Demand destruction

Junk Nomad
ARD Blog Chinese Bureau Chief
Updated: 04/29/06 09:22 am

Shanghai, China - I am in Shanghai right now. My hotel room looks down on Yanan Rd, a major road into the city, and it has been jammed for hours. My wife just spoke to her aunt who sat for 2 hours in stop and go traffic to cover about 60 mi between Shanghai and Suzhou. There is no hint at all that high gas prices are having an impact on demand here. Anywhere in the world, if you are rich enough to buy and maintain a new car, you can afford gas at $3 or $4.

Arena Resources to Triple Drilling Rigs
Company Expands from 1 to 3 Rigs

Tim Rochford, president & CEO, stated, "With the delivery of the rig we acquired in December 2005, and a second contract rig, we will for the first time have three rigs drilling at the same time in the Permian Basin."


Do not underestimate the significance of ARD acquiring a third drilling rig. This is especially true given the fact that drilling rig availability is extremely tight. In the last 52 weeks ARD drilled 52 wells according to their latest operational update. This is on a pace of 1 well a week. Now ARD has the capacity not only to double its drilling efforts from 52 to 104 with the acquisition of a rig in December of 2005 but to triple the drilling capacity from 52 to 156 wells a year as a result of the latest announcement. This is a wonderful strategic move by management to position the company to take advantage of the rising price of crude oil. The third drilling rig is also an indicator that another acquisition is on the horizon. Currently ARD has an inventory of about 300 drilling locations in the Fuhrman-Mascho property. While this is effectively a two year inventory with three rigs, the company also is taking into consideration that it needs to increase the inventory by acquiring another property at current rates rather than in the future when rates for crude will be higher. The fact that the company has a two year inventory of drilling locations provides bargaining leverage in any acquisition. Waiting until the drilling inventory is depleted will give the property holder the leverage knowing that ARD is desperate to acquire.

The acquisition of the third drilling rig effectively reduces the drilling inventory from about 3 years to approximately 2 years. The rig acquisition certainly is further evidence that another acquisition will soon be forthcoming.

Arena Resources Scheduled to Present at Informed Investors Forum Next Week
Presentation to Begin May 11, 2006 - 10:00 am ET

Click here for a link to the conference .

Weekly Petroleum Status Report
For the Week ended April 21st







Crude Oil Stocks down 200,000 Barrels from last week. Inventories now at 345.0 million Barrels.











Crude Oil Production was 5.127 million barrels per day. This is an increase of 20,000 barrels a day from last week.










Crude oil imports were at 9.864 million barrels per day. Imports this week were 19,900 barrels per higher than last week.










Crude Oil refinery inputs were 15.064 million barrels per day. This is 34,300 barrels per day higher than last week.











Gasoline stocks were 200.6 million barrels. This is 1.9 million barrels lower than last week.












Gasoline demand was 9.012 million barrels per day. This is a decrease of 88,000 barrels per day from the previous week. This is 288,000 barrels per day below last year's demand.









U.S. finished gasoline production was 8.47 million barrels per day. This was 38,000 barrels per day higher than last week but 40,000 lower than year ago levels.









U.S. total gasoline imports was 1.338 million barrels per day. This was 43,000 barrels per day higher than last week but only 26,000 barrels per day higher than last year.

The President's Idea on Increasing Oil Supply is Humorous


Yesterday President Bush gave a speech detailing plans on what can be done to lower oil prices and ultimately gasoline prices at the pump. His main solution was to increase supply by deferring Strategic Petroleum Reserve (SPR) inputs until fall. Why is this strategy flawed?

First of all, deferring inputs into the SPR does not address increasing real oil supply coming out of the ground.

Secondly, the president should be filling the SPR at today's lower prices. In the fall prices will be higher. This decision will end up costing tax payers more money in the long run. Also, an attempt to lower prices artificially today will only have the undesired effect of increasing demand. This will not help an oil market where supplies are already tight. The president's strategy did have the effect of reducing oil prices temporarily as witnessed yesterday when the price of crude declined for the June and July contracts.

Thirdly,deferring SPR inputs until fall will only make oil supplies tighter than normal in the fall. This will have the affect of causing oil prices to rise at a time when people are expecting them to recede.

