ARD v WGR: Valuation

Folks,WGR (Western Gas Resources) was one of the two companies with an offer to be bought out by Anadarko.

I had some questions about WGR, the potential transaction and the implications with ARD. Here are some of my questions:
1. What did Anadarko value the proved reserves of WGR at?
2. What are the WGR proved reserves per share?
3. What is the valuation of these proved reserves per share based on Friday's closing price of $6.41 NG and $70.87 CL?
4. What are the historical trends of WGR oil and gas production?
5. How does this production growth compare to ARD?
6. What are the historical trends of WGR oil and gas proved reserves?
7. How does this proved reserves growth compare to ARD?
8. What are the historical trends in proved reserves per share for both WGR and ARD?

These are only a sampling of the questions that I had. I did an initial investigation to determine production, proved reserves, proved reserves per share and valuation of proved reserves per share for 2003, 2004, 2005 for WGR.

My findings will blow ARD shareholders away. It will take me time to do the data mining, construct the charts, compose my thoughts and present my analysis. (Hopefully I can have this Analysis posted on the ARD blog in the coming weeks.)

For starters lets just say this:
Year End 2005 Proved Reserves Value per Share:
WGR.......$81.04
ARD......$148.44

Current Share Price:
WGR.......$59.67
ARD.......$31.70

Certainly these two facts alone don't mean much. When my analysis is posted I hope to build a case with strong supporting evidence that ARD shares are more valuable than WGR shares and that based on current prices ARD shareholders have tremendous upside potential. Please keep in mind my 2006 price target for ARD has been $60 since February 1, 2006.

The case will be made that ARD is the superior company, has the higher intrinsic value per share while at the same time trading at only 53% of the markets valuation of WGR shares. Buckle up folks. ARD shares will be volatile. They are headed higher. Much higher. The fact that a company (Anadarko) wants to buy another company (WGR) that has less value per share than ARD but at an 88% premium to ARD shares speaks volumes of where ARD shares are headed and the magnitude of the move to come.


What makes this comparison so compelling is the fact that it isn't simply an irrational stock market pricing WGR at $59.67. Rather it is an offer from Anadarko to buy out WGR at a price that is even higher than $59.67. Even if Anadarko's offer to buyout WGR is irrational it raises the stakes and ups the ante on valuation of proved reserves per share and ultimately share price. Even if one would assume that Anadarko's offer IS IRRATIONAL it is EVEN MORE IRRATIONAL that ARD shares trade at such a discount to WGR in light of the fact that ARD has higher intrinsic value per share and superior fundamentals to that of WGR.

The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel
This Book Offers Valuable Information to Readers

Author Stephen Leeb, PhD builds the case against our government being able to address the serious problems of the looming energy crisis. Unlike the energy crisis of the 1970s where shortages were a temporary phenomenon caused by geopolitics, this crisis will be much more serious as the shortages will be permanent due to world demand for oil exceeding supply.

Regarding our political leader's paralysis to handle serious problems, Dr. Leeb Stated, "Our political leaders may have learned how to deal with an immediate crisis, at least one that can be solved with fast cash. But they have not learned to take preventive measures well in advance of a crisis." In other words, our government is reactionary.

The Author discusses such topics as groupthink, what can be learned from the tech bubble and the 1970's oil shortages, Chindia, and profiting from the rising price of oil to name a few.

In conclusion, the author's background with a PhD in psychology, an MS in mathematics and a BA in economics make the evidence presented in this book credible, relevant and no doubt worthy of your time to read. While this book doesn't cover the history of oil like, "The Prize" or the problems with the Saudi Oil industry like, "Twilight in the Desert," it does offer insight into the problems our country faces and what investments are most promising. The information is contained in 196 pages. It is very easy to read. The book is no doubt worthy of your attention.

Arena Resources #18 on IBD 100 List
Report in June 26 Edition; Coverage Begins on Page 1B

Critical EIA Data: Change from Year Ago Levels
Data Released June 21, 2006

Weekly Gasoline Demand (6/16): Up 1.2%
Weekly Prices Regualar Gas/All Formulations (6/19): Up 32%
Weekly U.S. Crude Oil Production (6/16): Down 6.1%

Key Points:
1. With Gasoline demand up 1.2% and prices up 32% from year ago levels there is no demand destruction.

