Arena Resources

2007-03-16T19:43:00.001-06:00

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.

2007-03-15T05:03:00.000-06:00

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.

2007-03-08T18:23:00.002-07:00

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.

2007-03-06T08:55:00.003-07:00

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

2007-02-20T23:01:00.001-07:00

Why my ARD Share Count was Reduced 26% Today
Various Reasons Contributed to Decision; Diversification and More Attractive Investment Opportunity Played Key Role to Sell

Arena Resources' ratio of capex to cashflow from operating activities, EPS per dollar invested and the likely decline in future production growth were three primary factors that contributed to my decision to sell over a quarter of my ARD shares today. Such a sale never would have occurred in the absence of another more attractive investment opportunity.

The other company I moved the proceeds into was just far too undervalued based on the tremendous earnings power per dollar invested (topping that of ARD), cashflow from operating activities in excess of capex by a significant margin (unlike ARD) and production growth that is more secure without the great challenges of the natural declines that occur in mature oil fields such as the Fuhrman-Mascho.

The new company I invested in does not produce oil. It produces a commodity that has the same worldwide supply/demand issues that exist with that of oil. The peak oil problem will have the effect of increasing future demand for this non hydrocarbon as governments seek solutions to rising oil prices by investing in alternative fuels such as ethanol (stainless steel requirements) and hybrid vehicles (nicad batteries.) Both stainless steel and nicad batteries are only two of countless applications that consume a commodity the new company produces.

One should not construe my portfolio rebalancing as a result of glaring red flags at ARD. The more proper assessment would be that the other opportunity currently presents a more significant discount to intrinsic value than does ARD.

Going forward I do have certain expectations for ARD. Failure to meet or exceed my expectations would result in the possibility of future ARD liquidation. The expectations are as follows:

1. Oil in Kansas: The absence of commercial oil production associated with the deep test on the Syracuse in light of the Phil Terry promotion to COO at a salary of $160,000 a year would be a red flag. Only in the presence of oil in Kansas should Phil Terry have been hired. Lack of oil in Kansas noted in FY06 C.C. would yield a red flag.

2. EPS coming in at or Above $0.36: An EPS disappointment below my conservative estimate of $0.36 would yield another red flag. This would be a sign of a cost structure that is rising faster than expected.

3. Proved Reserve Growth of at Least 40.2%: Anything less than a 40.2% increase in year end proved reserves to 42,362,535 BOE for FY2006 would be considered a disappointment. This would constitute another possible red flag.

Even in the absence of potential red flags as mentioned above, a sound business decision could mandate the further decrease of ARD ownership and increase the ownership of the new company. The new company I have moved funds into as mentioned above is a producer of the base metal nickel. Here is the price history of the commodity. This company comprises the second company in my portfolio. After the release of ARD Q4'06 results this company will be revealed.

2007-02-07T17:28:00.001-07:00

ARD CEO Tim Rochford Sells 200,000 Common Shares
Two Day Transaction Size is Record for CEO; Represents First Time CEO has Sold Shares Prior to Release of Reserve Report

The CEO share sale on February 1-2 may seem bearish at first glance due to the number of shares sold. After all, this is the largest block of shares that he has sold in a two day span going back to the birth of the company in 2001. In fact, this is the largest share sale by the CEO in any 30 day span. In 2006 Rochford sold 140,000 shares in a period between September 18 and October 4th. However, one needs to understand that the timing of the share sale is extremely bullish.

Timing of Share Sale is Bullish

This is the first time in the history of the company that CEO Tim Rochford has sold shares prior to the Reserve Report announcement. This is also the first time that Tim has sold shares prior to the release of the operational results of the fourth quarter and full year. Certainly Tim would be subjecting himself to a potential SEC investigation if he sold his shares with either a disappointing reserves report or operational results.

We already know operationally the company produced approximately 325,000 BOE in Q4'06. This is below guidance. However, there were valid reasons for the shortfall in production which will ultimately be reflected in the fourth quarter revenues, net income and EPS. One should expect good news as it relates to the year-end reserve report. Expect at least a 40.2% increase in proved reserves over the previous year.

One should also expect to hear good news as it relates to the Syracuse Project in southwest Kansas with the joint venture partner. Specifically don't be surprised if Tim announces the presence of commercial oil production on this project in association with the St.Louis formation. Expect the partnership to reveal initial development plans. This increased activity in Kansas and the likely presence of oil bearing hydrocarbons fits perfectly with Tim's decision to give the day to day operational control to the newly appointed President and Chief Operating Officer, Phil Terry. The creation of this $160,000 a year position is further proof of the likelihood oil has been found in Kansas. This amount is more than the combined salaries of CEO Rochford, Chairman McCabe and CFO Broaddrick in 2006. Tim is a low cost man. He couldn't justify creating a new $160,000 upper level management position in the absence of significant growth going forward.

Below is a chart indicating ARD CEO Tim Rochford's common stock sales by year. The chart below tells the story of Tim's investment in Arena. The first four years of the company's existence he did not sell a single share nor profit from his investment of time and money. This is especially true given the fact that his annual salary has been no greater than $36,000 a year. Only since 2005 has ARD CEO Tim Rochford finally realized some return on his investment by virtue of his sales of common stock.

The chart below indicates that Tim's holdings are declining over time. The sales of common stock are partially being offset by increases in stock options. The picture below indicates that Tim has not decreased his position significantly in ARD shares and stock options when taken in aggregate. Certainly stock options are comprising a larger percentage of Tim's ARD portfolio.

In summary, Tim is finally beginning to see some return on his investment in Arena Resources. The size of the latest common stock sales should not be viewed as bearish. Instead the timing of these share sales should be clear indication of good things to come. His ownership in the company has not decreased significantly even with the common stock sales as a result of stock option awards. Additionally the appointment of Phil Terry as the new President and Chief Operating Officer at a salary of $160,000 a year is further proof of significant drilling opportunities not only in the Permian Basin but also as they relate to the very probable presence of oil bearing hydrocarbons in the Syracuse Project's St.Louis Formation.

2007-02-05T19:50:00.000-07:00

Michael Savage Considers Presidental Bid
Nation's Third Most Listened to Talk Show Host Mulls Run as GOP Candidate

Click here for the full story.

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2007-02-03T12:02:00.000-07:00

What will GMXR earn in Q4'06?

GMXR should have Q4'06 EPS of $0.13 fully diluted. GMXR earned $0.33 in the year ago period. With the current ttm EPS at $0.88 (according to Yahoo Finance) the $0.20 drop will result in ttm EPS of $0.68. The ttm P/E will balloon to 52 based on Friday's closing price of $35.41. The forward P/E remains over 24 based on Wallstreet consensus of $1.43. The shares are currently overvalued by a significant margin based on fundamentals.

2007-02-02T07:42:00.000-07:00

Why GMXR CFO Ken Kenworthy Sr. should either resign or be terminated
CFO Kenworthy consistently violates the company 'Code of Business Conduct and Ethics.'

GMXR has a 'Code of Business Conduct and Ethics' published on their company website. There are 14 points discussed in this 'Code.' What rules has he broken?

1. COMPLIANCE WITH LAWS
"It is the policy of the Company to comply with all laws wherever it does business."

GMXR CEO Fails to Certify 2005 10K as Required by SEC. Company Forced to Amend 10K. The CFO of GMXR (Ken Kenworthy Sr.) signed section 1350 on the 2005 10K reserved for the CEO; Effectively this made the document non compliant with SEC rules and regulations (laws) as the the SEC requires the CEO to sign the CEO certification (Not the CFO.)

See Photo of CFO signature on CEO certification section

2. RECORD KEEPING
"All Company accounting records and reports produced from those records shall be kept and presented accurately and in accordance with generally accepted accounting practices..."

GMXR CFO consistently puts out inaccurate information. Look at the latest press releases. There is absolutely no excuse for the amount of errors and magnitude of the errors that occurred with two separate press releases within the last week. The first error ridden press release was released on January 25, 2007. Not only was this press release full of errors but the headline in the press release was not grammatically correct and was very poorly worded. Compare the actual headline with another persons idea of how the headline should have been written.

Two days later on January 27, 2007 another press release was issued correcting the multiple errors in the initial press release from two days prior.

Here is one person's take on the errors confessed on January 27, 2007.

Four days later on January 31, 2007 GMXR issued the third public statement in 7 days either containing errors or confessing to them.

Error from January 31, 2007:
* "On January 31, 2007, the management of GMX Resources Inc. (the "Company") determined that its pro forma footnote disclosures for stock based compensation expense...were overstated and therefore not correct."

* "financial statements relating to the 2005 Interim Periods should no longer be relied upon."

3. PUBLIC DISCLOSURES
"We must assure that all disclosures... submitted to, the Securities and Exchange Commission...by the Company are...accurate (and) timely."

GMXR has consistently had problems submitting required SEC filings in a timely fashion:

* GMX RESOURCES INC NT 10-K 3/30/2004; 12/31/2003
PART III - NARRATIVE: The Company was unable to timely complete its audited financial statements for its Form 10-K for the period ended December 31, 2003, because of a lack of personnel and a delay in the receipt of the oil and gas reserve report by the Company.

* GMX RESOURCES INC NT 10-K 4/1/2003; 12/31/2002
PART III - NARRATIVE: The registrant was unable to timely complete its Form 10-KSB for the period ended December 31, 2002 because of reductions in accounting personnel due to working capital limitations.

* GMX RESOURCES INC NT 10-K 4/2/2002; 12/31/2001
PART III - NARRATIVE: The registrant was unable to timely complete its Form 10-KSB for the period ended December 31, 2001 because of a delay in receiving its reserve report from third parties necessary to complete the audited financial statements and other disclosures.

* GMX RESOURCES INC NT 10-Q 5/14/2003; 3/31/2003
PART III - NARRATIVE: The registrant was unable to timely complete its Form 10-Q for the period ended March 31, 2003 because of reductions in accounting personnel due to working capital limitations.

* GMX RESOURCES INC NT 10-Q 5/15/2002; 3/31/2002
PART III - NARRATIVE: The Company was unable to prepare financial statements in sufficient time to permit required review by its auditors.

* GMX RESOURCES INC NT 10-Q 11/15/2001; 9/30/2001
PART III - NARRATIVE: The registrant was unable to timely complete its Form 10-QSB for the period ended September 30, 2001 because of its inability to obtain some of the required financial information from third parties.

4. CONFLICT OF INTEREST:
"Conflicts of interest are prohibited as a matter of Company policy. A 'conflict of interest' exists when a person’s private interest interferes in any material way with the interests of the Company."

GMXR CFO Ken Kenworthy Sr. is the father of GMXR CEO Ken Kenworthy Jr. The frequency, magnitude and kinds of errors committed by CFO Ken Kenworthy Sr. are completely unacceptable for a CFO. Due to the family relationship of these two individuals, the son (the CEO) is not able to discipline the CFO (the father) with an unpaid suspension or termination. Clearly this is a conflict of interest and is in violation of the GMXR published 'Code.'

IN conclusion, CFO Ken Kenworthy Sr. should be terminated or at the very least disciplined (unpaid suspension?) The corporate governance clearly states:

"ACCOUNTABILITY:
Violations of the Code are cause for disciplinary action, which may result in disciplinary action up to and including discharge."

Ken Kenworthy Sr: You are not worthy.

2007-02-01T22:05:00.000-07:00

Matthew Simmons Mentions $300 Oil in Today's Bloomberg Interview

Watch Video

2007-01-27T14:25:00.005-07:00

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.

2007-01-19T16:36:00.002-07:00

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

2007-01-19T12:08:00.000-07:00

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.

2007-01-13T18:44:00.000-07:00

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.

2007-01-11T08:39:00.000-07:00

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.

2007-01-10T09:03:00.000-07:00

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.

2007-01-09T21:10:00.000-07:00

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

2007-01-04T11:35:00.000-07:00

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.

2007-01-03T13:46:00.000-07:00

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.

2007-01-01T20:57:00.000-07:00

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

2006-12-24T18:18:00.000-07:00

Merry Christmas!

Please remember that Christmas is really about the birth of our Lord and Savior Jesus Christ.

2006-12-24T18:13:00.000-07:00

Arena Resources #20 on IBD 100 List
Report in December 26th Edition

2006-12-20T08:57:00.000-07:00

Why Wallstreet Analysts are Biased and Why You may Not want to Take their Advice in Regards to GMXR

My track record on analyzing GMXR is near perfect. Note how my GMXR FY2006 EPS estimate on March 10, 2006 was $0.67 when wallstreet was calling for $1.67. Today Wallstreet is calling for EXACTLY $0.67. My analysis is right on target! Given the fact that the Wallstreet analysts were way off target on their earnings projections in March of 2006 when I was right on target in addition to the fact that the Wallstreet analysts may be biased it would make sense to listen to an unbiased independent researcher such as myself.

Why listen to what I have to say?
1. I understand GMXR fundamentals
2. I understand GMXR earnings potential. Reference my posts on March 10, 2006 and compare them to Wallstreet analysts.
3. I understand GMXR management.
4. I have a proven track record that is archived for all to see.
5. I am unbiased in regards to GMXR. I am neither long nor short the shares. I receive no bonuses if GMXR shares trade higher or lower. The only reason I comment on the company is a result of the benchmarking between GMXR and ARD. (GMXR is part of a 9 company peer group that I use to value ARD.)

Why Wallstreet Analysts may be Biased and Why You may Not want to Take their Advice
1. Their bonuses may be at stake. Failure to meet target prices could cost them personally.
2. The analysts or their firms may be long GMXR Shares. It would be logical for them to try and 'talk the stock higher.'
3. Their jobs may be at stake. Bonuses aside sometimes analysts pay the ultimate penalty for being wrong: their job.
4. They are slow to understand GMXR

What are Wallstreet Analysts Saying Today?
When you read their December 20, 2006 updates please keep in mind that their research may be inherently biased. Therefore, you may not want to listen to their advice.

1. First Albany Capital $61 Price Target. Reiterate Strong Buy Rating
(Analysts Eric Hagen and Rhett Bruno)

2. Capital Southcoast, Inc. $51 Price Target. Reiterate Buy Rating
(Analysts Richard T. Moorman & Christopher George)

3. Ferris Baker Watts, Inc. $70 Price Target. Reiterate Buy Rating
(Analyst Richard F. Rossi)

It is amazing that these three analysts today felt compelled to "Reiterate" their "buy" and "strong buy" ratings. The possible main reason they felt the need to "Reiterate" is due to what they may have at stake personally as mentioned above. All three reports have headlines admitting disappointment in the horizontal well yet price targets and ratings remain unchanged. This is proof that these three firms fail to understand that the value of a company is not based primarily on proved reserves. Rather the long-term value of a company is based on a combination of proved reserves and the profit that can be expected as a a result of producing those reserves, the management team running the company, the fundamentals of the company, and the future growth prospects of revenues, net income and earnings per share.

