ARD Closes at $36.47 a New Record
Market Cap now Exceeds $476 million


Headline only.

Q4 Production Estimates
Investor Expectations offer Variations

Without a doubt the single most important piece of information from the Q4 Operational Update will be the total production figures. Nearly every important quarterly figure ranging from revenues to net income is traced back to the Q4 production totals.

Investor sentiment is as follows:





Please note that the consensus estimate of 176,972 includes the estimates of DE, H, MSH and Dok.

I am confident that my estimate will be closest to the actual production totals.

$100 Oil is a Guarantee due to Iran
Expect Oil Prices to Spike through $100 En route to $120 to $180

$100 is a good initial target price due to the fact that it is both a nice round number and also very close to the all time inflation adjusted high price of oil during the Iran hostage crisis of December of 1979. While many are focused on $100 I can assure everyone that oil prices will not stop at the century mark.

The shockwave simulation conducted by the U.S. government in June of 2005 indicates that, "a roughly 4 percent global shortfall in daily supply results in a 177 percent increase in the price of oil (from $58 to $161 per barrel.)"Current estimates are that Iran alone pumps nearly 3.9 million barrels per day or 5% of the worlds daily production.

Look at this chart to get an idea of what happened to oil prices in December of 1979. We are on the verge of a crisis that is 100X more serious than the simple taking of hostages. The western world will soon be in a showdown with Iran in order to prevent a madman from having nuclear weapons. Expect to see a super spike similar to the one that was encountered in December of 1979.

Overnight prices have already risen past $69 in Asia. Don't be surprised to see prices for a barrel of crude oil to close above $70 in trading on Monday.

What does this mean for Arena Resources

Arena Resources (ARD) shares will continue to gain value as the price of oil rises. Clearly ARD stands to benefit as it has a large reserve base and production is going to rise dramatically in 2006. The timing could not be better. My 12 month price target for ARD of $50 was initiated on November 17, 2005. Any significant rise in oil prices will force me to raise my price target. Even if oil prices stay flat at current levels my $50 price target will have to be revised higher if my Q4 production estimates are achieved.

I would encourage everyone to read, "The Oil Factor" by Donna Leeb and Stephen Leeb. The book gives a good history of how shares of oil companies benefited investors portfolios during the 1970's and early 1980's.

ARD Closes at $36.10 a New 52 Week High
Friday's close is an all time high. The Best is Yet to Come.

Headline only.

Iran Transferring Foreign Cash Reserves
The Showdown at the UN Security Council is Fast Approaching

For anyone who doubt the seriousness of what's going on in Iran then this should remove all doubt. The Goldman Sachs call yesterday for $70 oil in 2006 will be a significant miss as the spike in oil prices blows pasts this number.

I was reading the other day that Northwest Airlines intends to exit bankruptcy and become profitable in 2007. Their business plan projects $65 oil for 2006 and $60 from 2007 to 2010. The executives at NWA will be in for a very big surprise when oil is DOUBLE their estimate. The execs at this carrier say they are ill prepared for a strike. Their real problems are not the employees but rising oil. This is going to be true for every major carrier going forward.

Dok Partners with Feedburner
The Blog is now Syndicated and Better than Ever.

This blog now has added features to enhance the functionality of your reading experience. Some of you may wonder what this orange icon represents. By clicking on the icon you are able to "subscribe" to every update on the ARD blog. It is free to use and is compatible with many different news readers. The photo below is an example of a page view from the Google Reader. For more information please click here.


(Click on image to enlarge.)

Google also offers a Google homepage as a way to stay current on blog entries. The page view below would be an example of what the Google homepage would look like with the ARD blog syndication added.


(Click on image to enlarge.)

The subscription feed will allow you to read the blog with black text and a white background. I have received some feedback from ARD blog readers who prefer a white background and black text for easier reading.

If you prefer to continue to visit this blog directly by bookmarking the webpage that is still a good option. This method still allows you to click on the orange Feedburner icon to view the blog with reversed colors (white background and black lettering) if you so desire.

In any case I am always trying to make the blog better than ever. If you have any comments, questions or opinions about the blog or how to make it better please email me at:

doktor_stocks@yahoo.com


I am also considering the addition of an editorial page where readers of this blog can email me if they wish to (as Bill O'Reilly says) opine. Again all your comments are encouraged and appreciated both positive and negative. I will reply to all emails as soon as possible when a reply is required.

