Projected 2006 Year End Proved Reserves

*123 wells drilled in 2006
-data as per the Q4 Operational Update

*108 of the 123 wells projected proved reserve "value creators"
-In Q2'06 C.C. CEO Rochford indicated that 107-110 value creators possible.

*Each of the 108 wells generates about 1.25 PUDs (Proved Undeveloped drilling locations.) By drilling 108 wells deemed value creators an additional 135 PUDs were generated.
-In Q2'06 C.C. CEO Rochford indicated that about 1.25 PUDs generated for each well drilled that was deemed a "value creator."
- Math: 108 X 1.25 = 135

*Credit of 45,000 BOE for each of the 135 PUDs generated.
-In Q2'06 C.C. CEO Rochford indicated that average production per well at F.M property should yield about 45,000 BOE. (Other properties assumed to yield similar results.)
-Math: 135wells X 45,000 BOE/well = 6,075,000 BOE oil

* ARD purchased property yielding 4,700,000 BOE oil.

* Increased drilling activity in 2006 in both KS and Permian Basin (San Andreas formation) should yield slightly more proved reserves of NG than was added in previous year.
-ARD should increase NG proved reserves by about 2,450,000 BOE as a result of Improved recovery and development.

Proved Reserve Increases:________________Oil________Gas
Improved Recovery & Development:......6,075,000........2,450,000
Purchases of Minerals in Place:............4,700,000.............0
Sub Total............................................10,775,000.......2,450,000

Less Production...................................923,900.........136,100
Total Proved Reserves Increase..........................................9,851,100.......2,313,900

Year End 2005 Proved Reserves............24,867,189.......5,330,346
Total Year End 2006 Proved Reserves.....34,718,289.......7,644,246

Total 2005 Year End oil and gas proved reserves were 30,197,535 BOE.
Total 2006 year end oil and gas proved reserves should be 42,362,535 BOE.

In conclusion FY2006 activities should increase proved reserves by 12,165,000 BOE or 40.2%. FY2006 proved reserves should yield 81.9% oil. This is down slightly from the 82.3% year end 2005 oil proved reserves. Anything less than a 40.2% increase in year end proved reserves to 42,362,535 BOE for FY2006 would be considered a disappointment.

Updated ARD Q4'06 Estimates for Revenues, Net Income and EPS

Production: 325,000 BOE
Average Price per BOE: $49.73
Revenue: $16,162,250
Net Profit Margin: 36%
Net Income: $5,818,410
Shares Fully Diluted: 15,900,000
EPS: $0.36 (Analyst Consensus: $0.49)
Year Ago Q4 EPS: $0.22

FY2006 EPS: $1.56
ARD Closing Share Price: $38.27
P/E ttm: 24.5

ARD Q4'06 Successful in Light of Lower than Expected Production
Management Continues to Impress; Several Q4 Projects Probably Rescheduled Due to Low Oil Prices

At first glance it seemed Q4'06 was a disappointment. However, there were valid reasons for production and ultimately revenues, net income and EPS coming in below expectations.

In the Q3'06 conference call on November 11, 2006 CEO Tim Rochford gave a preview of expected Q4 projects. In the call Tim indicated that there were 43 wells and 15 refracs scheduled for the fourth quarter. In reference to expected Q4'06 production Tim stated, "I believe that you will see a similar increase from a component standpoint that you saw from the third quarter." With Q3'06 production increasing 61,452 BOE from the previous quarter to 302,512 BOE Tim was essentially implying that we should expect Q4'06 production to increase approximately the same amount from 302,512 in Q3 to about 363,964 in Q4.

Estimated Q4 production as per the latest operational update was 325,000 BOE or an increase of 22,488 BOE. Clearly this is far short of the approximate increase that Tim had mentioned in the Q3'06 conference call. Essentially ARD came in 39,000 BOE short of the guidance given.

Why the Shortfall?