2. U.S. crude oil production is down 6.1% and demand for gasoline is up 1.2% from year ago levels indicating that our addiction to foreign oil is increasing.

3. U.S. crude oil production decline of 6.1% is a drag on worldwide oil production.

Groupthink: The Government's Role in Dealing with Iran

Iran is smart to announce that they need until August 22 in order to reply to an international proposal on their nuclear activities. This is valuable time that Iran will use to continue to get ever closer to BD-Day (Bomb Developed-Day.) It is a race against the clock just like it was for our scientists in the Manhattan Project.

Unfortunately, the U.S. government and Europe continue to allow unreasonable delays in dealing with Iran. The groupthink of these entities is that to deny Iran the time to look at the proposals (over two months) would be contrary to diplomacy. Iran realizes that the world is extremely hesitant to use military force on Iran in light of activities in Iraq. The crisis in North Korea over the long range missile test may also be a coordinated effort between Iran and North Korea to take some of the heat off of Iran.

In the end Iran will develop the bomb and then the bargaining power of the U.S. and Europe will have evaporated. In fact not only will the bargaining power disappear when Iran has the bomb but the day will come when Iran holds the upper hand by blackmailing the west. They could do this by threatening to detonate a bomb in an American city even in the face of their own annihilation.

I sincerely hope this scenario would never play out but I'm afraid groupthink will paralyze the U.S. and European governments from taking the reasonable course of action with Iran. Both the U.S. and Europe are afraid that using military force on Iran would look like an attack on Islam to the people of the middle east and within their own countries. Keep in mind that both the U.S. and especially European countries have a high percentage of their population who are sympathetic to their islamic cult and middle eastern homelands. Any such attack on Iran could cause significant internal problems. Hence, the need to make the appearance of going overboard on diplomacy even when doing so endangers 100's of millions of U.S. and European citizens with each passing day.

Israel may be the wildcard in the dealings with Iran. Currently Iran is increasing its presence on the border with Israel. A major regional conflict could erupt with an Israeli strike on Iranian targets. Israel will not allow Iran to reach BD-Day. Any Israeli-Iran conflict would surely drag the U.S. into war with Iran. Oil embargoes would ensue. Expect Saudi Arabia to again cut off oil to the west. Military action against Iran would destroy their nuclear program for years to come. This is the best case scenario. It is not realistic to believe that any agreement can be had with the leader of Iran. He is a madman. It is not possible to make deals with a madman. Reference Hitler's deal with Stalin. Reference Clinton's deal with North Korea. Time is ticking.

In conclusion, this is a classic example of groupthink in its purest form. Governments are not capable of making the right decisions in times of crisis. The correct decision would be to attack Iran militarily as soon as possible in order to render it's nuclear program and fascist government destroyed.

Groupthink: The Media's Role in Discussing Peak Oil

An editorial in the Washington Times is an example of the media going along with the consensus about peak oil even though the consensus is wrong. This is an excellent example of groupthink. "Groupthink" is a theory developed by Irving L. Janis. He is the author of numerous books on the topic.

U.S. Department of Energy Projections for 2015 and 2030 Examined
The Projections are Nothing Short of Shocking

Have you ever taken the time to see what our very own Department of Energy thinks about future oil prices and gasoline prices? Tonight I took a look at the most recent report posted on the DOE website. The following points are shocking and an example of how out of touch with reality the people making the projections at the DOE are:

1. On page 7 note that domestic oil production is expected to increase in 2006 avoiding any declines in production until 2016.

2. On page 8 note that the projected crude oil price for the "high price" or worse case scenario is $76.30 in 2015 and $95.71 in 2030.

3. On page 8 and 12 the reference or base projection for crude oil price is $47.79 in 2015 and $56.97 in 2030.

4. On Page 12 note that U.S. average gasoline price is projected at $2.00 in 2015 and $2.19 in 2030. Keep in mind that these prices are based on 2004 dollars. So if you factor inflation the real prices are much lower.

