Second ChanceChernoff calls GMX his favorite pick of the lot. And at least one research house now shares his bullish view. Late last month, Hibernia Southcoast Capital became the first firm to cover the stock -- starting it at "buy" -- since the company joined forces with Penn Virginia. Before, analysts had avoided the stock for a reason. Less than a year after going public during the market drought of 2001, GMX announced a major lawsuit against Nabors Drilling ( NBR) that soon disabled its exploration and production program. Only after settling that case last year did GMX finally snag a partner with the capital necessary to end the company's long dry spell. To be sure, Penn Virginia inked a lucrative deal for itself. By providing financial backing for GMX, Penn Virginia secured a major interest in some valuable GMX properties. Now, that investment is visibly paying off. When warning of lower production results last month, Penn Virginia pointed to its production program with GMX -- now accelerated and exceeding expectations -- as a bright spot for the quarter.
Future GainsChernoff sees plenty of upside left. "The market is still treating GMX as a dubious company that's had litigation problems and mediocre reserves," said Chernoff, who owns GMX himself. But "everything is setting up for a big, big gain in the value of the company." Because GMX is now actually drilling, Chernoff says, the company can simultaneously expand both its energy production and its proved reserves. He expects the company's production and cash flow to increase "rapidly" -- starting this quarter. In the meantime, the company itself has already cast a strong vote of confidence in its future. In a brief announcement earlier this month, GMX laid out plans to repurchase warrants that, until early 2006, can be exercised at $12 a share. "Why would a company with a stock price of $7 do this -- especially when they need money for drilling?" Chernoff asked. "This indicates they expect their own stock price to be over $12" before issuing new equity next year. Chernoff is convinced that the market will eventually recognize GMX's true value as well. The company's "exchange of working interest to Penn Virginia for equity and accelerated drilling is an excellent trade," he said. "It perfectly positions GMX to drill and prove up reserves on the remainder of its acreage, where it has retained as much as a 100% working interest." So "GMX gets a smaller piece of a much larger pie -- and a much larger valuation once the market realizes the size of the pie."
Repeat WinnerChernoff's second pick, Encore, has already proven itself. While young like GMX, Encore enjoys a much larger market value -- exceeding $1 billion -- and a profitable history. The company makes money by snatching up depleted fields on the cheap and then using technology to extract leftover oil from the properties.