In conclusion, it is easy to see that the Wallstreet analysts covering GMXR are slow to understand the company and may be biased in their support of the company even after yesterday's press release. On March 10, 2006 the Wallstreet consensus was calling for GMXR FY2006 earnings estimates of $1.67. At the same time I was calling for GMXR earnings of $0.67. Today Wallstreet analysts consensus is $0.67. Clearly Wallstreet is slow to understand GMXR, the fundamentals, what drives profits & valuation and the poor quality management team running the company. One of the main problems with Wallstreet analysis of GMXR is the fact that they focus their valuation on reserve growth while discounting GMXR's lack of earnings power, their high cost structure or the questionable management team running GMXR. Therefore, there are many reasons why you may want to avoid the biased and off-target advice of Wallstreet analysts and instead listen to on-target and unbiased logic.

2006-12-19T16:36:00.000-07:00

Seven Secrets the Kenworthys' do Not want You to Know
Today's Press Release Confirms These Findings

In a Yahoo Message board post dated December 14, 2006 entitled, "7 Secrets the Kenworthys' Do NOT Want you to Know," seven reasons were given that cast serious doubt on the GMXR franchise ranging from significant overvaluation of GMXR shares to a GMXR management team that is not talented or detail oriented. One of the seven 'secrets' includes my near perfect track record on analyzing GMXR. Note how my GMXR FY2006 EPS estimate on March 10, 2006 was $0.67 when wallstreet was calling for $1.67. Today Wallstreet is calling for EXACTLY $0.67. My analysis is right on target!

Of the, "7 Secrets the Kenworthys' do NOT want You to Know" there are three that apply to the press release issued today after the market close on December 19, 2006.

The 'secrets' that apply include:
1. Secret #2 (high cost structure; horizontal well project producing at a loss.)
2. Secret #5 (Poor management team; Lack of talent & detail orientation.)
3. Secret #7 (My analysis on GMXR has been on target; Wallstreet is slow to understand GMXR)

Certainly connections can be made with all seven 'secrets' as they pertain to the press release but the above three need to be emphasized in relation to the high probability of failure with the GMXR horizontal well project.

Secret #2 High Cost Structure/ Horizontal Wells Economic Failure
GMXR has an extremely high cost structure and it is only going higher. Why? Horizontal drilling is very expensive. GMXR will more than likely be losing money on the projects. Drilling expensive wells when NG prices are low and headed lower is not a good business decision.

Let me repeat a key phrase in Secret #2: "GMXR will more than likely be losing money on the projects."

In the press release Ken Kenworthy Jr stated that the production rate from the completion is, "below expectations."

GMXR CEO Kenworthy Jr. indicated that the horizontal wells could be money losing projects when he emphasized, "We need 4 BCFE ultimate recovery per horizontal well at a finding cost of $1.25 per mcfe to justify a change from vertical development and it could take several wells to judge whether these efforts are going to provide the necessary results."

Secret #5 (Poor Management at GMXR; Lack of Talent and Attention to Detail)
GMXR has a management team that could easily be classified as poor. CEO Ken Kenworthy Jr. and CFO Ken Kenworthy Sr. lack the qualities of a superior management team in that their decision making skills are poor and could be classified as careless and reckless towards the shareholder's investment in the company and the success of GMXR. In addition the GMXR management team lacks the necessary attention to detail that is an absolute requirement of any senior leadership role.

One problem caused by a lack of attention to detail resulted in the CFO Ken Kenworthy Sr. signing the CEO certification of the 2005 10K. The CEO certification is reserved for the CEO and signifies that the 10K complies with the requirements of the SEC Act of 1934 and that the information contained in the report fairly presents the financial condition and results of company operations. Ultimately an amended 2005 10K report had to be filed.

Another problem caused by a lack of attention to detail resulted in GMXR filing 6 SEC filings late in the last 5 years. This is not normal to be late on so many SEC filings. As an example Arena Resources has been in business since 2001 and has submitted every SEC filing ontime. There is absolutely no excuse for a late filing.

What are some examples of poor decision making skills? In a Q4'05 conference call that took place in March of 2006, Ken Kenworthy Sr. noted his desire to saddle GMXR with $50 million in debt and to find, "the best deal." It is important to note that even the 'best deal' could be one that is not worth taking. Drilling the expensive horizontal wells at a time when natural gas prices are weak can only lead one to believe that the 'best deal' was a gamble (high risk/high cost bet) on a project with a low probability of economic success.

By stating in the press release, "We need 4 BCFE ultimate recovery per horizontal well at a finding cost of $1.25 per mcfe to justify a change from vertical development and it could take several wells to judge whether these efforts are going to provide the necessary results," the CEO is admitting that 'the best deal' is now presenting the likelihood of failure if ultimate recovery is less than expected or production costs are higher than expected. If natural gas prices soften as a result of warmer weather this expensive horizontal well drilling project would be a significant loss for GMXR and the shareholders.

Another drawback to the horizontal project is the fact that it will take several more wells to judge the longterm viability of the entire project. In other words the stakes must be raised where there is already disappointment in terms of production coming in "below expectations."

Superior management teams do not make decisions that are setups for failure.

Clearly this project was a setup for failure and the best deal was nothing more than a gamble. This is especially true given the fact that GMXR is a company with a very high cost structure as noted in secret #2.

Secret #7 (My analysis on GMXR has been Near Perfect; Wallstreet is Slow to Understand GMXR)
My track record on analyzing GMXR is near perfect. Note how my GMXR FY2006 EPS estimate on March 10, 2006 was $0.67 when wallstreet was calling for $1.67. Today Wallstreet is calling for EXACTLY $0.67. My analysis is right on target!

In conclusion, GMXR presents many risks to investors as stated in the post, "7 Secrets the Kenworthys' do Not want You to Know." The press release today confirms these findings.

2006-12-16T09:31:00.000-07:00

Arena Resources #10 on IBD 100 List
Report in December 18th Edition

2006-12-13T06:36:00.000-07:00

Exxon Op-Ed Article on American Energy Security Unbelievable
Either Exxon intentionally misleading public or leadership is unqualified

An op-ed article entitled, "A World of Energy: Americans get oil from many sources - and this makes supplies more secure" is clear indication that America's largest oil company is either intentionally trying to mislead the public or they have leadership that doesn't understand the fungible characteristics of the world oil market.

Here are a couple points in the article that give the reader the idea that our supplies (and ultimately the price at the pump) are secure:

1. "A truly global market in oil, with multiple suppliers around the world, helps to mitigate the impact on the United States if supplies are disrupted in any one country or region."

If supplies are disrupted, the primary impact will be a significant rise in oil prices. The number of countries that supply oil to U.S. consumers has absolutely no impact on prices as the commodity is fungible.

2. One paragraph states the importance of Middle East oil production but downplays that importance by stating, "But it is important to remember that many different oil producers are competing for access to American consumers."

The statement above may have been true in the early days of oil production where company's such as Standard Oil were looking to secure a base of consumers for their newly found 'rock oil.' Today oil company's produce as much as they can. The concern is not a lack of market to consume the oil produced. Rather the concern is usually declining production growth and difficulty in growing proved reserves. The more correct statement would be that, "American consumers compete for access to oil."

3. The subtitle states, "Americans get oil from many sources - and this makes supplies more secure."

Since oil is a fungible commodity the above statement is false. There is no correlation between an increased number of suppliers and increased "security." The U.S. had many sources of oil during the 1973 oil embargo and our oil supplies were anything but secure. According to the EIA, the U.S. imported 11.9% of product supplied from the Persian Gulf in 2005. This is significantly higher than the 4.9% imported in 1973.

In conclusion, since the executives at Exxon must understand the fungible nature of the worldwide oil markets it is obvious that the op-ed piece is simply propaganda designed to mislead an extremely uninformed American society. Future oil supplies (and prices) are anything but secure.

2006-12-12T07:09:00.000-07:00

Why Value ARD Proved Reserves Based on NYMEX Prices?

One "investor" seemed offended at the thought of valuing ARD proved reserves based on the current NYMEX commodity prices. Most people probably feel the same as this "investor" in that it is "illegal" to value a company's proved reserves based on the spot price of oil and gas. The herd mentality of valuing proved reserves only serves to reduces ones ability to understand the fundamentals and intrinsic value of a company.

Valuing proved reserves at full value is helpful in determining the true value of reserves that will one day be produced. While it is true that if ARD sold a portion of their unproduced reserves they would receive far less income per BOE than if they actually produced the oil, it is important to keep in mind that ARD is in the business of PRODUCING their reserves....not selling their reserves prior to being produced.

Secondly, NYMEX market rates for crude oil provides superior transparency and visibility as to the value of produced oil due to both the frequency of the transactions and also the fact that transactions involve oil only and are paid in U.S. dollars.

On the other hand, there is far less visibility and transparency in valuing proved reserved based on what one would expect to recieve by selling the reserves that are still in the ground. Why? Transactions such as these are not only rare but almost always involve many other assets besides the proven reserves and the medium through which the deal is conducted often times involves both cash and stock. In other words, the additional variables involved in transacting proved reserves prior to production provide less visibility and transparency than that of oil of which is produced and sold on the open market.

Therefore, by using the market rate at which oil trades on NYMEX as a basis for valuing proved reserves, one can have a much clearer understanding of the intrinsic value of a company. This understanding is significantly enhanced when comparisons are made between the company being studied and that of a peer group. Ultimately we base the value of the proved reserves on net income the company can expect to generate as a result of producing the proved reserves on a per share basis.

This topic was blogged about on March 14, 2006.

2006-12-08T21:45:00.000-07:00

ARD Closes at Record High of $47.40
Record High of $47.70 set Intra-Day on December 8, 2006

Excellent Fundamentals, superb management, extreme undervaluation and significant margin of safety are drivers of the share price.

2006-12-07T17:20:00.000-07:00

The Dirty Little Secret the Government Does Not Want You to Know About Ethanol

Click here => Dirty Little Secret

2006-12-07T08:42:00.000-07:00

Arena's Acquisition in Permian Basin: Points to Ponder

* Spend $0.36 per share and increase value by $16.20
* Shareholders receive value that is 45X greater than the cost.
* Original acreage on Fuhrman-Mascho was 12,000 acres; Acquisition increases property size 5,000 acres to 17,000. This represents an increase of over 41%.
* Arena will be the operator and have an average working interest of 97% and average net revenue interest of 74% in these properties; Original sections of F-M have working interest of 100% and net revenue interest of 75%
* New sections of Fuhrman-Mascho will reduce ARD costs to develop by 3% as a result of only a 1% reduction in revenue. (See bullet point above.) ARD continues to emphasize being the low cost operator.
* The Leases are contiguous to the Company's Fuhrman-Mascho lease acquired in December 2004. This is a smart acquisition that not only adds value via increased acreage and proved reserves but also enhances value of pre-existing F-M property as a result of location.
* Arena's engineering team has identified 90 new drilling locations on 20 acre spacing. How many drilling locations are available with 10 acre spacing?

2006-12-07T08:17:00.000-07:00

ARD Limit Order Filled @ $46.61
Today's Acquisition Increases Value per Share by over $15 ; Management Team is Best in the Business

Today's press release reads: Arena Resources, Inc. Adds 4.7 Million Barrels of Oil Equivalent of Proved Reserves in Permian Basin

How does the acquisition add over $15 per share in value? Let's take a look at the math:

Assume the following:
Share Count (fully diluted)..........17.0 million
Proved Reserves Oil Added..........4.7 million BOE
Acquisition cost...............................$6,117,500

This deal adds oil proved reserves per Share as follows:
4.7mm BOE / 17.0 mm Shares = 0.27 BOE/Share

How much is the 0.27 BOE/share worth?

Lets value the proved reserves at $60/ BOE.

0.27 (BOE/Share) X $60 = $16.20

Acquisition costs were almost $6.2 million. How much were acquisition costs per share?

$6.2 million / 17mm (shares outstanding) = $0.36

The net gain in value of proved reserves per share is as follows:
$16.20 (value of oil) - $0.36 (Cost of oil) = $15.84

In summary, this deal adds over $15 in value to oil proved reserves per share at a cost of only $0.36 per share. This is a deal that is without a doubt stacked in favor of the ARD shareholders. However because the sellers are also receiving ARD shares it is a win-win situation for both parties involved. Congratulations are in order for Tim and Stan for a job well done!

2006-12-06T23:42:00.000-07:00

ARD Closes at Record High of $46.50
Record High of $47.09 set Intra-Day on December 6, 2006

2006-12-05T16:00:00.000-07:00

ARD Closes at Record High of $45.76
Record High of $46.09 set Intra-Day

2006-12-04T14:59:00.000-07:00

ARD Closes at Record High of $45.10
All-Time High of $45.85 set Intra-Day

2006-12-04T14:49:00.000-07:00

ARD Limit Order Filled @ $45.49
The Shares Remain Undervalued

2006-12-02T07:09:00.000-07:00

Arena Resources #11 on IBD 100 List
Report in December 4th Edition

"Oil and gas producer owns 10 straight quarters of triple digit revenue growth."
~Investors Business Daily

2006-11-30T18:05:00.000-07:00

Dr. Albert Bartlett: Arithmetic, Population and Energy
9th Grade Math is Used to Describe Infinite Growth in a Finite Environment

Read the transcript as you listen to the video segments:
Transcript, Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7

If you have RealPlayer you can also access the video Here.
You can also download the Audio (mp3) Here.

This is a very interesting presentation by retired Professor of Physics from the University of Colorado in Boulder, Dr. Albert Bartlett.

2006-11-29T17:56:00.000-07:00

ARD Closes at Record High of $43.81
Record Close is also the Intra-Day High

2006-11-29T09:42:00.000-07:00

Can GMXR and ARD be Compared to Determine Valuation, Fundamentals, Performance and Margin of Safety?

One investor questions the legitimacy of comparing the two companies by stating, "They are completely opposite focused investments (oil versus natural gas). Anyone who would try to compare them is living in a dream world or is looking through blinders."

Here is my response.

2006-11-29T08:48:00.000-07:00

Why Owning GMXR Shares is a Risky Proposition

Preferred Stock Offering
The latest GMXR 10Q stated on page 10, "On August 8, 2006, we sold 1,800,000 shares of our 9.25% Series B Cumulative Preferred Stock at $25.00 per share. Additionally, the underwriters exercised their option to purchase up to an additional 200,000 shares of Series B Cumulative Preferred Stock, resulting in a total offering size of $50 million. The closing of the sale of the 2,000,000 shares occurred on August 11, 2006."

The 10Q went on to state, "The initial annual dividend on each share of Series B Cumulative Preferred Stock is $2.3125 (an aggregate of $4,625,000) and is payable quarterly..."

Lets do the math:

$25(preferred share price) X 0.0925 (interest) = $2.3125

$2.3125 / 4 (quarterly dividend payments) = $0.5781 per quarter.

2,000,000 (preferred shares) x $0.578125 (dividend/share) = $1,156,250 dividend payment per quarter.

