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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.[1] 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.[2] 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.[3]

Business Overview

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A land rig drilling for oil

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.[1] Of the proved reserves, 86% is oil and 14% is natural gas and Arena operates 134 drilled wells as of 2007. [4][5]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.[6]

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.[7] 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. [8] 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.[9] Arena predicts its development costs will fall from $171M in 2008 to $33M in 2010.[10] This substantial fall in costs combined with a continued rise in production and prices give Arena the possibility of a large profit margin.

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Total Revenue and Operating Income from 2005 to 2007[11]

Geographic Area Oil (Bbl) Natural Gas (Mcf) Total (Boe) Pre-Tax PV10 Value Standardized Measure of Discounted Future Net Cash Flows
New Mexico 10,823,2967,880,97412,136,792$447,118,028$286,156,174
Texas 33,614,50437,516,04239,867,173$1,430,532,017$923,149,761
Oklahoma 2,975,422220,4543,012,164$101,542,849$64,576,577
Kansas - 2,457,492409,582$2,364,242$2,283,842
Total 47,413,22248,074,96255,425,711$1,981,557,136$1,276,166,354
' 2005 2006 2007
Oil production (Bbls) 441,995900,6141,316,025
Natural gas production (Mcf) 398,611989,9911,503,612
Total production (Boe) 508,4301,065,6131,566,627
Daily production (Boe/d) 1,3932,9194,292
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.[14]

Trends and Forces

Rising Gas and Oil Prices drive up the profitability of drilling

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Liquids Supply and Demand[15]

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. [16] From 2000 to 2006, the price of oil, adjusted for inflation, incresed 88%, from $32.26 a barrel to $60.78. [17] These rising prices increase the profitability of drilling and cause a rise in value of Arena's existing oil and gas reserves.

A substantial percentage of Arena's properties are undeveloped and may be worth less than predicted

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.[18] 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.[19] These plans are still in the development phase and may prove less successful than hoped.[20]

The emergence of Hybrid and alternative energy raises competition

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.[21] 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.[22] 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.[23] 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.[24] 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.[25]

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.

Total Production Between Competitors
Arena Resources Anadarko EnCana Comstock Apache Cabot Oil & Gas
Crude Oil (Bbl/d) 3,606[13] 195,258 [26] 130,498 [27] 6,310[28] 220,460 [29] 4,444 [30]
NGL (Bbl/d) N/A 42,778[26] 24,207[27] N/A 9,731[29] N/A
Natural Gas (Mcf/d) 4,119[13] 1,667,433[26] 3,367,400[27] 146,452[28] 1,358,972[29] 210,000[30]


  1. 1.0 1.1 ARD 10-K 2008 Item 1 "General" p.4
  2. Time "China's Quest for Oil"
  3. ARD 10-K 2008 Item 6 "Selected Financial Data " p.26
  4. ARD 10-K 2008 Item 1 "Business Stratety" p.5
  5. ARD 10-K 2008 Item 2 "Drilling Activity" p.20
  6. ARD 10-K 2008 Item 1 "Business Development" p.4
  7. ARD 10-K 2008 Item 2 "Standardized Measure of Discounted Future Net Cash Flows" p.23
  8. Oil & Gas Jobs: "Oil Pipelines Job Overview"
  9. ARD 10-K 2008 Item 1 "Current Employees" p.8
  10. ARD 10-K 2008 Item 2 "Proved Reserves" p.16
  11. ARD 10-K 2008 Note 15 "Quarterly Financial Data" p.76
  12. ARD 10-K 2008 Item 2 "General Background" p.14
  13. 13.0 13.1 13.2 ARD 10-K 2008 Item 2 "Production History" p.19
  14. ARD 10-K 2008 Item 1 "Major Customers" p.5
  15. [http://www.exxonmobil.com/Corporate/energy_outlook_liquidssupply.aspx Exxon Mobil: Energy and Environment "Liquids Supply and Demand"
  16. Rigzone: Day Rates
  17. DO 10-K 2006, "Delving into the Deep", p.12
  18. ARD 10-K 2008 1A "Risk Factors" p.8
  19. FreePatentsOnline: "Modified Waterflood Teachnique"
  20. ARD 10-K 2008 1A "Risk Factors" p.9
  21. BNET "J.D. Power Predicts Rise in Hybrid Purchases"
  22. New York Times: Science "Solar Energy"
  23. WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
  24. Google Finance: Arena Resources "Related Companies"
  25. EnCana: Groups
  26. 26.0 26.1 26.2 APC 10-K 2008 Item 1
  27. 27.0 27.1 27.2 Encana 2006 Annual Report
  28. 28.0 28.1 Comstock 2006 Annual Report
  29. 29.0 29.1 29.2 Apache Company Data as Compiled by RBC International Markets
  30. 30.0 30.1 Cabot Oil & Gas 2006 Company Data
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