ARD Concerns over 2006 Reserve Report Confirmed
Company Announces Delay in Issuance of 2006 10K

My Concerns were validated with today's SEC filing. On March 8th I mentioned my concern about the delay in the 2006 proved reserves report when it was stated, "...Investors are left wondering why such a delay in the 2006 reserve report. Are there problems?"

Here is the narrative from the 10NT (A filing to alert the SEC that the 10K will be late):

"Arena Resources, Inc. has engaged an independent petroleum engineering consultant to aid in the preparation of the Company's estimated quantities of oil and natural gas reserves and the related discounted present value of future pre-tax cash flows and standardized measure of discounted future net cash flows therefrom ("Reserve Estimate"). The Reserve Estimate will not be completed in time to enable the Company to complete all of the disclosure required in its Annual Report on Form 10-K..."

Clearly this is a red flag. The question that needs to be asked is 'why is the reserve report late?' There is absolutely positively no excuse. GMXR was criticized for its tardy 10K reports. ARD does not get a free pass. There better be some good reasons for the problem and assurance that it will not happen again.

Maybe we should ask management to give back the stock options that were awarded for 2006 for poor performance in getting the 10K submitted on time. The jury is out until we hear from management. This just seems so uncharacteristic of a Tim Rochford company to be late on an SEC filing. The company has been perfect in on-time performance since company inception back in 2001.

I'm left wondering if Tim Rochford has some health issues/problems. Is this a reason why he created the position of COO for Phil Terry? Given the fact that Tim is so meticulous in his managment style I"m left wondering if he relinquished day to day control of the company to someone ill-prepared to handle the task as a result of some health problems.

I have no information indicating that Tim had any recent health problems but this is the only thing that I can come up with. The other scenario would be some serious problems with the Fuhrman-Masscho property as it relates to the natural declines. In the Q3'06 conference call there was mention of secondary recovery techniques being utilized on the new wells being drilled. Could this fact coupled with some large natural decline rates have painted a grim picture in the mind of the independent petroleum engineering consultant? Maybe the final results of the petroleum engineer were not to the liking of ARD management. Maybe ARD decided to take the time to get a second opinion in order to challenge the initial report? While both of these scenarios are serious they can not be dismissed by investors at this time. I would expect ARD shares to decline in trading on Monday by a significant amount.

Why Lionore Mining Ownership is so Attractive
Nickel Miner Will Capitalize on Worlwide Demand Exceeding Supply in 2007

Previously it was noted why ownership of nickel producer Lionore mining is so compelling based on superior fundamentals and extreme undervaluation. Today nickel is at another record high based on supply & demand issues. Bloomberg.com describes the problem in an article entitled, "Nickel Rises to a Record for Fourth Day as Stockpiles Plunge."

Share ownership in ARD is nowhere near as attractive as share ownership in Lionore Mining (LIM.to / LMGGF.) Right now one can purchase over 3 shares of Lionore Mining for every share of ARD sold. This is an incredible opportunity given the fact that each LIM share is at least as valuable as each ARD share based on superior fundamentals as previously described. Don't be surprised to see the ARD/LIM ratio diminish to 2 to 1 in the near future.

The Last of ARD Shares Liquidated Today
ARD Shareholder July 29, 2005 -March 8, 2007

I remember the day July 29, 2005 with clarity and excitement. It was on this day that I decided to sell my GEOI in the $14-$15 range and move it into ARD in the $13-$14 range. My decision was based on logic and simple 8th grade math. ARD was superior to GEOI in terms of fundamentals, had far more oil assets per share, better future growth prospects, better management, and was significantly undervalued. The fact that ARD shares closed today at $44.67 and GEOI closed at $5.82 proves that the average person can do very well in the market by using simple logic and 8th grade math to take advantage of short-term inefficiencies in valuation. Long-term the market tends to get valuations right.

Today I sold the last of my ARD holdings and moved them into nickel producer Lionore Mining (LIM.to.) Lionore is traded on the Toronto Stock Exchange. Lionore Mining exhibits the same characteristics that ARD did back on July 29, 2005 except that Lionore has even better fundamentals, future growth prospects and an even higher degree of undervaluation. The company is so undervalued it is absolutely ridiculous.

The driving forces that led me to begin a quest to search for another company was the reality of slowing future production growth, revenues, net income and EPS. This concern was underscored when ARD appointed Phil Terry as Chief Operating Officer with a salary of $160,000. The creation of this new management position was in my mind the beginning of increased bureaucracy and higher costs and the end of the darling lean mean low cost company that I had grown to love. On top of that my analysis has indicated Q4'06 earnings of $0.36. The Wallstreet consensus is for $0.46. I expect up to a 21% miss in earnings. Certainly my number is conservative. In any case there is no way ARD will meet or exceed the consensus of $0.46 based on production of 325,000 BOE.

I don't believe the 2006 reserve report will surprise anybody. It is expected that they should increase by at least 40.2%. A miss would cause investor disappointment. Investors are left wondering why such a delay in the 2006 reserve report. Are there problems?

I believe investors have their heart set on commercial oil production in Kansas. Everyone is holding their breath on the results of the joint venture exploratory well that has been drilled on the Syracuse property in Kansas. If there is no oil then that will only cause disappointment.

One issue that has flagged my attention on the cashflow statement is the fact that even with all the capex spending the last 2 years cashflow from operating activities are still nowhere close to funding 100% of the capex program for 2007. The latest 10Q reveals $2 going out the door for every $1 that comes in the door. Compare the cashflow from operations of $30 million vs. Cashflow used in investing activites of $62 million. (See page 6 of 10Q.) This is not a good cashflow model.

Lionore Mining is the opposite. It has over $2.50 of cashflow from operations for every $1 of cashflow used in investing activities. (See page 5 of financial statement.)