5. On page 9 note that technology is expected to magically raise U.S. oil production.These key points indicate the typical GROUPTHINK that PROHIBITS our government from taking the necessary steps to avoid the ensuing energy nightmare.

Our government is "asleep at the wheel" just as they were for:
**9-11
**the Mexican border problem/illegals/colonization of America by Mexico's poorest
**Pearl Harbor
**Social Security
**National Debt
**Allowing ACLU to strip Jesus Christ from all public displays
**Allowing ACLU argument to make it "discrimination" to give Mohammed a second glance at airport security having no problem with grandma in wheelchair to get an anal examination.
**Not shutting down the border for National security reasons (drugs, WMD, etc.)
**Allowing your home to be taken away for purposes of private development with the excuse of eminent domain.

It looks like we can now add Peak Oil to the long list of events that paralyzed our goverment as a result of groupthink.

It's amazing how our government is paralyzed from taking action before the crisis is upon us. When it is upon us it is going to be more painful and much more damaging to this nation. Nobody in the DOE wants to be bold and make a prediction that would rock the boat so to speak. The projections are absolutely crazy and reckless. Even their worst case scenarios understate the problems and are therefore reckless and risk the very existence of this country.

I"m sure there are many more "gems" worth noting if you take the time to peruse the Department of Energy website. Talk about being paralyzed by Groupthink. Obviously if someone projected $250 oil that would upset a lot of big donors to the republican party. Feathers would get ruffled and someone (the little guy making the projection) would be fired in a heartbeat. This is GROUPTHINK in its purest form. On a positive note, you will be able to profit from rising oil prices exceeding the extremely low expectations set by government, major oil companies, the media, and Wallstreet.

Arena Resources to join Russell 3000 Index
Inclusion Should Result in Additional Institutional Buying

ARD is set to join the Russell 3000 Index when Russell Investment Group reconstitutes its family of U.S. indexes on June 30, according to a preliminary list of additions posted Friday on the Russell website.

For more information visit the FAQ list.

Open Letter to GMXR Shareholders...
Research Intended to Help Investors

Please don't take any of my previous posts regarding GMXR personally. I realize that when someone questions a company's fundamentals, valuation, business plan, management team, etc there are bound to be those who take it personally. Nobody likes to hear negative words about one’s investment. Let's face it, most have invested in GMXR because they think it is going higher. So someone like me who posts negative remarks about GMXR is viewed as a basher or someone with ulterior motives (short the stock.)

I can assure everyone that I am not short the stock. I have no ulterior motives.

My ONLY motive is to point out the fact that by comparing GMXR with other companies (benchmarking) I have determined that
GMXR is overvalued in relation to other companies (most notable ARD.) I first wrote about this overvaluation/imbalance on December 17, 2005, when I commented, "I have no doubt that ARD valuation in terms of share price will exceed that of GMXR in the near future as investors recognize the superior values and fundamentals." At that time, GMXR was priced at $36.69 and ARD was priced at $28.75. In other words, GMXR shares were valued at a 27.6% premium to ARD shares.

Today ARD shares trade at $29.71 and GMXR shares trade at
$28.48. Not only has GMXR lost 22.3% of its value while ARD has risen 3.3% since December 17, 2005 but ARD also has exceeded the share price of GMXR as I projected.

GMXR will trend lower (longterm) barring multiple hurricanes in the Gulf of Mexico. Note that the macro picture of NG is not good. At the same time we can expect ARD to trend higher: I have a $60 price target.

GMXR is not the first company I have been critical of regarding valuation. In July of 2005, I spent considerable time and effort comparing GEOI and ARD. At that time GEOI was trading higher than ARD (GEOI ~$14-$15 and ARD ~$13-14.) On July 29, 2005 I sold all my GEOI shares in favor of ARD shares. Fundamentally ARD was (and still is) a far superior company to GEOI. However the market felt otherwise. Today GEOI is $7 and ARD is $29. I feel the market is prone to "GROUPTHINK." Groupthink is simply going with the flow and agreeing with the group even if the group is wrong. Over time the valuation imbalances that exist between two companies will be corrected. We have witnessed a valuation correction between GEOI and ARD. I fully expect that we will witness the same valuation correction between GMXR and ARD. Currently, we are in the midst of this valuation correction between GMXR and ARD as investors take note of each company’s fundamentals and future prospects.

