Arena Resources Announces Issuance of 1.15 Million Shares in Private Placement
Placement to Raise $30.2 million to Keep 100% of Credit Facility Available

The Announcement is bullish. Historically ARD has used issuance of new shares to grow NAV 100% of the time. In other words, Oil Assets per Share have always increased even after the issuance of new shares. This has happened 100% of the time whenever ARD has issued new shares to raise cash.

Even if we account for the warrants being exercised in 2005 and 2006 that were connected with offerings in 2003 and 2004 the net result is the offerings still resulted in ARD being able to increase the oil assets per share.

Today's press release indicates ARD using the funds to, "...bridge the deficit between estimated 2006 cash flow and the company's current 2006 CAPEX budget of $65 million, and will allow the company to keep 100% of its credit facility available."

Keep in mind that just because ARD raised $30.2 million does not mean that they were expecting to have only $35 million in cash flow from operations. To the contrary, ARD will have cashflow from operations of about $65 million in 2006. The added $30.2 million will provide ARD with flexibility. Either they can boost their CapEx program in 2006 to $95.2 million or they can go out and purchase a property valued at $30.2 million or a combination of both while still allowing the company to, " keep 100% of its credit facility available." That is the key phrase.

I still believe there will be a major acquisition in 2006. Historically, whenever the credit facility and borrowing base are increased an acquisition has been soon to follow. Consider a portion of the transcript below taken from the May 11, 2006 first quarter conference call (scroll to 17:00 for the audio) :

John Lane (Lane Capital Markets): Hi Tim how are you?

Tim Rochford (ARD CEO): Good morning John how are you?

John Lane: Very Good.

Tim Rochford: Fine thankyou.

John Lane: Ahhh again, we all know of your ahh, Arena's desire to ahh acquire additional acreage but ahh I"d just like to congratulate you on your patience and in depth due diligence on you know on that acquisition front. Are there any prospects still coming to you that are worth considering or pretty much everything is priced you know in areas you're not willing to consider and are you probably content for the time being to still try to grow through expanding your current drilling on your existing properties?

Tim Rochford: Well that's a great question And one we are definitely on an aggressive mode in terms of looking and seeking out opportunities ahh but we're very cautious and and I can tell that Stan and I we just returned from the Permian Basin where we went out late last week and returned just a couple of days ago. We were there primarily to just look and evaluate projects. You know look kind of hands on and there's a number of deals that we are looking at but we have to be very cautious in this pricing environment right now. If you can't show, if we for our guidelines, if we can't show a component of of low risk probability ahh and potential that can evolve into the into the proved category we're not going to pay up for these properties. On the other hand, if we see that opportunity we're certainly postured and positioned financially to pull that trigger.

In conclusion, one should expect an acquisition to be announced in the near future. Considering that
1. Tim and Stan are,"definitely on an aggressive mode in terms of looking and seeking out opportunities" and that
2. there are a "number of deals" that they are "looking at" and
3. given the fact that they recently spent a few days in the Permian Basin to "look and evaluate projects" it is becoming very clear why the process of raising $30.2 million dollars has been accomplished: to "pull that trigger."

Everyone is led to believe by the press release that ARD is going to have cashflow from operations of $35 million and that the $30.2 million will close the gap to the $65 million CapEx budget for 2006. One should not assume that the gap between projected cashflow and the actual CapEx budget is $30.2 million. With 5 drilling rigs cashflow will easily be in excess of $65 million in 2006. (There is no gap.) The key is to focus on the second half of the sentence describing the purpose of this transaction: "allow the company to keep 100% of its credit facility available (after the purchase of a property.)" On the May 11th conference call Tim stated that, "...we're certainly postured and positioned financially..." On May 30th Shareholders witnessed Arena Resources CEO Tim Rochford, "...pull that trigger."

Support only those Republicans Who Vow to Sign and Honor the 8 Point, "Contract to Protect America."

Doktor Stocks to Enter 2008 Presidential Race
Candidate Pledges, "Contract to Protect America."

Tonight someone announced their candidacy for president of the USA. After much thought, careful consideration and soul searching I too made the decision to enter the presidential race in 2008. As I want to take back my party I will run as a republican. Let those who claim to be republicans but show very few republican values run as third party candidates. John McCain and Bill Frist are perfect examples of counterfeit republicans. I have 8 platforms as part of my Contract to Protect America. They are as follows:

1. National Security/ Illegals. I'm also for securing the border. However I plan on vetoing any bill that comes before me that does not include a 2000 mile double wall complete with a 100 feet of "no-mans-land" sandwiched between each wall. There will be no provision for illegals already in the country other than to enforce the current law: If you are here illegally you will be deported. No hospital care or emergency room care allowed unless you are here legally. No public education for kids unless you are here legally. No government perks like social security benefits, welfare, etc. Additionally I would push both houses of congress to adopt a law making all illegals felons. Businesses would be penalized for hiring illegals. The hiring process would involve checking application against government database. Those names that don't match identification numbers and that are clearly fraudulent would be taken into custody, questioned, fingerprinted, implanted with a tracking device the size of a grain of rice then deported.

2. Welfare reform. If you receive welfare you must actually do something to earn it. For example you must show up and put in 8 hours a day 5 days a week. Then and only then would you get your welfare check. Those that are handicapped would also be required to do SOMETHING. Remember the postage stamp from the early 1980s: "Disabled doesn't mean Unable." Also, those on welfare would be denied right to vote based on condition of accepting the welfare payment. Welfare would no longer be a political issue. Also, no increase in welfare payment if additional child hatched. Instead condition of continued welfare would require sterilization to prevent further children to those who obviously can not afford them.


