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. THE NAPEAGUE LETTER Wednesday, May 28, 1997 Editor: Bob Davis napeague.com SPECIAL BULLETIN Over the weekend, I received a "very enthusiastic" e-mail of a "buy recommendation" for ARXA International Energy (OTCBB:ARXA). Although I don't have any experience with small oil exploration companies, and am suspicious of Bulletin Board companies, I decided to take a brief look at this "Stock Pick of 1997". I started by checking EDGAR, the SEC filings database. The 10-K Report for ARXA for the year ended January 31, 1997 was filed by the company itself on May 14, 1997, and thus should provide the most current information available. However, this Report paints a fairly bleak picture. The company appears to have been dormant for a number of years and has only recently become active, and was at some point filing under the name "Major League Enterprises, Inc". Revenues for fiscal 1997 total $31 thousand, with a net loss of $1.1 million. The balance sheet shows that ARXA is extremely illiquid ($2 thousand in cash and $15 thousand in AR - negative working capital, etc.), and the bulk of its assets are in the "Unproved Oil and Gas Properties" classification. Regarding proven reserves, the 10K states "The Company's present value of estimated future net cash flows before income taxes from its total proved reserves (the "pre-tax SEC 10 value") was $1,194,713 at January 31, 1997." Of course, unproven reserves are difficult to value, but the description of several different exploration projects in the 10-K reads as follows: - "Two unsuccessful wells were drilled on the acreage during May 1996 after which management elected to farm out the acreage to minimize additional financial risk." - "...subject to the approval of ETAP, the Tunisian national oil Company. Unfortunately ETAP rejected the participation of ARXA in favor of the participation of a major oil company." - "The Company was forced to abandon its attempts to acquire an interest in the properties when it was unable to secure the necessary financing for the projects." These quotes are taken from descriptions of different exploration projects - they are not all from the same one. These quotes give new meaning to the ever-present caveat that "There is no guarantee the investment group will be able to secure financing for future projects". There is one item from the 10-K which I found interesting. In a segment entitled LEASEHOLD DEFECTS, the "K" states that "The Company attempts to obtain its interests in producing properties with a general warranty of title. In many instances, title opinions may not be obtained if in management's discretion it would be uneconomical or impractical to do so. This increases the possible risk of loss and could result in total loss of properties purchased. Furthermore, in certain instances management may determine to purchase properties even though certain technical title defects exist, if it believes it to be in the best interests of the Company." This may be standard in the industry, but it definitely is not the way that I buy a house..... I then took another look at the "buy recommendation", largely to confirm that it was talking about the same company. Many of the statements made in the recommendation seemed to be "at odds" with what I had read in the 10-K. I was especially interested in the statement made that: Although the company has hit 11 of the past 14 wells they have drilled, the Company has not issued any press releases to that effect. If you dig deep into the Annual Report (ending January 31, 1997) you will find all this information. The Annual Report for ARXA was just released 2 days ago. (The Annual Report will be circulated to the public shortly.) So, I accepted this "challenge and went back into the 10-K to "dig deep". "NOTE 13 - SUBSEQUENT EVENTS", contained no mention of any "70% hit rate", but did contain the statement that "On April 21, 1997 the Company entered into a six month agreement with an investment banking group to assist the Company in the sale of 1,000,000 shares of common stock for $700,000." This, and a whole bunch of warrants, and even more stock issued for "services", seemingly gives a reason for this push to reverse the stock's downward price trend. Then I went off in search of the 14 wells drilled and 11 which were successful, and "lo and behold" there they were....well, sort of.... - At West Sandy Creek, 5 wells were drilled, all of which were "successful" in that they found petroleum there, but the resulting reserves are valued at only $120,337. I'm not sure what these oil wells cost to drill, but my guess is that West Sandy Creek is not profitable at this point. - At West Lavaca River, 5 wells were drilled, of which 2 have generated reserves valued at $14,508, and engineering studies were still in progress for the other 3 as of May 14th. - Results from the Smothers #1 well (1 well) are not yet known because testing was interrupted by flooding in April. - The Hanson #3 well (1 well) was unsuccessful. - At Walnut Point, 2 wells were drilled, and both were unsuccessful; the costs of drilling these two wells was $590,000. In summary, of the 14 wells drilled, 3 are reported as unsuccessful, and testing is not yet complete on 4 more, leaving 7 "successful" wells which in total generated reserves worth about $135,000. It is not clear what it cost to drill these wells, but if it is approaching the $290,000 per well that Walnut Point cost, then a little bit more of this "success" would be fatal to ARXA. But once again, I don't know much about oil..... One last point, Friday's price increase to $2.06 resulted from a trade at 3:59PM for 1,000 shares at the ask...out of 3,000 shares traded all day. Yesterday, ARXA opened at $2.87 and moved to $3.69 on over 400,000 shares. Hopefully, none of you were caught up in this "promotion effort." I'm sorry that I didn't send this Bulletin out until this morning. Needless to say, I wouldn't touch this with an eleven foot pole. ARXA may be a good company intrinsically, but I don't see anything that would justify this level of "enthusiasm"..... Bob Davis | ||||||||||||||
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