In conclusion, My purpose is simply to raise the redflag on GMXR and sound the alarm bells so that those who are openminded (those that don't subscribe to GROUPTHINK) can exit GMXR without further damage to the value of their portfolio. Please don't view my posts as an attack on GMXR shareprice. My intent is only to inform, educate and to prove that the market is NOT efficient in valuing companies. My blog has been established in order to archive my remarks so that we can go back in time to see if I was right or wrong and to ultimately MEASURE MY PERFORMANCE.

God Bless,
Dok

Author, Research Analyst
The ARD Blog
www.doktorstocks.blogspot.com

The Case for Christ: A Journalist's Personal Investigation Of The Evidence For Jesus
This Book is a Must Read for Everyone No Matter if You are Strong in Your Faith or Have No Faith at All




Jesus Christ is important to me. He always has been as long as I can remember. This book no doubt has strengthened my faith and increased my knowledge about Jesus and also the Bible. The book certainly makes the case for Christ. In the end though, you are the jury. Is there evidence beyond a reasonable doubt that Jesus Christ is your Lord and Savior? Does it take more faith to NOT believe Jesus is God? The conclusion is very powerful.

Taking the time to read this 271 page book will be the best investment you ever made. The return on investment will be beyond your wildest dreams. The best part is that it is a free gift from God because he loves each of us more than our human minds can comprehend.

Thoughts on ARD Technical and Fundamental Analysis

I'm by no means an expert in technical analysis. (Fundamental analysis is my forte.) But I just wanted to chime in on something that I think is pretty basic. Maybe a technical guru could back me up.

We hit a 6 month low on March 8 intraday when we hit $25.71. The stock closed that day at $26.33. On June 13 we tested that 6 month low when we hit an intraday low of $25.88. The stock closed at $26.36.

Sandwiched between these two bottoms (I"ll call them a double bottom) we hit an intraday high on April 17 of $38.60 with closing high of $37.77 on this date.

My take is this (correct me if I"m wrong): We tested the March 8 bottom successfully (double bottoms are good as I understand) and now we are again moving higher. Is it now the technical analyst's view that the stage is now set to test the April 17 high of $38.60? If we break this point is it also the view that we will experience, "the next leg up?" Maybe mid $40's in anticipation of Q2 Operational Update? PE is 32. Should be 40(minimum.)

Again, I'm probably one of the least qualified people to discuss Technical Analysis but sometimes it is interesting to see the stock through another looking glass.

I believe investors should emphasize fundamentals when investing. Fundamentals like: Proved Reserves per share, EBIT per BOE Produced, Cost per BOE produced, Production Growth, Oil Ownership via Share ownership, Operating Margin, (Un)Hedged/Debt burden, management team, etc.

On a macro picture I believe you have to look at the fundamentals of supply and demand as they relate to petroleum (Peak Oil.) One also has to consider the geopolitics of the world as well. Many factors to take into account. Factors that range from Tulsa to Tehran; From East Hobbs to the Far East; From New Mexico to the Gulf of Mexico; From Auntie 'em to Uncle Sam.

Suntrust initiates Coverage on ARD with Neutral Rating and $31 Target Price

Try "Googling" 'Suntrust Robinson.' The first entry leads you to the Suntrust website. While you're there just click on "Research Disclosures" and then click on ARD.

Looks like Suntrust has ARD target price of $31. To come up with a target of $31 in my mind says they are lowballing price of crude, possibly lowballing production estimates, and not taking into account oil assets per share, superior cost structure, superior EBIT per BOE produced, superior operating margin, superior production growth and true NAV per share. In previous C.C. Tim stated that ARD has over $52 in NAV. So $31 target price is questionable at best. I'm curious to see how they modeled $31 as fair value and what technique they use.

Target Price of $31 is Low

To consider for a moment how ridiculous this $31 price target really is all you have to do is to consider what ARD will earn in 2006 and what kind of earnings multiple will be applied to those earnings.