My analysis indicates that LIM will earn $3.20 U.S. in FY2007. ARD is forecast to earn $2.58 by Wallstreet analysts. I feel the $2.50 range is reasonable. Based on ARD share price of $44.67 you could by 3.21 shares of LIM. If you decided to buy the 3.21 shares of LIM instead of the 1 share of ARD you would have earnings power of:

3.21 (shares) X $3.20 (2007 EPS projection) = $10.28.

In other words a $44.67 investment in LIM would yield $10.28 in EPS for 2007. The same investment in ARD would only yield 2007 EPS of $2.58. To put it bluntly, you are getting nearly 4X the earnings in LIM than by owning ARD. This is based on $15 a pound nickel. Currently nickel is worth over $20 a pound.

LIM has a stronger balance sheet, better cashflow and current assets exceed total liabilities. (Ben Graham would be proud!) The company has a demonstrated record of increasing production year after year. Given the fact that LIM takes in over 2.5 times as much as it spends (cashflow from operations vs. cashflow invested in capex and keeping the company running) there are no concerns about secondary offerings, issuance of preferred stock or going deep into debt. The same can not be said about ARD given the fact that its most recent cashflow statement shows over $2 spent for every $1 coming in from operations.

To top it all off LIM has a forward P/E of 4.4 in comparison to that of 17 for ARD. What we have in LIM is a company with better fundamentals, better future prospects, capable management, and extreme undervaluation. LIM should have a forward P/E at least double the current 4.4. This would yield 8.8 and yet nearly half of what the forward P/E is for ARD. (LIM really deserves a forward P/E at least as high as ARD. So you can see the high degree of undervaluation.)

In conclusion, there were events at ARD that got me looking for other investment opportunities. It was LIM's combination of superior fundamentals and incredible undervaluation that forced me to sell 100% of my ARD holdings and put them into LIM. I have been adding LIM (LMGGF) for a number of weeks. My low buy point was in the $9 range on LMGGF. Today LMGGF closed at $13.82.

I will continue to follow ARD. Since the last of my ARD shares were sold today I felt compelled to explain the reasons for doing so.

Sincerely,
Dok

Note: U.S. citizens can purchase the shares of Lionore Mining via the exchange symbol LMGFF. This is essentially LIM.to except that it is traded in U.S. dollars instead of Canadian dollars. Here is a link to the Lionore Mining website. There is also a wealth of information online about nickel.

Investor Email: Are there Problems with ARD?
Write to me at Doktor_Stocks@yahoo.com

XXXX from xxx@charter.net wrote:
Dok It sounds like you are down on ARD, as is the price of ARD. Something must have changed your mind rather quickly, like the CEO selling somestock. Any other ideas? My email is xxx@charter.net. I am just a simple investor trying to make money.....Thanks in advance for your thoughts.

XXXX,
Its not that I"m necessarily down on ARD. Rather the reason I sold 26% of my ARD holdings was due to the fact that I have found a company with stellar fundamentals that is significantly undervalued in relation to intrinsic value. So basically the fundamentals are superior to that of ARD. Also the other company has a gap between current share price and intrinsic value that is greater than that of ARD. In other words this other company is where ARD was back in 2005 in terms of attractiveness.

Keep in mind that up to this point of 26% of my ARD portfolio being sold I held a very concentrated position in ARD. By shifting some assets out of ARD and into the other company I was not only able to capture some better fundamentals and with a larger degree of undervaluation but I was also able to diversify. This is something I've always wanted to do but not at the expense of investing in a company with inferior fundamentals, future growth or current share price discount to intrinsic value.

On the other hand there have been some events at ARD that have pushed me to search for other investment opportunities. These events include the eventual slowing in future production growth, the creation of a $160,000 a year senior management position (increased G&A), challenges with production in Q4 (there were valid excuses), Tim Rochford selling a major portion of his common shares in 2007 and lack of clarity on status of exploratory well on the Syracuse property in Kansas.

Also I have certain expectations in order to maintain my high degree of investment in ARD going forward. These include but are not limited to the following:

1. Oil in Kansas. Lack of commercial oil production in Kansas would not make me happy. Given the massive acreage in Kansas I would like to start seeing some production from this region. This would also serve to take some of the load off the shoulders of the production at the Fuhrman-Mascho.

2. Q4'06 EPS of at least $0.36. This is a conservative estimate. If ARD comes in below this figure then you know there are some problems with rising costs. Rising costs that I consider to be significant will not be tolerated.

3. Proved Reserves Report for 2006 that has Year over Year growth of at least 40.2%. Anything less than 40.2% growth in proved reserves is an example of actual results coming in below expectations based on information provided by Tim in the previous quarterly conference calls. This report is crucial. It is an indicator as to your piece of the asset pie. The larger the numbers the larger your piece of the pie.

With everything said I still maintain a massive position in ARD. I have a higher percentage of my net worth in ARD than does Tim Rochford or Stan McCabe assuming they take their stock sales and diversify into other investment opportunities. Make no mistake about it: There is no better investment opportunity in the E&P sector right now that has a better combination of superior fundamentals and discount to intrinsic value than ARD.

I still believe in the concept of peak oil. ARD is the most efficient investment vehicle to capitalize on rising future oil prices.

However, we still need to keep our fingers on the pulse of ARD. We need to constantly pay attention to fundamentals and share price discount to fair value. When fundamentals deteriorate and/or share price exceeds fair value then one really needs to have a plan of action. In other words you need to have an idea where to move investment dollars. I currently have a plan with my nickel producing company. I will reveal the name of this nickel producer at or before the release of Q4'06 results. At that time I will discuss the company in more detail.

Until then, sit back and try not to let the volatility of today's markets bother you.

Dok