Dok's Recommended Reading

The recommended reading list are books that I have read or are on my list to read. Most have already been read. These are books that can enhance your understanding of peak oil, the history of oil, investing, politics, accounting, etc. You can even search for any book from the links on this website. If you feel the desire to purchase a book it would be appreciated if you would consider making your purchase via this website. Amazon.com gives me credit when books are purchased from their links that are on my website. Any credit would be like putting a dollar in my tip jar.



My hope is that you enjoy visiting this site, find the analysis educational, the information presented useful and are able to profit from it all.

Sincerely,
Dok

ARD v GOOG
Earnings are King & Why ARD is Undervalued to GOOG.

Yesterday ARD was listed as #1 on one of those top 10 lists that are often seen online at Yahoo Finance. I don't pay much attention to those lists put out by IBD and Yahoo. Sometimes terrible companies can make a list and slip through the cracks of a stock screener. However the list yesterday was right on Target to crown ARD as #1 out of 10 stocks. Some other notable stocks on that list include Google at #3 and Ultra Petroleum at #8.

The list is measuring the fastest growing companies in terms of earnings and sales growth. The opening sentence of the article stated, "One of the main drivers of a stock's price is growth more specifically, earnings..."

To get a better understanding of earnings between the two companies I decided to take a look at both the trailing 12 months earnings as well as the 2006 earnings estimates. The comparisons will give me not only an idea of where these companies have been and where they're going but also a trend relative to each other in terms of earning potential.

One more statement before we actually begin the comparisons between ARD and GOOG. I realize there will be some people who think the comparisons are without merit because one company is an oil and gas producer and the other is an internet company. While it is true that both companies are in completely different sectors they both have something that can be compared: EARNINGS.

The first step in comparing the two companies is to get a share price quote for both companies. I chose to use the opening share price for both companies on January 17, 2005. ARD opened at $32.87. For ease of math I rounded this figure to $33. GOOG opened at $463.06. To keep things simple I'll round that figure down to $463. The chart below depicts the opening share price for both ARD and GOOG.




Lets assume that one has $463 to invest. The investor is considering either an ARD purchase or a GOOG share purchase. The number of shares that could be purchased is depicted in the chart below.





The chart below displays the earnings per share (EPS) for both ARD and GOOG. An initial observationon is that GOOG earns over 7 times more on a per share basis that ARD.




However, one needs to keep in mind that with our $463 that is to be invested the choice is either 1 share of GOOG or 14 shares of ARD. It would be appropriate to determine the earnings power of that $463 invested no matter if the investment is made in ARD shares or GOOG shares. The chart below shows the total earnings power of the $463 investment.




The math for the chart above is like this:

ARD:
14 shares X $0.64 = $8.96

GOOG:
1 share X $4.51 = $4.51

To summarize the ARD shares purchased present the investor with $8.96 in earnings power. The GOOG purchase will provide the investor only $4.51 in earnings power. The chart below shows that the $463 investment in ARD shares presents the investor with nearly 2X the earnings of the $463 invested in GOOG.



The Chart above shows that the $463 invested in ARD provides the investor with an earnings advantage of 98% when compared to the similar GOOG purchase. Keep in mind that these results are based on the trailing 12 months.

Now let's take a look at the same share purchase decision except this time we will use forward earnings instead of trailing earnings. To be exact we will now compare 2006 projected earnings between ARD and GOOG. The chart below shows the amount of earnings for one ARD share and one GOOG share.




Again considering the investment decision of investing $463 the choice is buying 14 shares of ARD or 1 share of GOOG. The chart below shows the total earnings power of the $463 investment based on 2006 projected earnings.



The math for the above chart is as follows:

ARD share purchase (Remember $463 buys 14 shares):
14 shares X $1.74 = $24.36

GOOG share purchase (Remember $463 buys 1 share):
1 share X $10 = $10

By taking the above amount of $24.36 and dividing by $10 we find that the ARD earnings power is 2.43X that of GOOG. This ratio of 2.43 to 1 is depicted in the chart below.