In other words the GMXR preferred stock (2,000,000 shares outstanding) will effectively REDUCE GMXR net income by an amount of $1,156,250 each quarter. Since share price is based on EPS longterm, we can expect GMXR share price to be impacted negatively. This fact should be underscored given the fact that the dividend payment each quarter is a significant percentage of quarterly net income.

How would the full dividend payment of $1,156,250 have affected Q3'06 net income and eps?

GMXR net income (before dividend payment) for Q3'06 was reported as $2,860,905. If we factor in the full dividend payment that will be due each quarter the net income available for common shares would have been reduced to:

$2,860,905 - $1,156,250 = $1,704,655

With 11,380,283 fully diluted common shares outstanding the EPS would have been:

$1,704,655 (net income) / 11,380,283 (common shares) = $0.14

In other words EPS for the GMXR common shares (fully diluted)would have been $0.14 after a dividend payment to the preferred stock holders.

What would the EPS have been for common shares if there was no preferred stock?

$2,860,905 (net income before preferred payment)/ 11,380,283 (common shares) = $0.25.

In other words, GMXR common shares would have had EPS of $0.25 in the absence of any preferred stock dividend payments.

In conclusion, we are looking at a situation where GMXR common stock shareholders would have been penalized $0.11 per share in earnings if the full dividend payment were paid out in Q3'06. This effectively would have reduced earnings per share by 44% from $0.25 to $0.11 per share. This reduction in EPS increases the risk of holding the GMXR shares. (Margin of safety has already been eroded as previously discussed in an earlier post.) Any softness in the price of natural gas will magnify the negative impact of the preferred stock dividend on GMXR earnings per share.

2006-11-24T19:38:00.000-07:00

ARD Closes at Record High of $42.47
Why ARD is Really a $53 Stock Today by Virtue of Wall Street 2007 Earnings Estimates

On the GMXR board one poster was wondering why GMXR shares were drifting lower when he wrote, "I see GMXR suffering from some profit taking, especially a couple days the last week or so. Is there any news on the horizontal drilling that pushes it so much lower on days when natural gas and oil are relatively flat. Thanks."

My response is as follows...

Read my blog and type in keyword search, "GMXR." You learn a little bit about why GMXR is overvalued at current price of $42.23.

Here is a good start

GMXR has a forward P/E of 24.4 at current price of $42.23. This is assuming the consensus estimate of $1.73 for FY2007 is correct. Personally I don't see GMXR coming in above $1.25 for FY2007. But to be open-minded lets assume GMXR can come in at $1.73. (Reasons I don't see GMXR coming in above $1.25 eps for FY2007 is the fact that GMXR is paying dividends to the pref.stock holders. Also GMXR has a relatively high cost structure for being a gas producer. Also I have very little confidence in mgmt. They are NOT a talented bunch.

Lets assume $1.73 for FY2007 (to make the die-hard GMXR shareholders happy.)

For the first 9 months of 2006 GMXR had a pretty good increase in oil and gas production. Note that ARD had an increase of 116% YoY vs GMXR increase of 113%:

Chart 1 (Click on image to enlarge)

However, the GMXR earnings per share percent change (YOY) for 9 months ended Sept 30, 2006 was sub-standard. ARD exceeded GMXR EPS during this period by a margin of over 306% (ARD had over 4X the EPS growth of GMXR during this period):

Chart 2 (Click on image to enlarge)

GMXR should have better eps growth given that they had "pretty good" oil and gas production YoY. Part of the problem is the high cost structure of GMXR. Note how ARD has a EBIT margin that is 69% higher than GMXR (ARD 66% EBIT margin vs GMXR 39% EBIT margin.)

Chart 3 (Click on image to enlarge)

Given the fact that:
1. ARD has SUPERIOR Oil and gas production growth in the 9 months ended September 30, 2006 than GMXR and:

2. ARD had over 4X the EPS growth of GMXR during this 9 month period and:

3. ARD has an EBIT margin that is 69% HIGHER than that of GMXR. Keep in mind the EBIT margin does NOT factor in the pref. dividends that are paid to the pref. stock holders. When you factor in the dividends GMXR must pay the pref. shareholders there is even less net income left over for GMXR common stock shareholders and:

4. ARD does not have any pref stock dividend payments like GMXR. This has the effect of increasing growth in earnings power....and

5. ARD has every bit as bright of future as GMXR. Actually that statement is extremely sugar-coated. IF the truth be known: ARD has a future that is much much brighter than that of GMXR with better future production, revenue, net income and earnings growth than that of GMXR. And...

6. Given the fact that GMXR has a forward P/E of 24.4 (even after today's steep decline); ARD only has a forward P/E of 14.8; The average P/E of the peer group** was 18.9; then...

Chart 4 (Click on image to enlarge)

Be it resolved that ARD should have a MINIMUM 2007 Forward P/E of 18.9 (the peer group average) and GMXR should have a MAXIMUM 2007 Forward P/E of 18.9 (the peer group average.)

With GMXR estimated 2007 earnings of $1.73 the current fair market value should be:$1.73 X 18.9 (Forward P/E)= $32.69

With ARD estimated 2007 earnings of $2.81 the current fair market value for ARD should be:$2.81 X 18.9 (Forward P/E) = $53.10

Based on today's closing prices of:
GMXR: $41.99
ARD: $42.47

GMXR is OVERVALUED by:
$41.99 - $32.69 (Fair Value) = $9.30
This represents an OVERVALUATION of $9.30. Based on fair value of $32.69 GMXR shares have 22.1% depreciation potential.

ARD is UNDERVALUED by:
$53.10 - $42.47 = $10.63
This represents an UNDERVALUATION of $10.63. With a share price of $42.47 ARD shares have 25% appreciation potential.

To summarize, ARD clearly deserves an above average forward P/E multiple for 2007. Oil will base and move higher in Fy2007. Keep in mind that the earnings power of ARD in 2007 is greater than the Wallstreet estimate of $2.81. (We will discuss the issue of ARD earnings potential and share price in a future post.) In reality ARD is undervalued today by an amount that is significantly greater than 25%.

GMXR deserves at best the average forward P/E of the peer group and probably a lower one. I am confident that analysts are again over-estimating GMXR earnings capability just like they did in FY2006. Winters are not as cold as they used to be...global warming. This translates into less NG requirements. Also with the advent of LNG shipments, there will be no shortages in the USA. Prices will remain in check for natural gas. Since I feel GMXR earnings estimates from Wallstreet are overstated I feel the depreciation potential today of the GMXR shares exceeds 22.1%.

ARD will grow earnings significantly faster than GMXR. ARD share price will also grow significantly faster than that of GMXR. Since GMXR shares are currently OVERVALUED expect GMXR shares to be lower in FY2007. An investment in GMXR at current prices will go down in value over the next 12 months (barring an unusually cold winter and multiple hurricanes in the GOM in summer 2007.)

The bottom line is this: Sell GMXR. Buy ARD. Do it while GMXR share price is above that of ARD. GMXR shareholders have a GOLDEN OPPORTUNITY to profit from jumping from the OVERVALUED GMXR "ship" to the UNDERVALUED ARD "ship."

My track record of recognizing "sinking ships" and "rising ships" is perfect. God has blessed me with an ability to evaluate companies and make good decisions based on the information.

The choice is yours: Stay on the GMXR ship (Titanic) and go down with the ship to the low $30s (or lower)

-OR-

Put on your lifejacket and jump in the lifeboat (ARD) that will not only preserve your wealth (capital preservation) but also increase it significantly from present levels.

2006-11-22T08:09:00.000-07:00

FPA Fund Letter to Shareholders
Read the discussion on Energy

2006-11-22T07:14:00.000-07:00

ARD Limit Order Filled @ $41.75
Undervaluation Continues to Drive Share Acquisition Program

This order was filled on Tuesday morning. While it would have been nice to have had an order filled on Friday morning when the shares dipped momentarily below $40, I am satisfied with my latest entry point at $41.75. The shares could drift below $41.75 short-term. Long-term these shares are undervalued significantly as indicated in my November 17, 2006 blogpost. I continue to put my money where my mouth is.

2006-11-20T09:07:00.000-07:00

Arena Resources #24 on IBD 100 List
Report in November 20th Edition

Investors Business Daily is a publication that emphasizes trading based on technicals along with a whole host of "trading rules" that can only be characterized as bad advice. For this reason, one should discount the value of the information between the pages. However, due to the fact that the IBD 100 List is a source of ideas for many investors (both retail and institutional) one can not discount the value of being listed #24 on the list. Effectively Arena Resources is getting free advertising for the company and the shares. This fact will put ARD on the radar screen of more investors every day.

2006-11-16T23:01:00.000-07:00

ARD Shares Are Currently Undervalued
Benchmarking Indicates Significant Undervaluation

Benchmarking ARD Production Growth, Earnings per Share Growth, EBIT Margin and 2007 Forward P/E with the Domestic Oil Producer Peer Group Indicates Significant Undervaluation. ARD production and earnings growth for the first 9 months of 2006 is leading the entire peer group. (Click here to learn how the peer group was selected.) ARD also has an EBIT margin that is tops among the peer group. Given the fact that ARD has outperformed the peer group both past and present in addition to a future that is every bit as bright as any company within the peer group it is amazing that ARD has a 2007 forward P/E ratio that is below the peer group average. Based on future growth prospects ARD probably has one of the brightest if not the brightest outlook. Therefore, ARD shares are without a doubt undervalued in relation to the peer group.

The charts below indicate ARD with the blue bar. The average of the peer group is indicated by the red bar. Chart one below depicts ARD production growth of oil and gas exceeding every company within the peer group. In fact ARD oil and gas production is nearly 3 times greater than the average.

Chart 1 (Click on image to enlarge)

Chart 2 below indicates that ARD superior oil and gas production is driving superior earnings per share. It is interesting to note that not only is ARD leading the peer group in terms of EPS growth YoY but the ARD growth rate is over 3.5X that of the peer group average.

Chart 2 (Click on image to enlarge)

Below in Chart 3 we find that ARD is also the leader in EBIT margin. EBIT margin is defined as earnings before income taxes as a percentage of revenues. The fact that ARD is a leader in EBIT margin also indicates that ARD has an extremely low cost structure. Businesses with a higher margin and lower cost structure than their peers deserve a valuation premium. It is amazing how ARD exceeds the company with the second best EBIT margin by a whopping 53%. ARD's EBIT margin is nearly double that of the peer group average. This is truly amazing.

Chart 3 (Click on image to enlarge)

Given the facts above, it is most amazing that ARD superior performance, fundamentals and future prospects are overlooked by virtue of ARD having a below average 2007 forward P/E as indicated in chart 4 below. It is interesting to note that the peer group average 2007 forward P/E is actually 31% higher than that of ARD.

Chart 4 (Click on image to enlarge)

Golden Opportunity

ARD Shares present investors with a golden opportunity to own shares of a superior company at a significant discount to the market. This discount not only provides enhanced share price appreciation potential but also increased margin of safety. With tremendous growth in production and ultimately earnings per share in concert with an increasing 2007 forward PE multiple as the market recognizes the current excessive discount in relation to Arena's peers, these shares are poised for explosive upside potential. In other words, ARD share price will explode to the upside based on growth in earnings as well as P/E multiple expansion. Always remember that the three most important drivers of share price appreciation are (in no particular order): Earnings, Earnings and Earnings.

2006-11-15T18:15:00.000-07:00

ARD Closes at Record High of $41.99
All-Time High of $42.39 set Intra-Day

2006-11-03T17:26:00.000-07:00

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.

2006-11-02T14:58:00.000-07:00

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

2006-11-01T13:47:00.000-07:00

ARD Limit Order Filled @ $34.86
Expect Excellent Q3 Results Friday After the Close

Many wanting to find an entry point before final Q3'06 results are released after the market close on friday (10Q should be posted at this time) will be looking for the right opportunity between now and then.

Without a Doubt ARD is Undervalued

ARD is trading with a P/E ratio of 29 on ttm earnings of $1.18. Factor in expected Q3 results of $0.50 and the ttm earnings increase to $1.40 along with a P/E ratio of only 24. That is a bargain considering that ARD is the leader in terms of low cost structure, high operating margin, net profit margin, production growth, EBIT per BOE produced, cost per BOE produced with a superior balance sheet. The management team is second to none. Look for the company to impress after the close on Friday. Also look for the company to impress on Monday with the conference call. The key will be the results of any 5400'+ wells drilled in Kansas to the St.Louis formation. The results could be exciting. Hopefully there will be at least one successful completion to the oil bearing St.Louis formation.

2006-11-01T10:26:00.000-07:00

ARD Q3 Conference Call Scheduled for Monday, November 6 at 10 a.m. CST
This Company is Extremely Transparent and Predictable: A Good Thing

On October 27, 2006 I posted, "(Don't be surprised if the company 10Q is released after the close of trading on Friday, November 3 with the third quarter conference call to be scheduled promptly at 10 a.m.CT on Monday, November 6.)"

Today (November 1, 2006) Arena Resources made it official: ARD Q3 Conference Call scheduled for Monday, November 6 at 10 a.m. CST.

While I have no insider information I must admit that the company is very transparent and predictable. Five days before the official announcement was made I correctly predicted the exact day and hour of the earnings press release and conference call. (Keep in mind that even thought the company indicates that a press release will be issued the morning of Monday, November 6th, the 10Q will actually be posted after the market close on Friday, November 3rd.)

Stan McCabe's share sale was an indication that Q3 final results will be excellent. Due to my suspicion of the final results being excellent (Stan's share sale) the only logical day to have the Q3 final results and C.C. was on a Monday. That way investors (both retail and institutional) have all week to savor the data and drive the share price higher. The fact that the Q3 press release and conference call are scheduled on a Monday is confirmation that the numbers will be real good.

What can we expect for Q3'06 earnings?
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 14.64mm in Q2'06.)*
(Fully diluted)
EPS: $0.50.......(Up from $0.44 in Q2'06/ $0.27 in Q3'05.)

2006-10-27T21:15:00.000-06:00

ARD Chairman Stan McCabe Unloads 300,000 Shares Between Completion of Q3 and Release of Actual Results
Expect Q3 Results to Impress; The Alternative Would be Insider Trading and an SEC Investigation

It is amazing that ARD produced 295,000 BOE in Q3 along with estimated Revenue of $17.9 million as per the Q3 Operational Update. Expect ARD to impress with final results. Outlook for Q4 should be positive. For a chairman of a publicly traded company to sell at such a sensitive time (after the close of a quarter but before the release of the actual results) in the presence of bad news or simply lackluster performance would merit an SEC investigation for insider trading. (View the SEC filing here.)

The management team at Arena Resources is superior. Any thought of insider trading would be uncharacteristic of such a talented management team. Therefore, one should fully expect another quarter with excellent results to be posted possibly as early as next friday with the company conference call to follow on the following Monday. (Don't be surprised if the company 10Q is released after the close of trading on Friday, November 3 with the third quarter conference call to be scheduled promptly at 10amCT on Monday, November 6.)