3. Prison Reform. If the U.S. labor market can be outsourced to foreign markets then so should the bulk of our prison system. I've heard figures that it takes upwards of $30,000 a year to house one prisoner one year at a MINIMUM security prison. With the exception of those who have life without parole sentences all others would be sent to those countries willing to incarcerate our vast prison population. Countries and private firms would be allowed to bid on taking care of prisoners. Lowest bidder wins. If a prisoner escapes firm would be penalized significantly to ensure the highest security measures.

4. Balanced Budget. Period. Funding of war would come at expense of other sectors within government. I see way too much pork today. I"m sure you have too. Also Effective immediately, all government employees past and present will no longer be getting a fat pension. Social security and savings is it. Move towards self funded 401K. Put pay freezes in on all government employees for next 6 years.

5. Iraq and Afghanistan. Maybe a better approach would be to carpet bomb the Sunni triangle like we did Nazi Germany. Also, putting our soldiers under a microscope for accidental killing of civilian/terrorist is uncalled for. How about letting our soldiers fight without the ACLU getting involved. I don't believe our soldiers in WWII were under such a microscope as they are today.

6. Political Reform: Term limits: 2. If it is good enough for the executive branch of government it is good enough for the legislative branch of government. All forms of lobbying will become illegal. If you are getting paid to sway vote of politician or if you are offering perks to politician to sway vote either directly or indirectly you will be prosecuted.

7. The Enemy Within. ACLU and all other communist/anti-American groups will investigated by justice department. We will emphasize putting these communist/anti-American groups out of business just like we put the mafia out of business in Chicago.

8. Legal Immigrants: No more islamic immigrants allowed until war on terror is over. Only 10,000 Mexican immigrants a year for the next 20 years allowed. Extended family members not allowed to join in on citizenship.

I would not even debate any other issues such as environment, healthcare, Medicare, social security, abortion, etc. as they are all a moot point if we can not first nail down our borders and secure our citizens from those that want to harm us with a nuke. Also no border means no nation. Therefore, securing border would be most important on agenda.

Additionally, I would tighten the screws on the Mexican government to pay all costs of illegals dating back to 1986 to present time PLUS INTEREST. With price of oil surpassing $150 a barrel I would give the Mexican government 30 days to make payment in full or make a payment plan that is reasonable. Without cooperation from Mexico all major oil fields would be taken over by U.S. commando units and U.S. petroleum workers would ensure smooth transition from mexican to U.S. operation/control of oilfields. All oil will be diverted to USA. Massive deportations of illegals back to mexico. (Its easy: if you are hispanic, don't speak english, AND don't have documents proving you are here LEGALLY then you are deported. Entire process of determining to deport or not takes less than 5 minutes. Over 500 deportation camps would be set up across the country.)

Energy Observations this Memorial Day
There is Much to Learn from Action at a Gas Station, Restaurant Dining Room and a Trip to the Airport

Today on the drive home from the airport the interstate was at about 75% capacity with occasional bottlenecks with traffic moving at about 20mph. These bottlenecks were each on average about 3 miles long. The gas pumps were all being used at a local station when I left for the airport. They were all full again on the way back from the airport.
I don't see any drop in the number of people traveling this year over last from my very unscientific point of view. However, I did take note that the restaurant dining rooms have been unusually quiet the entire weekend.

Americans are a society of automobiles. We have been ever since the over 41,000 miles of interstate highway system was put in place with major construction taking place in the 1950s and 1960s.

As much as we are as a nation addicted to foreign oil, Americans are addicted to their autos: most notable the gas guzzling SUVs and light trucks. One observation today: about 75% of all autos on the road today were SUVs or light trucks. Not only do we like our autos large, we also like to drive fast as we are a restless society with the attention span of a child. Everyone seems to be more concerned about the conversation on their cellphone while driving than their gas mileage or cost to fill up the tank. Whatever pain there is at the pump, it only lasts for a second or two. Just charge it on the credit card and forget about it. Also, there seem to be many people on budgets who are determined to travel no matter what. They just avoid eating out at restaurants and instead take a cooler of food from home or buy groceries from a local supermarket. As previously noted, the restaurant dining rooms were eeriely quiet but certainly not the highways and biways.

Even with gas prices being higher this year over last, demand for gasoline has surely not declined; at least as far as I can determine from my observations driving to and from the airport this memorial day. Given the the percentage of autos that are SUVs and light trucks, and given the speed that people drive these SUVs and light trucks I think gas prices can go a lot higher before we see demand destruction. When I say higher I mean a double or triple from current prices. Then and only then will you start to see people driving not only slower but a higher percentage of cars than SUVs and light trucks.

I'm not complaining though. I was happy to see the occasional gas guzzler pass me as I cruised along at 75mph. I did my part today. I burned my token gasoline today. Did you do your civic duty and burn some gasoline this weekend? It's actually kind of fun when you own the shares of a quality oil and gas company (ARD!)