In summary, the ARD investment using trailing earnings results in $1.98 for every $1 of GOOG earnings. When using forward projected earnings for 2006 the ARD investment will result in $2.43 for every $1 of GOOG earnings. The ARD advantage expands by $0.45 between the two periods being measured. This is a 22% increase in ARD earnings above and beyond that of GOOG when comparing the trailing 12 months period to the 2006 period going forward. Keep in mind that the GOOG high estimate for 2006 of $9.40 was increased to $10. Also keep in mind that the ARD low estimate for 2006 of $1.74 was utilized for the 2006 calculations. The $1.74 estimate is from DE Investment Research. Please read my analysis of that report that was blogged on January 13, 2005. The intentions of rounding the GOOG high estimate higher and using the ARD low estimate for 2006 was to avoid any accusations that I was in someway favoring ARD in the comparison.

The bottom line is that a $463 investment in ARD presents the investor with a clear advantage in terms of earnings power. This is true not only in absolute terms for both periods measured but also in terms of the trends going forward. As earnings is one of the most important drivers in share price appreciation potential an investor would be wise to consider the ARD purchase over the GOOG purchase. Some will claim that any comparison between the two companies is without merit. While it is true that both companies are in completely different sectors they both have something that can be compared: EARNINGS. Certainly ARD trumps GOOG in terms of earnings power. The IBD top 10 list of fastest growing companies agrees with me.

Final thoughts on ARD v GOOG

Some will say that GOOG deserves a higher earnings multiple because it is a growth stock with disruptive technology. The fact is that GOOG is a growth stock and is expected to grow earnings 30% each year for the next 5 years. Even though ARD is in the energy sector it is also a growth stock. In fact ARD has the higher earning growth prospects due not only to the growth in oil and gas production but also the expected rise in commodity prices in the next 5 years.

A company like GOOG will experience challenges with it's profit margins going forward as consumers and businesses alike must evaluate and reduce budgets for advertising and the like due to challenges with rising energy costs and the negative impact on the U.S. economy. ARD on the other hand will be experiencing a rising profit margin and improving fundamentals as geopolitical events, natural disasters, and peak oil drive oil prices higher. The energy sector going forward will provide the investor the investment opportunity of a lifetime. Peak oil will be much bigger than even the internet. Consequently the bullrun in energy stocks will make the technology bullrun of the late 1990's look small in comparison.

Here are some interesting comparisons:

Profit Margin (ttm):
ARD.......38%
GOOG...24%

Operating Margin (ttm):
ARD.......61%
GOOG...33%

Return on Equity (ttm):
ARD.......22%
GOOG...21%

Price to Sales:
ARD.......23
GOOG...26

Forward PE:
ARD.......19
GOOG...53

The purchase of GOOG shares in lieu of ARD shares would cause diworsificationon in any portfolio. I"ll stick with ARD. You would be wise to do the same.

Tip of the Iceberg
Why Iran and Nigeria will push oil prices to record highs.

We currently have very little excess capacity in oil production. There is very little margin of error between supply and demand and any disruptions would no doubt cause a dramatic rise in oil prices. We all woke up to news headlines surrounding Iran and Nigeria. At this point it may be worthwhile to also review the U.S. government Oil Shockwave Simulation findings. This simulation determined that, " a roughly 4 percent global shortfall in daily supply results in a 177 percent increase in the price of oil (from $58 to $161 per barrel.)"

Current estimates are that Iran alone pumps nearly 3.9 million barrels per day or 5% of the worlds daily production.

The transportation sector within the U.S. would suffer the most as a result of any kind of oil disruptions. The airline industry would be among the hardest hit especially since it has had very little pricing power due to excess capacity. I predict that current events surrounding Iran and Nigeria will push some legacy aircarriers into liquidation over the next 2 years. United and U.S Airways would be the first to be liquidated. Delta, Northwest, American and Continental would not be far behind. Eventually such an oil crisis would require the federal government to reregulate the airline industry. In other words, the government would have to subsidize the remaining airlines for purposes of national security and the economic requirements of air travel. The issues in transportation would only be one of countless problems for the United States.