In conclusion, the President's plan to "increasing supplies" by deferring inputs until the fall is flawed. No real supply increase is created. The costs associated with deferring SPR inputs until fall will only be an added burden to tax payers as the cost to do so will be at increased prices. The oil companies are smart. They have built up crude inventories that are well above historical norms. They realize prices will be higher in the future than current prices. The government is too short sighted to realize this fact. One should note that with the exception of the June and July crude oil contracts declining in price the contracts beyond July were actually higher across the board. The traders realize that crude oil demands will only be higher and supplies tighter when the government finally begins to contribute to the SPR.

Third Drilling Rig Added; Arena Resources First Quarter 2006 Operations Update is Excellent
The Company Produces 192,000 BOE and Projects Revenue of $10.4 Million


The first quarter 2006 operational update was fantastic. The highlight is the addition of a third drilling rig. In a press release Tim Rochford, president & CEO, stated, "With the delivery of the rig we acquired in December 2005, and a second contract rig, we will for the first time have three rigs drilling at the same time in the Permian Basin." In Q1 2005 Arena drilled 16 wells and performed 13 refracs. Currently Q2 2005 is scheduled for 31 development wells and 6 refracs. This will no doubt increase sequential quarterly production growth over the previous period. This could easily increase Q2 production by 30,000 BOE over Q1 production levels. This would equate to 222,000 BOE. Expect the majority of production growth in the second half of 2006 as all three rigs are put in play.

The first mention of a third drilling rig being acquired in 2006 was first published here on February 1, 2006 when it was stated, "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. "

Production for the quarter was approximately 192,000 BOE as compared to production of only 91,000 BOE in the year ago period. The April 20th edition of this blog had a headline calling for production of over 190,000 BOE.

Projected Revenues for the quarter are $10.4 million. While production is up 12% from the previous quarter revenues are up 11%. This seems to indicate that natural gas has increased slightly as a percentage of total production over the previous quarter. Historical natural gas production as a percentage of total production is as follows:

FY 2002: 11.7%
FY 2003: 8.7%
FY 2004: 12.6%
FY 2005: 13.0%
Q4 2005: 12.2%

In today's blogpost entitled, "Hibernia Research Report Discloses Relationship with Arena Resources" a timeline and chronology of events is presented as clear evidence that a major acquisition is going to occur or has already occurred. While today's operational update did indicate that the company has acquired approximately 9,000 additional acres effectively expanding the Auntie Em property to more than 13,000 acres, I don't believe this is the big acquisition to be expected. The acquisition I am expecting will dwarf the Fuhrman-Macho acquisition as explained in today's earlier post. With a third drilling rig put into action the evidence is beyond a reasonable doubt that a major property purchase has occured or will occur.

In summary, ARD investors should be very pleased with today's operational update. Tim and Stan are making all the right moves to build Arena Resources into a midcap powerhouse. Share price will continue to appreciate over time as oil prices rise and production increases. The "story" of Arena Resources is just beginning to be told. The best part is yet to come.

Opinion/Editorial
Views with Interesting Perspectives from Others


The New World Economy
by: seethefuture2002
04/24/06 02:55 pm

The folks like Bill O'Reilly, Governor Rendell, Fritz Schumer and most Americans have not been able to grasp that the US has NO option it can exercise that will reduce the price of oil in any significant manner.

There are only two fundamental ways to do so:
1. Reduce demand
2. Increase supply.

Now O'Reilly believes that we can reduce our consumption by 3% and influence the world demand. That is increasingly not true as the Chinas and Indias of the world ramp up their consumption. Reducing our consumption, by tax, by boycott, or by hounding will NOT LOWER THE PRICE OF OIL ANYMORE. The US used to be such a huge consumer that changes in our consumption habits could influence the world oil prices. Now, it just means that the producer sells to someone else. The US has no control over prices on the demand side of oil! (Just like OPEC no longer has control over prices on the supply side of oil.)

Now we have known that the US has no control over the supply side. That went to OPEC years ago. The US's role is to maintain stability in order to keep the price of oil from going ballistic.

So let the talking heads bang the drum. We can't do anything about it. It's out of our control.

Isn't the first step to addiction recovery admitting that you are powerless?

Hibernia Research Report Discloses Relationship with Arena Resources

The Hibernia research report that was released this past Friday leads one to believe that a transaction involving a property acquisition may have occurred or will occur in the near future.