Part II: Analysis of Oil Companies with the Highest Percentage of Oil Proved Reserves
A Look at Operating Margin: The Trends are Fantastic at Arena Resources

This is part two in a series of investigative reports designed to determine which oil company is the strongest fundamentally. In Analysis of Oil Companies: Part I of our investigative report that was posted on May 9 we first determined which oil and gas companies had the highest percentage of proved reserves in crude oil. Those companies that had significant operations outside the USA were not considered. The reason for this is those companies with operations outside the USA carry an inherent risk of being nationalized or taken over by the host government as has been witnessed many times in history. It is even occurring today. Witness the actions in South America. In part one of our study we examined EBIT per BOE produced, Cost per BOE produced as well as determining valuation based on owning proved reserves via share ownership. We also took a look at the implications of capitalized costs per BOE produced as a function of the percent developed proved reserves. This analysis led to the conclusion of one company, Arena Resources (ARD), being not only far superior to the other companies fundamentally but also undervalued in relation to the other companies. These findings were surprising given the fact that the market usually tends to pay a premium for those companies with superior fundamentals and a bright future.

In part two of our analysis of the 10 oil companies we will take a close look at operating margin for the years 2003 thru 2005. We will study not only the actual operating margin for each of these years but also the change in operating margin between each of the years. Finally we will take a look at which company made the biggest improvements in operating margin between 2003 and 2005.

Why is operating margin important? It is an important indicator as to what percentage of revenues are being converted into profits strictly on an operating basis. Operating margin does not factor such nonoperating costs as income taxes or interest expenses on debt to name a few. Operating margin certainly provides the investor with a good initial picture of the company's "money printing press" capability. However there are many factors on a nonoperating basis that can erode operating margin before we get to the final net profit figures (Net Margin.) In light of these nonoperating factors that erode operating margin, it is still important to compare each company on an operating margin basis in order to get a clear picture of company performance.

Without any further delay lets take a look at operating margin beginning with FY2003. Below you will see how each of our companies fared on an operating margin as depicted below in figure one. Note that the average operating margin of the 10 companies is also depicted with the red bar. Arena Resources is the blue bar.





Figure 1. (Click on Image to Enlarge)


The chart below (Figure 2) shows the change in operating margin between years 2003 and 2004.



Figure 2. (Click on Image to Enlarge)


Below (Figure 3) depicts operating margin for 2004.



Figure 3. (Click on Image to Enlarge.)

Below we see operating margin again improving on average between 2004 and 2005.



Figure 4. (click on Image to Enlarge)

Below (Figure 5) we see that ARD is superior in terms of operating margin in 2005.


Figure 5. (Click on Image to Enlarge)

As noted below (Figure 6) we see that ARD has improved on an operating margin basis (31.9%) between 2002 and 2005. This is over twice the rate of the peer group average (14.7%.)


Figure 6. (click on Image to Enlarge)

In terms of absolute operating margin in the most recent year 2005 ARD is superior to any company. Between the years 2003 and 2005 the trends indicate that ARD has improved operating margin more than any company with the exception of GMXR. However, even though GMXR had a larger gain in operating margin between 2002 and 2005 (32.8 to 31.9) ARD clearly has a tremendous advantage over GMXR in the latest FY2005 (61.2 to 43.6.) Clearly ARD is "on top of the world" in terms of operating margin.

Arena Resources #11 on IBD 100 List
Report in May 30 Edition; Coverage Begins on Page 1B

The Ethics of Many U.S. Elected Officials is in Doubt
It Would be Interesting if the FBI Investigated All 535 Members of Congress

Our politicians are influenced a lot like Congressman William Jefferson D-LA. While many votes on issues in congress may not be influenced necessarily by a suitcase with $100,000 I think there are other little material perks that are off the radar screen...like contributions to a campaign, or an offshore bank account, or hiring little Johnny into a well paying position with company XYZ, etc.

Considering how our U.S. Senators voted to give Social Security benefits to ILLEGALS is indicative of their collective integrity. What is the old saying? "~Absolute Power Corrupts Absolutely." How is it that a lobbyist works anyway? How is it that they are able to sway seemingly "intelligent" well informed Senators whose responsibility is to vote based on the will and values of their constituency? IF the FBI investigated all 535 members of congress we would find a lot more than 2 cases of impropriety. I"ll guarantee it.

The Price of Oil is Over $70 Again
Today we Continue the Journey Higher

ARD is making so much money at these prices it puts the best of the best to shame. No reason for the panic selloff to begin with. It was a great buying opportunity. Keyword: WAS. What is amazing is that even a major selloff in oil stocks couldn't keep oil under $70 for very long. This time last year began the long march higher in oil prices. We will probably begin that journey higher as we build on yesterday's gains.

U.S. Senate Votes to Provide Social Security Benifits to Illegals 50-49
Is Your Senator Guilty of Voting in Favor of Such a Proposition?

It is unbelievable that the U.S. Senate voted to give illegals social security benifits. This is a case in point why 50% of the U.S. Senate needs to be voted out of office. We need a major change folks. Business as usual will lead this country down the path of destruction. The vote summary sheds light on who is guilty and needs to be voted out of office. Is your Senator Guilty? Pick up the phone and voice your disgust by calling your senator.

To Contact your Senator Click Here!

Profit from the Oil RollerCoaster
While Others are Panic Selling You Should be Panic Buying

Let's face it, oil is volatile. It will be especially volatile as we transition from the shoulder season into the summer driving season/hurricane season. As much as oil is plunging from the peak of about $75 a couple weeks ago it will spike higher by an equal or greater amount when the traders start to worry about oil supplies being outstripped by demand. Why should investors in fact be "panic buying" instead of "panic selling?"

