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Speculating on GMX Resources

Now that Cramer thinks crude has bottomed, he’s willing to endorse some speculation in the oil and gas sector. The key to this kind of trade, though, he told viewers Friday, is to find companies that are cheap relative to their net asset value.

Net asset value is the amount left over after a firm’s liabilities are subtracted from total assets. Investors want stocks that trade at a discount to that number. Like natural-gas play GMX Resources , which closed Friday at $23.84 despite a net asset value estimated range of between $20 and $57. GMXR sells for about $15 less than the estimated average of $38.50. And that doesn’t even take into account the probable reserves, whose estimated net asset value when combined with proven reserves is between $60 and $85 a share. This is just the kind of speculative upside that investors want.

GMX Resources, all of the company’s land and the natural gas under it, could be worth two, three, almost four times as much as the current share price, Cramer said, if those assets were sold off. The drop in natural gas has left most of the sector in a similar position, as investors dumped these stocks. It makes GMXR both an attractive investment and takeover target now that the company’s so cheap. Someone will probably catch up soon enough, though, pushing that valuation much, much higher.

A deeper look at the business: GMX Resources produces 94% of its natural gas in the Haynesville shale, a reserve spread across Northwest Louisiana and East Texas. The company holds 435 billion cubic feet in proven reserves and 3.2 trillion cubic feet in total reserves, with a 32-year reserve life. Major budget cuts should allow GMXR to better handle its $206 million debt obligations. Even with those cuts, 2009 production is expected to increase $93 over last year. And this is one of the lowest-cost producers in the game, granting GMX Resources earnings power over its competitors.

Cramer thinks this company has a lot in common with Chesapeake Energy and Anadarko Petroleum. Chesapeake in particular is trading below its net asset value estimates. Though CHK is more dependent on higher natural gas prices than GMX Resources is, because of the latter’s low production costs.

So GMXR is a buy, Cramer said. But remember the speculation rules: Use limit orders, buy in small increments, be patient, and don’t pay up for this stock.

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