ARD Q3'06 10Q Released Promptly After Friday's Market Close
Quarterly Report Hit the Wire Promptly at 4:17pm EST

Here were my estimates:
Revenues: $17.9 million........ (up from $14.69 mm in Q2'06)
Net Profit Margin: 42%......... (down from 43.8% in Q2'06.)
Net Income: $7.51 million.....(up from $6.44 mm in Q2'06.)
Share Count*: 15 million.......(up from 14.71mm in Q2'06.)*
(Fully diluted)
EPS: $0.50.......(Up from $0.44 in Q2'06/ $0.27 in Q3'05.)

Here are the actual results (with sequential quarter and Year over Year changes):
Production: 302,512...........(up 25.4% QoQ).......(up 114% YoY)
Revenues: $18,192,860.......(up 23.8% Q0Q).......(up 129% YoY)
Net Profit Margin: 44%.........(up 0.4% QoQ).........(up 1.6% YoY)
Net Income: $8,006,824.......(up 24.2% QoQ).......(up 132% YoY)
Share Count*: 15,579,742......(up 5.8% QoQ).........(up 20% YoY)
*(Fully diluted)
EPS: $0.51.........................(up 15.9% QoQ).......(up 88% YoY)

ARD topped my estimates across the board with the exception of the share count. Production was 7,500 barrels higher than the estimate in the Q3 operational update. This lead to higher than estimated revenues. The lack of "other expenses" and the addition of "interest income" helped increase the estimated net profit margin from 42% to the actual 44% (previous quarter net margin was 43.8%.) Even with the higher than estimated share count earnings still topped my estimate of $0.50 by a penny. The analyst consensus estimate was for $0.47. ARD matched the high estimate of those polled. Q3'06 was undoubtedly a superb quarter from top to bottom.


Based on current share price of $36.68 and the Q3'06 earnings the current trailing 12 month P/E has been lowered to 25 (ttm earnings have risen from $1.17 to the current $1.44.) This is historically low. ARD ttm P/E normally trades between a range of 30 and 45. Even if investors awarded ARD shares a ttm P/E of 30 that would generate a share price of $43.20. This is a 17% premium to Friday's close.

Given the fact that other companies with lesser future expectations and fundamentals are awarded higher forward P/E multiples it should be evident that ARD is positioned to rally so as to have a forward P/E at least inline with the other inferior companies. Some companies that have higher forward P/E ratios are as follows (along with their forward P/E.)
1. DPTR................295
2. CWEI...............44.4
3. UPL.................25.6
4. GMXR...............22.8
5. PLLL................17.7
6. DNR.................15.7
7. TXCO...............15.5
8. PXP..................14.5
9. ARD................13.1

Six of the companies listed above (not including ARD) have been written about extensively in this blog. In fact detailed analysis of production growth, EBIT per BOE produced, Cost per BOE produced, operating margin and others all indicate that ARD is the superior company across the board. Therefore, it is amazing that the 6 companies studied with inferior fundamentals and future prospects are awarded a higher forward P/E multiple. Over time one should expect the market to make the necessary corrections so as to award ARD (the superior company) with the higher forward P/E ratio. This is further proof that ARD shares provide investors with significant value, margin of safety and tremendous upside potential.