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Is The Arena Resources Sell Off Overdone?
Looking at a chart of Arena Resources (NYSE:ARD) over the last few days, one might think a catastrophe is in the making at this low-key exploration and production operator, as the company has already lost 25% of its value after reporting 2009 fourth-quarter earnings.
IN PICTURES: Top 10 Solutions For A Big Tax Bill
The Numbers
Arena Resources reported net income of $9.2 million or 24 cents per share in the fourth quarter of 2009, down from $13.5 million or 35 cents per share in the same quarter of 2008. This was somewhat unexpected since analysts were expecting 35 cents per share for the quarter.
Large earnings misses can be difficult to understand for those who invest in the exploration and production industry because companies typically give guidance on production and hedges, and the commodity prices for oil and natural gas are publicly available. This makes it easier to model revenues for the companies. (Before jumping into this hot sector, learn how these companies make their money. For more information, read Oil And Gas Industry Primer.)
Arena Resources reported a large year-over-year jump in operating expenses for the fourth quarter of 2009, to $27.7 million from $11.8 million in the same quarter last year. The company also reported production down by 1% in the quarter, on a year-over-year basis, to 638,262 barrels oil equivalent (BOE), compared to 642,593 BOE in the same quarter of 2008.
The Sin Of Omission
Arena Resources biggest sin in the minds of investors may be that it goes about its business of exploration and development without paying any attention to shale. Most of its production comes from the Furman-Mascho field in the Permian Basin in Texas, and this is where the company spent 94% of its $111 million in capital in 2009.
Arena Resources has 36,000 net acres in the Furman-Mascho field, and drilled 176 wells here in 2009. The company plans to increase this in 2010, and will try to finish more than 300 wells in this field.
Other operators also find the area attractive. Energen (NYSE:EGN) also entered into the Furman Mascho in 2009 when the company bought out Range Resources (NYSE:RRC), which chose to focus on its Marcellus Shale properties instead.
Look Ma, No Debt
The company has also avoided the debt trap that hurt so many of its peers during the recent credit crisis. Arena Resources carries no outstanding debt, and built its cash to end 2009 with $63 million.
The exploration and production industry is capital intensive and it is difficult to build a company using only free cash flow, but Arena Resources has accomplished this. Another company with no debt in the industry include Evolution Petroleum Corporation (NYSE:EPM), which is a small cap company with properties in Texas, Louisiana and Oklahoma. The company produced 31,238 BOE in its most recent quarter.
Contango Oil & Gas Company (NYSE:MCF) focuses its capital on the offshore Gulf of Mexico, and had no debt also as of February 2010.
Bottom Line
The sharp sell off in Arena Resources may be an overreaction by short-term investors rather than the catastrophe that is implied by that price action. The company is debt free, and its oil focus may be a hedge against the doom and gloom predictions circulating in the natural gas market. (Find out how this commodity's fluctuating price affects more than just how much you pay at the pump. Read How Does Crude Oil Affect Gas Prices?)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: Top 10 Solutions For A Big Tax Bill
The Numbers
Arena Resources reported net income of $9.2 million or 24 cents per share in the fourth quarter of 2009, down from $13.5 million or 35 cents per share in the same quarter of 2008. This was somewhat unexpected since analysts were expecting 35 cents per share for the quarter.
Large earnings misses can be difficult to understand for those who invest in the exploration and production industry because companies typically give guidance on production and hedges, and the commodity prices for oil and natural gas are publicly available. This makes it easier to model revenues for the companies. (Before jumping into this hot sector, learn how these companies make their money. For more information, read Oil And Gas Industry Primer.)
Arena Resources reported a large year-over-year jump in operating expenses for the fourth quarter of 2009, to $27.7 million from $11.8 million in the same quarter last year. The company also reported production down by 1% in the quarter, on a year-over-year basis, to 638,262 barrels oil equivalent (BOE), compared to 642,593 BOE in the same quarter of 2008.
The Sin Of Omission
Arena Resources biggest sin in the minds of investors may be that it goes about its business of exploration and development without paying any attention to shale. Most of its production comes from the Furman-Mascho field in the Permian Basin in Texas, and this is where the company spent 94% of its $111 million in capital in 2009.
Other operators also find the area attractive. Energen (NYSE:EGN) also entered into the Furman Mascho in 2009 when the company bought out Range Resources (NYSE:RRC), which chose to focus on its Marcellus Shale properties instead.
Look Ma, No Debt
The company has also avoided the debt trap that hurt so many of its peers during the recent credit crisis. Arena Resources carries no outstanding debt, and built its cash to end 2009 with $63 million.
The exploration and production industry is capital intensive and it is difficult to build a company using only free cash flow, but Arena Resources has accomplished this. Another company with no debt in the industry include Evolution Petroleum Corporation (NYSE:EPM), which is a small cap company with properties in Texas, Louisiana and Oklahoma. The company produced 31,238 BOE in its most recent quarter.
Contango Oil & Gas Company (NYSE:MCF) focuses its capital on the offshore Gulf of Mexico, and had no debt also as of February 2010.
Bottom Line
The sharp sell off in Arena Resources may be an overreaction by short-term investors rather than the catastrophe that is implied by that price action. The company is debt free, and its oil focus may be a hedge against the doom and gloom predictions circulating in the natural gas market. (Find out how this commodity's fluctuating price affects more than just how much you pay at the pump. Read How Does Crude Oil Affect Gas Prices?)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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