Consider the following timeline:

1. February 6, 2006.
Arena CEO Tim Rochford in an audio interview states his desire to, ""Look to see this company continue to grow production and cashflow but I think most importantly net asset value per share."

2. March 31, 2006.
Arena Resources Announces increase and extension of credit facility from $50 million to $150 million. Click here to see historical significance.

3. April 5, 2006.
ARD Blog Headline reads, "ARD Acquisition Announcement Imminent."

4. April 21, 2006.
Hibernia research report issued stating, "We expect further acquisitions to occur in 2006." (Page 6.) Hibernia also discloses in the same research report they expect, "...to receive, or intends to seek, compensation for investment banking services from Arena Resources, Inc. within the next three months." (Page 7.)

My question is this: What kind of investment banking services will ARD receive in the next three months? Could it be services required to make an acquisition? Absolutely! Expect an acquisition announcement in the next three months that will dwarf the Furhman-Mascho acquisition announcment of 2005. (I have no inside information. I'm just "connecting all the dots.")

ARD Shares Advance 5.81% to $36.43
Shares Rally on Rise in Crude Oil and Research Report Issued by Hibernia

Shares of Arena Resources Advanced $2.00 to close the week at $36.43. The company is profiting from the rise in crude as well as the coverage announced today by Hibernia Southcoast. Hibernia initiated coverage on ARD today with a BUY rating and a $42 target. To see this report please contact Investor Relations at Arena Resources.

June Crude Oil Closes at $75.17; July at $76.07
West Texas Intermediate at Record High of $71.25 to $71.75

The Affects of NYMEX Crude Oil at $75 on ARD Valuation

In the March 10th post ARD valuation was discussed. At that time crude oil was much lower than today. In fact in that post we modeled ARD valuation based on an average realized price of $58. However with NYMEX crude oil now trading at over $75 a barrel we need to go back and take another look at valuation.

With NYMEX above $75 a barrel on crude oil that means the West Texas Intermediate prices will be about $71 or discounted about $4. Since we are not even in the summer driving and hurricane season we can expect oil prices to be much higher than they are today. To keep things simple lets assume that $71 will be our average realized price for FY2006 (This is being extremely conservative.) Lets also factor in NG sales that comprise about 17% of total production. Lets assume NG sells for $7 per Mcf. This means that each BOE of NG will sell for $42. (Keep in mind that the SEC states that there are 6 Mcfe per BOE of Natural Gas.)
The math is as follows:
$7 X 6 = $42.

ARD should produce about 1,000,000 BOE in 2006. Based on historical trends of 83% crude oil and 17% natural gas FY 2006 production would be as follows:

*830,000 BOE Crude Oil.......(83%)
*170,000 BOE Natural Gas...(17%)

Crude Revenues will be as follows:
830,000 X $71 =$58.93 million

Natural Gas Revenues will be as follows:
170,000 X $42*= $7.14 million
*(Remember 6 Mcfe at $7 per Mcf = $42 per BOE of NG)

Total Oil and Gas Revenues will be $66.07 million.
The equates to $66.07 per BOE produced.


(Click on image to enlarge)


Our Costs per BOE should be less than $20 per BOE produced. Therefore ARD should have EBIT* per BOE produced of about $46 in FY2006 ($66 - $20 = $46)

*(EBIT = Earnings Before Income Tax)

Assuming 1,000,000 BOE produced this generates EBIT of $46 million.

Lets assume a tax rate of 25%.
$46 million X .25 = $11.5 million.

Lets subtract out the taxes to arrive at our final net profit:
$46 million (EBIT)- $11.5 million (Taxes) = $34.5 million Net Profits

Lets assume 14.8 million shares outstanding.

$34.5 million (Net Profits) / 14.8 million (Shares) = $2.33 EPS.

Put a conservative PE of 25 on the EPS to arrive at a target price of:
$2.33 (EPS) X 25 (PE) = $58.25 Share Price

While this is no big jump above our March 10th estimate it does take into account the increased natural gas production as a percentage of total production as well as factoring in a larger share count to be ultra conservative.

Keep in mind that ARD has a better chance of having a higher PE than 25.

The affects of the following PE multiples:

PE = 30
30X $2.33 = $69.90
At $69.90 we are trading at 51% of our target price with 93% price appreciation potential.


