The Effects of Average Realized Price per BOE Produced on ARD Net Margin
Analysis Confirms Initial FY2007 Projections

By taking a look at the effects of historical average realized prices per BOE produced on ARD net margin we can take a look into the future and make a realistic projection of future net profit margin.


Analysis of Average Realized Prices per BOE Produced

We can determine average realized oil prices for 2003, 2004 and 2005 by dividing total revenues by total production. Revenues were as follows:
2003: $3,665,477
2004: $8,482,130
2005: $25,843,077

Production (BOE) was as follows:
2003: 128,867
2004: 223,334
2005: 508,430

Average Realized price per BOE was as follows:
2003: $28.44
2004: $37.97
2005: $50.82

The percentage increases in yearly average realized prices were as follows (year over year):
2004: 33.5%
2005: 33.8%


Analysis of Net Profit Margins

Below are the total net income figures:
2003: 670,143
2004: 2,451,652
2005: 9,460,683

Below is Net Profit Margin:
2003: 18.2%
2004: 28.9%
2005: 36.6%

The percentage year over year growth in net profit margin is as follows:
2004: 58%
2005: 26.6%

Since 2003 our average realized oil price increased 33.6% while our net profit margin increased at an average of 42.3% per year. Put another way, for every 1% increase in average realized price per BOE we received a 1.25% increase in net profit margin. Over time I expect the yearly average realized price to continue to climb. However I believe that the corresponding grow rate of the net profit margin will no longer exceed that of the growth in average realized price. In 2006 I"m expecting growth in average realized price of 37.7% (going from $50.82 in 2005 to $70 in 2006.) Assuming $80 oil in 2007 the growth rate in average realized price comes out to a conservative 14.2% (going from $70 in 2006 to $80 in 2007.)

You see that even $80 oil is very conservative in 2007 EPS computations in a previous post. Clearly, price has a direct and dramatic impact on net profit margin at ARD. If net profit margin grows only TWO/THIRDS as fast as the projected average realized price (37.7% in 2006 and 14.2% in 2007) then we will see net profit margins of:
2006: 45.9%
2007: 49.9%

(You can see that my realistic FY2007 net profit margin estimate of 48.9% in previous post is in fact conservative.)

In conclusion, the case has been made that $80 realized price and 48.9% net profit margin projections in 2007 are in fact conservative. Also given the fact that an additional million shares has been factored in for 2007 along with a modest production increase of 85% we see that 2007 EPS of $4.25 is a realistic number that could easily be topped. We also see that the Wall Street consensus of $2.61 is quite low. In fact it is obvious that the analysts are not going out on a limb. Their reputations are at stake and the consensus is that oil prices can't possibly go higher. Wallstreet is figuring $40 to $60 oil. The analysts will continue to nibble at their estimates by increasing them little by little over time. There is certainly nothing bold in their predictions. Don't wait for Wallstreet to up their consensus again and again. Instead, buy ARD shares before they become progressively more expensive.