The geopolitical problems would be the tip of the iceberg. Below the waterline would be the inescapable hidden supply and demand issues that virtually all politicians and people fail to recognize. Most people today feel strongly that today's high oil prices are a result of Wallstreet, Washington, the big oil companies, or any combination thereof.

Peak Oil Roundtable
Guests include 'Twilight in the Desert' Author


An excellent video roundtable discussion regarding peak oil can be accessed here. Parts I & II are available online for your viewing pleasure. Simply scroll down the page below the heading '2006 Season' to find peak oil part I & II. Each segment is about 27 minutes.

DE Initiates Coverage on ARD
Initiated with Strong Buy and $37 Price Target

DE Research analyst Barry Borak seems to like ARD. He likes it so much that he initiated coverage with a Strong Buy. However Mr. Borak isn't exactly putting his reputation on the line with the $37 price target. In other words the 12 month target price is extremely conservative.

Consider the following: Mr Borak also initiated coverage on GMXR on December 6, 2005 with a Buy rating and a 12 month target price of $36. On December 5, 2005 GMXR shares closed at $30.11. The difference between the December 5th price and the target price of $36 represents a 19.5% gain in the next 12 months.

Now consider the same type of thinking with ARD. Yesterday ARD closed at $30.72. The difference between yesterdays close on January 12, 2006 and the target price of $37 represents a 20.4% gain in the next 12 months.

Both stocks were initiated with coverage along with an initial price target that represents nearly an identical percentage gain in the next 12 months. The percentage gain appreciation potential between the two stocks is separated by less than one percent. You would think that both stocks would have the same rating as both are scheduled to appreciate nearly identical amounts or roughly 20%. Why not give both stocks the same rating upon coverage initiation if both were projected to gain about 20% in the next 12 months?

On page 7 of the report DE Investment Research discloses that a strong buy is defined as a stock with total returns exceeding 20% in the next 12 months. The definition of a buy rating is a stock with expected total returns of 10% to 20% during the same time frame. The collective difference between expected total return of ARD and GMXR is less than 1% (0.9% to be exact.)

The beauty of ARD coverage initiation is that it received a Strong Buy instead of the vanilla Buy rating that GMXR received. Mr Borak also gave ARD the ceremonial $1 advantage over GMXR in terms of 12 month target price $37 to $36.

Development Well Drilling in 2006

In a press release dated December 8, 2005, it was announced that ARD had purchased a second drilling rig. The release stated that prior to the purchase of the second rig, "...Management had announced an estimated 2006 capital expenditure budget of $35 million, which included the anticipated drilling of 90 development wells..."

The press release went on to state that since the purchase of the second rig, "the company estimates it will drill approximately 130 development wells out of its inventory of more than 540 drilling locations" in 2006. The number of development wells to be drilled in 2006 will increase from 90 to 130 due to the second rig purchase. This is a 44% increase in drilling activity for 2006.

In Mr. Boraks research and projections for 2006 he estimates that ARD will drill only 85 development wells in 2006. Mr. Borak is basing his projection for 2006 by understating the official company drilling activity projections by 52%.

I strongly feel that Mr. Borak's conservative stance in the research is not only reflected in his estimates for 2006 but also for his estimates for Q4.

As for Q4 2005 Mr. Borak is calling for total oil and gas production of 158,000 BOE. It should not come as a surprise when ARD announces production that is closer to my estimate of 214,000 BOE than his estimate of 158,000 BOE. Mr. Borak's Q4 estimate of 158,000 BOE is only a 12% sequential increase above the Q3 final production results of 141,204 BOE. The fact that Mr. Borak fails to recognize is that the number of Well-Weeks has surged from 169 in Q3 to 359 in Q4. A Well-Week is a well producing oil for one week. The quarterly sequential increase in well-weeks during this period is over 112%.



Today's initiation of coverage by DE Investment Research by Mr. Borak is definitely a positive for ARD shareholders and further underscores the interest that ARD is garnering from institutional investors. Clearly Mr. Borak has initiated coverage on ARD with a very conservative stance. This is true not only for 2006 and the 12 month price target of $37 but also for Q4 2005. I don't fault the conservative nature of the coverage. However, those interested in ARD shares need to understand the conservative nature of this report. Based on the conservative nature of the report I expect Mr. Borak to raise his price target and revise his estimates upward within the next 4 months. While Mr. Borak put out a report with conservative estimates he was absolutely right on target with his Strong Buy rating on ARD shares.

