ARD 2006 Target Price Increased to $60.
Projected 2006 Average Realized Price Increased to $70 per BOE

The estimate for 2006 Production is 1 million BOE. My modeling was adjusted to account for the Q4 2005 production results. My previous estimate was for $60 oil in 2006 and a $50 price target. Due to supply and demand issues I have chosen to up my projected average realized price for 2006 from $60 to $70. I have also upped my price target from $50 to $60 based on this fact.

Below you will see the total quarterly oil and gas production.



The above chart is based on steady increases in average daily production as depicted in the chart below. Some may question the fact that there are not larger increases in average daily production. Due to the Q4 2005 production results I suspect that the water cut and mature nature of the oil fields are limiting the production growth that many had come to expect. The second rig will allow ARD to continue to increase average daily production in each of the next 4 quarters in 2006. (Blue represents actual results. Red indicates my projections.)



(Click on Image to Enlarge)

With 1 million BOE produced and an average realized price of $70 ARD will generate $70 million in revenues.


With a conservative 47.1% net profit margin net income will come out to be about $33 million.

Based on 13.75 million shares fully diluted the EPS will equal $2.40 for 2006.

With a PE multiple of 25 we have a $60 price target.

I'm looking for ARD to make significant acquisitions and add a third rig in 2006 in order to continue production increases going into 2007. Given the fact that ARD is ramping up oil and gas production with increasing oil and gas prices going forward I suspect that investors will warm up to the ARD story. Given the fact that ARD has 100% of proved reserve within the United States I suspect investors will put a premium on ARD shares. A PE multiple of 25 may be too conservative especially given the extreme risk of a super-spike in oil prices to north of $100 per barrel. The volatile situation with Iran would be the primary driver of this super-spike. Secondary drivers would be Venezuela cutting off world oil supplies in sympathy towards Iran. The situation in Nigeria is also very precarious. The clock is ticking. I feel ARD is a fantastic buy at current prices given the potential going forward.

I am not investing in any gold mining companies at this time due to the simple fact that one can't put gold in your car to drive to work. Gold doesn't heat your home. Gold isn't used in the production of the countless number of consumer items that we encounter each day. Gold isn't used in the production of food unlike the petroleum based fertilizers and the fuel to run the tractors. People won't be fighting over the right to buy an ounce of gold. Instead they'll be fighting over the right to buy a gallon of gas for their SUV. While gold may double going forward. The price of oil may rise 3-4X from current prices or even higher. Profit margins with ARD will top any gold company. High profit margins and low cost structure are key no matter what the business. The higher the profit margins and lower the cost structure the better.

ARD even has a higher profit margin than GOOG. The oil companies like ARD will become the new darlings of wallstreet replacing technology as we go forward. The fall of Google is the first sign of weakness in the tech sector. Look for investors to rotate out of tech and into oil as the public becomes more aware of the problems associated with our oil based economy and our dependence on mideast oil. The State of the Union address certainly put the energy problems facing this country in focus.

I'll be buying more shares of ARD on Wednesday. I'm passing on any gold mining stocks for reasons already mentioned. The black stuff that ARD pumps out of the ground will be regarded as gold in the future.

Avoid Airlines, Auto's, and technology (Google is the tipping point: Read my January 18, 2005 analysis of Google.)