2006-10-23T18:23:00.001-06:00

Can Saudi Arabia Expect to Top Record Oil Exports of 1980?
Geology of Oil Fields and Saudi Population Growth may Make such a Feat Impossible

Saudi Arabia is the world's largest producer of crude oil. In 2005 Saudi oil production was estimated at 9.3 million barrels/day (b/d.) Based on total worldwide production (84.3 million b/d) Saudi production accounted for 11%. Since Saudi Arabia is the world's largest producer of oil it is only logical that their production, consumption, and exports should be under the microscope and closely watched.

In his book, "Twilight in the Desert," Matthew Simmons pieced together the evidence that indicates major problems with Saudi Arabia's major oil fields and specifically the world's largest: Ghawar. Many of the problems originate with the fact that the largest oil fields were discovered first. Hence they are the oldest. Elderly oil fields tend to have 'health problems' just like elderly people do. In the case of old oil fields the major problem is declining production. Certainly there are steps that are taken to treat the 'symptoms' of declining oil production. Over time maintaining (let alone increasing) production becomes very challenging.

While many focus on the problems associated with the Saudi Oil fields one must not discount the problems created by Saudi Arabia's increasing population. Saudi Arabia is a country with a rapidly expanding population. Between 2000 and 2005 the Saudi population increased by an average of over 600,000 people each year. The chart below depicts yearly estimated Saudi population between 1960 and 2005.

(Chart 1)

(click on image to enlarge)

The chart above depicting Saudi population (Chart 1) indicates that the population was 9.6 million people in 1980 and 23.9 million people in 2005. In other words the population was just about 2.5 times larger in 2005 than in 1980. This change took place in a span of 25 years. With a growing population it is only evident that the Saudi society will have larger oil requirements. Chart 2 below depicts Saudi refined product consumption between 1960 and 2005.

(Chart 2)

(click on image to enlarge)

Again if we take a look at 1980 it is noted that the refined product consumption was 407,000 b/d as noted in chart 2 above. In 2005 internal consumption increased to 1,227,000 b/d. During the 25 year span between 1980 and 2005 Saudi refined product consumption more than tripled.

Based on this fact it should be extremely evident that Saudi oil exports will be limited not only by the geological problems associated with production but also with the country's internal thirst for oil consumption.

The chart below (chart 3) highlights Saudi oil production, exports and consumption between 1960 and 2005. The red area indicates Saudi production each year in terms of millions b/d. Saudi Arabia's best year was 1980 when they produced an average of 9.9 million b/d. Fast forward 25 years and they were only able to produce 9.3 million b/d. Keep in mind that production is depicted in the red area. In order to match 1980's production level Saudi Arabia would have to increase production by about 600,000 b/d or 6.4%.

Due to population growth we already discussed how Saudi Arabia has increased demand for oil productions as depicted in chart 2 above. In chart 3 below we have determined the amount of oil Saudi Arabia produces and then consumes (demand and/or storage) simply by subtracting published exports from published production figures. The amount of Saudi production that is used within the country is depicted with the green area. In 1980 Saudi Arabia kept 1 out of every 14.1 barrels of oil produced for internal consumption (7.0%). In 2005 Saudi Arabia kept 1 out of every 4.4 barrels produced (22.6%). The pink squares denotes 1980 consumption of 700,000 b/d and 2005 consumption of 2.1 million b/d.

Not only does Saudi Arabia have to find ways to replace production that is lost to geological natural decline in the oil fields but in order to maintain their exports at 1980 levels they must now produce an extra 1.4 million b/d to account for the increase in Saudi oil demand caused in large part to the growth of the Saudi population. One can certainly count on the population to continue growing along with their demand for oil.

(Chart 3)

(click on image to enlarge)

Saudi Oil Exports
The yellow shaded area in chart 3 above indicates the oil that was actually exported. In 1980 total exports amounted to 9.2 million b/d. In 2005 total exports came in at 7.2 million b/d. What caused exports to decline? Actual production declined by 600,000 b/d. Internal consumption of oil increased by 1.4 million b/d. If we add these amounts up we come up with 2 million b/d in reduced oil exports. 2005 Exports would have to be increased 27.7% to match 1980 exports.

In order to export 9.2 million b/d as was done in 1980 and to satisfy the oil needs of the Saudi population in 2005 (2.1 million b/d) total production would have to equal 11.3 million b/d. Given the fact that estimated 2005 Saudi production was 9.3 million b/d we would need to see an increase of 2 million b/d (21.5%) from 2005 levels.

In conclusion, given the fact that Saudi Arabia has serious problems with their oil fields of which most notable is the Ghawar (world's largest oil field) along with Saudi Arabia's growing growing thirst for oil it should come as no surprise that the chances of Saudi Arabia ever matching the level of exports in 1980 is extremely doubtful.

2006-10-18T00:56:00.000-06:00

GMXR Earnings Projections: A Look Back to March 10, 20006
On this Date My GMXR Estimate for FY2006 was $0.67 with Analyst Consensus of $1.67; Which Estimate was More Correct?

On March 10, 2006 my estimate for GMXR FY2006 EPS was $0.67. This estimate was computed and promptly posted on this blog at that time. On this same date (March 10, 2006) the GMXR Analyst Consensus was for $1.67 as recorded by my series of posts on the Yahoo Message Board in March of 2006.

This post dated March 15, 2006 on the Yahoo Message Board indicates my estimate of $0.67 for GMXR in FY2006 as posted 5 days prior on this blog. It was on March 15, 2006 that the analyst consensus estimate was lowered from $1.67 to $1.59 for FY2006.

Fast Forward to October 18, 2006...
The analyst consensus for GMXR FY2006 EPS has dropped from $1.67 on March 10, 2006 to the current estimate of $0.66. It was evident back in March that GMXR was having serious problems with their operation with no chance of posting FY2006 EPS of $1.67. My calculations back on March 10, 2006 that GMXR would earn only a fraction of the consensus Wallstreet estimate is testimony that the average guy can make projections that end up being more accurate than that of the Wallstreet analyst. Many of these analysts have MBAs from Ivy League universities with impressive resumes. While I do in fact have a 4 year degree (Bachelor of Science), it is not in a field even remotely similar to that of the average Wallstreet analyst. I did however take Accounting 101 as well as ECON 101 as electives. In other words, I have no formal education in finance, accounting, business or the like. I feel this is to my advantage (I don't over analyze.) With simple math and a basic understanding of what makes a good company one can look at SEC filings and determine if a company is undervalued. Earnings projections are quite simple and require nothing more than simple 8th grade math skills.

In conclusion, my estimate of $0.67 on March 10, 2006 was $1 below the analyst consensus of $1.67 on this date. In other words, my estimate was only 40% of what Wallstreet analysts were calling for. Today, Wallstreet has lowered their projections in-line with my projections that were made over 7 months ago. Today the Wallstreet consensus is for GMXR to earn $0.66 in FY2006. The fact that my March 10, 2006 estimates for GMXR are looking to be much more accurate than the highly educated Wallstreet analyst is proof that the average retail investor can make better investment decisions and projections based on one's own research. It is my hope that this blog will serve to educate and prove how average retail investors 'armed' with basic knowledge and simple math can "beat the street."

2006-10-16T11:51:00.000-06:00

ARD Limit Order Filled @ $36.63

I'm putting my money where my mouth is. Rational for today's purchase:

1. ARD continues to sell at impressive discount to intrinsic value of shares based on oil assets per share.

2. Production growth continues to impress. (2007 production should be significantly larger than 2006 production.)

3. Oil prices are near a bottom ($58-$59 range.) OPEC will conduct an emergency meeting on October 19, 2006 to discuss and work out details of at least a 1 million bpd production cut.

4. Elections are 16 trading days away. Investors (both retail and institutions) will pour vast amounts of money into oil and gas equities in anticipation of post election rise in oil prices. This is already starting to happen.

5. Tim Rochford filing to sell 100,000 shares on October 8, 2006. (News release posted on October 13, 2006.) Because Q3 is complete and the results have not yet become public any share sale by the CEO as a result of a quarter with lackluster results or worse would lead to SEC scrutiny. In other words, Tim Rochford (ARD CEO) would be unwise to sell 100,000 shares with any kind of disappointing Q3 results in any way shape or form. One can conclude that Q3 was a success in terms of revenues, production, net income and EPS.

6. ARD management continue to hold sizeable position in ARD shares.

7. The St.Louis formation (oil bearing structure at 5400'+) in Southwest Kansas could be of a magnitude of Furhman-Mascho or larger. ARD will drill 1-2 test wells in this formation during Q4. By the time the Q3 C.C. rolls around in early November there could very well be some initial results to report. This could be a wild card.

8. The shoulder season is coming to an end. We are now entering the winter heating season.

9. By Q1 of 2007 ARD should report a large increase in proven reserves (mostly oil.)

In conclusion, there are currently a significant number of drivers to push ARD share price higher from current levels. Expect a new record high in ARD share price before year end.

2006-10-07T14:37:00.001-06:00

Q3 Operational Update Commentary

Operationally the company met or exceeded every projection from the Q2'06 C.C. with only one exception. The lone exception was a projection of 6 development wells on Seven Rivers Queen to be drilled in Q3. There were actually 2 wells drilled on this property. In order to meet the total wells drilled projection for Q3 the company drilled 3 extra wells on the Fuhrman-Mascho property, 1 extra well on the Eva South property in OK, and 1 extra well on the Ona Morrow property in OK. (Keep in mind that if one added up all the individual wells to be drilled by property as projected in the Q2'06 C.C. the total would come out to 35. However, the company projected 36 total wells at that time allowing for one additional well to be drilled somewhere.)

ARD Incremental Oil and Gas Production

The quarter over quarter growth in total oil and gas produced was very impressive. The incremental increase produced (Q3 over Q2) was about 53,940 BOE (295,000 to 241,060 BOE.) The previous quarter (Q2) saw a quarterly incremental increase of 50,271 BOE (241,060 to 190,789.) On an absolute basis the change in incremental oil and gas production between Q3 and Q2 when compared to Q2 and Q1 increased 3669 BOE. This translates into a 7.2% increase in absolute incremental production in the Q3-Q2 period over the Q2-Q1 period. Considering that this increase occurred in the face of the natural declines in the ever expanding inventory of wells says a lot. To be clear, it means that the 295,000 BOE produced was very impressive.

We should realize about 85% of total production being oil. This is down slightly from the 86.2% reported in Q2. Given the fact that NG prices are so depressed and given the fact that the vast majority of domestic E&P companies have well under 50% of total production being oil, one should expect Arena Resources to command an earnings multiple premium to other oil and gas producers.

Benchmarking ARD with 2 Other Companies

Currently ARD shares command significant value based on the fact that comparisons to other companies with larger market caps (slower growth prospects) and/or higher percent production being NG reveal that the other companies in the comparison have a higher earnings multiple than ARD. In other words 2 other companies that are fundamentally inferior with slower growth prospects have an unjustified earnings multiple premium when compared to ARD.

For example UPL is growing production, revenues, net income and EPS slower than ARD (ARD has the better future prospects.) UPL also has a higher percent of production in NG. Currently the market is giving UPL an earnings multiple of 29 in comparison to the ARD earnings multiple of 28.

One other example of the ARD earnings multiple being lower than another company that produces a significantly lesser amount of oil as a percentage of total production is GMXR. GMXR has less than 10% production in oil. Also GMXR growth in production, revenues, net income and EPS is much slower than ARD. (ARD has the better future prospects.) Currently the market is giving GMXR an earnings multiple of 38 in comparison to the ARD earnings multiple of 28.

Since ARD will grow earnings faster than both UPL and GMXR we can also conclude that ARD currently has a lower foward PE than both UPL and GMXR.

Expect that ARD earnings multiple to continue to expand back into the mid 30's or higher.

What can we expect for Q3'06 earnings?

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 14.64mm in Q2'06.)
*(Fully diluted)
EPS: $0.50.......(Up from $0.44 in Q2'06/ $0.27 in Q3'05.)

The projected quarter over quarter decline in net profit margin is a result of the potential for "other expenses" increasing due to NYSE listing fee requirements of at most $150,000. We'll have to wait and see how much of the listing fees are expensed in the third quarter. In terms of EPS this ($150,000) amounts to one penny ($0.01.)

Ttm Earnings will increase to $1.40. Put a earnings multiple of 29 on these earnings and you have a share price of $40.60. A more realistic multiple would be 35. This would yield a share price of $49. (One Wall Street firm recently put a target price on ARD shares of $49.)

The 1 year chart below indicates that ARD has been making higher lows and higher highs.

ARD 1 Year Price Chart

Expect the trend to continue as ARD earnings per share increase over time. The three most important drivers of share price appreciation are earnings, earnings, earnings.

2006-10-02T20:48:00.000-06:00

Hypothesis on Why Oil Declined From $78 in August to Low $60s if in Fact Peak Oil is Real

When supply is closely matched to demand little things can cause the price of oil to fluctuate significantly. For example such things as a hurricane in the Gulf of Mexico, a colder than normal winter, oil worker strike in Nigeria, concerns on Iran, sabotage can cause the price of oil to fluctuate significantly higher.

In contrast there are events that can also cause the price of oil to fluctuate significantly lower even though supply is closely matched with demand. Such events include a warmer than normal winter, a lack of hurricane activity in the Gulf of Mexico, lack of concern over Iran, U.S. government decisions, higher than average inventory levels to name a few.

We have been lucky with world events since August of 2006. In this time concerns over Iran have declined. Actually since autumn of 2005 we have been very lucky by virtue of having experienced a warmer than normal winter along with an absence of hurricanes this year in the Gulf of Mexico. Inventories have been built up for a worst case scenario (cold winter, hurricanes, problems with Iran, etc) and we have in fact experienced a best case scenario.

So here we sit with oil inventories at 5 year highs and the price goes down from $78 a barrel in August to the low $60s currently and now Wall Street analysts, the media, traders who are short oil and economist claim that there was never any Hubbert's peak and that peak oil was a myth because, "The price has gone down."

This feeling that low oil prices are here to stay or that they may even go lower will quickly be dispelled as soon as we experience a little bit of bad luck such as a colder than normal winter, Iran becoming an issue again, OPEC announcing significant cuts, a hurricane, natural disaster, terrorism, or quite simply the passage of time. As time passes the gap between supply and demand will become even tighter or worse: demand exceeding that of supply. One can certainly expect demand to continue to climb higher especially with current prices. One can also expect worldwide supply to continue to flatten out as the worlds largest oil fields continue to go into decline by virtue of their old age. Spare capacity will continue to be squeezed out of the system with the passage of time.

In conclusion, expect prices to offer significant fluctuations both to the upside and to the downside due to supply and demand being so close. Having a little bit of good luck as previously described will offer a false sense of security that everything is just fine when in fact it is not. It would not be surprising at all to be back above $70 within 3 months time. Enterprising investors will take advantage of any significant market fears of declining oil prices and subsequent market panic selling to increase or initiate positions in quality oil companies or drillers. It is precisely at this time when the outlook appears the gloomiest when ownership in these equities offers the most promise and profits.

