Arena Resources drills for an oil recovery

With a strong balance street, the oil and gas producer is poised to bounce back when energy prices go back up.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Katie Benner, writer-reporter

301 Moved Permanently

301 Moved Permanently

When do you think the economy will improve?
  • In the next few months
  • In six months to a year
  • In a year or more
  • It's already on the mend
CDs & Money Market
MMA 0.37%
$10K MMA 0.33%
6 month CD 0.35%
1 yr CD 0.67%
5 yr CD 1.38%

Find personalized rates:

Rates provided by

NEW YORK (Fortune) -- Arena Resources has pleased investors with rocket-fueled growth, but the oil and gas producer seems to have hit a wall.

Falling energy prices have cut into the company's latest quarterly results, with revenue down 56% and income down 42% from the previous year, while oil prices fell 54% and gas prices dropped 61%. Its stock is down about 21% over the same period.

But Tulsa, Okla.-based Arena's results beat Wall Street expectations as drilling costs fell along with oil prices; and the company had a strong enough balance sheet to weather the downturn. Arena has more than $68 million in cash and a $150 million credit line that it has yet to tap. And it has no long-term outstanding debt, in large part because it funds its acquisitions with cash flow.

Now energy prices may be moving in Arena's favor. The decline in oil consumption that began last year should ease up by the end of 2009, the Energy Information Administration said in its July monthly report; and a rebound in global growth would stabilize and increase demand and prices for oil and gas.

"The price of [West Texas Intermediate] crude oil is expected to average near $70 per barrel through the second half of 2009, an increase of about $18 compared with the average for the first half of the year," the EIA wrote in its report.

The EIA predicts that natural gas prices, which are expected to remain below $4 per thousand cubic feet (Mcf) until late this year, should increase to just below $6 per Mcf in 2010 if economic growth increases industrial consumption of natural gas.

Against this macroeconomic picture, Arena (ARD) said during its earnings call last week that it plans to increase capital spending in 2009 by $20 million to $85 million in response to the rebound in oil prices. Among other things, it has added a second rig in its largest field, the Fuhrman Mascho field, and is planning 40 more wells there, bringing the number to 120.

Every time the price per barrel of oil increases by $1, it generates about 10 cents in incremental cash flow per share, Neal Dingmann, an analyst at Wunderlich Securities, wrote in a recent report. "With costs under $20 [a barrel] to produce oil... we believe Arena provides investors some of the highest exposure to oil price moves."

Arena's business model allows it to keep production costs low. Rather than spend a lot of money looking for new oil and gas fields, Arena acquires U.S. properties that other companies no longer want to explore, but which still have reserves and can provide immediate cash flow. Since its founding in 2000, Arena has bought oil-and-gas producing fields in Texas, Oklahoma, Kansas, and New Mexico, further explored these proven properties, and extracted even more resources.

The company is trading at a price-to-earnings ratio of 16, versus 17 for the S&P 500, according to Morningstar. While Arena's valuation is only slightly less that of the S&P, it is a substantial discount to the company's five-year average P/E of 29. The average Wall Street estimate predicts that Arena's earnings will decline by more than 62% in 2009, but grow by nearly 54% in 2010.

For investors who believe that we're in the midst of a global recovery and that energy consumption is about to zoom higher, now might be a good time to buy Arena. To top of page

Company Price Change % Change
Apple Inc 99.02 1.35 1.38%
Facebook Inc 74.92 -0.27 -0.36%
Bank of America Corp... 15.50 -0.09 -0.58%
Dollar Tree Inc 54.87 0.65 1.20%
Family Dollar Stores... 75.74 15.08 24.86%
Data as of Jul 28
Index Last Change % Change
Dow 16,982.59 22.02 0.13%
Nasdaq 4,444.91 -4.65 -0.10%
S&P 500 1,978.91 0.57 0.03%
Treasuries 2.49 0.02 0.89%
Data as of 7:31am ET
More Galleries
The 13 most WTF gadgets From the weird to the gross, these 13 gadgets will make you wonder why they even exist. More
Best-loved cars in America These cars and trucks topped J.D. Power's APEAL survey, which measures how much owners like their new vehicles. More
America's most powerful cars A new 'horsepower war' has erupted among U.S. automakers and these are the most potent weapons in their arsenals. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.