PE = 35
35X $2.33 = $81.55
At $81.55 we are trading at 44% of our target price with 125% price appreciation potential.

If investors invest in oil like the internet of the late 1990's we could get a PE on ARD that blows past 35X. Considering that an inferior company like GMXR carries a PE north of 50X earnings, it isn't out of the question for ARD to have a rising PE multiple as oil prices rise into the $80s and $90s this summer.

ARD Market Order Filled at $34.95
Prices this Low Won't Last Long

ARD Limit Order Filled at $34.56
June Crude Oil at $73.69 as May Contract Expires Today; West Texas Intermediate Closes at $68.00 to $68.50

I could not resist adding more shares at today's prices. The May contract is history. June is now the current month beginning tomorrow. Arena Resources is no doubt poised to capitalize on oil above $73 on the NYMEX.

First Quarter 2006 Operational Update Release Imminent
Expect production of over 190,000 BOE in Q1

Report is due out this month with only six trading days remaining.

Arena Resources Shares Hammered; $34.60 at 11:45 a.m. eastern
Shares are down $2.25 or 6.11%

As crude is off over a dollar to $71 a barrel, traders on Wallstreet and Mainstreet look for an excuse to take some profits on the recent rise in oil prices to record highs. Fundamentally demand is still strong for crude oil and supplies are as tight as ever. The May contract for NYMEX crude oil expires today. Tomorrow the June contract will become the front month. Even with a drop in crude oil prices today, look for prices to be higher tomorrow. The current price on the June contract is $72.85 at 11:21 a.m. This is $0.80 higher than yesterday's record close on the May Crude Oil contract of $72.05. The summer driving season is not yet upon us. Neither is the hurricane season. Stay tuned. Care to buy the dip? Enterprising investors may want to consider this as an excellent entry point off the record highs to initiate or increase a position in ARD. Don't wait too long though. At prices this low supplies won't last long.

May Crude Oil Closes at $72.05; June at $74.12
West Texas Intermediate at Record High of $68.25 to $68.75

Weekly Petroleum Status Report
April 19, 2006

It is said that pictures are worth a thousand words. Below are 8 pictures that allow you to understand the "BIG PICTURE."















Crude oil supplies dropped 800,000 Barrels from last week. Inventories are 26.3 million barrels higher than a year ago. (The oil industry is prepared for higher prices.)
















Domestic crude oil production is down over 400,000 barrels from last year.
















Crude imports are down nearly 200,000 barrles from 2005.
















Crude oil refinery inputs are down over 670,000 barrels from last year.
















U.S. gasoline supplies are down 9.1 million barrels from 2005.
















Demand for gasoline is 70,000 barrels higher this year than in 2005.















Finished gasoline production in the U.S. is down 57,000 barrels from year ago levels.















U.S. gasoline imports are down 190,000 barrels from 2005. The chart indicates no change over last year. However the text in the report states that total gasoline imports for the week ended April 14th was 907,000 barrels. This isn't charted properly. You must extend the red line close to the "0.9" mark.

In conclusion, it is easy to see that this weeks petroleum status report is very bullish for rising oil prices. We are seeing increased demand and decreasing supplies. The oil industry has oil inventories built up to take advantage of the future price increases. Right now the oil industry is in a "sweet spot."

Weekly Petroleum Status Report due Today at 10:30 a.m. Eastern time
Expect a Bullish Report for Rising Oil Prices: Increasing Crude Inventories and Declining Gasoline Supplies

Expect crude inventories to build again this week as the oil industry fortifies their crude oil position in anticipation of higher prices in the future. Also look for gasoline supplies to decline again as consumption outstrips production. The blog posts on April 13th and April 14th explained the paradox of why increasing crude inventories is actually bullish supporting the case for higher future oil prices, not lower prices. It should be reiterated that keeping crude oil inventories is expensive. However, the costs to keep crude oil in inventory will be cheaper than buying it in the future.

May Crude Oil Closes at $71.35; June at $73.09
West Texas Intermediate at Record High of $67.50 to $68.00

Arena Resources Completes Well
Potentialed Production 1,462 Mcf Natural Gas per Day

Arena Resources has completed the Pearl Barron Well No. 3 in the Minden Field with a depth of 10,844 feet. The well is located one mile southeast of Henderson. When gauged on a 16/64-inch choke, the well potentialed 1,462 mcf of natural gas per day. Production is in the Cotton Valley Consolidated formation. In terms of BOE the inital production is over 240 BOEPD.

