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