If ARD earned just $1 per share in 2006 it would hit it's $31 price target with a PE multiple of 31. The math is as follows:
$1 (EPS) X 31 = $31 share price

Currently the consensus analyst estimate for FY2006 is $1.46. The current PE multiple is 33. A more reasonable PE for ARD would be 40 to 45 given what I have learned about the evidence of ARD's tremendous future prospects. The evidence provides some compelling arguments for ARD to receive a premium based on the superior fundamentals of the company.

Even if you use the current PE of 33 and the current (reduced) consensus of $1.46 we come up with a target price of $48. Use a more realistic PE multiple of 40 to 45 based on current oil prices and you arrive at a target price of:
$1.46 X 40 = $58
$1.46 X 45 = $65

I currently have a $60 target price on ARD. Even if my earnings estimate of $2.33 comes in on the high side reaching my target price of $60 is very easily done even with the current consensus estimate of $1.46 as noted above.

I"m expecting Oil to rise as high as $95 this summer. When this happens I have no idea what will happen to the PE multiple on ARD. Investors will be flocking in from other sectors that know little if anything about the oil sector. They could very well bid share prices up with PE multiples rivaling that of tech stocks in the late 1990s. So there is tremendous upside to my target price of $60. However, Wallstreet refuses to put realistic target prices on oil stocks.

Target Price and Ratings Based on Politics and Money

My hypothesis is this: Suntrust has ulterior motives. It isn't simply about putting up an accurate buy/neutral/reduce rating with an accurate target price. It is more about politics and money.

For example consider this: Suntrust has a coverage universe of 297 companies. Of those 297 companies, they have the following Buy/Neutral/Reduce ratings:
Buy.......147 companies or 49%
Neutral...141 companies or 47%
Reduce......9 companies or 3%

Now...factor in the ratings Suntrust has on a company if they do investment banking with a particular company. Suntrust has investment banking services with 43 companies they cover. Consider how their ratings of Buy/Neutral/Reduce are drastically different:
Buy.......26 companies or 60%
Neutral...15 companies or 34%
Reduce.....2 companies or 4%

It isn't by chance that a company is nearly twice as likely to get a buy rating than a neutral rating if they do investment banking with Suntrust(60-34%) compared to a company like ARD that has no investment banking with Suntrust in which case the chances of a Buy rating are about 50-50 (49-47% to be exact.) You really have to ask yourself how many of those companies that do investment banking with Suntrust and have a Buy rating would have garnered a Neutral rating if they decided not to do investment banking (Overstating true value.) You also have to ask yourself how many of those companies with a neutral rating would be rated a "Buy" if they only did investment banking with Suntrust. (Understating true value.)

I'm not saying that research firms automatically and purposely skew the ratings and target price. I am saying that there are other external factors (money and politics) that make research and target prices from institutional firms questionable. There is no getting around the law of reciprocation. Basically this sales tactic says that if you do a favor for someone they are indebted to you and owe you a favor right back. This isn't just in sales. This is a deeply ingrained human mechanism. If your neighbors invite you over for dinner you feel obligated to reciprocate. So it is also true with institutional research firms like Suntrust and their customers like ARD. If Suntrust "comes a knock'en" for some investment banking business and ARD declines do you really think they are going to reciprocate with a favor?

How else can you explain the fact that there is a 22% increased likelihood of a buy rating as opposed to a neutral rating if a company does investment banking with Suntrust?

My final point is this: Sometimes Wallstreet isn't the most accurate source of information. Sometimes the researcher with an MBA from Harvard has other "external factors" that play a role in target price and stock rating. Even when accurate stock ratings and target price are paramount often times these researchers with the MBAs actually know too much. Its called paralysis by analysis. It is a a paradox. Sometimes less (education and knowledge) is more. Life is filled with paradoxes. The ultimate paradox is that in order to live we must first die. The Bible states***** in 1 Corinthians 15:22, "For as in Adam all die, so in Christ all will be made alive." Keep in mind that the key is to have Jesus Christ as your Lord and Savior. All who have Jesus as their Savior will be made alive. In other words, you can NOT be saved by your own good deeds.