OPEC Limits Downside Risk at $60 per Barrel

OPEC will no doubt begin to defend the price of oil as it nears $65 a barrel. Recently we have witnessed OPEC making bearish statements regarding oil when it was in the $70s. Certainly they do this because they want to prevent the price of oil from going too high. That would encourage countries to look seriously at an alternative for oil. OPEC would prefer to keep the world hooked on their oil.

On the other hand OPEC does not want oil to fall below the magic $60 per barrel mark as that would not only decrease revenues but also provide incentive for massive increases in demand worldwide. We already know that OPEC has a hard time meeting current worldwide demand. Any sizeable increase in demand would cause shortages and ultimately shortages and spikes in the price of oil. That would put us back to square one again: countries looking for ways to reduce reliance on OPEC oil. Therefore, if oil goes below $65 look for OPEC to make statements that would put a floor on the price at the $60 level.

No Demand Destruction in the United States



We have witnessed that there has been no demand destruction in the U.S. even though prices are higher when compared to the year ago period. In the chart entitled, "U.S. Gasoline Demand" it should be noted that this years demand is the red dotted line. Year ago demand is the dotted blue line. To be precise the demand for the week ending May 13, 2005 demand was 9.269 million barrels per day. In contrast, the current demand for the week ending May 12, 2006 was actually higher: 9.327 million barrels per day. This speaks volumes about not only the U.S. appetite for oil but also the willingness to pay more for gas no matter what. If American's can spend $20,000 to $40,000 for their gas guzzling SUVs and light trucks they can afford the gas, even if it goes up significantly. In 2005 according to Autodata SUV and light truck sales comprised 54.7% of all autos sold in the U.S. This is down less than 1 percent from 2004 even though the average price of gasoline and diesel rose from $1.85 in 2004 to $2.27 in 2005. This represents an average increase of 22.7% at the pump from 2004 to 2005. Is this amazing or what. I am fully expecting consumers to continue their love affair with light trucks and SUVs even as the average gasoline and diesel prices rise again in 2006.

Chindia Demand Underestimated

Combined these two countries will push demand higher than supplies. This may occur even before we reach peak oil if in fact we have not already achieved peak oil. This will in effect cause peak oil like symptoms earlier than most expect. Afterall, a shortage is a shortage is a shortage. Don't confuse the shortages to be caused in 2006 and 2007 to be the same as those of the 1970's. The shortages in the 1970's were caused by geopolitics and shutting off the oil at the wellhead. The shortages today will be the result of real shortfalls in supply even though the oil wellheads worldwide are wide open or nearly so.

Many skeptics will say that the shortages of today are just like the shortages of the 1970's. The oil industry will continue to downplay any shortages and state that peak oil is decades away. Why would the oil industry want to fool the public and governments into thinking that peak oil is far away? Money and investments in the current energy economy are the reason. The next energy economy will require trillions in investments. This is why ExxonMobil feels the way they do about the topic of "Peak Oil."

To conclude, we have not even covered other many important factors that will put a floor on oil in the $60s most notable the nuclear standoff in Iran and other unstable governments like Nigeria and Venezuela that control a large percentage of worldwide oil production. Investors should be panic buying at these prices, not panic selling. Those who panic buy will be rewarded handsomely. Those that panic sell don't see the real picture and will be penalized. No doubt ownership in shares of a superior company like Arena Resources will involve a bumpy ride. However, in the end ownership of the shares will reward those who hold longterm.

Summer Reading...

I'm currently reading, "End of Oil" by Paul Roberts. I"m halfway through it and the author makes some excellent points about various topics ranging from alternative energy, demand, peak oil, geopolitics, global warming, consumer trends, government and energy, etc, etc, etc.

The chapters weave an interesting tale the worlds unwillingness to change patterns of consumption and how current developing nations (namely China and India) idolize lifestyles of USA, Japan, South Korea. These developing countries will ultimately end up increasing consumption per capita to grasp this lifestyle.

***Consider this: China has over 20% of world's population yet less than 2% of world's oil reserves.

***developing countries can NOT afford to pay extra for more efficient and less polluting cars and factories. Fuel efficiency is an afterthought.

***when developing countries DO achieve higher efficiency and consuming less energy, they do not reduce consumption of fossil fuels. Instead they "reinvest" their "efficiency dividend" by increasing production and lowering unit costs and effectively becoming more competitive in the world markets.

The book is very readable and compliments the information in "Twilight in the Desert" and "The Prize."

Summer Driving Season 10 Days Away
ARD on Sale at $31

Some Facts to Consider

Earnings last 4 quarters: $0.89
PE based on $0.89 = 34

Earnings annualized based on Q1 EPS of $0.25:$1.00
PE based on $1 = 31

My estimated EPS for 2006:$2.33
PE based on $2.33 = 13

FYI: Production in 2006 will more than double that of 2005. Expect oil prices in 2006 to be at least 40% higher than those of 2005. (40% is the magic number. Why? Because people are able to adjust to anything less than 40%. In other words, a steady increase is desired outcome. A spike is not. Obviously a spike could happen.) You are looking at MASSIVE EPS and an operating and net margin that will continue to drift higher. People got excited about investing in internet stocks in the late 90s. Those stocks were valued based not on profits but on sales. That same MANIA will hit oil stocks. However, the difference is the oil stocks have earnings and for some companies like ARD they will be massive. Don't be surprised to see valuations bid into the stratosphere.