May Crude Oil Closes at $70.40; June at $71.98
West Texas Intermediate at Record High of $66.50 to $67.00


(Oil Traders at NYMEX)

GDP Growth in China for First Quarter 2006 at 10.2%
Growth Wil Drive Demand for Oil

Keep your focus on China. With first quarter GDP growth at 10.2% in China look for major growth in oil consumption. This consumption is coming at a time where excess supplies are not available. India is the other country to watch. China will be a contributing factor that drives Oil over $75 a barrel in the short term.

Happy Easter!
Today We Celebrate Jesus Rising from the Grave and Ascending into Heaven

Jesus Christ is our Lord and Savior. On Christmas we celebrate His birth. On Good Friday we observe his crucifixion on the cross. On the third day, Easter Sunday, he rose from the dead, conquered death and ascended into heaven. Jesus lived the perfect life free of sin. He suffered and died on the cross having carried the burden of all the sin from all the sinners past present and future. Even though we are sinners, when our judgment Day comes we will have a "clean slate." You will be perfect in the eyes of God and will be able to call Heaven your eternal home.

Had it not been for Jesus our judgment Day would be one in which we would have a long list of sins and we would not be worthy to enter Heaven. Jesus loves us more than we will ever know or comprehend. Please take a moment and thank your Creator and Savior Jesus Christ. If you are not a Christian don't be afraid to learn about your Lord and Savior.

I know for a fact there is life after death. I can't prove it. I have faith. Please allow me to use a radio to illustrate. I can't see the radio waves going through the air that our radios pick up. I know they are there because when I turn the radio on I hear the news or good music. Some people say seeing is believing. I say seeing is NOT believing. Our eyes only pick up visible light. There is so much out there that is INVISIBLE. Just as we can't SEE Heaven or SEE Jesus I have faith that there is Heaven and that Jesus is with me.

Here is a question for you. Can a person experience life without first being born? Of course not! First you have to be conceived and spend about 9 months in your mother's womb. Then you can experience life.

The same is true with eternal life. First you have to live life on Earth. This is kind of like being in your mother's womb. Then when you die you are able to enter the realm of eternal life in heaven. This is kind of like a baby coming out of the womb and being born. So just as you can not live life on earth without first being born, so is it also true that you can not experience eternal life with your creator in heaven without first living your life on earth. Having to die in order to live is a paradox, just as increased crude oil inventories announced this past week is really a sign that oil prices will rise rather than fall.

One nice thing about having Jesus Christ as your Savior is you don't fear death. I had an experience 3 years ago where I had to have an emergency surgery. In fact it was so serious that I was given priority for the operating room immediately after the room becomes available. Basically I was moved up the list from like number 7 in line for the operating room up to number 2. I told my parents, my wife and family around me that Jesus Christ is my Lord and Savior and that nobody should worry if the surgery is not a success. The doctor told my family that my chances of survival following the surgery were 50-50. I can honestly say that I was never afraid of dying. While I did feel like everything was out of my control and I was just 'going along for the ride' I was thankful to be able to pray and put all the worries and concern on Jesus' shoulders. If you click on one of my side links you'll see that I have my favorite Bible passage present. It is this Bible passage that I relied upon almost exclusively with the days leading up to my hospitalize and eventual surgery. If you click here you can even listen to the audio of this passage.

Bloomberg Survey Indicates Most Analysts Wrong about Interpretation of Crude Inventory Increase
Disruption of Iranian Oil Production Would be Catastrophic; Crude Inventories would be Irrelevant as Prices Surge to over $100 a Barrel

According to the Bloomberg News survey, "Crude oil may fall on speculation that surging inventories will reduce the impact of a possible disruption to Iranian exports..." The analysts surveyed who truly believe this are wrong. First of all, if there is a disruption to Iranian oil exports then crude oil will no doubt climb to over $80 a barrel within a week of the event. The status of oil inventories being either at normal levels or above normal levels will have no bearing on the panic that will send the price of crude oil higher.