*****Full context of Chapter 15 via Audio: "The Resurrection of the Dead."

In conclusion, I hope everyone understands that research put out by firms is flawed from the start. There are a whole host of external factors that play a role in rating and target price as previously discussed. Another factor is if the firm or researcher is long or short the shares. Does the researcher use a modeling technique that is viable? (While on person may think reserves growth is more important another researcher may think cost structure and earnings are more important.) What is the projected realized price of oil and quantities produced in the modeling? What about the researcher being conservative due to the fact that by putting a target price that is considerably higher than current price they are in effect putting their reputation, neck and possibly their job on the line (fear.) There are many factors that cause the research to be flawed. Some more than others. If the research was perfect you wouldn't see so many changes in projected EPS and target price within a research firm. Couple that with the fact that if you take 10 research firms you get 10 different projections. Take Suntrust's $31 price target and Neutral rating with a grain of salt and look at the bright side: There is a lot of upside potential to ARD.

Significant Rotation in the Central Atlantic Tonight

Here are the views:
Visible Loop:
Water Vapor Loop

Greenspan Remarks on Oil Dependence and Economic Risk
Lengthy Senate Hearings Provide Insight into Greenspan's Opinions and Wisdom

CSPAN video is available while you read the prepared remarks.

Henry Groppe Chimes in on Chindia
Worldwide demand for Oil to Increase due to New Automobile Society

"About 70% of all oil is used for transportation." (transcript begins near 35:10)

"the two largest population countries in the world, China and India, are entering the consumerist automobile culture and society for the first time almost overnight because of globalization and the rapid transmission technology. They're creating a middle class consumer population approximately the size of the U.S. And they have been preparing for it. China is over halfway through the construction of a modern interstate highway program that has more mileage than the total system in the United States. Think about it. All of these 250 to 300 million new middle class will want automobiles and there will be all the infrastructure for it..."

~Henry Groppe on China's Future Transportation Society

Analyzing Production Percent Change
Q4'05 to Q1'06

With first quarter production data available we will monitor changes in quarter over quarter production. The analysis will measure both oil production as well as total oil and gas production percent change between Q4'05 and Q1'06.

Below in Figure 1 it should be noted that ARD is second only to CWEI in terms of oil production percent change. ARD growth was over 3.5X that of the peer group average.


Figure 1. (Click on Image to Enlarge)


The chart in figure 2 depicts both oil and gas production percent change. ARD had the largest percent increase in the peer group. ARD growth was over 3.5X that of the peer group average.


Figure 2. (Click on Image to Enlarge)

Second Quarter Expectations

In the first quarter ARD had one rig drilling active.

ARD CEO Tim Rochford stated, "Our first quarter resulted in 16 development wells drilled and 13 refracs on existing wells on our Fuhrman-Mascho property."

The second quarter will realize up to 5 drilling rigs being active. This increase in drilling activity will no doubt result in the production growth rate increasing.

CEO Rochford commented on the increased second quarter drilling activity, "We have taken delivery of our own drilling rig and now have two rigs drilling full time on the Fuhrman-Mascho. We currently have a third rig drilling on our Seven Rivers Queen property in New Mexico and a fourth rig will soon be operating on our Auntie Em property in Kansas. In June, an additional drilling rig will move onto our Rocky Prospect, also in Kansas. In total, we hope to drill as many as 37 new wells in the second quarter, 31 in the Permian Basin and six in Kansas, while continuing the restimulation of selected existing wells."

In conclusion, ARD oil and gas quarter over quarter production percent change was superior to any company in the peer group. Given the fact that ARD has dramatically increased the number of drilling rigs in Q2 we can expect ARD to continue to dominate production growth among the peer group and to post very strong second quarter results. I'm expecting ARD oil and gas production of 225,000 BOE in the second quarter. This represents a 17.9% increase over Q1 production. The surge in drilling rigs will not only result in increased production and an increase in the quarter over quarter production growth rate but also increased revenues, earnings, cashflow and ultimately share price.

Steven Leeb, Author of "The Coming Economic Collapse," Expects $200 a Barrel Oil

"...I'm not really saying oil production has peaked but what has happened in my opinion is our ability to increase production doesn't match the increases the we see in demand."