Future ARD Oil Production
Why this Company is Worth it's Weight in Gold

Arena Resources oil production will simply be amazing in 2006. There really is no other way to describe it. ARD has already amazed us with its impossibly low cost structure and the corresponding unbelievably high EBIT per BOE produced. When we closely examine the production estimates for not only Q4 2005 but also FY2006 we should get a clear picture of why this stock is poised to march much higher from the current levels of $29 per share.

Q4 Production

The production models that I came up with involve first determining the number of oil wells that have been drilled in each quarter beginning with the 2005 drilling program. The number of oil wells that have been completed and producing in each quarter are indicated in the respective quarterly operational update. How do I know how many wells will be drilled in Q4? In a December 8, 2005 press release it was stated, "Management initiated development work on the Fuhrman-Mascho in mid April, 2005 with one contract drilling rig and projects it will drill and complete 35 development wells and re-frac 20 existing wells by year end 2005."

I simply subtract the number of wells that have been completed to date from the total number of wells to be drilled and completed in 2005.

The chart below will illustrate the number of wells that have been completed and producing in each successive quarter.


(Click on image to enlarge)

The number of wells to be drilled in Q4 is an estimate based on the stated objectives in the above press release.

Understanding Well-Weeks

The next step is to determine how much production potential has been created in Q4 as a result of having drilled 16 wells. Each well that has been completed and producing for 1 week generates one well-week (W.W. for short.) For example if one well has been producing oil for five weeks it has produced five W.W. One more example would be if three wells have been producing for 10 weeks the resultant number of W.W. would be 30.

How many W.W. were created in Q4 2005? Since there were 16 wells estimated to have been drilled simply divide 16 by 13 (the number of weeks in Q4.)

16/13 = 1.23 wells drilled each week.

How many well weeks total?

________Wells Drilled____Weekly Total____Quarterly Total

Week 1........1.23.............1.23...............1.23

Week 2........1.23.............2.46.............3.69

Week 3.........1.23.............3.69..............7.38

Week 4.........1.23.............4.92............12.3

Week 5.........1.23............6.15.............18.45

Week 6..........1.23...........7.38............25.83

Week 7..........1.23............8.61............34.44

Week 8..........1.23............9.84............44.28

Week 9..........1.23...........11.07...........55.35

Week10.........1.23...........12.30............67.65

Week11........1.23.............13.53............81.18

Week12.........1.23.............14.76.........95.94

Week13.........1.23.............15.99........111.93

The weekly total is the number of well-weeks generated each week. The quarterly total is the cumulative number of well weeks generated. At the end of the quarter you will notice that 111.93 well-weeks will have been created.

Now the next step is to put a value on each well-week.

In 2005 Q3 production increased 31,367 Bbl (from Q2 oil production total of 92,233 to Q3 total of 123,600.) It should also be noted that Q3 had 169 well-weeks.

If we divide the increase of 31,367 Bbl Oil in Q3 by the number of well-weeks we get:

31,367 / 169 = 185.6

Lets round that quotient down to 185 for simplicity. This number simply means that each well produced 185 Bbl per week. (Keep in mind that this is an estimate and assumes that gains from refracs are added in as well as natural declines in production.)

We have determined that Q4 will alone create 112 (rounded from 111.93) well weeks as determined from above. However we must also add in the number of well-weeks from Q2 and also from Q3. Please note that although the number of well-weeks created in Q4 2005 was 112 when we add in Q4 well-weeks for figuring Q1 2006 the 112 w.w. effectively increases to 208.

How does the number of well-weeks corresponding with Q4'05 magically increase from being 112 in Q4'05 to 208 well-weeks in Q1'06?

The total number of wells in Q4'05 (16) are all pumping oil for every week in Q1'06. Since there are 13 weeks in each quarter the math is as follows:

16 x 13 = 208.

Please keep in mind that this is part of the process in determining the total number of well-weeks for each quarter in the chart below.



(Click on image to enlarge)

Now that we have determined the number of well-weeks in each quarter and have determined from above that each well-week is initially valued at 185 Bbl we can figure out the quarterly production.

