Value Microcaps Motherboard

[Guy]

stockmann Re:ARD.

From: Taikun

I called ARD today and agree this is a minimum of a double here. D

I know much of this has been covered, but the SI search option doesn't make it easy to go back to older posts, that's why I called for an update. Here's a recap. -David

This company was founded by a management team that put together Magnum Petroleum-now Magnum Hunter. The objective was to go out and find underproducing wells where they could increase productivity through small investments in infrastructure and/or wells. The first phase of the company (and they are still in this phase) has been the 'asset-building' phase, and this is the reason for the low productivity on the reserves. They are acquiring value, though, and they paid <$2/bbl in a recent acquisition.

Many of the wells acquired have been 'mom 'n pops' that just need some TLC.

The company has spent the first few yrs in acquisition mode and weren't planning on really increasing CAPEX until end of Q1 05 but partly due to high commodity prices their Q4 04 was good enough to start CAPEX early. In total they've made 11 acquisitions in 4 yrs, and are still making more.

The CAPEX is to be primarily funded from CF, as management doesn't like the dilutive effect of offerings. Some CAPEX will come from warrants and options exercise. They have a $25 debt facility of which $10 was used for acquisitions. $5m of that will be paid down from the $12m they took in from recent exercise of warrants.
http://www.arenaresourcesinc.com/Pages/2005/press.html

The 2005 program includes 33 wells, including 27 in the Fuhrman-Mascho Field, TX and 3 in NM. They have one rig (for the Fuhrman-Mascho Field) and as rigs are hard to come by they aren't planning on a second but if they can get access to one they'll consider it.

2004 exit prodn 1100boe/day
2005est exit 2200-2500boe/day
2006 est exit 4500-5000boe/day

2006 CAPEX expected to double.

The 2004 exit NAV was $30/shr

NAV Value:
PV (10%) basis $300m
Cash $1.5-2m
Debt (after retiring $5m) $5m
Net $297m
Issued shares:10.1m
$29.40/shr in NAV

They have another 1.06m in wrts exerciseable at $7.32 which will add about $12 for CAPEX when exercised in 05. There are another 10.5m shrs in employee stock options which vest over 5yrs at $12 exercise price.

ARD has currently $29 in NAV and provides excellent value and upside at $12.65. Investors are mainly retail with not many institutions or investment banks due to the smaller float. (I believe one or two analysts at smaller houses cover)

Part of the reason this has been undervalued for so long is that the SEC was not allowing them to recognize some reserves as Proved instead of Probable. They wanted to go ahead with the secondary, though, and didn't want to waste time. Therefore, the filings associated with this secondary:
http://www.arenaresourcesinc.com/Pages/press_08-19-04.html

included the Dodson reserves and East Hobbs reserves as probable and now all the Dodson and half of the East Hobbs are proved. This was recently announced and the stock moved.