Onshore natural gas producer GMX Resources Inc. said Monday it will cut its capital expenditures (capex) this year by more than half -- to $70 million from an earlier forecast of $150 million -- with 98% of the funds earmarked for East Texas.
Under the modified capex budget, GMX this year plans to drill a net total of 14 wells and complete 16 horizontal wells in its East Texas leasehold, which is spread across portions of the Haynesville Shale and the Deep Bossier Sands.
Wells by four rigs now running are scheduled to be completed with a drilling program in April, and once done, two of the rigs on well-to-well contracts are to be released; the other two rigs, owned by a subsidiary of GMX, would be laid down. GMX then plans to drill horizontal wells through June using two Helmerich & Payne "FlexRigs."
"We have stated in the past that we have operational flexibility," said CEO Ken Kenworthy. "We will spend less than our cash flow and available credit every quarter. If prices improve, or if we continue to improve our completions and as we continue to lower well costs, the cash flow and credit versus capex picture gets even better."
GMX, he said, has successfully drilled three Haynesville/Bossier (H/B) horizontal wells "that have a 25% or greater return at today's prices. All 14 of our 2009 wells will be drilled inside our H/B acreage that we believe is substantially derisked. Additionally, our current banks and lenders have confirmed their support to provide additional borrowing base capacity as our reserves grow."
The first full-month average production for both the H/B Callison #9H and the Bosh #11H was 4,100 Mcf/d, the company noted. The 16-day average daily production for the most recent H/B well, the Baldwin #17H, was 6,000 Mcf/d.
GMX also secured contracts for an additional 3,900 gross (3,700 net) acres of acquired and drill-to-earn leasehold in the H/B leasehold from undisclosed parties. It now is drilling on 1,100 gross acres and has also obtained first refusal rights on an additional 5,000 gross acres.
New guidance for 2009 production is 14.6 Bcfe, which is 13% higher than in 2008. GMX estimates that production through March will total 2.8 Bcfe. Four horizontal wells are projected for completion in 2Q2009, five more are planned in 3Q2009 and an additional five wells are scheduled in 4Q2009. In total the wells to be drilled this year are expected to add 80 Bcfe to proved developed producing reserves.
Based on the company's 2009 expected production of 14.6 Bcfe, the current natural gas strip price and current hedges, GMX expects average prices to be $7.20/Mcfe in 2009.
At the end of 2008 GMX had $110 million available under its current borrowing base of $190 million. A borrowing base redetermination is scheduled for "early" April, and as a result of "significantly lower commodity prices, the company could potentially see a reduction in its borrowing base at its next bank redetermination," it said.
"Our assumptions are fairly conservative: natural gas prices will remain flat for the year, our well results will be at least as good as our first three and the banks will remain open and willing to lend to the energy sector," said CFO James A. Merrill.
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