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.
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.
posted by -Aztec- at 12:29 PM
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