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Others Scour The World, But This Oil Company Searches Locally
BY AMY REEVES
INVESTOR'S BUSINESS DAILY
Posted 4/8/2008
These days, global energy companies are looking for oil and gas in ever more exotic locations — in India, Brazil, deep in the ocean, and under previously impenetrable rock. But domestic players believe there's still plenty of fuel to be found in traditional fields — like West Texas.
That's where Arena Resources (ARD) has been buying up property since it started in 2000. The exploration and production company owns 70,000 acres in West Texas and neighboring areas in New Mexico, Oklahoma and Kansas. The plan is to do "infill" drilling between existing wells to get the most out of the fields.
"What we've really done is we've tried to get a footprint in the Permian Basin," said Chief Executive Lloyd Rochford. "We have been as successful as anyone out there."
The heart of the company's operations is an Andrews County, Texas, field called Fuhrman-Mascho, which Arena bought in late 2004. More than a third of Arena's developed acreage resides there, and in the past year, it's been abuzz with activity.
New Purchases
All but one of the 134 new wells the firm drilled last year were in this field. In November, Arena also bought $6.5 million worth of property in Andrews County and in an adjacent part of New Mexico.
That last move was not without trouble. At the time of the purchase, Arena said the new lands had about 4.2 million barrels of oil equivalent in reserves. However, at year's end, the company, as usual, hired a third-party reserve engineer to estimate the amount independently. The engineer's estimate was somewhat lower.
"Since Sarbanes-Oxley, we've seen more of this happening," said analyst Neal Dingmann of Dahlman Rose, which has done investment banking for Arena. "We've seen third-party engineers become much more conservative."
Even so, the change affected Arena's depreciation costs, which are determined by the projected value of proven but undeveloped reserves. This is the main reason first-quarter profit fell 11 cents a share below analysts' views.
Earnings were still 53% above last year at 26 cents a share. The increased drilling more than doubled revenue to $35.1 million. Wall Street was sufficiently impressed by production growth that it didn't really punish the stock for the higher costs.
"With oil at $100 (a barrel), you can live with it," said analyst Philip Dodge of Stanford Group.
Joel Murante, analyst with C.K. Cooper, says forecasts in this business can be a bit rough anyway. Arena is young and still in ramp-up mode, and the fruits of its shopping can be unpredictable.
"We expected (costs) to go up," he said. "When you're trying to estimate something that's in transition, it's a lot more difficult than trying to estimate something more stable."
Rochford still stands by Arena's more bullish estimates. The first-quarter production report, released April 7, encouraged the Street. The firm said its oil sales rose 51% over the year-ago quarter to 510,000 barrels equivalent, thanks to 54 new wells drilled in Andrews County. Shares rose 2% on the news.
Analysts polled by Thomson Financial expect 62% profit growth this year, on the average, to $1.65 a share. They see earnings growing more than 40% each of the next two years.
Though it's a bull market for all energy stocks these days, Arena's rise has been especially impressive. Since it hit the market five years ago, the share price has increased 15 times over.
Rochford says that Arena's relatively small size actually helps it compete in the southwestern markets. It usually buys property from comparatively small landowners who may have a few wells going but lack the capital for full-bore development.
"We take the time to visit with people," said Rochford. "I doubt the management teams at the big companies take time out of their schedules to do that."
However, Arena offers financial as well as personal motivations for selling. The seller can still reserve an interest in the property, without having to pay expenses. As a result, Arena owns only about a 75% net revenue interest in most of its properties.
Dingmann believes Arena's skill with wheeling and dealing helps it compete with its main regional rival, Range Resources, (RRC) even though Range is much bigger.
"Arena is differentiated both in what it has been able to add, and (in that) the cost of what it's been able to add is incredibly low compared to the rest of the group," he said.
Drilling New Wells
Rochford says Arena still has an eye out for acquisitions, but it's shifting more energy toward developing existing properties. It's scheduled to drill another 220 wells in Fuhrman-Mascho alone this year. So far, fewer than 20% of all potential wells on its properties have been drilled.
Dodge says most of its wells at this point are separated by at least 40 acres of land. But he expects Arena to keep drilling productive wells within as few as five acres of each other.
Not bad for a property Arena has worked for only three years.
"They should get credit for that focus," Dodge said. "My business school professor used to say, 'Focus on your strengths and avoid your weaknesses.' Arena is a good example of that." |
