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.
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.
posted by -Aztec- at 10:35 PM
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