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.
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.
posted by -Aztec- at 3:05 PM
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