2006-09-25T23:04:00.000-06:00

Why an Economic Slowdown in the USA Would Have Little Impact on World Oil Demand
North American Incremental Oil Demand Accounted for only 8% of Total Between 2004 and 2005.

Between 2004 and 2005 world oil demand increased by 1.11 million barrels per day according to the International Energy Agency Oil Market Report dated July 2006. Of this incremental increase of 1.11 MMB/d demand in North America (USA and Canada) increased only 90,000 b/d as depicted in chart 1 below. In terms of percent this amount to just over 8% of the incremental world oil demand between 2004 and 2005 as depicted in chart 2 below.

Chart 1. (Click on Image to Enlarge)

Notice how the Middle East accounted for over 28% of the world incremental oil demand. This is nearly twice as much new demand as that of China between 2004 and 2005. With the new found oil wealth from rising oil prices the countries in the Middle East have vast amounts of money to spend on their economies. There is no doubt that the increase in GPD causes an increase in oil consumption. If you plot total Middle East GPD against total Middle East oil consumption you will see a line that increases against each axis. For more information on this phenomenon read chapter 4 of Peter Tertzakian's book, " A Thousand Barrels a Second."

Chart 2. (Click on Image to Enlarge)

In conclusion, those Wall Street analysts with Harvard MBAs who are worried about a US economic slowdown causing a significant drop in year over year world oil demand will be surprised to find that such an occurrence will have very little affect on world incremental oil demand. Even if growth does slow one can still expect year over year U.S. oil consumption to increase in 2006 and 2007. Now is not a good time to sell quality oil company shares like ARD.

2006-09-23T21:52:00.000-06:00

The End of High Oil Prices and Peak Oil?
Should Investors Sell ARD Shares Based on Decline in Oil Prices?

Volatility in Oil is Normal

This is the shoulder season....for starters. What this means is that the need for oil products is at a seasonal low due to lack of heating and cooling requirements.

The worldwide oil supply and demand the picture is very bullish. Nothing has changed.

Note how Q2'06 supply is less than Q2'05 supply. In fact it is 500kpbd less. Now look at demand. Demand in the most recent quarter in which data is available (Q1'06) is higher than year ago numbers. It is 900kbpd higher.

Now look at this chart:

(Click on Image to Enlarge)

Last year in 2005 we hit about $69 in mid August. The first week of November we hit about $57. This represents a $12 drop or 17%.

Fast forward one year to 2006 and we hit a high in mid August of $78. We are one week from October and at $60. This represents a $18 drop or 23%. This decline has lasted 6 weeks so far.

If we go back to 2004 we see that there was a major sell off in oil prices between October and December of that year. In October 2004 oil hit a new high of about $55. It sold off after making that new high to about $41 in December of 2004. This represented a $14 sell off or 25%. This sell off lasted about 6 weeks.

Percentage wise we may drop another couple percent to hit a $20 drop (25% decline) from our high of $78...maybe close at $58-59 for a day or two followed by a final goodbye to the $50s before oil goes above $60. OPEC may be a driver of pushing oil back above $60 by either announcing a cut or even the mere WORRY of an OPEC oil cut. You can bet that the oil bears will begin to become fearful with their short positions when oil goes below $60.

As far as duration goes we have been in this bearish funk for 6 weeks now. While the sell off in oil lasted longer in 2005 (17% drop) the sell off in 2004 was more pronounced (25%) but the decline was shorter lived (6 weeks.)

ARD Volatility is Normal

ARD has seen two drops in share price in the last year previous to the current decline. On January 23, 2006 ARD closed at a high of $36.47. Six weeks later it closed at a low of $26.33. The represents a 27.8% decline. Keep in mind that the duration of the decline was 6 weeks.

The second occasion in which ARD shares declined had the peak on May 10, 2006 when the shares closed at $36.20. Five weeks later the shares hit bottom on June 13, 2006 when they closed at $26.36. This represented a 27.1% decline. Again the duration was 5 weeks.

Most recently ARD hit a high of $40.64 when it closed on August 26, 2006. Yesterday ARD closed at a low of $30.61. This is a decline of 24.6% in a period of 4 weeks. Given the fact that the most recent decline has been more dramatic one should expect the duration to be shorter lived.

In conclusion, based on duration as well as percentage decline I think we are extremely close to a bottom. Contrary to what some have said we have NOT broken a multi-year upward trend. The worldwide supply demand issues have not changed. The decline in ARD shares is nothing new. Volatility is normal. Don't be fooled into thinking that peak oil, high oil prices and prospects for success at Arena Resources Inc. are over. This is just the beginning.

2006-09-22T08:13:00.000-06:00

ARD Limit Order Filled @ $32.02

I'm putting my money where my mouth is.

2006-09-21T12:42:00.000-06:00

ARD Production Concentrated in Oil
Production Profile Provides Limited Downside Risk with Significant Upside Potential in Current Oil and Gas Pricing Environment

In the latest quarter ARD had 86.2% of its production in crude oil as depicted in the chart below. This is one of the highest oil production percentages in any domestic E&P. Given this fact ARD is insulated to a large degree from the declines in natural gas.

(Click on Image to Enlarge)

Oil prices have fallen about 21% from their highs in the $78 range to the current $61. Even with the significant drop in oil prices ARD is generating tremendous amounts of cash in the current pricing environment. Part of this is due to the low cost structure of ARD. The other primary factor is the high oil production percentages of total production as depicted in the chart above.

Where Do Commodity Prices Go From Here?

There is no shortage in natural gas in North America or worldwide. In fact when Saudi Oil fields go into steep decline they will switch from being major producers of crude oil to major producers of natural gas. Liquid Natural Gas will keep the USA well supplied in the coming years. Certainly there could be a rise in Ng prices if the Gulf of Mexico is hit with multiple hurricanes.

Given the fact that there is limited spare capacity with crude oil, demand worldwide is increasing and supplies are becoming increasingly more difficult to maintain let alone increase to meet the rising demand. One should expect Saudi Arabia and OPEC to defend the price of oil at $60. With that said we are near a bottom in terms of oil prices. In addition many commodity traders and investors feel that the decline in oil is due in part to government shenanigans related to the upcoming elections in November (release of oil from SPR, timing of news release regarding oil find at over 27,000' in Gulf of Mexico, and any other possible government involvement in commodity trading that is "under the table.") Many investors have stated their intentions to buy back into oil as we near the U.S. elections. In any case we have two lines in the sand regarding oil. The first is the $60 line as dictated by OPEC. The second is the anticipation of rising oil prices after the US elections that occur on November 7, 2006.

In conclusion, ARD investors should expect limited downside risk and significant upside potential from current prices based on the ARD production profile of over 86% oil in the most recent quarter.

2006-09-21T09:25:00.000-06:00

U.S. Oil Addiction Index & Peak Oil Meter
For the Week of September 15, 2006

U.S. Crude Production: 5,109,000 bpd
Increase from Year Ago: 609,000 bpd
Percent Increase: 13.5%

Gasoline Demand: 9,229,000 bpd
Increase from Year Ago: 410,000 bpd
Percent Increase: 4.6%

U.S. Average Retail Regular Gasoline Price: $2.49
Decrease from Year Ago: 10.4%

Figures for Year Ago Weekly Amounts:
U.S. Crude Production: 4,500,000 bpd
Gasoline Demand: 8,819,000 bpd
U.S. Average Retail Regualar Gasoline Price: $2.78

2006-09-16T18:36:00.000-06:00

Arena Resources #30 on IBD 100 List
Report in September 18th Edition; Coverage Begins on Page 1B

2006-09-14T09:43:00.000-06:00

GEOI Merger: An Example of How Not to Operate an Oil and Gas Company
Acquisition is Costly to Current GEOI Shareholders

The merger announced today is a bad deal for current GEOI shareholders.

Here's why:

Prior to merger GEOI had about 3.767 million shares outstanding with proved reserves of 2.812 million bbls oil and 232K BOE gas.

Valuation is as follows:
$60 (per Bbl oil) X 2.812 million bbls oil = $168.72 million
$36(per BOE gas*) X 232 thousand BOE gas = $8.352 million

*(6Mcfe = 1 BOE)

Total value of GEOI proved reserves prior to merger = $177.0 million.
Total shares outstanding prior to merger = 3.767 million shares
Value per share proved reserves = $47.00

............Post Merger....................
8.1 million BOE proved reserves. (Lets assume that every BOE is oil.)

8.1 million X $60 = $486 million in value.

Total shares outstanding =3.767mm (pre-merger) + 8,263mm (Southern Bay) + 1,931mm (Chandler) = 13.961 mm shares outstanding.

$486 million (value proved reserves)/ 13.961 million shares = $34.81

Value per share proved reserves = $34.81

What can we conclude?

GEOI shareholders have lost 25% of their proved reserves asset value ($47 to $34.81) overnight. GEOI Shares should be selling off sharply instead of rising. Investors are too quick to associate the word "acquisition" to the phrase,"good for shareholders." This is an acquisition that dilutes proved reserves per share. In other words, the underlying asset value per share has decreased sharply overnight. One should also keep in mind that the figures in the above computation assumed the best case scenario for current GEOI shareholders in that all 8.1 million BOE were 'assumed' to be oil. We all know that is most certainly not the case.

Expect GEOI shares to decline in value to the $4 to $5 range based on a reduction in proved reserves asset value of over 25%.

2006-09-13T22:03:00.000-06:00

U.S. Oil Addiction Index & Peak Oil Meter
For the Week of September 8, 2006

U.S. Crude Production: 5,076,000 bpd
Increase from Year Ago: 808,000 bpd
Percent Increase: 18.9%

Gasoline Demand: 9,368,000 bpd
Increase from Year Ago: 732,000 bpd
Percent Increase: 8.4%

U.S. Average Retail Regular Gasoline Price: $2.61
Decrease from Year Ago: 11.5%

Figures for Year Ago Weekly Amounts:
U.S. Crude Production: 4,268,000 bpd
Gasoline Demand: 8,636,000 bpd
U.S. Average Retail Regualar Gasoline Price: $2.95

2006-09-11T17:08:00.000-06:00

ARD Shares Capitulate on Fear
Arena Resources and the Shareholders are Presented with Opportunity

Yesterday ARD shares closed significantly lower based on fears of Iran cooperation with the west and lower oil prices in the future. From a macro standpoint of oil one should disconnect from the market fears based on the fact that the fundamentals for rising oil prices longterm are in place. Read the books, "Twilight in the Desert" and "A Thousand Barrels a Second" for more guidance on this topic.

Based on a company perspective there is no better oil investment on any exchange that has stronger fundamentals and growth prospects in terms of oil production, revenues, net income and EPS than Arena Resources, Inc. In terms of growth ARD will eclipse the competition and continue to impress. ARD also has the luxury of over 86% in oil production and 82% proved reserves oil. The point is that even if ARD realizes $57 oil per BOE this is significantly higher than those oil and gas companies with a majority of their production in NG. A BOE of NG is currently worth less than $36 based on $6 per Mcfe (6Mcfe = 1 BOE.)

One should not be at all concerned about the recent drop in oil prices. The longterm worldwide supply demand issues remain in place. This fact must be underscored. The decline in ARD share price is an excellent opportunity for those looking to initiate a position or expand their position in ARD shares. Share ownership means you have an ownership in the business. The drop in share price is a good thing in this context. The more irrational Mr. Market the greater the potential profits that can be realized. Mr. Market is currently manic depressive. The current price is very attractive. The lower the price the more attractive the shares become.

The other attractive feature of the current oil selloff is the fact that ARD has enhanced opportunities to make an acquisition at a price that is reasonable. The bargaining power is with the buyer instead of the seller in times like this.

In conclusion, investors in ARD need to view the decline in oil as a positive. The more irrational Mr.Market the greater the potential for reward for both Arena Resources and the shareholders.

2006-09-09T15:43:00.000-06:00

ARD Down 12.3% from 52 Week High
Superior Fundamentals are Intact; Volatility Normal

Worldwide oil supply-demand issues remain in place. China, India and rest of the world continue to exhibit growth in thirst for petroleum. Problems with Saudi Oil fields as well as declines in some of the worlds largest oil fields have not disappeared. Oil sell off is normal as we enter the "shoulder season" (Demand for heating and cooling is minimized between the summer and winter months.) If oil declines further expect OPEC to defend price at $60. The words of Matthew Simmons, Peter Tertzakian, Boone Pickens and Stephen Leeb should be underscored. The fundamentals of Peak Oil remain in place. Just remember that the cure for low oil prices is nothing other than low oil prices.

2006-09-09T15:25:00.000-06:00

Arena Resources #4 on IBD 100 List
Report in September 11th Edition; Coverage Begins on Page 1B

2006-09-07T21:39:00.000-06:00

U.S. Oil Addiction Index & Peak Oil Meter
For the Week of September 1, 2006

U.S. Crude Production: 5,101,000 bpd
Increase from Year Ago: 741,000 bpd
Percent Increase: 16.9%

Gasoline Demand: 9,622,000 bpd
Increase from Year Ago: 595,000 bpd
Percent Increase: 6.5%

U.S. Average Retail Regular Gasoline Price: $2.72
Decrease from Year Ago: 11.1%

Figures for Year Ago Weekly Amounts:
U.S. Crude Production: 4,360,000 bpd
Gasoline Demand: 9,027,000 bpd
U.S. Average Retail Regualar Gasoline Price: $3.06

2006-09-02T15:17:00.000-06:00

Arena Resources #2 on IBD 100 List
Report in September 5th Edition; Coverage Begins on Page 1B

2006-09-01T10:35:00.000-06:00

Why Owning too Many Stocks is Nothing More than a Hedge Against Ignorance
Examination of One Investor's Portfolio Reveals a Serious Problem: Too Many Stocks

Northbeach,
your post indicates that you own way too many stocks in your portfolio. 12 stocks is enough to be considered a mutual fund. Owning so many stocks is nothing more than a hedge against your ignorance.

I have some questions for you:

1. How in the world are you able to follow so many companies at one time? IMHO there is no way you can keep up on all 12 companies without compromising the thoroughness of the information you maintain on each company.

2. Why do you own so many stocks? (Why don't you just own the most promising company in each of your three categories?) I believe I know the answer to this question. You have so many companies in your portfolio that you know very little about each one. In other words, you are hedging your ignorance.

By comparison,
I own only 1 company in my portfolio.

U.S. E&P: ARD (100%)

I am up 41.5% YTD. You are up only 29.3% YTD.

At this time I am not hedging my ignorance. After tremendous amounts of research and analysis I have determined that ARD is fundamentally superior with better growth prospects than any other company in the oil sector. Additionally, ARD has significant margin of safety. In other words, there is a major gap between intrinsic value and current share price. The reason I invest in ARD is to take advantage of Peak Oil. Keep in mind that there is no shortage of worldwide natural gas spare capacity unlike crude oil where there is a shortage of worldwide spare capacity. I'm pleased to announce that ARD is a leader in percentage of oil produced as well as percentage of oil proved reserves (86.2% and 83% respectively.)

sincerely,
Dok

2006-08-31T11:11:00.000-06:00

HELP LANCE CORPORAL ROBERT PENNINGTON!!!

www.DefendRob.com

Update 27 August 2006 Video of Terry on Hannity and Colmes from June of this year is located here.
Update 20 August 2006 Rob's hometown newspaper, The Mukilteo Beacon, has printed a couple of pieces in the last two weeks which are of great value. The first, a news story by Paul Archipley appeared in the August 9th edition of the paper.

