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.