ARD Production Concentrated in Oil
Production Profile Provides Limited Downside Risk with Significant Upside Potential in Current Oil and Gas Pricing Environment

In the latest quarter ARD had 86.2% of its production in crude oil as depicted in the chart below. This is one of the highest oil production percentages in any domestic E&P. Given this fact ARD is insulated to a large degree from the declines in natural gas.


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Oil prices have fallen about 21% from their highs in the $78 range to the current $61. Even with the significant drop in oil prices ARD is generating tremendous amounts of cash in the current pricing environment. Part of this is due to the low cost structure of ARD. The other primary factor is the high oil production percentages of total production as depicted in the chart above.

Where Do Commodity Prices Go From Here?

There is no shortage in natural gas in North America or worldwide. In fact when Saudi Oil fields go into steep decline they will switch from being major producers of crude oil to major producers of natural gas. Liquid Natural Gas will keep the USA well supplied in the coming years. Certainly there could be a rise in Ng prices if the Gulf of Mexico is hit with multiple hurricanes.

Given the fact that there is limited spare capacity with crude oil, demand worldwide is increasing and supplies are becoming increasingly more difficult to maintain let alone increase to meet the rising demand. One should expect Saudi Arabia and OPEC to defend the price of oil at $60. With that said we are near a bottom in terms of oil prices. In addition many commodity traders and investors feel that the decline in oil is due in part to government shenanigans related to the upcoming elections in November (release of oil from SPR, timing of news release regarding oil find at over 27,000' in Gulf of Mexico, and any other possible government involvement in commodity trading that is "under the table.") Many investors have stated their intentions to buy back into oil as we near the U.S. elections. In any case we have two lines in the sand regarding oil. The first is the $60 line as dictated by OPEC. The second is the anticipation of rising oil prices after the US elections that occur on November 7, 2006.

In conclusion, ARD investors should expect limited downside risk and significant upside potential from current prices based on the ARD production profile of over 86% oil in the most recent quarter.