1. Natural Gas buyer shut down plants due to OSHA audits. This affected Arena's Permian Basin NG production.

2. Weather and electrical problems shut in production. This affected properties in KS, NM and OK.

3. Low/Declining Oil Prices.

ARD management had scheduled the drilling of 43 wells and refracing 15 wells in Q4. Probably due to the relatively lower oil and gas prices in Q4 they opted to drill only 36 wells and refrac 8 wells. In other words they only drilled 83% of the originally scheduled wells and only 53% of the scheduled refracs. Clearly this also lowered Q4 production. Short term this management team could have opted to drill out the scheduled wells and complete all the refracs in order to meet or exceed the production guidance. Instead ARD management opted to cut back on the projects for the fourth quarter and wait for oil prices to recover to higher level. This tells me that ARD management focuses on longterm goals and on what benefits the company the most in the long run. This is further evidence proving that Arena Resources has a superior management team that is among the best in the business. As a shareholder you could not ask for better stewards of your investment dollars.

Arena management estimates that the combination of the problems with the NG buyer along with the weather/electrical problems contributed to a production loss of over 25,000 BOE in the fourth quarter. Add the 25,000 to the 325,000 and now we are looking at fourth quarter production of 350,000 BOE. Factor in the 7 development wells and the 7 refracs that were originally scheduled for Q4 but were ultimately rescheduled and one can argue that this contributed to another 10,000 BOE of lost production. Now it appears that ARD could have easily produced 360,000 BOE in Q4 if we had higher oil and gas prices, better weather, an absence of electrical problems in the field and a buyer for the NG. Finally, we can add another 5,000 BOE to our total given the fact that Q4 production was estimated at 330,000 BOE while sales were only 325,000 BOE. More than likely the difference was a result of an increase of infrastructure (tanks and lines) that needed to be filled so as to push out the previous oil production. Now we are up to 365,000 BOE for Q4. This figure is slightly higher than the stated guidance given in the Q3'06 conference call. This figure is between my base and best Q4 production estimates of 363,000 and 368,000 BOE.

Ultimately the lower production will lead to lower than expected revenues, net income and EPS. Given the reasons behind the production shortfalls one can say with confidence that Q4'06 was a success. The odds are also favorable that the deep test on the Syracuse was a success for commercial production for oil and/or gas given the fact that the company and the venture partner are still looking at the results. Hopefully we'll have some oil production from the lower St. Louis formation in Q1'07 along with the multiple payzones of gas.

ARD Fourth Quarter 2006 Operational Update Release Preview

___Production (BOE)________________________
...............Base Case.......................Best Case
1. CL.........306,000............................310,000
2. NG..........57,000.............................58,000
3. Total.....363,000............................368,000

Production Notes:
*Q4'06 Production Up 113% YoY.....(Base)
*FY'06 Production 1,097,361 BOE...(Base)
*FY'06 Production Up 115% YoY......(Base)
*Q4'06 Production 84.2% Oil..........(Base)

**Q4'06 Production Up 116% YoY.....(Best)
**FY'06 Production 1,102,361 BOE...(Best)
**FY'06 Production Up 116% YoY.....(Best)
**Q4'06 Production 84.2% Oil.........(Best)


___Average Sales Price___________________
........Base..................................Best Case
1. CL..$53.16*................................$53.16*
2. NG...$5.22**...............................$5.22**

Note: Q4'06 Average Sales Price per BOE $49.73 (CL + NG)
*Price per BOE
**Price per Mcf
(6 Mcf = 1 BOE)

____Revenue___________________________
..............Base............................Best Case
1. CL......$16,266,960......................$16,479,600
2. NG.......$1,785,240.......................$1,816,560
3. Total...$18,052,200......................$18,296,160

Revenue Notes:
*Q4'06 Revenue Up 92.8% YoY...(Base)
*FY'06 Revenue Up 137% YoY....(Base)

**Q4'06 Revenue Up 95.4% YoY..(Best)
**FY'06 Revenue Up 138% YoY...(Best)

___Net Income__________________________
.......Base...................................Best Case
1. $6,859,836.................................$7,318,464

Net Income Notes:
*Q4'06 Net Income Up 127% YoY...(Base)
*FY'06 Net income Up 163% YoY...(Base)

**Q4'06 Net Income Up 142% YoY..(Best)
**FY'06 Net Income Up 167% YoY..(Best)


___Net Margin________________________
.........Base..............................Best Case
1.___38%....................................40%

___Shares Fully diluted_________________
........Base...............................Best Case
1. 15,900,000..........................15,900,000

___EPS______________________________
.....Base..................................Best Case
1. $0.43.....................................$0.46

EPS Notes:
*Q4'06 EPS Up 95% YoY......(Base)
**Q4'06 EPS Up 109% YoY...(Best)

Noteworthy Statistic: ARD has a streak of 18 Consecutive quarters of rising revenues. If ARD comes in with the base estimate of revenues it will come in short and break the streak at 18 quarters. If ARD can come in with Q4'06 revenues in excess of $18,192,860 it will extend the streak to 19 consecutive quarters. This is an incredible statistic. It would be nice to see the streak continue.

