For the rest of 2005 it looks like the increase will result in drilling an extra well on F-M property and acceleration in the consolidation and modernization of the infrastructure of the lease in preparation for future developmental drilling. I think this is a good thing. They are preparing now for a big 2006. I think this can not be understated. 2006 budget is slated for $35 million. This is subject to be increased at year end. I think they probably will increase it at year end as oil prices continue to climb.
Last year at year end they announced a capital budget of $15 million for 2005. They have basically increased that amount by 60% to the current $24 million.I look for ARD to boost 2006 budget at year end to $40 million. THEN, I expect them to bump it up a few times throughout 2006 for a final tally that is $40 million + an extra 60% for a grand total of $64 million in capex. With 139 drilling locations looking ARD right in the eye they are probably going to get an extra rig and drill DOUBLE TIME in 2006. This is not beyond the realm of possiblity as they will have drilled 35 wells on F-M in 2005.
I see ARD doubling the amount of wells to 70 in 2006 on F-M property. I believe they will get a second rig in second half of 2006 and the majority of these wells will be drilled in Q3 and Q4. (Remember when ARD mgmt stated in Q2 earnings release, "We believe that the drilling activity and infrastructure improvements we began in the second quarter will have a very positive effect on the second half results.") I think they will again look for a BIG second half of 2006.
Where will funding come from for 2006 Capex program?
2006 capex program will come from cashflow from operations. ARD will EASILY pump over 1 million BOE in 2006 (just rough estimates here.) With average realized price of oil around $65 per BOE in 2006 (the trend higher in oil prices continues) and a 50% net profit margin due to increased production and prices ARD should easily NET $32.5 in 2006. Based on 14.1 million shares that comes out to about $2.30 per share in EPS. It gets better when you talk cashflow...
Hibernia Research Report dated 9-26-05 projects 2006cashflow from operations of $50,027,000. Hibernia came in way low in their Q3 revenue and net income estimates. I also think they will come in low when ARD outperforms in 2006. $65 million in cashflow from operations is very much a realistic target for ARD in 2006. This will be more than enough to fund an agressive CAPEX program of what I think will be over $60 million when all is said and done.
If ARD decides to INCREASE capex in 2006 they drill more wells and this = more $ for MORE capex spending. No dilution or borrowing from credit line is necessary. As Sherlock Holmes used to say, "It's ELEMETARY my dear Watson."
Now is the time to be acquiring shares of ARD especially if you are of the belief that we are at or near worldwide peak oil production. I along with many other investorsstill think ARD is the best small cap oil play on the planet bar none.
Why?
Three Reasons: 1. Reserves......Well over $100 in oil assets per share based on $60 oil. 2. Production...Growth in production is nothing short of jaw dropping. 3. Cost Structure...It's like fine wine: it only gets better with each passing day.
Doktor Stocks Recommendation List Strong Buy: 1. Arena Resources: Ticker Symbol: ARD(Quote)(Chart) This company has not only production and reserves per share but also a very low cost structure. Management team has proven track record of stellar performance. ARD shares are up from $13 range when I bought my first shares in late July 2005.
ARD 2006 Price Target = $50 This represents a 117% increase from current price of $23. Expect well over $2 in EPS. To be conservative I use $2. This company is growing over 50% per year. I will only provide a P/E multiple of 25 to be conservative. The result is $2 X 25 = $50.
Buy: 2. Ultra Petroleum: Ticker Symbol: UPL(Quote)(Chart) This company has some of the largest natural gas reserves in the United States in the Wyoming Pinedale Anticline. Their cost structure is the lowest in the industry and their record of increasing production makes this a very attractive investment.
UPL 2006 Price Target = $75 This represents a 44% increase from current price. I expect UPL to post EPS of $2.50 with a P/E multiple of 30 based on expected future growth rate. Growth driven by increased downspacing to 10 and eventually 5 acre spacing on WY properties. Look for increase in proved reserves to also drive price higher.
Doktor Stocks Red Flag List Strong Sell: 1. GeoResources Inc: Ticker Symbol: GEOI This particular company has a record of production that is unbeatable. Unfortunately it is a record that is unbeatable in that I have yet to find another oil company with a longer period of continuous declining production. As production declines cost structure will continue to rise. There is little chance of a 2006 capex program to turn this company around.
GEOI 2006 Price Target = $7 This represents a decrease of 14% from current price. Leonardite production facility is no more. Western Star Drilling is break even at best. Oil production is in decline with little expectation for any actual increase YoY. Even with rising oil prices I expect GEOI to fall to $6.50 in 2006 as investors seek oil companies with increasing production and a more favorable cost structure. Decrease in share price is softened by rising oil prices.
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.
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.
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