Natural Production Declines

As it is natural for oil production to decline over time we must also add in the natural production declines to get the most reliable oil production totals. There was only a 2% annual decline rate for Q4'05 as I feel refracs would compensate for any additional declines. However beginning with Q1 2006 I have included natural decline rates as follows:

Annual Decline Rates*

Q1 2006____(-6.4 %)

Q2 2006____(-6.6 %)

Q3 2006____(-8.9 %)

Q4 2006____(-9.1 %)

*Quarterly rate x 4 = annual decline rate.

In order to factor in the above projected natural decline rates the estimated amount of production per Well-Week is reduced. The Production per Well-Week figures are as follows:

Q3 2005_____185 (Base quarter.)

Q4 2005_____184 (-2 %)

Q1 2006_____181 (-6.5 %)

Q2 2006_____178 (-6.6 %)

Q3 2006_____174 (-8.9 %)

Q4 2006_____170 (-9.1 %)

The above decline rates are conservative as I feel the above decline rates overstate the actual declines. I would rather have my quarterly oil production figures error on being too conservative (small) than too aggressive (large.)

Please also note that the oil production figures below do not yet include any natural gas production.



(Click on image to enlarge)

The above chart indicates total oil production for each quarter only. We must still add in the gas production totals.

Gas Production

Based on my analysis of gas production by state and the associated trends I am calling for Q4 2005 gas production in terms of Mcf as follows:

TX: 62,000

NM: 42,000

OK: 10,000

KS: 35,000

Total: 149,000 Mcf or 24,833 BOE

With Q4 2005 oil production of 189,656 BOE and gas production of 24,833 BOE we should achieve a total Q4 2005 figure of 214,489 BOE.

189,656 + 24,833 = 214,489

Based on $54 realized price per BOE we will achieve a total revenue figure of $11,582,406 in Q4 2005

214,489 x $54 = $11,582,406

Based on a Net Profit Margin of 49% I forecast Net Income of $5,675,378

$11,582,406 x 0.49 = $5,675,378

Based on a share count of 13.4 million shares the fully diluted EPS (Earnings per Share) should be $0.42 for Q4 2005.

$5,675,378 / 13,400,000 shares = $0.42

Q4 2005 Forecast Summary:

Total Oil and Gas Production: 214,489 BOE

Revenue: $11,582,406

Net Profit Margin: 49%

Net Income: $5,675,378

Shares Outstanding: 13.4 Million

Q4 2005 EPS: $0.42

In conclusion, it is easy to see that Arena Resources is not only an oil and gas company but also a goldmine.

Required Reading: Twilight in the Desert

Understand the Longterm Value of Owning ARD Shares.

The book Twilight in the desert is a must read for those who own shares of ARD. It provides the necessary insight into understanding what is really happening inside Saudi Arabia's petroleum industry and more specifically Saudi ARAMCO. I read the book and found it a very good read. It definitely gives you a deeper understanding of not only the history of where the world's largest oil producer has been but a good idea of what the future holds and why. The world's largest oil field is located within Saudi Arabia. It is amazing that this field has been in production for over 50 years! All is not well though as this book will explain. You won't be sorry for investing the time to read the book.

I know ARD is one of the "biggest little oil and gas producers" on the planet. However reading "Twilight in the Desert" gives me the desire to continue to add to my ARD position. I know longterm it will be the investment of a lifetime. Peak Oil will provide a bullmarket for oil and gas stocks that will be like no other. The bull run in oil and gas stocks will make the tech bull market of the late 1990's pale in comparison. Peak oil will provide an investment opportunity that will be far greater than even the internet.

To have the best returns you will want to own the best of the best. ARD certainly is without a doubt a company that I would consider the 'best of the best.'

Here is a link to a recent interview of Matthew Simmons that you may also find interesting.

ARD v GMXR Part III
Cost Structure and Production are Key

The purpose of today's post is to make sure everyone has a good understanding of why GMXR will have limited upside potential from the current share price of $36. This information is provided to give you the edge over those retail and institutional investors who may be looking to take advantage of the current valuation imbalance between ARD and GMXR. I want everyone to know that my intentions are to bring out analysis and commentary that has until now not been present. I think most of you would agree that the research provided by firms such as Hibernia don't present the in depth comparisons between ARD and GMXR and they don't address the problems associated with GMXR.