And on another front, Rob was finally allowed to see a dentist last week. It took the Marines almost three months to respond to his constant tooth pain. It took them a full week to provide medical treatment for a severely sprained ankle. Would someone like to tell our elected representatives who love to whine about "torture" at the detainment facility at Guantanamo Bay Cuba about the torture that's being perpetrated on our Marine heroes in the brig at Camp Pendleton? I'd love to hear their response to these facts.
Update 16 August 2006 Rob's Article 32 hearing, the preliminary hearing which will determine whether or not he faces general court martial has been scheduled for the 25th of September. Deanna and I plan to attend.

You can now write to Rob directly at:
Lcpl Pennington, Robert B.
Camp Pendleton Brig
Box 555226 Camp Pendleton CA 92055-5226

You can write to the others as well by substituting their rank and name.

Rob is going to need about $100,000 to hire a quality defense team. Currently his family has raised about $33,000. While it is true that the government can provide a defender, it is also true that the skills of that appointed defense lawyer are lacking in a case where Rob's life is on the line.

Please visit Rob's Website for more details on how to help him.

www.DefendRob.com

~Dok~ "God Bless You Rob."

2006-08-31T08:18:00.000-06:00

ARD Co-founders Tim Rochford and Stan McCabe Continue Plan to Grow the Company and Impress the Shareholders
ARD CEO Tim Rochford and Chairman Stan McCabe Ring the opening bell at the NYSE

Today is a very proud day for Arena co-founders Tim Rochford and Stan McCabe and also for the shareholders as well. Tim is standing in front of the podium. The gentleman immediately behind and to Tim's left with the red tie is Stan.

2006-08-31T08:17:00.000-06:00

ARD v SU: Why ARD is the Better Investment
Arena Resources has the Advantage in Terms of Fundamentals and Future Growth Prospects

Analysis of the information and facts reveals that ARD is the better investment based on a whole host of reasons. Lets us begin the comparison and grasp a better understanding of why ARD shares will appreciate faster over time than those of SU.

1. Production Growth: ARD has been growing oil and gas production much faster than SU since 2002. Specifically each company had the following production growth:
______ARD____SU_____
2003:__93%____5%
2004:__73%____5%
2005:__127%__-21%

Average annual production growth for ARD is over 97%. In contrast, SU has been experiencing an average production decline of over 3.6% since 2002. In a best case scenario SU is targeting 350,000 BOE/D for 2008. That is only 10.4% annual growth in production until 2008. ARD will no doubt continue to grow production a rate many times that of SU.

(SU data taken from 2005 Annual report page 5. ARD data taken from various 10K filings.)

2. Revenue Growth
SU: 71% (Quarterly YoY)
ARD: 217% (Quarterly YoY)

Clearly ARD has been growing quarterly revenues faster than SU in the YoY. Also, between 2003 and 2005 SU did not even double their annual revenues. In contrast, ARD increased their annual revenues by a factor of 7.

4. Net Income Growth
SU: 7%
ARD: 244%

The above figures represent average annual growth in net income since 2003. Clearly ARD has significantly superior growth in net income.

5. EPS Growth:
SU: 12%
ARD: 733%

The above figures represent the EPS growth between 2003 and 2005. ARD grew EPS in the latest two year period over 61X faster than that of SU.

6. Share Price Growth:
SU: 200%
ARD: 500% +

As share price longterm is always a function of earnings, the fact that ARD grew earnings faster than SU in the previous two years it should come as no surprise that ARD share price appreciation was also greater. Just remember: The 3 main drivers for share price growth are Earnings, Earnings, Earnings! (Here is the ARD v SU comparison.)

7. Operating Margin (ttm):
SU: 25%
ARD: 65%

ARD is THE low cost producer of oil and gas. Over 86% of production is oil. ARD operating margin is the highest in the oil and gas universe. SU operating margin is average at best.

8. Net Profit Margin (ttm)
SU: 22%
ARD: 38%

ARD is over 72% MORE EFFICIENT than SU in converting revenue dollars into earnings.

9. Debt/Equity Ratio (The Lower the # the Better)
SU: 0.29
ARD: 0.00

ARD is virtually debt free. In contrast, SU has over $2.1 BILLION in debt or 29% debt when measured against the value of its equity.

10. Market Cap (The Lower the # the Better)
SU: $35 Billion
ARD: $571 million

Since ARD has the smaller market cap it will be easier for ARD to double the size of the company from $571 million to $1.142 Billion as compared to SU growing from a $35 Billion company to one of $70 Billion. SU has a lot more resistance in growth potential than ARD. Consequently future share price will be much more limited at SU than at ARD.

The above 10 components of each company's fundamentals is a fair representation of why ARD is the better investment. It should be very clear that ARD has the had the superior grow in production, revenues, net income and EPS and will continue to maintain this advantage into the future. $10,000 invested in ARD today will be worth more on August 31, 2007 than if the money were invested in SU. If anyone wants to put their reputation on the line by challenging this assessment I"d be more than happy to revisit both companies one year from now.

Any takers?

sincerely,
Dok

2006-08-30T22:26:00.000-06:00

Arena Resources Celebrates Transfer to the NYSE
Watch the Event LIVE Starting at 9:26 a.m. ET on August 31, 2006

Arena Resources (NYSE-Listed ARD) celebrate its transfer to the NYSE. In honor of the occasion Chairman Stan McCabe and CEO Tim Rochford ring the Opening Bell.

Click this link at 9:26 a.m. ET on August 31, 2006 to view a live webcast of The Opening Bell.

2006-08-30T11:58:00.000-06:00

U.S. Oil Addiction Index & Peak Oil Meter
For the Week of August 25, 2006

U.S. Crude Production: 5,099,000 bpd
Decline from Year Ago: 328,000 bpd
Percent Decline: 6.0%

Gasoline Demand: 9,610,000 bpd
Increase from Year Ago: 204,000 bpd
Percent Increase: 2.1%

U.S. Average Retail Regular Gasoline Price: $2.84
Increase from Year Ago: 8.8%

Figures for Year Ago Weekly Amounts:
U.S. Crude Production: 5,427,000 bpd
Gasoline Demand: 9,406,000 bpd
U.S. Average Retail Regualar Gasoline Price: $2.61

2006-08-26T09:49:00.000-06:00

Arena Resources #2 on IBD 100 List
Report in August 28th Edition; Coverage Begins on Page 1B

2006-08-22T10:12:00.000-06:00

Author of "The coming Economic Collapse," Stephen Leeb Interviewed

"No one knows for sure. I mean we could discover oil ahh you know in the core of the earth but based upon what we do know right now as we sit yes that's exactly the case."

~Dr. Steven Leeb when asked if we know for sure that demand for oil exceeds supply

Reporter Greg Greenberg from Thestreet.com showing everyone his pierced tongue.

Dr. Stephen Leeb defending himself and Peak Oil against a barrage of questions from an unconvinced reporter.

2006-08-21T15:52:00.000-06:00

ARD Shares Begin Trading on NYSE Effective August 31, 2006
Move is Likely Part of Master Plan Since Inception of Arena Resources

Today's announcement of ARD shares being listed on the NYSE is an important step that enhances ARD value and visibility. To understand today's news we must first review the history of ARD's management team.

ARD CEO Tim Rochford and Chairman Stan McCabe are a pair that have previously worked together. They co-founded Magnum Petroleum in 1989. In 1995 they acquired Hunter Resources and the combined company became Magnum Hunter. Magnum Hunter became a NYSE listed stock in 2002. Eventually it was acquired by XEC (Cimarex) in January 2005 for $2.1B.

One should expect Tim and Stan to use the Magnum Hunter "blue-print" with Arena Resources. One positive is that Tim and Stan not only have a proven track record with their successes with Magnum Hunter Resources but they also have the ability to use that experience as a learning experience and avoid making any of the same mistakes at Arena Resources. In addition the connections and relationships that have blossomed as a result of their dealings in the oil and gas industry will prove to be a significant asset for Arena Resources shareholders.

One drawback of the listing on the NYSE is that it will cost money to do. By looking at the list of fees for the NYSE it seems that there is at least $148,000 in fees to be paid each year. Based on 15.5 million shares this would come out to less than one penny a share in EPS for the year. This is reasonable. In comparison the AMEX has a fee structure of about $21,500 each year based on ARD share count. So in the end it is only costing an additional $126,500 a year or so to be listed on the NYSE instead of the AMEX. This is less than a penny. Given the benefits of being listed on NYSE it is a very small price to pay. Arena Resources is no doubt an example of the biggest little oil and gas company on the planet. The shares deserve to be listed on the most prestigious exchange in the world: the NYSE. This company continues to impress.

2006-08-12T08:46:00.000-06:00

ARD FY2007 Estimates Announced
Expect Revenues of $148 million, Net income of $72.37 million, and EPS of $4.15 on production of 1.85 million BOE in FY2007;

Today will mark the official release of ARD FY2007 estimates. The "official" estimates released today are in essence the 'realistic' projections of a previous calculation of ARD FY2007 estimates. Analysis indicates that ARD will have EPS of $4.15 in FY2007.

To arrive at FY2007 EPS of $4.15 the following was projected:

1. Production: 1.85 million BOE
2. Average Realized Price per BOE: $80
3. Average Net Profit Margin: 48.9%
4. Shares Outstanding: 17.43 million shares

The math is as follows:

Revenue:
1.85mm (BOE) X $80 (ave realized price)= $148 million

Net income:
$148mm (revenue) X .489 (net profit margin)=$72.37mm

EPS:
$72.37 mm(net income) /17.42 million shares = $4.15 EPS

Lets now compare our estimate with that of the Wallstreet consensus estimate. First lets meet the Wallstreet analysts. Everyone but Richard Moorman has a bio online. The current analysts covering ARD include:

1. Philip J. McPherson - C. K. Cooper & Co.
(Director of Research)
* Degree in Economics - East Carolina University

2. Barry Borak - Decision Economics, Inc.
(Sr. Analyst - Energy Sector)
* MBA - Boston College (1990)
* MS Petroleum Geology - Rennselaer Polytechnic Institute (1978)
* BA Geology and Mid-Eastern History/Archeology - Queens College, CUNY (1975)

3. Richard T. Moorman - Capital One Southcoast
(No Bio Available)

4. David M. Heikkinen - Pickering Energy Partners, Inc
(Managing Director)
* MBA - Tulane University
* BS - Mechanical Engineering - University of Missouri

5. Neal Dingmann - Pritchard Capital Partners
(Vice President and senior energy analyst)
* MBA - University of Minnesota

6. John J. Gerdes - Sun Trust Robinson Humphrey
(Analyst - Energy Exploration & Production)
* MBA - University of Chicago (1994)
* BS Petroleum Engineering - University of Tulsa (1986).

The above gentleman who get paid to cover ARD have impressive resumes for the most part. At least 4 of the 6 individuals have an MBA. At least 2 of the 6 have degrees in petroleum or geology. They all have many years of experience analyzing companies. The FY2007 consensus EPS estimate coming from these seemingly very intelligent people is $2.79. (The range is $2.47 to $3.13.) The consensus estimate is a result of 4 of the 6 individuals above submitting their earnings estimates when polled. Keep in mind that at least 2 of the 4 estimates (maybe all 4) are coming from guys with an MBA. These people are often referred to as "smart money." They comprise a small section of Mr.Market. Afterall, their analysis and target prices help many investors value ARD shares and is what leads many to buy or sell the shares. We all know that Mr. Market taken as a whole is often times "irrational" and "inefficient."

Based on my simple math there is no doubt in my mind that barring a collapse in oil prices (ain't gonna happen) ARD will earn $4.15 in FY2007. This is 48.7% higher than the current consensus analyst estimate of $2.79. ARD will earn 32.5% more than even the current high consensus estimate of $3.13.

If we lock in our best efforts guess on FY2007 EPS there is no doubt in my mind that I will be closer than that of the analysts.

Disclosure: I do not have an MBA or degree in business. I feel this is to my advantage as I am able to realize the big picture and don't over analyze. The other advantage I have is that I have a portfolio that allows me to devote a significant percentage of my time studying ARD. The analysts don't have this advantage. They must cover a much larger portfolio of companies. Another advantage I have is that I can make a projection that I feel is accurate without fear of going against Wallstreet sentiment (groupthink), being questioned and having to justify my estimate, being denied a bonus or even worse: losing my job for being wrong. In other words, these guys make EPS estimates and price targets with the goal of "not being wrong" instead of "trying to be correct." One need only look at the price target of some of these seemingly intelligent people. One guy has a price target of $40. Another $43. Based on the current price of $38 these target prices seem to reflect a high degree of analyst paralysis in light of the fact that ARD is growing production, revenues, net income, and earnings per share consistently and rapidly.

Based on the FY2007 EPS of $4.15 and a P/E multiple of 25 the target price for FY2007 is $103.75. The target price is expected to occur on or before the release of Q4 FY2007 results (expected release March 2008.)

$4.15 (EPS) X 25 (P/E) = $103.75

This represents an increase of 72.9% over the FY2006 target price of $60.

In conclusion, it is evident that growth in earnings at ARD will be phenomenal in the coming 6 quarters. Earnings growth will continue to drive share price higher. The drilling programs in 2006 and 2007 will also add significant proved reserves in absolute terms and also on a per share basis. This will serve to reinforce the rising valuation of ARD shares based on earnings. Expect analysts to revise their FY2007 EPS estimates and price targets higher with each passing quarter. Those who hold the shares long term (years) will realize significant financial reward.

2006-08-11T18:08:00.000-06:00

ARD FY2006 Estimates Revisited

Some folks are wondering if I have changed my FY2006 earnings and price target estimates for ARD. Certainly I could leave my estimates in place as they were on April 21, 2006. On this date I was calling for $2.33 in EPS based on the following projections:

Production: 1 million BOE
Production Composition: 83% Oil & 17% NG
Average Realized Price of Oil: $71
Average Realized Price of Gas: $42/BOE ($7 per Mcfe)
Revenue: $66.07 million
Average Realized Price/ BOE Oil and Gas Combined: $66.07
Average Total Cost per BOE Produced: $20
Average EBIT/ BOE Produced: $46.07
Total EBIT: $46.07 million
Tax Rate: 25%
Total Tax: $11.5 million
Net Profit: $34.5 million
Share Count: 14.8 million shares
EPS: $2.33

Please allow me to revisit the following assumption in order to come up with my revised EPS projection for FY 2006.