Why Flooding the Worldwide Market Place with Oil Will Not Stop Iran from Achieving their Nuclear Ambitions;
Lowering oil prices may have worked against the Soviet Union in the mid 1980s but it will not work against Iran; Such a Move Would Increase Risk of Nuclear Terrorism

Iran
Iran will always have a customer willing to buy their oil. (China needs the oil and Russia is more than willing to aid and abet Iran.) Even if Saudi Arabia is able to flood the worldwide marketplace with oil and lower prices Iran will still derive revenues from their sales. These revenues will easily be applied towards their nuclear arsenal/construction. One need only look at the model employed by North Korea. Their country is dirt poor yet there objective of building a nuclear device has been achieved in all likelihood.

The objective with Iran is to stop them from building the nuclear bomb. Lower oil prices will not achieve this objective.

Iran vs. Soviet Union
The objective of lower oil prices in the mid 1980s was to bankrupt the Soviet Union and prevent them from growing their military. The soviets depended on their oil revenues to fund their military growth. The Soviet Union could not continue on without the oil revenues. Eventually they didn't even have the money to hold their country together as the economy went from bad to worse. Michael Gorbachev also aided the situation by allowing some new freedoms.

A bankrupt Iran would not stop them from continuing with their desire to achieve nuclear arsenal.

Iran vs. OPEC
OPEC would be badly damaged. Any price cuts would not only bring down the Iranian economy but also the economy of Saudi Arabia and all the rest of the OPEC countries. The OPEC countries are not willing to allow self inflicted wounds to their economies. Damage to the Saudi Economy would do more harm to their economy than Iran. A damaged Saudi economy could drive their citizens to revolt and a more dangerous radical regime could emerge to power in that country.

While there are some countries in the Middle east who would feel uncomfortable with a nuclear Iran all of them would love to see Iran use nuclear force against Israel. Therefore there will be no organized effort on behalf of OPEC (or Saudi Arabia) in driving oil prices to levels that would bankrupt the Iranian economy.

FSU and Lower Prices
Sharply lower oil prices could create incentive for the FSU to sell some of their nuclear warheads on the black market. Iran would be a customer.

In summary, lower oil prices will not stop Iran from building a nuclear arsenal. Investors should doubt any conspiracy theories that surround Saudi Arabia opening the wellheads to flood the worldwide marketplace with oil in order to drive down prices and bankrupt Iran. Such a move would increase instability within Saudi Arabia, threaten the very existence of the Saudi monarchy and would not stop Iran from becoming a nuclear power. The only way to prevent Iran from becoming a nuclear power is the use of military force.

Arena Resources Board Member Chris V. Kemendo, Jr., Passes Away

According to the related press release, "Mr. Chris Kemendo, a member of the Company's Board of Directors since February, 2003, passed away on Friday, January 5, 2007 after a brief illness. Mr. Kemendo served on each of the Audit, Compensation and Nominating and Corporate Governance Committees of the Company. Mr. Kemendo had previously informed the Company of his plans to resign from the Board due to lingering health issues."

The proxy statement dated December 7, 2006 indicated that Mr. Kemendo was 85 years old.

This is a good opportunity for each and every one of us to reflect on our life and the fact that our time here is very brief.

We should all pray to our Lord and Savior Jesus Christ so that we may use our limited time wisely, in a way that honors Him and to focus on life eternal instead of the temptations of this world... For more information an online Bible is available for your convenience. The online Bible also has an audio capability compatible with either Real Audio or FlashPlayer.

Arena Resources #84 on IBD 100 List
Report in January 8th Edition

EIA Data Indicates Decreasing Supplies of Crude Oil; Gasoline Demand Higher
Days Supply of Crude oil Declines 3.2% YoY; Gasoline Demand Rises 0.4% YoY

The daily price of NYMEX crude oil for the last week of December 2004 was approximately $42.50 per barrel. Today the daily price is quoted at $57 a barrel. This is a 34% increase in the price of crude oil over the two year span. Even with oil prices rising over 34% during this period domestic crude oil production has managed to slip 1.1%.



