I feel… it has either got to be recession resistant or it has got to have a high yield… or I can’t bless it anymore… because this market is too hard.
 

[verbatim recap]

[end of segment]

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