Cliff, Re:ARD.
Here is another interesting post.
From: Ed Ajootian
Arena is an "acquire & exploit" company that concentrates in the Permian Basin (TX, OK and SE NM). They are run by a coupla ex-Magnum Hunter guys who have been around the oil business forever. As a clue to how these guys think about their shareholders, they pay each of themselves the grand sum of $36K a year in salary. The Arena receptionist might be earning more than they are.
Over 90% of Arena's production & reserves is light sweet crude oil (i.e. the single commodity that is in such high demand right now, aka "Texas tea").
The company has been able to acquire very valuable properties for pennies on the $, due to their being willing to work in a very unsexy area that is currently being passed over by almost everyone else. Also, their typical acquisition ($5 -- $15 M) is in a range where they typically have little competition, as opposed to acquisitions outside of that range. When you go below $5 M, every goddam Mom & Pop firm is going after that also. When you go > $15 M, then the other publicly held companies start to get interested. Most publicly held companies don't bother even looking at properties being offered for under $15 M. Also, many of the properties in the Permian basin are held by multiple interest holders, so it takes a much larger amount of effort to put together a deal there vs. when a property is held by say just 1 owner.
The stock has had a pretty good run in recent months but still remains absurdly undervalued IMO. It currently trades at around half of its SEC PV10 value. The primary reason it trades at such a discount is that 3/4ths of the company's reserves are PUDs. IMO this discount is unwarranted, since these PUDs are very low risk PUDs, most of which relate to either: 1) wells that can be drilled by decreasing the spacing between already producing wells, or 2) additional oil recovery that can be gotten from existing wells by implementing waterfloods and doing other secondary recovery techniques.
Currently the stock is covered only by 2 boutique firms, MS Howells and CK Cooper. Cooper has a price target of $20 and projects that they will increase production from 611 bopd in '04 to 1,653 bopd in '05, and then almost double it again to 3,083 bopd in '06. This just takes into account their existing properties and does not assume any acquisitions, which is very conservative IMO.
The current price to cash flow ratio is high, but justifiably so in light of the staggering increases in their cash flow that are in store in the coming years.
The company has grown using a somewhat unusual strategy for an "acquire & exploit" company, they have made use of debt only sparingly. Oftentimes when an "acquire & exploit" company starts off they start using debt too early and for too much, and then as soon as commodity prices go down they start getting into trouble. Its pretty safe to say this will never happen to Arena.
One ancillary benefit of not using much debt is that they have not been required (nor have they seen fit on their own) to hedge any of their production. Thus they are in position to fully benefit from the current sky-high price of WTI crude.
I have been building a very large position in this from around December, and was holding off writing it up in the hopes that it would dip down one last time for me to top off the position. But I believe the stock is getting ready to bust a move and I just figured out that I own too much of this already (it comprises around a quarter of my portfolio) so I decided to write it up now.
Near-term catalysts to stock price appreciation would be:
1) Arena is holding 2 breakfast meetings at the HowARD Weil conference, on Tues. & Wed. In conjunction with this they will be putting a slide deck on their web site (for the first time ever as far as I can tell).
2) After the above, they have a nationwide hype tour planned, one-on-one meetings with institutions. So far this has been mainly a retail-owned stock (Yahoo says institutions own 4%), but they believe (and I fully concur) that they are now ready to start pitching their story to institutions. I believe this company has all the earmarks of becoming an institutional "darling", with its low-risk profile yet large upside, and high exposure to WTI oil prices.
3) They will be participating in a "virtual hype show" given by informedinvestors.com in early May.
4) 1Q production should come in at around 100K BOE, which would represent a sequential ~ 30% increase in production.
5) They expect to be initating a continuous drilling program on their Permian Basin properties within a few weeks, and with the drill bit turning to the right this should get folks excited. By my calc these Permian Basin oil wells pay out in a little over 7 months with $50 oil (assuming 40 bopd initial production, $320K/well drilling costs, $9/bbl. production costs, and production tax of 7.5% of revenue).
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