~Steven Leeb on Oil Demand Outpacing Production

Matthew Simmons, Author of "Twilight in the Desert," Debates Peak Oil on CNBC

"You could look at the United States of America. We peaked in December of 1970 before we had Alaskan deep water at over 10 million barrels a day and today we are down to three. That could well be the sort of future direction of our global oil supply."

~Matthew Simmons on Future Oil Production

Boone Pickens the Famous Oracle of Oil Interviewed Recently on CNBC
Oil Prices to Continue Trend Higher on Supplies Peaking and Rising Demand

"The trend is always up because we have, we're dealing with a limited supply of oil which I think is 85 million barrels a day and that's it. I don't think we can get any more out of the system. I"m talking about globally. And when I see fourth quarter projected for 86.5 million barrels a day, its gonna get tight."

~Boone Pickens on Oil Prices

Daniel Yergin, Author of "The Prize," Interviewed Today on CNBC
Author is Bullish on Oil and Bearish on Gas

"In terms of oil, I think these geopolitical issues are going to continue to be very dominating at least until we start to see an even bigger demand effect."

~Yergin on Oil

Part III: Analysis of Oil Companies with the Highest Percentage of Oil Proved Reserves
A Look at Production Growth

Production growth is a very important factor in determining the value, success and future prospects of an oil company. Oil production was a primary reason I sold GEOI in July of 2005 and moved into ARD. The former had declining production. The later had expanding production growth. (Editors Note: Since July of 2005 my initial ARD position has increased from $13.52 to present value of $32.30. This represents a share price increase of 138%.) While there are certainly more factors than just production growth in determining the value of an oil company it is no doubt one of the primary indicators of an oil company's "health."

The ability of an oil company to grow production is an important driver of earnings growth. While those oil companies with flat to lower year over year production rely heavily on rising oil prices in order to achieve higher revenues and profits, those oil companies that are able to grow their production are less reliant on rising oil prices for revenue and earnings growth. Also, when oil prices are rising those companies with increasing production stand to profit the most. Therefore, those companies with higher production growth tend to command a higher valuation than those companies with the slower growth.

Below is the oil production percent change between 2002 and 2003. Arena Resources is color coded with the blue bar. The average of the peer group is coded red. Note that ARD grew nearly twice as fast as that of the peer group in terms of oil production between 2002 and 2003.



Figure 1. (Click on Image to Enlarge)

Below is the oil production percent change between 2003 and 2004. Note how ARD had significantly higher production growth than the peer group on average. In fact ARD grew over three times faster during this time period than the peer group on average.



Figure 2. (Click on Image to Enlarge)



Figure 3 below depicts oil production growth between 2004 and 2005. Note how ARD grew over 3.5 times faster than the peer group on average.



Figure 3. (Click on Image to Enlarge)

In terms of oil production growth ARD had the second largest average growth rate between 2002 and 2005 second only to PLLL.


Figure 4. (Click on Image to Enlarge)

However this only includes oil production. Since oil companies also produce natural gas we must also take a look at total production growth. For purposes of conversion of natural gas (NG) we shall use the SEC mandated 6 mcf equals 1 barrel of equivalent (BOE.)

Figure 5 shows the percent change in both oil and gas production between 2002 and 2003. Note how ARD grew total production 93.7% while the average production growth from the peer group was only 36.4%. This put ARD production growth at over twice that of the peer group.


Figure 5. (Click on Image to Enlarge)

Between the years 2003 and 2004, as shown in figure 6, ARD was again growing total production that was significantly greater than the peer group average. During this time period ARD grew production that was over triple the average for the peer group (73.3% to 19.6%.)



Figure 6. (Click on Image to Enlarge)

Figure 7 below indicates that between 2004 and 2005 ARD grew production that was over four times greater than the average for the peer group. ARD had the highest total production growth year over year than any other company in the peer group.


Figure 7. (Click on Image to Enlarge)

In the chart below we find that ARD had the highest average annual oil and gas production percent change at 98.2%. This compares to the average of 29.8% for the peer group. This is over triple the growth of the peer group average.


