Q3 Final Production

Final production numbers should come in a bit higher than the associated operational update figure of 141,000 Boe.

Consider the following:
6 wells drilled and producing in Q2 with stated production of 40 Boepd
4 wells drilled in Q2 completed and producing in Q3.
9 wells drilled and producing in Q3.

If you take the 6 wells at 40 boepd the weekly production is 1680 Boe. In the Q3 operational update it was noted that the 19 new wells are currently averaging over 50 BOEPD per well. Initial flush production rates were 50+ for those wells completed in Q3. I feel that those wells drilled and producing in Q2 are still producing 40 Boepd. I feel the wells drilled in Q3 are producing somewhat more than 50 Boepd on average. To be conservative I'm going to continue to project 6 wells producing at 40 Boepd. I'm also going to be conservative and project the remaining 13 wells are producing only 50 Boepd.

Q2 production + 6 wells drilled in Q2 + 13 wells drilled in Q3 = total Q3 production*

*Please Note: I do NOT account for 1.5% decline in production from Q2 amount. This amount is more than offset by refracs performed in Q2 and Q3. (We will discuss refracs soon.)

My REVISED weekly projected numbers for Q3 are as follows:
__________NQ3__FQ2___T1________T2__
Week 1.....350 + 1680 = 2030...... 2030
Week 2.....700 + 1680 = 2380...... 4410
Week 3....1050+ 1680 = 2730...... 7140
Week 4....1400+ 1680 = 3080..... 10220
Week 5....1750+ 1680 = 3430...... 13650
Week 6....2100+ 1680 = 3780...... 17430
Week 7....2450+ 1680 = 4130...... 21560
Week 8....2800+ 1680 = 4480...... 26040
Week 9....3150+ 1680 = 4830...... 30870
Week 10..3500+ 1680 = 5180...... 36050
Week 11...3850+ 1680 = 5530..... 41580
Week 12...4200+ 1680 = 5880..... 47460
Week 13...4550+ 1680 = 6230..... 53690

NQ3 = New Q3 production
FQ2 = Full Q2 production from 6 wells drilled and producing in Q2.
T1 = Weekly total.
T2 = cumulative total for Q3.

With Q2 ending production of 106,394 BOE it should be easy for ARD to report final Q3 production of up to a MAXIMUM (perfect conditions less normal declines) of 160,084. For purposes of nice round numbers lets just call it 160,000 BOE in Q3.

I think you begin to see the POTENTIAL of ARD drilling. Why is ARD reporting less than 160,000 in the operational update?

Probably because production doesn't always work like a well oiled machine. (Pardon the pun.) Also the oil inventory on the last day of Q3 probably was not delivered. Therefore this oil was not sold and therefore not counted as official production.

It looks like if we back off our MAXIMUM POTENTIAL by 15,000 BOE or 10% going forward we should be able to generate a range of probable production.

160,000 - 15,000 = 145,000
160,000 - .10 = 144,000

We should have ARD come in between 144,000 and 145,000 for Q3 which is slightly higher than the Q3 operational update figure.

REFRACS....
At the end of Q2 there were 3 refracs that were producing.
In the Q3 operational update it was stated that average refrac output was 20 Boepd.
Since refracs produce less than a developmental well I'm projecting that the new Q3 refracs occurred towards the end of Q3.

My production projections for these workovers are as follows:
__________W1____W2__
Week 1.....420......420
Week 2.....420......840
Week 3.....420......1260
Week 4.....420......1680
Week 5.....420......2100
Week 6.....420......2520
Week 7.....420*....2940
Week 8.....560......3500
Week 9.....700......4200
Week 10...840......5040
Week 11...980......6020
Week 12..1120.....7140
Week 13..1260.....8400

W1 = Weekly production @ 20Boepd/well
W2 = Weekly Cumulative production for Q3
*Week 7 production was 420 due to Q2 refraced well going offline and new Q3 refrac coming online simultaneously.

With natural projected declines of 1.5% each quarter it is easy to see that the workovers more than compensate for any declines from previous quarter's total production.

106,394 * 0.015 = 1596 (Lets round to 1600)

Q3 Refracs production = 8400 BOE.
Q3 Natural decline = 1600 BOE

Q3 excess from refracs = 6800 BOE.

In conclusion, it is easy to see the true production capability of the FY2005 program. While ARD will more than likely report final production results of 144 MBoe to 145 MBoe their potential was for about 15 MBoe more. In addition, the 7 workovers from Q3 plus the 3 workovers from Q2 (minus 1 workover in week #7) provide spare capacity (cushion) of 6800 BOE to compensate for any natural production declines or unexpected production declines that could be caused by any number of things (mechanical interruption, excessive natural declines, scheduled maintenance, etc.) It is apparent as to why some analysts were calling for Q3 production as high as 163,000 BOE for Q3. The growth probabilities and potential of owning ARD shares are truly incredible.

Third Quarter 2005 Update

Highlights_____Q3 2005______% Diff____Q2 2005
Production_____141,000 BOE___+32% ____106,294
Revenue_______$7.75 million___+68%____$4.6 million
Realized price__$55 (Per BOE)___+29% ___$43.50

This is a HOME RUN in every sense of the term. Arena Resources outperformed my projections in all of the above areas.

Production, Revenue, Realized Price, you name it...they topped. Keep in mind that these are only the approximate results of Q3. When ARD reports they will FURTHER suprise to the upside.