Considering that foreign governments will continue the trend of nationalization of their oil industries, stay away from those companies with foreign operations. ARD will get a premium in the form of a higher PE multiple based on fact that it has no foreign operations. Also keep in mind that ARD has no offshore operations. The operations are far enough from the Gulf of Mexico that hurricanes will have NO impact on production. ARD earnings have a HIGH SAFETY PROFILE due to both of these facts.

ARD Long story short: ARD on Sale. Excellent value. Future is bright. Peak Oil. Volatility is normal. The longer you hold, the greater your reward. Tim and Stan doing a marvelous job.

Theodore Roosevelt on Immigrants and being an AMERICAN


"In the first place we should insist that if the immigrant who comes here in good faith becomes an American and assimilates himself to us, he shall be treated on an exact equality with everyone else, for it is an outrage to discriminate against any such man because of creed, or birthplace, or origin. But this is predicated upon the man's becoming in very fact an American, and nothing but an American...There can be no divided allegiance here. Any man who says he is an American, but something else also, isn't an American at all. We have room for but one flag, the American flag, and this excludes the red flag, which symbolizes all wars against liberty and civilization, just as much as it excludes any foreign flag of a nation to which we are hostile...We have room for but one language here, and that is the English language...and we have room for but one sole loyalty and that is a loyalty to the American people."

Theodore Roosevelt 1907

ARD 2006 First Quarter Financial & Operating Results Conference Call
May 11, 2006 - 10:00 AM CT

Arena Resources Presentation at Informed Investors
Presented 9:00 am CT, Thursday, May 11, 2006

Protect Our Borders! Volunteer!

For information on securing our borders please click on Uncle Sam. You will be directed to the minuteman website. Volunteers and/or donations are appreciated. God Bless!

Our corrupt two party system of government REFUSES to shutdown the flood of illegal immigrants. It is an issue of NATIONAL SECURITY and our Sovereignty as a nation. No borders means no nation. Get it?!

I'm not against immigration. I'm just against people who feel they can come here without regard to the rule of law. I feel these people need to be deported and a fence constructed. Also there needs to be a law passed that prohibits U.S. citizenship to babies that are born in the USA from ILLEGAL immigrants. What do you think? Send me an email.

Analysis of Oil Companies with the Highest Percentage of Oil Proved Reserves
One Company is Fundamentally Superior with a Valuation Significantly Discounted

How can one profit from Peak Oil? The answer is quite simple. Buy shares of a superior oil company that are significantly undervalued. Since oil is the commodity in strong demand and tight supply and not natural gas it would be prudent to consider those companies with the highest percentage of oil proved reserves. Nine companies were found to have the majority of their proved reserves in oil. The percentage of oil proved reserves of these companies range from 56% to 92%. The market caps of these companies range from $36 million to $3.7 billion. It should be noted that GMXR, a company with only 7% oil proved reserves was also included for comparison purposes. The purpose of sifting through the information on these companies is not only to find the best company fundamentally but to use the other 9 companies as a benchmark to determine if the superior company shares are selling at a discount to their fair value. Analysis of the company fundamentals included such important performance metrics as cost structure, earnings power, EBIT margin per BOE ownership, production growth, hedging, long term debt and exploration and development capex as a function of production. If the company with superior fundamentals is selling at a significant discount to fair value then enterprising investors should consider the shares for purchase after a "full background check." One such company is not only found to be fundamentally superior to the rest but also sells at a significant discount to fair market value. This company is none other than Arena Resources (ARD.)

Searching for Companies Concentrated in Oil

The investigation began by digging through countless SEC filings in order to determine which companies have the highest percentage of oil proved reserves. This was somewhat tedious as only 9 companies were found to have proved reserves of over 50% oil. Keep in mind that GMX Resources was included for comparison purposes even though it only has proved reserves of 7% oil. Companies were only considered if they were traded on NYSE, NASDAQ or the AMEX with market caps between $30 million and $4 billion. Companies with significant foreign operations were not considered.


The 10 companies meeting our criteria with the associated percentage of oil proved reserves are as follows:

1. GeoResources (GEOI) ________________92%
2. Plains Exploration & Production (PXP) ____ 89%
3. Parallel Petroleum (PLLL)_____________ 84%
4. Berry Petroleum (BRY)_______________ 82%
5. Arena Resources (ARD)_______________ 82%
6. Whiting Petroleum (WLL) _____________ 75%
7. Exploration Co. of Delaware (TXCO)_______ 75%
8. Denbury Resources (DNR) _____________ 69%
9. Clayton Williams Energy (CWEI)_________ 56%
10. GMX Resources (GMXR)_______________ 7%



(Click on image to enlarge)


Determining Cost Structure

One of the most important considerations of a company fundamentally is the cost structure. The lower the cost to produce a product the better. It doesn't matter what industry you talk about, the low cost producer always rises to the top and has an advantage over the competitors. Southwest Airlines and Walmart come to mind as two prominent low cost producers. They also happen to be the most successful companies in their industry. Shareholders have certainly been richly rewarded over time. Lower costs mean higher earnings. Higher earnings yields a higher share price.

An effective method of determining cost structure of an oil company is finding the cost per BOE produced. To determine cost per BOE produced simply divided total expenses on the income statement by total production in BOE.

The SEC mandates that oil companies use one of two methods in determining their expenses. The methods are either the full cost method of accounting or the successful efforts method of accounting. Its seems most companies use the full cost method of accounting. One big difference between the two methods is that the "Successful Efforts" method of accounting expense such items as exploration costs and dry holes. Such items as exploration costs and dry holes are not expensed under the full cost method of accounting. They are instead capitalized and are therefore not included as an expense on the income statement.

