Arena (NYSE: ARD) is an onshore drilling company with 55.4 million Barrel of Oil Equivalents (BOE) spread throughout Oklahoma, Texas, New Mexico and Kansas. The company has not fully developed 64% of its proved oil reserves which are a mix of 84% oil and 14% gas. Arena acquires, explores, drills, and extracts oil and gas from on land reserves. The rise in gas and oil prices have driven up the profitability and the expected revenue of both commodities. The growth in demand for energy from China, India, and other emerging markets have further increased the price. These rises in price combined with a fall in development costs and increased output have led to a steady rise in net income from $670,143 in 2003 to $34M in 2007.
As of fiscal year 2007, Arena had 55.4 million Barrel of Oil Equivalents (BOE) in proved reserves spread throughout Oklahoma, Texas, New Mexico and Kansas. Arena's focus is on developing its existing reserves; 64% of its reserves are undeveloped. This means that it must discover the best place to drill, then drill and establish oil and gas pumps. It then can ship the fuel to major companies who purchase the raw material and have it processed. Of the proved reserves, 86% is oil and 14% is natural gas and Arena operates 134 drilled wells as of 2007. The proved reserves have an estimated pre-tax PV10 (present value of future net revenues before income taxes discounted at 10%) of approximately $1.98 billion as of 2007.
Arena has consistently increased its production of both oil and natural gas over the course of the past 3 years. The rise in daily production and the average sale price have resulted in a large rise in net cash-flow: from $445M in 2005 to $545M in 2006 and $1.28B in 2007. The rise in production is likely to continue to rise as Arena further develops its oil and gas deposits. The most costly aspect of oil exploration and production is discovering and building the infrastructure necessary to extract and move the oil or gas to the refinery. This type of equipment includes oil rigs, pipelines, oil trucks, etc.  Because Arena has the discovery aspect and most of the infrastructure completed, its costs are now much smaller. In fact, Arena only has 86 full time employees. Arena predicts its development costs will fall from $171M in 2008 to $33M in 2010. This substantial fall in costs combined with a continued rise in production and prices give Arena the possibility of a large profit margin.
|Geographic Area||Oil (Bbl)||Natural Gas (Mcf)||Total (Boe)||Pre-Tax PV10 Value||Standardized Measure of Discounted Future Net Cash Flows|
|Oil production (Bbls)||441,995||900,614||1,316,025|
|Natural gas production (Mcf)||398,611||989,991||1,503,612|
|Total production (Boe)||508,430||1,065,613||1,566,627|
|Daily production (Boe/d)||1,393||2,919||4,292|
|Average sales price:|
|Oil (per Bbl)||$52||$59.26||$66.82|
|Natural gas (per Mcf)||$6.72||$6.46||$8.02|
|Total (per Boe)||$50.83||$56.08||$63.83|
|Average production cost (per Boe)||$7.54||$6.06||$7.34|
Arena has two major customers Navajo Refining Company and DCP Midstream, LP. They represented, respectively, 83% and 11% of oil and gas revenues in 2006 and 85% and 7% in 2007. Although Arena is heavily dependent on these two customers, it is unlikely that the loss of either of these customers will effect the business. Because of the commodity nature and the large, unmet demand for oil and gas, Arena will be able to easily find a new customer at the market price.
Rising prices in gas and oil have pushed the demand to find gas and oil reserves and to further drill existing ones. Higher prices also allow companies to increase exploration for new deposits. A rise in the global demand for oil from places like China have pushed prices higher. This price increase also raises the utilization rate for rigs.  From 2000 to 2006, the price of oil, adjusted for inflation, incresed 88%, from $32.26 a barrel to $60.78.  These rising prices increase the profitability of drilling and cause a rise in value of Arena's existing oil and gas reserves.
Because 64% of the the property owned by Arena is considered "proved but undeveloped," it is uncertain that these regions actually contain the quantity predicted. These regions may never actually produce a positive cash-flow if the oil and gas is less than expected, or too expensive to extract. 30% of Arena's 2007 reserve predictions are also based on secondary recovery techniques. Arena plans to use waterflood technique as its secondary recovery method. The waterflood technique is a method that uses a strong acid to dissolve the edges of the rock formation and then uses an aqueous solution to displace the remaining oil and oil rich rock. These plans are still in the development phase and may prove less successful than hoped.
Rising oil prices have pushed consumers and companies to develop hybrid and alternative energies. The sales of hybrid cars have risen and the producers have increased their design of new cars. Renewable Energy and alternative sources of energy such as nuclear, solar, wind, biofuels, and ethanol have grown in both awareness and design. Concerns about environmental issues and global climate change have also had negative effects on the oil and gas industry. Within the US, the Energy Independence and Security Act forces automakers to achieve 35mpg average by 2020 and sets a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022. This change in consumer consciences, government regulation, and the growth alternative sources of energy will alter the demand for the oil and gas Arena produces.
Arena's competitors within the the independent oil and gas sector are numerous. The leading and most well known companies are Anadarko Petroleum, EnCana, Comstock Resources, Cabot Oil & Gas (COG) and Apache. Anadarko Petroleum is the largest of the group with nearly 54 times the daily output as of 2007. Comstock Resources is closer in size to Arena, but is investing heavily in deepwater exploration, while Arena has stayed with onshore reserves. EnCana has a much larger natural gas reserve than Arena. EnCana, however, is spread internationally, from Canada to Qatar to Brazil, and is investing in ultra-deepwater technology to try and dramatically increase its production capacity.
Despite the much larger competition, Arena is still in the early development stages of oil production. Because it still has yet to develop the majority of its reserves, it has yet to achieve its maximum production rate. The oil and gas industry is also particular in the sense that it does not face as direct competition as other sectors. The demand for the commodities is greater than the supply, so Arena and its other competitors have little difficulty finding a buyer.
|Arena Resources||Anadarko||EnCana||Comstock||Apache||Cabot Oil & Gas|
|Crude Oil (Bbl/d)||3,606||195,258 ||130,498 ||6,310||220,460 ||4,444 |
|Natural Gas (Mcf/d)||4,119||1,667,433||3,367,400||146,452||1,358,972||210,000|