GMX Resources Inc. (GMXR) said it has branched out from its Haynesville/Bossier natural gas-directed properties, collecting about 67,724 net acres within the core horizontal oil development areas of the Bakken/Sanish-Three Forks Formation in the Williston Basin and the Niobrara Formation in the Denver-Julesburg (DJ) Basin.
The company said it has signed four purchase and sale agreements (PSA), along with one letter of intent also involving the Bakken and Niobrara. GMXR said it will spend $85 million for initial development of the Bakken and Niobrara properties, at the same time setting aside development of its Cotton Valley Sands reserves in Texas.
The new acreage includes approximately 26,087 net acres in the Williston Basin of North Dakota and Montana targeting the Bakken/Sanish-Three Forks Formation and approximately 41,637 acres in the DJ Basin in Wyoming, targeting the Niobrara Formation.
"These combined transactions are transformational for GMXR, providing us with 342 additional horizontal drilling locations in the most actively developed oil resource play in the U.S.A. and one of the most promising emerging oil resource plays. These acquisitions now reposition GMXR into three significant basins with two oil resource developments and two natural gas resource developments, which include the largest natural gas resource basin in the U.S.," said Ken L. Kenworthy Jr., CEO of the Oklahoma City-based producer.
GMXR previously announced on Jan. 20 that its year-end Haynesville/Bossier reserves were 234.1 Bcfe, an increase of 208.2 Bcfe from the end of 2009; this was an increase of 804%. The company's total proved reserves at Dec. 31, 2010 were 319.3 Bcfe, a decrease of approximately 10% from the total of 355.3 Bcfe at year-end 2009.
Going forward the company will be directing exploration and production (E&P) activities to the best returns over 700 net horizontal locations in the three resource plays, a multi-year inventory using three FlexRig3 rigs. "We believe our horizontal Haynesville/Bossier experience, our knowledge from resource consortium participations, data exchange relationships and our technical team's Rockies experience will be instrumental in the successful development of the Bakken and Niobrara horizontal resources." GMXR plans to raise capital to fund development.
Two of the Bakken transactions, totaling 8,290 net acres, reflect an average purchase price of $4,665 per acre, with approximately 67% paid in common stock to be priced based on an average closing price over a period around the transaction closing date expected in early March. The shares would have a minimum price of $5.50 and a maximum price of $6.50. The leases have a average of 82% net revenue interest and are fee (freehold), all taken within the past 12 months. The leases generally have three-year primary terms, and many of the fee leases have options to renew for two more years.
Another Bakken transaction, previously announced Jan. 20, totals 17,797 net acres for a purchase price of $1,000 per acre. Approximately 90% of the consideration will be paid in common stock (a total of up to 2.67 million shares), based on a valuation of $6.00 per share, subject to certain adjustments. The leases have a minimum 80% net revenue interest and are a mix of fee (freehold), state and federal leases, all taken within the past 12 months. The leases generally have five to 10-year primary terms, and many of the fee leases have options to renew for five more years.
The total acreage from the Bakken transactions represents the potential for 81.5 net wells using four wells per 1,280-acre spaced units.
In addition to the cost of these acquisitions, GMXR "is budgeting capital expenditures in the Williston Basin to be $31.5 million to establish a presence and begin our drilling program...GMXR plans to continue leasing and has successfully recruited experienced Bakken land staff, brokerage and title teams to augment its current land staff capacities and competencies," the company announcement said.
GMXR's entry into the Niobrara involves two transactions for approximately 41,637 net acres in southwestern Goshen, southeastern Platte and north central Laramie Counties in Wyoming, with an 80% net revenue interest. One of the sellers has retained a 90-day option to reacquire a 50% working interest in approximately 16,000 acres. The fee leases generally have five-year primary terms, and many have options to extend the lease another five years. Approximately 20% of the total net acres are new federal leases with 10-year terms. Adding in the new acreage provides GMXR with a development potential of an estimated 260 net wells using four wells per 640-acre unit.
Following the acquisitions, the company is budgeting 2011 capital expenditures in the DJ Basin of approximately $53.6 million to establish a presence and begin its drilling program. GMXR plans to continue leasing and has successfully recruited experienced land staff, brokerage and title teams for the DJ Basin.
Since it does not plan to drill into its Cotton Valley Sand resource base in the next five years, it has removed 219.6 Bcfe in reserves from its overall calculation in compliance with Securities and Exchange Commission guidelines that require all E&P operators to report their reserves consistent with their next five-year capital expenditure and drilling plans.
"Due to the company's focus on developing the new acreage in the Bakken and Niobrara oil resource plays, and the prolific nature of the Haynesville/Bossier gas resource, we do not currently expect to reactivate a Cotton Valley Sand vertical drilling program within the next five years."
Removal of the Cotton Valley from the total leaves the company's 2010 year-end Cotton Valley Sand, Travis Peak, and other non-Haynesville/Bossier reserves at 85.2 Bcfe.
"We have completed our reserve report work for the Cotton Valley Sand with MHA Petroleum Consultants and we have made a decision that writing off our PUD [proved undeveloped] inventory was the most prudent approach even though they were marginally economic," said CFO James A. Merrill.
"Our intellectual and monetary capital will be targeted at the highest value opportunities that allow us to diversify our basin and commodity risks through the development of our new Bakken and Niobrara oil resource opportunities and our Haynesville/Bossier gas resource.
"We had a very large upgrade in our Haynesville/Bossier reserves from the DeGolyer and MacNaughton work. At year-end 2010 the company has added 55.6 Bcfe in proved developed reserves and 152.6 Bcfe in proved undeveloped reserves in the Haynesville/Bossier, up from 23.5 Bcfe and 2.4 Bcfe, respectively, last year. Our expectations are that the Cotton Valley Sands would be more economical as a horizontal development plan; however, our immediate focus and attention is the development of the Bakken, the Niobrara, and the Haynesville/Bossier resources."