To keep our cost structure analysis meaningful, those companies utilizing the successful efforts method of accounting had certain items expensed on the income statement removed for our calculations. This effectively reduced expenses and increased EBIT for these companies. If this step was not taken it would be impossible to make meaningful comparisons. This analysis effectively converts those companies using the successful efforts method of accounting to that of the full cost method thereby allowing comparisons using one method of accounting.

We will begin our analysis of the 10 companies by reviewing the cost structure of each company in the FY 2003. You will note that the average of the 10 companies is included in red. The results of our superior company, Arena Resources, is displayed in blue.


Figure 1 (click on image to enlarge)

In the above slide you will note that ARD had a cost structure that was nearly identical to the average cost structure. As we transition from 2003 to 2004 the changes in cost structure for each company are charted below.



Figure 2 (Click on image to enlarge)

In Figure 2 the average rise in cost per BOE produced was $3.21. ARD had the smallest rise in cost per BOE produced. Such a small rise between the years 2003 and 2004 allowed ARD to have a cost structure significantly lower than the average as noted in Figure 3.


Figure 3 (Click on image to enlarge)

Below, in Figure 4 the average rise in cost per BOE produced was $4.04. ARD had a $0.64 decline in cost per BOE produced between 2004 and 2005.

Figure 4 (Click on image to enlarge)

The superior cost controls between 2004 and 2005 allowed ARD to move into first place as the low cost producer in 2005 as noted in figure 5 below. This is significantly lower than the average cost per BOE produced. The ARD cost structure is $7.60 lower than the average cost structure to be exact.

Figure 5 (Click on image to enlarge)

If we look at Figure 6 below it is noted that ARD was the only company to reduce its cost between the years 2003 and 2005. The other nine companies saw a rise in cost per BOE produced between these two years. The average rise in cost per BOE produced was $7.25. ARD certainly exhibited superior cost controls in order to show a decline of $0.38 per BOE produced while the average cost change for everyone else was $7.63 higher than that of ARD. Even the gap in performance between ARD and the company with the second best record is significant. ARD truly is the low cost king of oil production. This is especially true given the fact that the other companies were unable to fend off rising costs per BOE produced. Certainly ARD has a significant advantage over its peers in terms of cost structure.


Figure 6 (Click on image to enlarge)

Determining Earnings Power

Earnings power in this analysis is determined by each oil companies EBIT per BOE produced. To determine this amount simply divide EBIT (earnings before income taxes) by the total BOE produced. Those companies using the successful efforts method of accounting actually had their EBIT amounts increased by these calculations due to expenses being decreased as described earlier. The efficiency of an oil company to produce the highest amount of EBIT for every BOE produced is important. The higher the amount of EBIT per BOE the more efficient is the operation. The company with the superior EBIT per BOE produced not only provides the greatest earnings potential but also increases the effective value of the proved reserves resting underground.

FY2003 EBIT per BOE Produced is displayed in figure 7 below. The average EBIT is $7.01. ARD has an EBIT of $8.41.

Figure 7 (Click on image to enlarge)

In the slide below it should be noted that ARD had the greatest increase in EBIT change per BOE produced between 2003 and 2004 at $8.82. The average increase between these years was only $2.39. See figure 8.


Figure 8 (click on image to enlarge)

In 2004 ARD had the highest EBIT per BOE produced coming in with $17.23 as noted below in figure 9. The average EBIT per BOE produced was only $9.40 in this year. ARD had nearly a $3 advantage over the second best EBIT per BOE produced performer and nearly an $8 advantage over the average.


Figure 9 (Click on image to enlarge)

Between 2004 and 2005 ARD had an above average increase in the EBIT per BOE produced as noted in figure 10 below. ARD increased EBIT per BOE produced by $12.44 between these years while the average only rose by $5.49 during the same time period.


Figure 10 (Click on image to enlarge)

In figure 11 below note how ARD EBIT per BOE produced is now $29.67. This has now grown to nearly $7 higher than the second best EBIT per BOE produced performer and nearly $18 above the average.

Figure 11 (Click on image to enlarge)

Between the years 2003 and 2005 ARD had the greatest increase in EBIT per BOE produced. During this time period ARD increased EBIT per BOE produced by $21.26. This compares to the average increase of $4.95 as noted in figure 12.


Figure 12 (Click on image to enlarge)

Clearly ARD is superior in terms of EBIT per BOE produced. ARD displayed the highest EBIT per BOE produced in 2004 and 2005. ARD also proved that between the years 2003 and 2005 it was able to increase EBIT per BOE produced more so than any of its peers. Without a doubt, ARD has a significant advantage over its peers in terms of converting each BOE produced into the highest amount of EBIT.

Owning Proved Reserves Via Share Ownership

One way to gauge the value of the shares of an oil company is to determine how much money you have to spend in order to "own" one BOE of proved reserves. Certainly the lower the "cost" to own one BOE the better. Determining the cost to own one BOE is easy. Simply divide the current share price by the number of BOE per share.

For example, ARD has 30.19 million BOE of proved reserves. ARD has
13,226,702 shares outstanding according to the cover page on the 2005 10K. The first step is dividing the amount of BOE by the number of shares to arrive at oil per share. The math is as follows:

30.19 million BOE / 13,226,702 shares = 2.28 BOE per Share.