I think the sell off today was simply traders selling the news. However, one must understand that while it may be possible to buy the rumor and sell the news and make a profit...those same traders will have to buy back in at a HIGHER price as this stock will not stay down long. These shares are poised to RALLY and GRAVITATE towards the $36 price target set by Hibernia and the $30 price Target set by Howell.

These shares are SERIOUSLY UNDERVALUED given the SUPERIOR PERFORMANCE & SUPERB EXECUTION of the company operations.

I can not overstate how much these operating results please me!!!

ARD shares are poised to go MUCH HIGHER as Q4 will present further evidence of the TREMENDOUS potential offered to ARD shareholders.

Q3 Projections are as follows:
Oil production:____________117,713 BBL
Gas production:___________85,124 Mcf (14,187 Boe)
Total O&G Production:_____ 131,900 BOE
Total O&G Production Range 131,900 to 138,500 BOE (+5%/-0%)
Realized Oil price:_________$54 per BOE
Revenue:________________$7.13 million
Net Profit Margin:_________41% (up from 37% in Q2.)
Net Profit Margin Range 40% to 42%
Net Income:______________$2.92 million
EPS:_________________$0.22 (Up from $0.13 in Q2.)
Shares Fully Diluted:_______13 million

Ranges are provided for Total O&G Production and Net Profit Margin as these are the most important metrics provided and should be considered PRIMARY PERFORMANCE indicators. The other performance parameters should be considered SECONDARY PERFORMANCE indicators. Anything within my range should be considered acceptable. Anything outside the range on the low end should be considered a disappointment. Anything outside the range on the high end should be considered SUPERIOR OPERATING PERFORMANCE. Note that 6Mcf = 1 Boe.

Projection Commentary

ARD stated, "From mid-April through the end of the quarter, the Company performed a re-freak on five wells, three of which are currently in production averaging approximately 30 BIPED per well. Each of these wells was producing one to two BIPED prior to the re-stimulation. The Company plans on performing this re-freak technique on 20 wells in 2005."

I feel that the re-stimulation should at a minimum offset the natural production declines. Therefore I considered these items as "production neutral."

I didn't account for any growth in gas production in my Q3 projections as growth in gas production in Q over Q was virtually neutral.

In light of my projections I feel that they are conservative and there is potential for ART to surprise on the upside. I feel ART could surprise to the upside by no more than 5% of my estimate of 131,900. In other words, the maximum oil and gas production ceiling that one should expect under the most optimum circumstances would be 138,500 BOE.

Anything over this number would really be a GRANDSONS HOME RUN in every sense of the term.

Most dilution is bad. The primary bad dilution is a result of management incentive plans and stock options. It is rare to come across a situation where dilution is actually good. How in the world could dilution actually be GOOD?

Here's the answer: When it INCREASES shareholder value. Lets examine ARD. Management has a stated mission of making acquisitions to increase proved reserves. There are 1,667,500 warrants to be redeemed. The redemption price is $7.32 per warrant.1,667,000 X $7.32 = $12,206,100The investment banker will get a part of the proceeds. Lets be CONSERVATIVE and assume ARD takes in $11,000,000 in net proceeds.I firmly believe mgmt will use the proceeds to not only increase production but also to increase proved reserves.

While the warrants will increase share count by roughly 10% I believe the company will be able to acquire properties that will increase proved reserves by MORE than 10%. (If current proved reserves are 22.1 MMBOE then I expect the proceeds to increase this amount by MORE than 2.21 MMBOE for a total of over 24.31 MMBOE.)The last major purchase was the Fuhrman-Mascho property in west Texas. This purchase was announced on December 21, 2004. The purchase price was for $10.5 million of which $9.5 million cash was used with the remainder being 150,000 restricted shares (These shares have already been accounted in the fully diluted share count.) The $9.5 million came from a bank line of credit.In July of 2005 ARD announced a private equity investment for $10 million of which total net proceeds were $9.8 million.The $9.8 million basically was used to pay off the line of credit from the bank. In other words the purchase was ultimately financed through the private equity sale that was announced on July 13, 2005.

How much dilution was there due to this equity sale?
ANSWER: 970,874 restricted shares.

What quantity of proved reserves did ARD receive in the Fuhrman-Mascho Property?ANSWER: 6,476 MBOE

How much dilution did ARD get hit with after the private equity placement on July 13, 2005?ANSWER: 8.3% (970,874 Shares/11,674,000 Shares outstanding at end of Q2 2005.)

How much did proved reserves increase as a result of Fuhrman-Mascho acquisition?ANSWER: 43% (Prior to this acquisition ARD had 14,741 MBOE in proved reserves.)

The bottom line is this: The Fuhrman-Mascho diluted share count by 8.3% while at the same time increasing proved reserves by 43%. The net result was that AFTER the dilution each share had INCREASED oil assets per share.On page 3 of the Hibernia Southcoast research report it states under "Strategy" that, "Arena (Resources) has an acquire-and-exploit strategy..."

Consider the following:

Even though share count increased every year:
2001: 3,367,774
2002: 4,556,921
2003: 7,241,676
2004: 8,694,178

...Oil assets per share BOE continued to increase (based on year end December 31 fully diluted share count):
2001: 0.29
2002: 1.01
2003: 1.05
2004: 2.44

The final answer is this:

This management team has a proven track record of INCREASING oil assets per share while at the same time utilizing dilution to acquire properties.Just remember one thing: Since 2001 dilution has been used to expand oil assets per share. Using dilution to EXPAND oil assets per share it is a good thing. I expect the trend should continue. So should you.