GMXR High Cost Structure

The main problem with owning GMXR at this time is the cost structure. When measuring total cost per BOE produced it is prohibitively high. This is especially true given the fact that GMXR is a gas company. Gas companies are supposed to have cost structures lower than their oil producing counterparts.

The counterpart I am specifically referring to is Arena Resources (ARD.) ARD has lifting costs that are slightly higher than GMXR. This is to be expected as ARD produces about 93% oil and 7% gas.


(Click on image to enlarge)

However, on a total cost per BOE produced basis ARD has a cost structure that has always been lower than that of GMXR. In fact, in the latest period measured ARD has total costs per BOE that are 66% below that of GMXR as noted in chart below.


(Click on image to enlarge)

ARD total cost structure is impossibly low. One should also examine the gap between GMXR total cost per BOE produced and that of ARD. Here is the total cost per BOE produced advantage that ARD has over GMXR:
FY2002.......$3.15 or 19%
FY2003.......$7.01 or 37%
FY2004.......$10.97 or 54%
Q3'05...........$11.60 or 66%

The gap has been widening in favor of ARD. I have every reason to believe that the ARD low cost advantage will continue to widen the gap and the trends that have been in place since 2002 will continue into 2006.

Unfortunately, the high cost structure at GMXR will keep a lid on not only earnings but also share price Share price appreciation potential will also be limited due to the current valuation imbalance with ARD. In other words the GMXR shares are overpriced.

Cost Structure Impacts Earnings

Due to the high GMXR cost structure it should be evident that GMXR will have the lower Earnings Before Income Tax (EBIT) per BOE produced and ARD will have the higher EBIT per BOE produced (and ultimately the higher profit margin.) The chart below shows this comparison.


(click on image to enlarge)

Production in 2006

If you examine the Hibernia research report for ARD dated 9-26-05 you will note that ARD is scheduled to produce over 1.1 million BOE for FY2006. (See Production Summary on Page 12.)

One day after GMXR announced the acquisition of another drilling rig Hibernia came out with a updated research report on GMXR. In that report it was estimated that GMXR would produce just under 1.1 million BOE as a result of the additional rig.

People need to realize that since Hibernia made the call for ARD to produce over 1.1 million BOE for FY2006 ARD has since acquired a drilling rig. This event occurred on December 8, 2005. The drilling rig that was acquired by ARD in December will when up and running effectively DOUBLE their drilling capability.

This rig is scheduled to be up and drilling by the start of Q2. Therefore, it should be easy for ARD to INCREASE PREVIOUSLY ESTIMATED 2006 production of 1.1 million BOE by MORE than 50% based on this fact. However lets be conservative and assume 0% (ZERO) growth.

In any case ARD is scheduled to produce more BOE in FY2006 than GMXR even without the ARD acquisition of a second drilling rig.

Cost Structure and Production

There are two very big reasons why ARD will not only earn more per share in 2006 and consequently have the higher share price. The reasons are as follows:

1. ARD has the SIGNIFICANTLY LOWER cost structure (66% lower.) As a consequence, ARD will continue to earn more for every BOE produced than GMXR in 2006.

2. ARD has more production capability and will outproduce GMXR in 2006. ARD will also continue to exceed GMXR in terms of production per share as noted in my shares per BOE produced analysis.


(click on image to enlarge)

Shares per BOE indicates the number of shares required in order to "own" one BOE of production. Note how ARD shares per BOE produced has been dropping for each and every quarter while GMXR shares per BOE produced has been rising for each and every quarter. Put another way, production per share is increasing at ARD and decreasing at GMXR.

In conclusion, with the combination of ARD being able to earn more for every BOE produced AND and the ability to produce more BOE both in absolute terms and on a per share basis it should be elementary that ARD EPS will exceed that of GMXR in 2006. On this basis alone ARD shares would offer the more compelling investment. However, in previous posts it has been determined that ARD is the superior franchise to GMXR in virtually every statistic. ARD valuation is poised to surpass that of GMXR not only in terms of the various ratios that include Price to Earnings and Price to Sales but also in terms of share price.