Delta Petroleum (DPTR) vs ARD
Which Company Offers Superior Future Prospects?
Today I recieved a request from Mrdecember123 to provide analysis on which company has the better future prospects and investment potential. An email was sent to Mrdecember. The contents of that email are as follows:
Dear Mr December,
I"m not sure if this is an email account that you check. Hopefully it is. While we have had our differences in the past we'll have to agree to disagree on our investment philosophies and what makes a good investment. In any case, I respect you as a person. I"m sure the feeling is mutual. I spent an hour today to fulfill your request of comparing DPTR and ARD. The information I"m providing to you is at no charge. :-)
Delta Petroleum (DPTR) has proved reserves of 44,901,000 BOE. Of this amount 32% is oil. DPTR has a hedge in place for 300,000 Bbl of oil in 2006. This amount would represent 28.4% of 2006 oil production if year over year production is flat. The ceiling on the hedge is $61.80 with a floor of $35. Clearly the hedge provides no downside protection as oil will never go below $35 in 2006 but limits upside of rising oil prices to $61.80. No doubt the hedge will impact a significant portion of their 2006 production. One should certainly expect oil prices to rise above $62 a barrel before the hedge expires (June 2007) due to winter heating season, peak oil, geopolitics (most noteable Iran) and terrorism.
DPTR has offshore production operations on the Gulf Coast. Even though it is for a small portion of their total oil production it increases the cost structure in total, increases risk of instability in oil production, and reduces predictability of production, revenues, net income and EPS during the hurricane season. Investors pay a premium only for those companies that can demonstrate predictability and transparency in these factors.
As of the 2005 10K DPTR had 4.32 Mcf gas and 0.35 BOE oil per share. Based on $8/Mcf and $60/Bbl oil DPTR has oil assets per share of $55.56. In 2005 DPTR had a net profit margin of 15% (the latest quarter net margin was only 9%.) If the entire proved reserve base were extracted in 2005 with the 15% profit margin net income would amount to $8.33 per share. The math is as follows:
$55.56 (oil assets) X 0.15 (net profit margin) = $8.33
This current share price of $25.34 represents over 3X the oil assets value per share. In other words, you are paying $25.34 to achieve $8.33 in value. This is not an acceptable business proposition.
IN Contrast...
ARD had 1.97 Bbl oil per share and 2.52 Mcf gas per share as per the latest 2005 10K. The company also had shares outstanding of 12,614,244 as of the 10K filing date. Based on $8/mcf and $60/Bbl oil ARD had oil assets per share of $138. ARD had a net profit margin of 36.6% in 2005. If ARD proved reserves were extracted in 2005 oil assets per share would have been valued at $50.50. Math is as follows:
$138 (oil assets) X 0.366 (net profit margin) = $50.50
The value of the oil assets represents a PREMIUM of 44% over the current share price of $35. This is an excellent business proposition.
ARD shareholders should expect proved reserves to increase in 2006 even though there were no acquisitions. How is this possible? In 2006 ARD will drill 120-130 wells. Of these wells 107-110 will be value creators. In other words, the 107-110 new wells drilled will create 139-140 new PUDs. (For every well drilled 1.25 new PUDs are created.) Essentially, 139-140 new PUDs will be created as a result of the 2006 drilling program. Each well on the current 20 acre spacing is estimated to have reserve potential of 45,000 Bbl. Simple math reveals the following:
140 (new PUDs) X 45,000 Bbl (proved reserves potential) = 6.3 million Bbl proved reserves.
The 2006 drilling program could easily add another 6.3 million Bbl oil proved reserves without any acquisitions. This doesn't even take into account increases in proved reserves due to the natural gas drilling program. In 2005 the natural gas proved reserves more than tripled from the previous year when gas proved reserves increased from 1.66 MMBOE to 5.33 MMBOE. This occurred in the absence of any major acquisitions.
Fundamentally, ARD has the lowest cost structure of any domestic oil producer. ARD also has the highest operating margins, net profit margins, and production growth. Additionally, ARD is unhedged, debt free and has a $150 million line of credit. This company is well positioned to continue an aggressive drilling program and/or make smart acquisitions in 2007. Proved reserves will continue to grow in 2007 without a doubt. On top of all this ARD management is second to none. CEO Tim Rochford and Chairman Stan McCabe are extremely talented individuals.
Here is the kicker: ARD is currently in the early stages of exploration on their Syracuse property in southwest Kansas. They are drilling to a depth of over 5000'+ to the St.Louis formation. The St.Louis formation is predominately oil bearing. According to CEO Tim Rochford the St. Louis formation has, "...very large reserve potential." Expect 1-3 wells to be drilled in the 4th quarter to reach the St.Louis.
Currently there is no better investment in the oil sector than Arena Resources (ARD.)
