Q3 Projections vs. Actual
Before I comment on the actual Q3 results lets take a quick look at ARD actual performance and how it compared to my earlier projections.
Oil production:_______117,713 v. 123,600 BBL (Beat by 5%)
Gas production:_______85,124 v. 105,629 Mcf (Beat by 24%)
Total O&G Production:_ 131,900 v. 141,204 BOE (Beat by 7%)
Realized Oil price:____$54 per BOE v. $58.92 (Beat by 9%)
Revenue:___________$7.13 v. $7.93 Million (Beat by 11%)
Net Profit Margin:____41% v 43.5% (Beat by 6%)
Net Income:_________$2.92 v. $3.46 Million (Beat by 18%)
EPS:_____________$0.22 v. $0.27 (Beat by 22%)
I have to admit that I was EXTREMELY pleased with the Q3 results.
The realized price for oil was very strong at $58.92. This was over 7% higher than the $54.96 listed in the Q3 operational update.
It was nice to see those net margins so high.
Net Income per BOE produced came in at $24.50. This is up 50% from the Q2 2005 figure of $16.27 per BOE. The importance of this figure is tremendous. It is an excellent measure of managements ability to convert topline into bottomline as a function of each BOE produced. In other words, this metric gives me a good idea of the EFFICIENCY in net income production. As oil and gas are scarce resources the idea is to maximize the amount of profit for every BOE produced.
Cost per BOE produced came in at $17.14. This is up 9% from the Q2 2005 level of $16.51 per BOE produced. This is a way of looking at efficiency from the cost side of the equasion. It is disappointing that the cost per BOE increased in light of the fact that production increased significantly. Lets break this one down (increase or decrease percentages are based on changes between Q2 2005 and Q3 2005):
1. Oil and Gas Production costs: This measure goes up when properties are acquired. As production ramps up this measure should go down for a given lease. It is worth keeping an eye on this item to see how these costs are affected by future acquisitions and production. Up 13%
2. Oil and Gas production Tax: Higher realized price per BOE in Q3 lead to more taxes paid even though the tax rate in Q3 2005 was only 7% as compared to the tax rate of 8% in Q2 2005. The fact that this measure is higher is actually good. It means that the realized price per BOE was higher: This is what we want. Up 22%
3. D D & A: The increased depreciation, depletion and amortization rate was the result of a revision to ARD reserves and increased capitalized costs and development costs from the properties acquired recently. This figure was virtually flat on a per BOE basis. No change.
4. General and Administrative Expense: It is good to see this lower. This cost was down in Q3 by 28% when compared to Q2 of 2005.
As far as cost per BOE expense is concerned it is easy to see that there are numerous factors that affect this figure. Some of these factors are associated with ARD acquisitions, development of production infrastructure, and production growth. Given these facts it is normal to see some of these figures higher. This is certainly no red warning flag but something to monitor. The fact that G&A costs were lower per BOE certainly is worth noting again. This is something management has direct control over. They are containing this cost like true professionals.
Oil Production Breakdown
Here are the actual Q3 2005 production figures for each state along with the net change from Q2.
Oil (Bbl)
TX.............66,633..........+21,361......+47%
NM............43,511 ..........+12,041......+38%
OK.............13,456 ...........-2,035........-13%
Gas (Mcf/Boe*)
TX.............31,728/5,288......+17,979/2,996.....+130%
NM............38,683/6,447......+4,002/667..........+11%
KS.............25,515/4,252.......+414/69..............+1%
OK.............9,702/1,617........-1,737/289............-15%
*Note: 6 Mcf = 1 Boe.
It was surprising to see the strong results out of NM. It seems the waterflooding is boosting production already. I would have expected stronger results out of Texas with all the drilling on the Fuhrman-Mascho property. In Q2 there were 6 wells completed and producing at a rate of 40 Boepd. This equates to 1,680 per week. With 13 weeks in Q3 (given a perfect world) we would have expected to see 21,840 Bbl produced in Q3 just from those 6 wells alone.
Given the fact that 13 wells were completed and producing in Q3 in addition to the 6 in Q2 I would have expected more out of Texas. I was however pleased to see the increase in gas production out of Texas. Kansas was flat. Oklahoma went backwards as no resources were devoted to OK.
It will be interesting to see how the new wells drilled in Q4 along with the preexisting wells from Q2 and Q3 contribute to Q4 total production. I think it will be a stellar quarter. I also expect more double and triple digit percentage gains in gas production from both TX and NM.
One positive so far for Q4: 6 wells were completed in October. That is a strong start for Q4.
Shares/Boe Produced came in at:
91.9 (Down from 107.3 in Q2 2005)
I like to use this metric to give me a sense of production per share. For every 91.9 shares in my portfolio I also "own" 1 BOE of production. The lower the number the better. (Fewer shares required to own that 1 BOE.) For comparison purposes UPL came in at 51.9 for Q3. This was down from 54.6 in Q2 of 2005.
Final thought: I think ARD has most of those new wellheads throttled back. Based on Q4 production I don't see them wide open. I think they are taking good care of the fields, with the ability to throttle up and open the well heads wide open when prices are deemed satisfactory. This company is setting the stage for much bigger numbers in the future, consistent growth, and a rising share price.
I will continue to buy these shares.