Figure 8. (Click on Image to Enlarge)

Clearly, ARD has production growth that is far superior to every company in the peer group. Not only has the growth been consistent but it has also been gigantic. ARD has nearly doubled production every year for the last 3 years. No other company in the peer group even comes close to this feat. In fact the company with the next highest average production growth is only averaging 49.2% during this 3 year period. This is nearly half the average growth rate of Arena Resources. ARD is again on pace to more than double its 2005 production of 508,000 BOE in 2006. One should expect over 1 million BOE in 2006. With oil prices pushing $95 a barrel this summer and production more than doubling, we have the ingredients for significant share price appreciation in 2006.

Top 10 Reasons to Buy ARD Shares Today
ARD Limit Order Filled @ $32.90

1. ARD production higher.
2. Oil prices higher.
3. ARD Oil Assets per Share to jump in 2006 due to either acquisition and/or result of massive drilling program.
4. No Debt/Unhedged.
5. EBIT/BOE produced superior to any oil company.
6. Cost /BOE produced superior to any oil company.
7. Worldwide Peak Oil....(Supplies dropping 8% YoY in USA. The same is true for many mature oil producing regions of the world.)
8. Worldwide Demand increasing. (Can you say Chindia?)
9. Gas prices are inelastic at current YoY levels in USA (36% increases cause virtually no loss in gasoline demand.)
10. Now is the time to build up an inventory of ARD shares in anticipation of rising share prices just as the oil industry has above normal inventory levels in anticipation of rising oil prices and/or supply disruptions.

Arena Resources #11 on IBD 100 List
Report in June 5 Edition; Coverage Begins on Page 1B

This is the second time in as many weeks ARD has been on IBD 100 since I initiated IBD 100 coverage last week. Arena Resources is #11 on the list this week which is unchanged from last week.

Northwest Airlines Hedges Fuel Costs

Maybe some big-wigs at NWA read, "Twilight in the Desert." This is a good move for Northwest Airlines to enter into some hedging contracts by putting a ceiling in at $79 a barrel and a floor at $65 a barrel for 25% of fuel consumed between July and December of 2006. This summer we will surpass $95 a barrel.

Twilight in the USA
New Oil Production Unable to Replace Yearly Declines in Domestic Fields


Today there was a rumor that the ThunderHorse production platform in the Gulf of Mexico has been experiencing some undersea oil leaks that may delay production. Some believe this platform in the GOM will have the capacity to produce over 250,000 BOPD. This seems like a lot of oil...

...until you realize that the latest weekly petroleum update indicates that domestic production of oil is down 8.1% from year ago levels. This equates to a production decline of 449,000 barrels. Even if we would bring on production from a super-platform like the Thunder Horse, the production won't even replace the oil lost due to natural declines. Keep in mind that even these record high nominal oil prices are unable to spur year over year production growth. This is an amazing aspect of peak oil on the supply side. On the demand side it is amazing how record prices is having virtually no effect on year over year gasoline demand. For example, in the latest EIA report, U.S. Regular All Formulations Retail Gasoline Prices rose 36.1 percent from year ago levels. However demand for this gasoline dropped less than half of one percent or 0.3%. Demand is very inelastic. In other words, people are going to buy gas no matter what the price. On the supply side, not even record prices have the power to maintain production at year ago levels. Some of the talking heads on CNBC, FOX and CNN claim oil prices are inflated $15 to $20 based only on Iran and geopolitics. These people really have no clue about peak oil. They refuse to accept the facts presented in this article.

This phenomenon isn't just happening in the USA. It is happening worldwide. If you want to invest your hard earned money in high quality oil companies like Arena Resources and be able to ignore the market noise about selling the stock then you should read, "Twilight in the Desert." You will never have another restless night after a decline in oil or other market uncertainties. You'll understand that the daily market fluctuations mean nothing in comparison to the big picture discussed in this book.

The weekly petroleum updates that are presented every week should give investors confidence to not only defend their positions vigorously in market declines but to increase their positions in quality companies like Arena Resources (ARD.) I had a limit order filled in my 401K today at $31.37 for more ARD. Don't let some pompous arrogant pin-head hedge fund managers scare you out of your shares when oil declines. Remember volatility is not only normal, it is the rule.