Sincerely,
Dok
Which Company Offers Superior Future Prospects?
Today I recieved a request from Mrdecember123 to provide analysis on which company has the better future prospects and investment potential. An email was sent to Mrdecember. The contents of that email are as follows:
Dear Mr December,
I"m not sure if this is an email account that you check. Hopefully it is. While we have had our differences in the past we'll have to agree to disagree on our investment philosophies and what makes a good investment. In any case, I respect you as a person. I"m sure the feeling is mutual. I spent an hour today to fulfill your request of comparing DPTR and ARD. The information I"m providing to you is at no charge. :-)
Delta Petroleum (DPTR) has proved reserves of 44,901,000 BOE. Of this amount 32% is oil. DPTR has a hedge in place for 300,000 Bbl of oil in 2006. This amount would represent 28.4% of 2006 oil production if year over year production is flat. The ceiling on the hedge is $61.80 with a floor of $35. Clearly the hedge provides no downside protection as oil will never go below $35 in 2006 but limits upside of rising oil prices to $61.80. No doubt the hedge will impact a significant portion of their 2006 production. One should certainly expect oil prices to rise above $62 a barrel before the hedge expires (June 2007) due to winter heating season, peak oil, geopolitics (most noteable Iran) and terrorism.
DPTR has offshore production operations on the Gulf Coast. Even though it is for a small portion of their total oil production it increases the cost structure in total, increases risk of instability in oil production, and reduces predictability of production, revenues, net income and EPS during the hurricane season. Investors pay a premium only for those companies that can demonstrate predictability and transparency in these factors.
As of the 2005 10K DPTR had 4.32 Mcf gas and 0.35 BOE oil per share. Based on $8/Mcf and $60/Bbl oil DPTR has oil assets per share of $55.56. In 2005 DPTR had a net profit margin of 15% (the latest quarter net margin was only 9%.) If the entire proved reserve base were extracted in 2005 with the 15% profit margin net income would amount to $8.33 per share. The math is as follows:
$55.56 (oil assets) X 0.15 (net profit margin) = $8.33
This current share price of $25.34 represents over 3X the oil assets value per share. In other words, you are paying $25.34 to achieve $8.33 in value. This is not an acceptable business proposition.
IN Contrast...
ARD had 1.97 Bbl oil per share and 2.52 Mcf gas per share as per the latest 2005 10K. The company also had shares outstanding of 12,614,244 as of the 10K filing date. Based on $8/mcf and $60/Bbl oil ARD had oil assets per share of $138. ARD had a net profit margin of 36.6% in 2005. If ARD proved reserves were extracted in 2005 oil assets per share would have been valued at $50.50. Math is as follows:
$138 (oil assets) X 0.366 (net profit margin) = $50.50
The value of the oil assets represents a PREMIUM of 44% over the current share price of $35. This is an excellent business proposition.
ARD shareholders should expect proved reserves to increase in 2006 even though there were no acquisitions. How is this possible? In 2006 ARD will drill 120-130 wells. Of these wells 107-110 will be value creators. In other words, the 107-110 new wells drilled will create 139-140 new PUDs. (For every well drilled 1.25 new PUDs are created.) Essentially, 139-140 new PUDs will be created as a result of the 2006 drilling program. Each well on the current 20 acre spacing is estimated to have reserve potential of 45,000 Bbl. Simple math reveals the following:
140 (new PUDs) X 45,000 Bbl (proved reserves potential) = 6.3 million Bbl proved reserves.
The 2006 drilling program could easily add another 6.3 million Bbl oil proved reserves without any acquisitions. This doesn't even take into account increases in proved reserves due to the natural gas drilling program. In 2005 the natural gas proved reserves more than tripled from the previous year when gas proved reserves increased from 1.66 MMBOE to 5.33 MMBOE. This occurred in the absence of any major acquisitions.
Fundamentally, ARD has the lowest cost structure of any domestic oil producer. ARD also has the highest operating margins, net profit margins, and production growth. Additionally, ARD is unhedged, debt free and has a $150 million line of credit. This company is well positioned to continue an aggressive drilling program and/or make smart acquisitions in 2007. Proved reserves will continue to grow in 2007 without a doubt. On top of all this ARD management is second to none. CEO Tim Rochford and Chairman Stan McCabe are extremely talented individuals.
Here is the kicker: ARD is currently in the early stages of exploration on their Syracuse property in southwest Kansas. They are drilling to a depth of over 5000'+ to the St.Louis formation. The St.Louis formation is predominately oil bearing. According to CEO Tim Rochford the St. Louis formation has, "...very large reserve potential." Expect 1-3 wells to be drilled in the 4th quarter to reach the St.Louis.
Currently there is no better investment in the oil sector than Arena Resources (ARD.)
Sincerely,
Dok
posted by -Aztec- at 2:58 PM
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