Production: 1 million BOE
Production Composition: 83% Oil & 17% NG
Average Realized Price of Oil: $71
Average Realized Price of Gas: $42/BOE ($7 per Mcfe)
Revenue: $66.07 million
Average Realized Price/ BOE Oil and Gas Combined: $66.07
Average Total Cost per BOE Produced: $20
Average EBIT/ BOE Produced: $46.07
Total EBIT: $46.07 million
Tax Rate: 37% (Increased from 25%)
Total Tax: $17.04 million (Increased from $11.5 million.)
Net Profit: $29.03 million (Decreased from $34.5 million.)
Share Count: 15.25 million (Increased from 14.8 million.)
EPS: $1.90 (Decreased from $2.33)

In summary the only changes I would like to make to my projections from April 21, 2006 is to increase the tax rate from from 25% to 37% and to increase the share count from 14.8 million shares to 15.25 million shares. The result is EPS of $1.90 for FY2006. With a P/E multiple of 31.5 my target price remains $60 on the date that Q4 and FY2006 Earnings are released. This will probably occur in March of 2007. Expect the current FY2006 analyst consensus estimate of $1.69 (range $1.50 to $1.82) to be revised higher between now and the associated earnings release date.

2006-08-08T07:41:00.000-06:00

ARD Q2'06 Conference Call is Archived

2006-08-08T07:31:00.000-06:00

ARD Q2'06 Press Release Posted

2006-08-04T22:52:00.000-06:00

ARD Announces Record Second Quarter Production, Revenues, Net Income, and EPS
Revenues Up 217%, Net Income Up275%, Earnings per Share up 193% and Production up 126.5% Year Over Year

The company 10Q was posted promptly at 4:12pm on Friday afternoon. Arena Resources had the best quarter in the history of the company with Q2'06 results. The Q2 Conference Call is scheduled for Monday, August 7, 2006 - 10:00 AM Central

Some of the highlights are as follows:
*Revenues up 217% YoY
*Revenues up 41.5% QoQ
*Net Income up 275% YoY
*Net Income up 79.8% QoQ
*EPS up 193% YoY
*EPS up 76% QoQ
*Production up 126.5% YoY
*Production up 26.3% QoQ
*Net operating margin 69.9%.
* Net operating margin was up from 62.8% in Q1'06 and 60.8% in Q2'05.
*Net profit margin 43.8%
*Net profit margin was up from 34.5% in Q1'06 and 37% in Q2'05
*Trailing twelve month earnings increase 32% from $0.88 to $1.17
*P/E ttm drops from 42.3 to 31.9 (based on Friday's close of $37.38.)
*Cost per BOE produced is $18.49
*Cost per BOE produced is down from Q1'06 amount of $24.60 but up only slightly from Q2'05 amount of $17.82
*EBIT per BOE produced is $42.43
*EBIT per BOE produced is up from Q1'06 amount of $29.80 and up from Q2'05 amount of $25.67
*Oil production accounted for 86.2% of total production
*Oil average realized price was $64.37
*Gas average realized price was $6.57
*Crude oil production up in all states (TX, NM, OK.)
*Gas production up in TX, NM, OK with the exception of KS.
*Oil production growth driven primarily by Fuhrman-Mascho Field
*Gas production growth driven primarily by Yates Gas Formation in TX.
*ARD topped both the consensus EPS estimate of $0.37 and the high estimate of $0.40 by reporting $0.44

In a July 25, 2006 blogpost I stated, "Also I'd like to say that I"m a bit suspicious of the production figures of 240,000 BOE and $14.5 million in revenue. If ARD really did produce 240,000 BOE then I would have expected something higher than $14.5 given my projection of about 87% production in oil. Unless the Yates Gas formation on the F-M was adding significant amounts of increased incremental BOE then I would have expected the revenue number to be higher. Wouldn't it be a treat if we read the Q2 Earnings to find that revenues were actually closer to $15 million???"

Sure enough, revenues came in at $14.69 million or $190,000 more than estimated. While the revenue number was indeed closer to $14.5 million than $15 million it is interesting to note that the production in the Yates Gas Formation was nearly DOUBLE the previous quarter.

This quarter was absolutely fantastic. ARD is maturing every quarter from a small cap pip-squeak to a soon to be midcap powerhouse. The shares will continue to appreciate in value towards my target price of $60 by year end. Expect analyst upgrades soon. ARD is the best investment out there poised to capitalize on Peak Oil. Fundamentally ARD is second to none. On a valuation basis the company is currently extremely undervalued. Taken together this company will provide shareholders the investment opportunity of a lifetime. The big money will be made by those who hold longterm. Q2'06 was nothing short of an "out of the park home run."

2006-08-03T18:30:00.000-06:00

Transocean (RIG) CEO Displays Incompetence and Disregard for Shareholder Value

"We're buying back stock as a chosen method to return excess cash to shareholders and which we think is the most efficient way to do it without taking a view on whether the stock is intrinsically overvalued or undervalued."
~Bob Long RIG CEO

This is absolutely incredible. An angry shareholder(rightfully so) questions RIG CEO Bob Long about the share repurchase program. The question begins at 27:45.

Caller is upset about rational for share repurchase program. Caller notes enormous insider selling while company is buying back shares.

"We're buying back stock as a chosen method to return excess cash to shareholders and which we think is the most efficient way to do it without taking a view on whether the stock is intrinsically overvalued or undervalued." ~Bob Long RIG CEO

That has to be on of the most ridiculous statements I"ve ever heard come from a CEO's mouth. By making such a statement he is CLEARLY not qualified to run a $23 billion company. Either that or he CLEARLY does not have any concern for the shareholders. My question is this: How can a CEO say that he going to buy back shares of the stock without regard to whether the stock is intrinsically overvalued or undervalued? If you feel the stock is overvalued then why is Sam's h*ll would you want to buy it back? All I can say is I"m glad I"m not a shareholder of RIG. I am very happy with Carl Thorne running ESV. Carl talks like he has a brain. Bob Long talks like has NO brain.

I put a big fat "X" on RIG.

You should too.

Disclaimer: I am neither long nor short RIG. I am long ESV.

2006-07-31T12:46:00.000-06:00

Decision to Sell GEOI and Buy ARD Shares on July 29, 2005 is Analyzed
One Year Later ARD Shares Rise 163%; GEOI Shares Decline 47%

Concerns about GEOI production declines raised concerns about the company's future prospects. As production was declining costs were also increasing on a per BOE basis. There were other concerns as well. However, after a call to GEOI headquarters even more red flags became evident. A conference call with both Treasurer and comptroller Ms. Connie R. Hval and Secretary Business Office Manager Ms. Cathy Kruse was unimpressive. Neither woman seemed very knowledgeable about GEOI operations. Many questions went unanswered. The speaking ability of these women left me feeling as though I had been talking to a couple of hillbillies with North Dakota accents. The way these women spoke and conducted themselves in the telephone conference call led me to believe that both were former waitresses at a greasy spoon truck stop with minimal education. GEOI was certainly not a quality oil company to be invested in due to a whole host of issues.

I made some comments on the Yahoo Message board regarding my decision to sell GEOI shares in favor of ARD shares on July 29, 2005. My first post on this day details my thought process on selling GEOI in favor of ARD. My second post is a continuation of additional thoughts. My third post on July 29, 2005 summarized my decision. All three posts lay out the case for selling GEOI and buying ARD.

In the end it was an easy decision. Fast forward one year and it also turned out to be an extremely profitable decision as well. The market is often irrational in the way it prices securities and is therefore often times not efficient as many have postulated. Longterm Mr. Market eventually seems to get things right. On July 29, 2005 I sold my GEOI shares to Mr. Market for $14.85. On that same day I purchased ARD shares for $13.50. One year later GEOI shares closed at $7.80. ARD shares closed at $35.60.

__July 29, 2005_________________July 28, 2006_
SOLD: GEOI...$14.85______________GEOI...$7.80
BUY: ARD...$13.50_______________ARD....$35.60

GEOI share price declined 47%.
ARD share price appreciated 163%.

In the end it was an easy decision to sell GEOI in favor or ARD. Fast forward one year and it also turned out to be an extremely profitable decision as well. The market is often irrational in the way it prices securities short-term and is therefore often times not efficient as many have postulated. Long-term Mr. Market eventually seems to get things right.

2006-07-31T11:06:00.000-06:00

Boone Pickens Interviewed on CNBC

"If I went to sleep this afternoon and woke up January 1st and you called me and said, 'Boone did you see that oil is $100 a barrel,' I would not be surprised."

~Boone Pickens, July 25, 2006

2006-07-25T12:32:00.000-06:00

Q2 2006 Operational Update Commentary

It seems finding oil bearing acquisitions in TX or NM that meet all the criteria has been difficult for ARD. The company is nibbling on additional acreage in KS with little or no fanfare.

The best part about ARD today is that they are not "boxed in." By this I mean they are NOT pressed to buy unless the deal favors ARD. The reason ARD is not hard pressed to acquire TODAY or in the next 2-3 years is because they have over 540 drilling locations. 300 of the 540 are on the Fuhrman-Mascho Property. This figure for 300 drilling locations on F-M assumes 20 acre spacing. Keep in mind that ARD's neighbor Range Resources (RRC) have already been approved and are drilling on 10 acre spacing. With this being the case ARD has over 600 possible drilling locations at F-M alone if you figure 10 acre spacing down the road at ARD.

130 drilling locations in 2006
260 drilling locations in 2007
450 drilling locations in 2008
...............................
840 drilling locations between now and year-end 2008
(even with an aggressive drilling program.)

Today Capex was increased by 17%. Wells to be drilled in FY 2006 were increased from 120 to 130. Re-fracs for FY 2006 were boosted from 36 to 60. This is no doubt good news and will certainly reap big rewards for ARD shareholders. If oil prices continue to drift higher I wouldn't be surprised to see CAPEX increased again in 2006. This would especially be true if ARD is given the opportunity to acquire and own a second drilling rig. Tim Rochford stated that he would be open to this possibility if the economics favor such an acquisition (acquiring a second rig) in the Q4'05 and FY2005 C.C. on March 17, 2006.

You gotta love ARD.Keep your eyes on net margin. I'm targeting 42% net margin on 15.225mm shares fully diluted for an EPS of $0.40. If ARD can come in with a higher net margin and/or a smaller fully diluted share count then we could easily see some FABULOUS numbers. I just hope there are no big "other expenses" in the income statement.

Also I'd like to say that I"m a bit suspicious of the production figures of 240,000 BOE and $14.5 million in revenue. If ARD really did produce 240,000 BOE then I would have expected something higher than $14.5 given my projection of about 87% production in oil. Unless the Yates Gas formation on the F-M was adding significant amounts of increased incremental BOE then I would have expected the revenue number to be higher. Wouldn't it be a treat if we read the Q2 Earnings to find that revenues were actually closer to $15 million???

2006-07-24T00:16:00.000-06:00

Expect More Analyst Upgrades on ARD Shares in Near Future
Fantastic Q2 Results & Increased Drilling Program Seen as Driver for Upgrades

Don't be surprised to see more analysts upgrade ARD shares and raise projected EPS and ultimately the target price on the shares. ARD production as a percentage is growing faster than any domestic oil producer. With over 87% of production in crude oil, ARD is better positioned to profit from Peak Oil than any other company.

2006-07-24T00:08:00.000-06:00

ARD Analyst Consensus Estimates Increased
Current Estimates Will Easily be Topped; Expect Further Upward Revisions in EPS Estimates

Q2 2006 EPS Estimate increased from:
$0.36 to $0.37.......UP $0.01

Q3 2006 EPS estimate increased from:
$0.42 to $0.44.......UP $0.02

FY2006 EPS estimate increased from:
$1.54 to $1.61.......UP $0.07

FY2007 EPS estimate unchanged:
$2.61.

2006-07-18T10:37:00.000-06:00

Yahoo Downgrades Message Board System; Investor Village Becomes De Facto Message Board for Investors
Link Added to Sidebar for Easy Access

At first I was disappointed that Yahoo changed their message board system for the worst. However, as a result of Yahoo's changes investors looked for a free alternative message board system. Investor Village was found to offer not only a very similar board to that of the old Yahoo message board, but also has enhanced features that make it significantly better. Instead of describing these enhancements I hope you will go to Investor Village and try it out for yourself. I'm confident you'll be extremely pleased.

2006-07-18T10:14:00.000-06:00

Amendment: Analysis of ARD FY2007 Earnings Estimates
Share Count Revised Higher

In the latest S-3/A filing with the SEC it was noted on page 3 that the common stock to be outstanding after the offering (including option and warrants) is 16,247,484 shares. Previously I calculated 16 million even. For purposes of EPS calculations I"ll use an even more conservative share count that will not only take into account the slightly higher share count of 16.24 million shares (original calculation was 16 million shares) but also factor in an extra 191,070 shares to be even more conservative in my projections for 2007.

It is evident that even after the latest upward revisions in ARD FY2007 EPS estimates the current estimate of $2.61 is still dirt cheap.

Why?

Lets work the math...

Assume the following:
1. 17.438 million shares fully diluted. (Let's assume that ARD offer another 1.191 million to acquire new reserves or for Capex.)

2. Net profit margin of 45% (48.9% average net profit margin in 2007 is my actual projection based on current information.)

3. $68 Average Realized Price ($80 average realized price in 2007 is my actual projection based on current information.)

4. 1.5 million BOE produced. (This projected growth of 50% is conservative in light of historical growth of 93%, 74% and 127% growth in 2003, 2004 and 2005 respectively. 85% production growth is my actual target.)

In essence I"m offering two figures. The first is a conservative estimate and the second is my actual projection.
1. Shares Outstanding:
____17.43 million (Conservative)
____17.43 million (Realistic)
2. 2007 Net Profit Margin:
____45% (Conservative)
____48.9% (Realistic)
3. Average Realized Price per BOE
____$68 (Conservative)
____$80 (Realistic)
4. Production Estimate for 2007
____1.5mm BOE (Conservative)
____1.85mmBOE (Realistic)

Lets do the math first from the conservative viewpoint.

Revenue:
1.5mm (BOE) X $68 (Ave Realized price)= $102 million

Net income:
$102 mm (revenue) X .45 (net profit margin) = $45.9 mm

EPS:
$45.9 mm (net income)/ 17.43 million shares = $2.63 EPS.

Now lets figure the more realistic earnings potential of ARD in 2007.

Revenue:
1.85mm (BOE) X $80 (ave realized price)= $148 million

Net income:
$148mm (revenue) X .489 (net profit margin)=$72.37mm

EPS:
$72.37 mm(net income) /17.42 million shares = $4.15 EPS.

By conservative estimates we should expect ARD to come in at a worst case scenario of $2.63 EPS. A more realistic expectation for ARD shareholders would be for 2007 EPS of $4.15. If $2.63 is the low end, $4.15 is the middle ground then the high end is something north of $4.15. At this point it doesn't make any sense to even try to determine the high end.