It truly is amazing how college "educated" analysts fail to understand and interpret the true significance of rising crude oil inventories. Probably most of these professional investment "wizards" were too young to remember the oil shocks of 1973-74 and 1979-80. During these times the oil industry did in fact keep extra crude oil inventories as insurance against not only possible disruptions of future crude oil shipments but also as a way to lock in the current price of oil and hedge against future price increases.

A look back at the oil shock of 1979-80 is in order. During this time the crisis in Iran precipitated a 4% decrease in worldwide oil production. The price of oil more than doubled in a matter of weeks. Fast forward to 2006. Iran still controls over 4% of worldwide oil production. What would happen if 4% of worldwide oil production is taken off the market? The U.S. government conducted a computer simulation appropriately called, "Oil Shockwave."

*In Oil Shockwave, a roughly 4% global shortfall in daily supply, results in a 177% increase in the price of oil (from $58 to $161 per barrel.)

The added crude inventories maintained by the oil industry will only act as insurance against potential supply disruptions and as a hedge against increasing crude oil prices by allowing continuous production and increased margins in the short term. The increased inventories should be a signal to the world that the oil industry expects crude oil prices in the future to be higher than current prices. The oil industry maintained higher oil inventories in the 1970's because they expected higher future oil prices. They were correct then. They will be correct again in 2006. The actual increased inventories, however, will have no impact on reducing the panic that will grip the market when Iran takes their 4% of worldwide production off the market.

ARD Closes at Record High of $37.95
Crude and Gasoline Inventories along with Events in Iran, Venezuela and Nigeria Indicate Prices Going much Higher in 2006


The drivers today were continued defiance by Iran and the increase of $0.70 in oil to $69.32. Today's intraday high in the oil markets was $69.50. Look for continued rise in the price of oil as we approach the summer driving season. Last year we didn't get the rise of crude oil in anticipation of the summer driving season until mid May of 2005. Last year at this time we didn't have the political problems in Iran, Venezuela and Nigeria.

Examination of U.S. Crude Oil Inventories
It is very evident to me that yesterday's rise in crude inventories is in part due to the desire of the oil industry to continue to buy oil for their refineries now while prices are relatively low than to buy them in the future when they will be higher. While the facts are that holding oil in inventory is expensive, it will certainly cost the oil companies even more to buy the crude a month from now. Certainly the oil industry would refrain from taking on added crude inventories above and beyond the normal range if they thought the price of oil was going lower. Also, it is no coincidence that U.S. Crude oil stocks are significantly higher than their average range. One need only go back in time to the oil panic of 1979 and 1980. The same phenomenon also occurred in the oil shock of 1973-74. Back then oil companies were increasing oil stocks well in excess of their current needs. This was done simply as insurance in case there were problems later on in acquiring oil supplies. Take another look at the U.S. Crude Oil Stocks chart. Do you notice how the monthly inventories have been above the normal range for the last 12 months? Do you notice how the weekly stocks are getting further and further from the normal range?

Examination of Gasoline Inventories


While crude inventories are building upstream due in large part to expectations of higher prices in the future so is true with the expectations of higher prices by the consumer. The news media hits the average U.S. citizen with a barrage of information that we should expect higher gas prices at the pump. Consumers are also worried about higher prices and are also building their inventories by keeping more gas in their tanks. It would make sense for consumers to fill the tank up today while the prices are lower instead of tomorrow or next week when they are higher. This phenomenon also occurred during the oil shocks of 1973-74 and 1979-80. While today's motorist are by no means in a panic they are certainly thinking about keeping the tank as full as possible for the least amount of money. It is amazing that as gas prices have risen since February the gasoline inventories have actually declined. There certainly is no demand destruction at current prices. Certainly the phase out of the additive MTBE is a factor in declining gasoline stocks. I think to a larger degree we are seeing prices rise due a combination of consumer expectations of rising gas prices and increased consumption. The chart "Regular Gasoline Prices" depicts the prices in 2005-06 as indicated by the red line as being consistently higher than the prices of 2004-05. If you extend the line for the current year out to the beginning of May it seems we will have to endure gas prices over $3.00 a gallon.

You Ain't Seen Nothing Yet!