Before I comment on the actual Q3 results lets take a quick look at ARD actual performance and how it compared to my earlier projections.
Oil production:_______117,713 v. 123,600 BBL (Beat by 5%)
Gas production:_______85,124 v. 105,629 Mcf (Beat by 24%)
Total O&G Production:_ 131,900 v. 141,204 BOE (Beat by 7%)
Realized Oil price:____$54 per BOE v. $58.92 (Beat by 9%)
Revenue:___________$7.13 v. $7.93 Million (Beat by 11%)
Net Profit Margin:____41% v 43.5% (Beat by 6%)
Net Income:_________$2.92 v. $3.46 Million (Beat by 18%)
EPS:_____________$0.22 v. $0.27 (Beat by 22%)
I have to admit that I was EXTREMELY pleased with the Q3 results.
The realized price for oil was very strong at $58.92. This was over 7% higher than the $54.96 listed in the Q3 operational update.
It was nice to see those net margins so high.
Net Income per BOE produced came in at $24.50. This is up 50% from the Q2 2005 figure of $16.27 per BOE. The importance of this figure is tremendous. It is an excellent measure of managements ability to convert topline into bottomline as a function of each BOE produced. In other words, this metric gives me a good idea of the EFFICIENCY in net income production. As oil and gas are scarce resources the idea is to maximize the amount of profit for every BOE produced.
Cost per BOE produced came in at $17.14. This is up 9% from the Q2 2005 level of $16.51 per BOE produced. This is a way of looking at efficiency from the cost side of the equasion. It is disappointing that the cost per BOE increased in light of the fact that production increased significantly. Lets break this one down (increase or decrease percentages are based on changes between Q2 2005 and Q3 2005):
1. Oil and Gas Production costs: This measure goes up when properties are acquired. As production ramps up this measure should go down for a given lease. It is worth keeping an eye on this item to see how these costs are affected by future acquisitions and production. Up 13%
2. Oil and Gas production Tax: Higher realized price per BOE in Q3 lead to more taxes paid even though the tax rate in Q3 2005 was only 7% as compared to the tax rate of 8% in Q2 2005. The fact that this measure is higher is actually good. It means that the realized price per BOE was higher: This is what we want. Up 22%
3. D D & A: The increased depreciation, depletion and amortization rate was the result of a revision to ARD reserves and increased capitalized costs and development costs from the properties acquired recently. This figure was virtually flat on a per BOE basis. No change.
4. General and Administrative Expense: It is good to see this lower. This cost was down in Q3 by 28% when compared to Q2 of 2005.
As far as cost per BOE expense is concerned it is easy to see that there are numerous factors that affect this figure. Some of these factors are associated with ARD acquisitions, development of production infrastructure, and production growth. Given these facts it is normal to see some of these figures higher. This is certainly no red warning flag but something to monitor. The fact that G&A costs were lower per BOE certainly is worth noting again. This is something management has direct control over. They are containing this cost like true professionals.
Oil Production Breakdown
Here are the actual Q3 2005 production figures for each state along with the net change from Q2.
Oil (Bbl)
TX.............66,633..........+21,361......+47%
NM............43,511 ..........+12,041......+38%
OK.............13,456 ...........-2,035........-13%
Gas (Mcf/Boe*)
TX.............31,728/5,288......+17,979/2,996.....+130%
NM............38,683/6,447......+4,002/667..........+11%
KS.............25,515/4,252.......+414/69..............+1%
OK.............9,702/1,617........-1,737/289............-15%
*Note: 6 Mcf = 1 Boe.
It was surprising to see the strong results out of NM. It seems the waterflooding is boosting production already. I would have expected stronger results out of Texas with all the drilling on the Fuhrman-Mascho property. In Q2 there were 6 wells completed and producing at a rate of 40 Boepd. This equates to 1,680 per week. With 13 weeks in Q3 (given a perfect world) we would have expected to see 21,840 Bbl produced in Q3 just from those 6 wells alone.
Given the fact that 13 wells were completed and producing in Q3 in addition to the 6 in Q2 I would have expected more out of Texas. I was however pleased to see the increase in gas production out of Texas. Kansas was flat. Oklahoma went backwards as no resources were devoted to OK.
It will be interesting to see how the new wells drilled in Q4 along with the preexisting wells from Q2 and Q3 contribute to Q4 total production. I think it will be a stellar quarter. I also expect more double and triple digit percentage gains in gas production from both TX and NM.
One positive so far for Q4: 6 wells were completed in October. That is a strong start for Q4.
Shares/Boe Produced came in at:
91.9 (Down from 107.3 in Q2 2005)
I like to use this metric to give me a sense of production per share. For every 91.9 shares in my portfolio I also "own" 1 BOE of production. The lower the number the better. (Fewer shares required to own that 1 BOE.) For comparison purposes UPL came in at 51.9 for Q3. This was down from 54.6 in Q2 of 2005.
Final thought: I think ARD has most of those new wellheads throttled back. Based on Q4 production I don't see them wide open. I think they are taking good care of the fields, with the ability to throttle up and open the well heads wide open when prices are deemed satisfactory. This company is setting the stage for much bigger numbers in the future, consistent growth, and a rising share price.
I will continue to buy these shares.
posted by -Aztec- at 3:14 PM
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