Lets now use both of these figures and use a conservative PE multiple of 30, a more realistic multiple of 35, and a high end multiple of 38 (current PE today.)Share Price Projections based on EPS of $2.70

$2.63 X 30 = $78.9
$2.63 X 35 = $92.05
$2.63 X 38 = $99.94

Share Price Projections based on EPS of $4.25
$4.15 X 30 = $124.5
$4.15 X 35 = $145.25
$4.15 X 38 = $157.7

Even with a slightly higher share count assumption, the current 2007 estimate of $2.61 is low and proof that Wallstreet has yet to realize the true value in E&P companies and especially ARD.

2006-07-15T16:35:00.000-06:00

CNBC Interview: Analysts Debate $80 Oil
Maria Bartiromo Moderates Debate

2006-07-15T15:06:00.000-06:00

The Effects of $80 Oil and Beyond on ARD Share Price

You have no doubt heard in the media many times about $100 oil. In the U.S. government Shockwave Study it was determined that a 4% decline in worldwide oil production will lead to crude oil prices rising to over $161 per barrel. (Currently Iran controls 4% of worldwide production.) Steven Leeb has talked about $200 oil. Matthew Simmons has even mentioned oil prices far beyond $200 a barrel.

Triple digit oil prices aside, $80 oil would generate MASSIVE earnings for ARD. Consequently the share price would soar. Keep in mind that $80 oil is a drop in the bucket compared to projections of $161 to $200 oil or even higher. $80 a barrel is cheap. I'm afraid that even $80 oil will not be enough to sufficiently kill demand even in an economic slowdown. Factor in the crisis in the Middle East and God only knows how high the prices go. Clearly ARD has is well positioned to earn $4.25 per share in 2007 with $80 oil. $80 oil could ultimately end up being a low projection for the year. In any case, sleep well at night knowing how valuable your ARD shares really are. The last couple days we have seen the Dow and Nasdaq sell off significantly. When oil continues to rise and other sectors continue to sell off due to declining earnings and expectations investors (both Wallstreet and individual investors) will be looking to recover their losses by investing in oil stocks with superior fundamentals and growth such as ARD. When the herd finally realizes the value, earnings power and growth of ARD they will push valuations to levels you never dreamed possible. Many of you may remember the valuations on internet stocks in the late 1990s. Many internet and tech stocks had triple digit PE multiples. There were also many internet stocks that were losing money. These stocks were valued based on price to sales ratios (P/S.) Some of those P/S ratios were also triple digit.As long as humans are investing in stocks you will continue to see panic buying and selling. At some point we will see investors panic buy quality stocks like ARD. Don't be surprised if you see ARD valued like the internet and tech stocks of the late 1990s. The only difference is that ARD has MASSIVE earnings power(unlike a large number of internet stocks that were losing money with triple digit p/s ratios.) Put a MASSIVE earnings multiple on MASSIVE earnings and you have MASSIVE share price. The money to be made in oil stocks such as ARD will eclipse even that of the highest flyers during the internet boom of the late 1990s.

2006-07-15T14:16:00.000-06:00

The Effects of Average Realized Price per BOE Produced on ARD Net Margin
Analysis Confirms Initial FY2007 Projections

By taking a look at the effects of historical average realized prices per BOE produced on ARD net margin we can take a look into the future and make a realistic projection of future net profit margin.

Analysis of Average Realized Prices per BOE Produced

We can determine average realized oil prices for 2003, 2004 and 2005 by dividing total revenues by total production. Revenues were as follows:
2003: $3,665,477
2004: $8,482,130
2005: $25,843,077

Production (BOE) was as follows:
2003: 128,867
2004: 223,334
2005: 508,430

Average Realized price per BOE was as follows:
2003: $28.44
2004: $37.97
2005: $50.82

The percentage increases in yearly average realized prices were as follows (year over year):
2004: 33.5%
2005: 33.8%

Analysis of Net Profit Margins

Below are the total net income figures:
2003: 670,143
2004: 2,451,652
2005: 9,460,683

Below is Net Profit Margin:
2003: 18.2%
2004: 28.9%
2005: 36.6%

The percentage year over year growth in net profit margin is as follows:
2004: 58%
2005: 26.6%

Since 2003 our average realized oil price increased 33.6% while our net profit margin increased at an average of 42.3% per year. Put another way, for every 1% increase in average realized price per BOE we received a 1.25% increase in net profit margin. Over time I expect the yearly average realized price to continue to climb. However I believe that the corresponding grow rate of the net profit margin will no longer exceed that of the growth in average realized price. In 2006 I"m expecting growth in average realized price of 37.7% (going from $50.82 in 2005 to $70 in 2006.) Assuming $80 oil in 2007 the growth rate in average realized price comes out to a conservative 14.2% (going from $70 in 2006 to $80 in 2007.)

You see that even $80 oil is very conservative in 2007 EPS computations in a previous post. Clearly, price has a direct and dramatic impact on net profit margin at ARD. If net profit margin grows only TWO/THIRDS as fast as the projected average realized price (37.7% in 2006 and 14.2% in 2007) then we will see net profit margins of:
2006: 45.9%
2007: 49.9%

(You can see that my realistic FY2007 net profit margin estimate of 48.9% in previous post is in fact conservative.)

In conclusion, the case has been made that $80 realized price and 48.9% net profit margin projections in 2007 are in fact conservative. Also given the fact that an additional million shares has been factored in for 2007 along with a modest production increase of 85% we see that 2007 EPS of $4.25 is a realistic number that could easily be topped. We also see that the Wall Street consensus of $2.61 is quite low. In fact it is obvious that the analysts are not going out on a limb. Their reputations are at stake and the consensus is that oil prices can't possibly go higher. Wallstreet is figuring $40 to $60 oil. The analysts will continue to nibble at their estimates by increasing them little by little over time. There is certainly nothing bold in their predictions. Don't wait for Wallstreet to up their consensus again and again. Instead, buy ARD shares before they become progressively more expensive.

2006-07-15T12:11:00.000-06:00

Analysis of ARD FY2007 Earnings Estimates
Expect Wallstreet to Increase ARD Projected Earnings

Yesterday Wallstreet increased ARD FY2007 consensus EPS estimate from:
$2.46 to $2.61.......UP $0.15

The previous day ARD FY2007 consensus EPS estimate was increased from $2.30 to $2.46. So in the last two days we have seen FY2007 estimates increased $0.31 or 13.4%. The increases the last 2 days were a result of the fantastic results of the Q2 Operational Update. There were two key elements of the Operational Update. The first was the estimated revenue of $14.5 million. The second was the estimated production of 240,000 BOE. Another item that was buried in the release was the announcement of a partnership between ARD and another Tulsa based company.

The partnership was revealed in the Q2 Operational Update when it was stated, "Syracuse Prospect, Hamilton County, Kansas -- Two exploratory wells were drilled on this 18,000-acre lease and are currently being completed and readied for production. The two wells were drilled as part of a joint venture the company has entered into with another Tulsa-based energy company. The partnership will evaluate the results and then determine a future development program."

It is evident that even after the latest upward revisions in ARD FY2007 EPS estimates the current estimate of $2.61 is still dirt cheap.

Why?

Lets work the math...

Assume the following:
1. 17 million shares fully diluted. (Let's assume that ARD offer another 1 million to acquire new reserves or for Capex.)

2. Net profit margin of 45% (48.9% average net profit margin in 2007 is my actual projection based on current information.)

3. $68 Average Realized Price ($80 average realized price in 2007 is my actual projection based on current information.)

4. 1.5 million BOE produced. (This projected growth of 50% is conservative in light of historical growth of 93%, 74% and 127% growth in 2003, 2004 and 2005 respectively. 85% production growth is my actual target.)

In essence I"m offering two figures. The first is a conservative estimate and the second is my actual projection.
1. Shares Outstanding:
____17 million (Conservative)
____17 million (Realistic)
2. 2007 Net Profit Margin:
____45% (Conservative)
____48.9% (Realistic)
3. Average Realized Price per BOE
____$68 (Conservative)
____$80 (Realistic)
4. Production Estimate for 2007
____1.5mm BOE (Conservative)
____1.85mmBOE (Realistic)

Lets do the math first from the conservative viewpoint.

Revenue:
1.5mm (BOE) X $68 (Ave Realized price)= $102 million

Net income:
$102 mm (revenue) X .45 (net profit margin) = $45.9 mm

EPS:
$45.9 mm (net income)/ 17 million shares = $2.70 EPS.

Now lets figure the more realistic earnings potential of ARD in 2007.

Revenue:
1.85mm (BOE) X $80 (ave realized price)= $148 million

Net income:
$148mm (revenue) X .489 (net profit margin)=$72.37mm

EPS:
$72.37 mm (net income) / 17 million shares = $4.25 EPS.

By conservative estimates we should expect ARD to come in at a worst case scenario of $2.70 EPS. A more realistic expectation for ARD shareholders would be for 2007 EPS of $4.25. If $2.70 is the low end, $4.25 is the middle ground then the high end is something north of $4.25. At this point it doesn't make any sense to even try to determine the high end.

Lets now use both of these figures and use a conservative PE multiple of 30, a more realistic multiple of 35, and a high end multiple of 38 (current PE today.)Share Price Projections based on EPS of $2.70

$2.70 X 30 = $81
$2.70 X 35 = $94.5
$2.70 X 38 = $102.6

Share Price Projections based on EPS of $4.25
$4.25 X 30 = $127.5
$4.25 X 35 = $148.75
$4.25 X 38 = $161.5

The purpose of today's exercise in math is to show that the current 2007 estimate of $2.61 is low and proof that Wallstreet has yet to realize the true value in E&P companies and especially ARD.

2006-07-13T10:19:00.000-06:00

The Possible Effects of Middle East Tension on ARD Shares

Expect volatility in ARD shares due to events transpiring in the Middle East with Israel and bordering Lebanon. Tensions could quickly escalate causing Syria and Iran to be brought into the war-zone. While this would certainly cause oil prices to rise it could also cause the markets to PANIC and cause UNCERTAINTY. In other words, even with rising oil prices Mr. Market could declare, "The Sky is Falling." This would set off program and hedge fund selling causing even E&P companies like ARD to sell off potentially. If history is any guide we know for a fact that Mr. Market is not always rational. He certainly isn't efficient either (Just look back to when Mr.Market valued GEOI and GMXR more than ARD. Or look at how high the valuations are on the airline sector: LCC, UAUA, AMR, etc.)

Anyway, the point is that if the market is often times irrational and inefficient then we shouldn't bet the farm that a surge in oil prices would guarantee higher share price of a superior E&P like ARD.

In conclusion, don't over extend yourself on margin to buy ARD shares. They are golden. However you don't want the hedge funds to box you in and cause a margin call that would force you to sell your shares in the cheap. Just remember:
1. Expect Volatility
2. ARD shares are GOLDEN.
3. Don't over extend yourself on margin.

2006-07-12T08:46:00.000-06:00

ARD Q2 Results a Home Run
Total Production Estimated at 240,000 BOE on Estimated Revenue of $14.5 Million

The Q2 Operational Update was released this morning promptly at market open. ARD results for Q2 were nothing short of not only a "home run" but one that was 'hit out of the park.'

Let me begin by saying that I expected ARD to have sequential quarter over quarter production growth of between 15% and 19% for oil and an increase 14% to 16% for gas. My most optimistic case for total oil and gas production was for a quarter over quarter production increase of 35,539 BOE for a total output during the second quarter of 226,000 BOE.

ARD not only topped my most optimistic projection but they went off my projection scale by large margin. My best case quarter over quarter projection of 35,539 BOE for combined oil and gas production represented an increase of 18.6%. ARD came in at a 25.7% quarter over quarter production increase. This topped even my most optimistic projection by 7.1 percentage points or 38%.

THIS IS INCREDIBLE!!!!

Is it any wonder that SunTrust upgraded ARD shares from neutral to buy?!

Revenues were very strong as well! ARD did $14.5mm.

Oil Production Estimates
Lets do the math: My best case scenario for oil production was a quarter over quarter increase of 18% or 31,752 Bbl. If we add this amount to Q1 oil production of 167,117 we come up with a best case total oil production of 198,869.

I previously determined average realized oil price for Q2 was $63.26. Total Oil production considering my best case scenario would have been:
198,869 X $63.26 = $12,580,452

Gas Production Estimates
Quarter over quarter gas production best case scenario called for an increase of 16% or 3787 BOE. The previous quarter had gas production of 23,672. Therefore the best case scenario would have reflected total gas production for Q2 of 27,459 BOE. Based on $5 NG per Mcf($30 per BOE)we would have had total Q2 gas revenues of:
27,459 X $30 = $823,770

Total Oil and Gas Production Estimates
Adding both best case oil and gas revenues:
$12,580,452 + $823,770 = $13,404,222

Previous Q1 revenues were $10.38 million. My most best case scenario was calling for a revenue increase of 29%.

ARD Tops Production and Revenue Estimates
ARD came in at about $14.5 million or a sequential increase of 39.6%. This topped my best case scenario by 10.6 percentage points or 36.5%.

I believe total oil production was between 88% of total production or 211,000 Bbl. Gas production was near 29,000 BOE for Q2 up from previous quarter of 23,672 BOE.

EXCELLENT QUARTER!

Thankyou Tim and Stan! Keep up the good work.

ARD shares are EXTREMELY UNDERVALUED in light of most recent Q2 RESULTS. If you factor in a very conservative 42% net profit margin and 15.225 million fully diluted shares we arrive at $0.40 EPS. Consensus was for $0.35. The consequences of these results are for ARD shares to continue the march towards my 2006 target price of $60 per share.

2006-07-07T15:35:00.000-06:00

The Case Against Ethanol
E85 May Actually Cost You More per Gallon at the Pump

Here is some analysis on why Ethanol is a bad deal.

Just remember: E85 has about 83,260 Btu/Gal.
Gasoline has about 114,000 Btu/Gal.

Therefore E85 has only 73% of the energy of a gallon of gasoline.

Hypothetically if your car could get 100 miles per gallon of gasoline it would only get 73 miles per gallon with E85.

Therefore, if E85 is $2.75 and gasoline is $3.00 per gallon which is the better deal?
Many think buying E85 is the better deal because it costs less per gallon. However if we do the math it is a TERRIBLE proposition to fill up with E85 under this situation.

We must divide $2.75 by .73 to arrive at the true price for the equivalent amount of energy found in a gallon of gasoline.

$2.75/ .73 = $3.76

So if you fill up with E85 you are really paying an equivalent of $3.76 per gallon of gasoline. Not such a good deal is it?

You'll end up paying an extra 25% if you fill up with the E85. This further erodes your buying power as an individual and sucks the energy (no pun intended) right out of the economy. When you figure the tax dollars that go into subsidizing the ethanol in each gallon of E85 the costs are even higher.

2006-07-06T08:07:00.000-06:00

ARD Executive Comments on Oil Rig Purchase

Stan McCabe was interviewed recently and explained the reasons for the previous rig purchase of December 2005.

2006-07-06T08:06:00.000-06:00

ARD Q2 Average Realize Oil Price Estimated at $63.26
Projection is 13.2% Increase over Q1 Average of $55.85