With realistic expectations of $3.00 a gallon by May I think the summer driving season will surely push the average price of a gallon over $4.00 nationwide. Back in February I called for an average realized price of $70 for crude oil. Oil at that price could end up being a bargain. Consider that a nuclear Iran is a problem infinitely larger than the 50 Americans taken hostage on November 4, 1979 and held for exactly 444 days. Also consider that as a result of the siege of the U.S. Embassy in Tehran and the taking of hostages a panic in oil prices pushed oil from about $14 a barrel to over $36 a barrel in a period of weeks. Therefore, $100 a barrel is a real possibility before yearend considering all the problems of a nuclear Iran, that consumption (demand) is higher today than it was in 1979 yet the worlds largest producer of crude oil, Saudi Arabia, is producing less oil today than back in 1980. In 1980 Saudi Arabia average daily output was 9.9 million barrels per day. Compare that to 2005 production of 9.55 million barrels per day and factor in that there are more problems with the Saudi oil fields today than there were 26 years ago. It should be quite evident that oil and gas prices are going higher, much higher. Keep in mind that back in 1980 there was no wave of demand for petroleum coming from China and India like there is today.

You ain't seen nothing yet!

The purchase of ARD shares today is the best way to take advantage of the rising oil prices. As oil and gas will surely be more expensive in the coming weeks and months so too will shares of ARD. Many investors, including wallstreet will be looking at shares of oil and gas companies the same way they think about keeping their gas tanks full in their automobile. The herd will be coming to oil and gas stocks most certainly. Humans invest based on fear and greed. Investors will be buying shares of oil companies based on fear of being left behind and also based on greed and wanting to take advantage of the upward momentum that will most certainly ensue. Investment in quality oil and gas companies such as ARD will yield returns and profits that will dwarf that of even the most successful internet companies at their peak.

You ain't seen nothing yet!

ARD Closes at Record High of $37.02
Record Intraday High was $37.30

News of the day: Iran announces that it has enriched uranium.

The Department of Energy's Energy Information Administration stated that crude oil inventories climbed by 3.2 million barrels for the week ended April 7. However, Gasoline inventories declined week-over-week by 3.9 million barrels. Both the crude inventories rising and the gasoline inventories declining are strong indications that the future price of oil will be much higher than it is today. I'll explain the rational in an upcoming post. Stay tuned.

Expect First Quarter 2006 Operations Update this Week

A look at the release dates of various press releases in 2006 in all cases have come earlier than their equivalents in 2005. Specifically, last years Q1 2005 operational update was released on April 13, 2005. Therefore, odds are that this year's release will be issued either on Tuesday, April 11th or Wednesday, April 12th. I believe this management team is very detail oriented and feels it is important to continually improve all facets of this company from cost structure, production performance, NAV, EPS, and shareholder value right down to improving the timeliness of financial and production data to shareholders.

GMXR CEO Fails to Certify 2005 10K as Required by SEC
Company Forced to Amend 10K.

The CEO of GMXR failed to sign section 1350 on the 2005 10K as required by the SEC. It is rather ironic that GMXR CEO Ken Kenworthy Jr. failed to sign the most important part of the 10K filing that certifies that the Company's Annual Report on Form 10-KSB for the year ended December 31, 2005 fully complies with the requirements of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents the financial condition and results of operations of the Company.

Notice below in Exhibit 32.1 "Certification of the Chief Executive Officer" that it is in fact the Chief Financial Officer that signs the document.


CFO signs for CEO. (click on image to enlarge.)

Paying attention to detail is one of the most important job requirements of a CEO and CFO. Obviously both GMXR's CEO and CFO failed to pay attention to detail. This reflects poorly on these two individuals and this company. This is yet another strike against this management team. Not only are they tardy in submitting SEC filings they also fail to properly certify that they are accurate.

Here is the amendment.

Peak Oil: The Crisis at Hand
The Problems Begin Long Before the Last Drop is Pumped

Do you remember when you were in grade school or highschool and instead of a the normal routine the teacher brought in the movie projector and a film reel? The movies were often times very interesting and the chance of a homework assignment was slim to none. Movies were always a time to socialize and visit with friends while the teacher set up the projector and students moved desks.

The reason I mention the fond memories of watching movies in school is because the movie I am presenting to our "class" today is one of those classic interesting presentations that take us back to yesteryear. The topic is Peak Oil. The title is, "Real Oil Crisis." There is no homework assignment today. Just enjoy the movie and feel free to visit with friends while I "set up the movie projector."

