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.
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.
posted by -Aztec- at 12:08 PM
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