This is a phenomenon not unique only to the United States. Rather, it is a challenge facing every oil field in the world. The most notable field is that of Ghawar, the world's largest. It is located in Saudi Arabia and has been in production since 1951. It is a tired old field that is over 55 years old.

Between late December 2004 and today gasoline demand has increased 1.1% from a 4 week average of 9.238 million barrels per day to 9.340 million barrels per day. Gasoline demand increased even though the average price in the U.S. increased 31.6% from $1.77 to $2.33 during the same time period. Whoever says rising prices will kill demand is lying. This is precisely why peak oil is an event that provide longterm investors the money making opportunity of a lifetime.

Days supply of crude oil has decreased from 21.3 days in the year ago period to the current 20.6 days. This is a 3.2% decline. Gasoline demand has increased from 9.30 million bpd to 9.34 million bpd. This is an increase of 0.4% YoY.

Crude oil imports have declined 695,000 barrels per day or 6.8% from 10.134 million bpd in the year ago period to 9.439 million bpd in the current 4 week average.

In conclusion we have a process in which crude oil supplies are becoming tighter as a result of natural declines in domestic production and cuts in OPEC production. Domestic demand for gasoline continues to rise. The increased demand also serves to reduce supplies as is evident in the declining days supply of crude oil. If Oil prices stay in the mid 50's for any duration expect OPEC to announce another cut in order to defend $60 oil.

Arena Resources Shares are Volatile
Volatility is Normal for ARD Shares

Today oil sold off $2.73 to $58.32 a barrel for the front month on NYMEX. It is precisely at these times that one wants to own an oil company that is a low cost/high margin producer of oil. It just so happens that ARD is the domestic oil producer with potentially the lowest cost structure and the highest margins in the E&P universe.

The decline in ARD shares is due to the selloff in oil as it relates to the warmer than normal winter. Demand for heating is less and consequently the demand for heating oil and natural gas.

Today's Action is Actually a Positive for ARD Shares
The lower oil prices will increase the rate of growth in demand for crude oil. On the supply side the lower prices will actually be an incentive for OPEC to institute a third production cut on top of the previous two cuts of 1.2 million bpd in November 2006 and the one already approved beginning February 1, 2007. It is safe to say that the lower prices for crude oil only make the oil markets going forward tighter.

Additionally the sell-off in ARD shares present investors with an excellent opportunity to initiate or add to positions. The sell-off also give ARD management an excellent opportunity to acquire additional proved reserves on terms favorable to the company. With a credit line of $150 million you can bet Tim and Stan are always looking for an acquisition that makes sense.

Volatility is No Stranger to ARD Shares
On September 22, 2006 ARD hit bottom during a period of selling lasting weeks. The case was made at that time against selling ARD shares. Only 11 weeks later ARD went on to close at an all-time record high of $47.40 on December 8, 2006.

Right now ARD shares are 15.8% below the all-time record close set on December 8. Certainly the shares could trade a bit lower short term. In the longterm one can anticipate a new record high for ARD shares before the end of March 2007.

What Will Drive Share Price?
Drivers in share price will be the reality that demand for oil is increasing. Since approximately 70% of petroleum is used for transportation the most important driver in demand will be gasoline to power the world's ever increasing desire to travel. The warm weather and the lack of demand for heating oil is of secondary importance since a relatively small percentage of crude oil is used for heating. Keep your eye on gasoline demand and crude oil production.

Domestic crude oil production will continue to decline over time. Also we are now at the point where we will begin to see declining imports of crude oil.

With respect to ARD we can expect the 4th quarter operational update in January. We can expect the 2006 year-end production and proved reserves report in February. In March we can expect the Q4 and FY2006 financial and operating results. Investor interest will focus on the presence or absence of crude oil commercial production to date on the Syracuse and Auntie Em properties in Kansas.

In conclusion, volatility with ARD shares is normal. Fundamentally the company is strong. On a macro scale supply and demand issues will push oil prices higher. On a micro scale there are multiple drivers that will push ARD share price higher over the medium and longterm. Enjoy the ride.

Arena Resources #28 on IBD 100 List
Report in January 2nd Edition