Click here to begin the movie.

Below is an excerpt from this excellent movie, "Real Oil Crisis."

Narration: "All oil fields follow the same pattern of rise, peak, then fall – even if they encompass an entire nation.The US hit peak oil in 1971. The UK with its North Sea oil peaked in 1999. Australia peaked in 2000. So when will planet earth reach peak oil?That depends on what’s really happening here. The place that provides a quarter of the world's oil - the Middle East."

With the above excerpt one could even focus in on one country in particular and the world's largest oil producer: Saudi Arabia. It would be prudent for you to gain a better understanding of the Saudi oil industry. Afterall, if you are going to be an informed investor and purchase shares of ARD you owe it to yourself to have a macro view of oil from the perspective of the world's largest producer. There is no better way to take a peak inside the Saudi oil industry than to read Matthew Simmon's, "Twilight in the desert." Please purchase a copy for your library by clicking on one of the links on this website. Your business is very much appreciated.

ARD Acquisition Announcement Imminent

In my April 3rd blog post I discussed the historical significance of the credit facility being increased as it relates to acquisitions. The trend was very clear: increasing the credit facility invariably led to an acquisition within a very short period of time.

While going through some previous posts I found an audio interview that I blogged about on March 7th. Pay close attention to the part where CEO Tim Rochford stated his intentions going forward of growing production and cashflow but, "...most importantly net asset value per share." While the drill bit will no doubt increase NAV I feel that the easiest way to grow NAV is by making an acquisition. Notice how Tim EMPHASIZED Net Asset Value!!! These facts lead me to believe that an acquisition will occur. I wouldn't be surprised if the upcoming acquisition dwarfs the Fuhrman-Mascho acquisition based on the fact that the increase in the credit facility was so dramatic.

ARD Executives Sell 200,000 Shares in March
CEO Rochford and Chairman McCabe each Sold 100,000 Shares


Are the share sales by CEO Rochford and Chairman McCabe cause for alarm? Is this a sign that the wheels are coming off the cart at Arena Resources? Should you avoid ARD share purchases currently? To all three questions I say, "Absolutely not!"

If we go back to 2003 an equity incentive plan was approved by shareholders allowing the issuance of 1 million stock options to be vested at 20% a year for 5 years at which time 100% of the shares will be exercisable. What this means is that in 2005 and in 2006 both Messrs. Rochford and McCabe each received 100,000 stock options in each of those years.

Keep in mind that Messrs. Rochford and McCabe each collect a salary of only $36,000 annually. Their compensation is really from the sale of shares of stock. Therefore it should be no surprise to see that these two executives sell a portion of their shares each year. Back in 2005 we see that both Rochford and McCabe sold 100,000 shares between the dates of March 31st and April 8th.

Fast-forward to 2006 and we see that the big "R" and the big "M" each sell another 100,000 shares of common stock on March 22, 2006. Again, this is just a repeat of the pattern in 2005. The number of shares sold is no coincidence- both executives received 100,000 stock options in 2005 and again in 2006.

Currently CEO Rochford and Chairman McCabe each control about 1,112,600 shares or about 8.25% of the shares outstanding. There is no need for alarm. The wheels are not coming off the cart. You should continue to buy ARD shares at current prices based on the significant margin of safety and discount to the intrinsic value of the shares.

ARD Limit Order Filled @ $34.80
I'm Putting my Money Where my Mouth is.

ARD Shares Poised to Rally
History Indicates Acquisition Announcement Imminent; First Quarter Operational Update to be Released Soon.

The ARD announcement of the increase and extension of credit facility historically indicates that there is a strong probability of an acquisition announcement on the near horizon. One need only look at history.

Here are the dates of the last credit facility increases, the dollar amounts and properties acquired:

Date____Credit Facility/Base__Date of Acquisition/Property
Apr 14 04....$15 mm/$8.5 mm......Apr 23 04-East Hobbs SA
Nov 04........$25 mm/$15 mm........Dec 04-Fuhrman-Mascho
May 05........$50 mm/$35 mm.......May 05-Parrish Lease
Mar 06........$150mm/$50mm...... ???

Based on history I"m expecting another acquisition in the next 3 months. Also, look for the operational update to be issued in the next 2 weeks. Both of these facts should be drivers of share price in the short term.