Now simply divide the current share price $35.80 by the amount of oil per share. The math looks like this:

$35.80 / 2.28 BOE = $15.70

This means that you would have to spend $15.70 to "own" one BOE of oil proved reserves. The next step to determine what you would receive if your BOE was sold. The latest year with data available is 2005. In 2005 ARD had EBIT of $29.67 per BOE produced. In other words, your BOE if it was sold would put $29.67 in your pocket. Since you only had to spend $15.70 to buy that BOE you will profit by the amount of $13.97

Math is as follows:

$29.67 (your EBIT per BOE) - $15.70 (your cost per BOE) = $13.97.

What kind of EBIT margin did you achieve on the transaction? To figure this amount simply divide $13.97 (the amount in EBIT you "earned") by $15.70 (the amount you had to pay for "ownership" of the BOE.) The result is 88.9%

What does 88.9% mean to you as an investor? It means that if you purchased the exact amount of shares or fractions thereof in order to own one BOE of proved reserves you could turn around and sell your BOE and have earnings before income tax (EBIT) that is 88.9% higher than what you paid. That is an excellent return on investment. By computing this amount we are taking into account many different factors that include share price, proved BOE per share, EBIT per BOE and shares outstanding. The results are as follows in figure 13 below. Clearly ARD is second best of the 10 companies when measuring value in terms of EBIT margin per proved BOE ownership. Long term debt was not factored in the results below.

Figure 13 (Click on image to enlarge)

Certainly companies can borrow millions from their credit facility in order to purchase oil fields with proved reserves. A company could go into debt in order to make their proved reserves per share look large. Another company might chose to remain debt free and have a smaller proved reserve per share amount. To compensate for this long term debt must be "factored out." In other words we take the amount of debt and divide by the number of shares outstanding. This amount is added to the current share price. The debt has the effect of increasing the cost of share ownership and hence an increase in the cost to own one BOE of proved reserves.

Below in figure 14 it is revealed that if we factor in the debt ARD is actually the leader in EBIT margin per proved BOE ownership. WLL had a significant drop in margin from 175% to 75% as a result of $875 million in longterm debt. ARD is virtually debt free and had a drop in EBIT margin per proved BOE ownership from 88.9% to 88.8%. ARD has only a $400,000 that it owes to Tim and Stan ( CEO and Chairman of ARD.)

Figure 14 (Click on image to enlarge)

Capitalized Exploration and Development Costs per BOE Produced

Does ARD have a weakness? At first glance it may appear that the capitalized costs per BOE produced are excessive. However, after examining the peer group it is evident that those companies with the higher percentage of developed proved reserves also had lower exploration and development capitalized costs per BOE produced. Since ARD has a very high percentage of undeveloped proved reserves it is not alarming to see a higher exploration and development capitalized cost per BOE produced. GMXR and GEOI are perfect examples of why this is true. Since ARD is spending money to ramp up production and is working with a relatively small production base it is not worrisome to see these figures. Over time expect ARD to post a higher percentage of developed proved reserves and a lower exploration and development capitalized cost per BOE produced.


Figure 15 (Click on image to enlarge)

In conclusion, it is easy to see that ARD is the superior franchise. ARD is the low cost producer. ARD also has the highest EBIT per BOE produced. It is ironic that ARD, being the superior franchise, is selling at a discount to every company in the peer group. The very fact that ARD has the highest EBIT margin per BOE ownership indicates that ARD shares offer the most compelling value in terms of share price, BOE per share, EBIT per BOE produced and long term debt. At first glance it seems ARD has an Achilles heal in terms of the exploration and development capitalized costs per BOE produced. However a look at the peer group indicates that this is normal and we should expect these costs to decline over time. ARD does not hedge and has virtually no debt. Most in the peer group have vast amounts of long term debt and many of these companies are forced to hedge and will be limiting their total returns when oil prices spike higher this summer. ARD is increasing production every quarter. ARD will be increasing the rig count from one to three this quarter. Tripling the rig count will no doubt boost production results and ultimately earnings and cashflow. Many companies in the peer group have production that is flat to lower. As more investors learn of the ARD story expect the shares to appreciate significantly as earnings continue to grow and the PE multiple expands.

"ARD is the Biggest Little Oil and Gas Company on the Planet."

Bill O'Reilly Doesn't Understand Ethanol

O'Reilly recently wrote an editorial on the topic of immigration and the use of ethanol. He is convinced that we can become independent of foreign oil by ramping up our ethanol production. One smart reader replied with an email some interesting facts: facts that O'Reilly probably would not want to be confronted with.

The False Sense of Security Discount

Smcp Value
05/03/06 08:12 pm

Location Unknown - I have believed for 2 years that instead of a 10-20 dollar terror premium on oil prices that instead we have a false sense of security regarding supply of oil. This false sense of security, based on historical availability, will eventually be replaced with a new understanding of world wide demand being larger than world wide supply and short term availability is a luxury and not an entitlement.

I have no numerical formula to value this false sense of security discount. I do know that I would be happy to pay twice what I'm currently paying for energy to insure availability. Since the Chinese government has lots more money than I have and growing needs(while mine are constant) I am guessing they would be willing to pay twice what they are currently paying for energy for reliable supply.

Since this false sense of security discount is priced in and may be as much as 72 dollars a barrel (in my subjective opinion) the timing of peak oil becomes all important. As peak oil becomes a reality and more of us realize it is not just a theory but a reality I believe this discount goes away.

This discount will evaporate quickly as the need to secure supply becomes urgent. Some examples would include the politicians not messing with SPR because the military would require a full SPR to help insure our national security. Also you may see commercial supplies build even more as refiners would want to have product to deliver. I think inventories would build all along the demand chain. The Chinese may or may not be filling their SPR now but in the event of peak oil certainty their military would demand a full SPR.

I posted this because I believe we have peaked. I believe the government, the G-8, Iran, China, Venezuela, Bolivia are behaving as if they believe we have peaked.

If we have peaked a world wide recession is the only way to slow demand. I have written here before that to have a world wide recession(including China) may mean depression in the US and Europe. I don't think the policy makers have the stomach for this.

More likely prices will continue to rise, demand will be destroyed at the margins and central banks will continue to inflate.

I'm long oil, gas, uranium, coal, copper, nickel and water. Silver and gold represent about 15% of my assets.

Political stability of the home countries is most important at this time. We need to pay close attention to this as the Bolivian silver miners found out yesterday.

Thanks to so many of you for your insight and effort on our collective behalf.

I read earlier today that Warren Buffet is up about 30 times since the end of 1987. I'm up, even after today's plummeting, about 53 times in the same time frame. No leverage, no options. What a great time to be alive.

Powerful Senator Targets "Big Oil" as Culprit for Rising Gas Prices
Peak Oil is ignored as Government is in Denial

Prominent U.S. Senator Charles Schumer, D-NY., is biased towards penalizing "Big Oil" as he believes they are the reason gas prices are so high. When commenting on the $100 rebate to consumers he stated, "The rebate is nothing but a fig leaf," claiming Republicans "won't do anything to go after Big Oil."

Right now many members of Congress are in denial about the realities of Peak Oil and use "big oil" as the scape goat. However, penalizing the oil industry by passing anti-oil legislation in Washington will only exasperate the problem.

Why the Public is Angry About Rising Oil Prices
U.S. Government Production Outlook Obscures Peak Oil Reality

As noted in yesterdays post about Exxon's view of Peak Oil the point was made that the public is misinformed not only by Exxon but also by the U.S. Government in regards to Peak Oil. The chart to the left is a perfect case in point of the U.S.Energy Department projecting 105.4 million barrels per day of production in the year 2015. This is going to be off by over 20 million barrels per day. The blue line representing Matthew Simmon's projections will be closer to reality in the year 2015.

The U.S. Government no doubt plays a role in giving the public a false sense of security in terms of unfettered oil supplies. Such misinformation as provided by the Energy Department is going to be a major source of public frustration as the public attempts to blame everyone and everything but Peak Oil for the rising prices at the pump. Such misinformation only "clouds" the reality of peak oil as depicted in the cartoon below.

Weekly Petroleum Status Report out Today at 10:30 am ET.
Report Likely to Add Nervousness to Market

Keep your eyes on the Gasoline Stocks. They are currently below the average range of inventories as depicted in last weeks chart. If gasoline inventories drop again by any significant amount look for this data to apply upward pressure on oil prices. This is a time when inventories should be trending higher ahead of the Memorial Day weekend.

NPR discusses Peak Oil with Matthew Simmons and Daniel Yergin


NPR had an interesting article about Peak Oil in their morning business edition dated May 2, 2006. Along with today's article was an intriguing interview on NPR that earlier discussed the topic of Peak Oil. In the interview are two competing view points on the subject. Matthew Simmons, author of, "Twilight in the Desert," believes we are running dangerously close to worldwide peak oil production. Also interviewed was author of, "The Prize: The Epic Quest for Oil, Money and Power," Daniel Yergin, believes there are, "...ample supplies of (oil) beneath the surface of the planet" to last, "...quite a number of years." Yergin does however question,"...what happens above ground," in the production of oil.



In a related article NPR has a Q&A feature regarding high gas prices.

Webcast Alert: Arena Resources to Present at Informed Investors Energy Forum
Webcast on Thursday, May 11, 2006, 10:00 am ET

Today's press release by Arena Resources confirms blog post on Friday, April 28. Just remember: You heard it here first on Friday.

What Does Exxon Say About Peak Oil?

In an Op-Ed piece submitted by Exxon to a major news publication it was stated in the closing paragraph, "With abundant oil resources still available...peak production is nowhere in sight." The picture below was taken from that op-ed submission by Exxon.


(click on image to enlarge)


Below is the truth about Peak Oil.


(Click on image to enlarge)

The truth about Peak Oil is clouded by OPEC stating that they will be able to provide enough oil to meet all the worlds demands for the next 50 years. The truth is obscured by the U.S. Geological Survey stating that Peak Oil is decades away. The truth is shrouded by companies like Exxon who pretend that Peak Oil will not be a problem for years to come. This is why the U.S. public is angry about the rising oil prices and feel that the culprits are Wallstreet, Washington, Haliburton, President Bush or Big Oil. Nobody realizes the truth: The price of oil and gasoline are rising due to demand becoming dangerously close to exceeding that of supply.

The other night I witnessed a debate on CNN between two analysts who were fighting about the cause of rising prices at the pump. One analyst said it was the result of big oil and price gouging. The other analyst said the high prices were the result of the war on terror. The second analyst thought that we had to choose between fighting terror or having low oil and gasoline prices. The sad part is that both analysts were completely wrong in their analysis of why prices are rising and will continue to rise. The fact of the matter is that rising prices at the pump are a direct result of world oil production being at or near peak oil.



(Click on image to enlarge)