TWST: May we start with a short history and overview of your company?
Mr. Terry: Arena Resources is a Tulsa, Oklahoma-based exploration, acquisition and production company. The history of the company dates back to the year 2000. It was formed by Stan McCabe and Tim Rochford who had a previous history with each other in building and growing oil and gas companies. They were the principals behind a company that ultimately became Magnum Hunter Resources. After a series of transactions, which resulted in Magnum Hunter being sold, Tim and Stan formed a new company, Arena Resources. The company was started with private funds for the purpose of acquiring oil and gas producing properties. In the years 2001 and 2002, small acquisitions were made in western Oklahoma in the Oklahoma Panhandle. Later, properties were purchased in Texas, in Fisher County and Montague Counties. The Arena acquisition model required growth opportunities in development drilling, secondary recovery or behind pipe potential. That model has been used to appraise acquisition opportunities for Arena Resources, Inc.
In 2003, Arena started acquiring properties in the Permian Basin, West Texas and southeastern New Mexico. The company made three small acquisitions in 2003 and then later, in 2004, the first major acquisition was purchased, the East Hobbs San Andres unit. In late 2004, the company purchased what we call the Fuhrman-Mascho Fields properties in West Texas in Andrews County, Texas. Arena started a development-drilling program on that property in April 2005, which has been responsible for the growth of Arena Resources.
TWST: Would you expand on that property, your production, as well as your future drilling plans there?
Mr. Terry: Fuhrman-Mascho is the flagship project for Arena Resources. It was originally comprised of properties owned by four separate companies. The four companies combined their interests into one sales package and Arena purchased the property through a broker dealer. The original acquisition involved about 11,500 acres. There were approximately 160 producing wells on the property and the gross production at the time of acquisition was about 240 barrels of oil per day total. The properties produced primarily from the San Andres formation, which is found at a depth of about 4,800 feet. The San Andres formation is a proven reservoir in terms of both primary production and secondary recovery and ultimately we think there will be opportunities for tertiary recovery. Arena started a development-drilling program on the Fuhrman-Mascho properties in April 2005 and as of today, we are drilling well number 385. We have also refraced a total of 130 old wells. We have four rigs running, which will result in drilling 250 to 255 wells in 2008. We anticipate that number growing to somewhere around 300 wells in 2009.
As a direct corollary to that drilling activity, the gross production on this property has increased from 240 plus barrels a day to approximately 7,000 barrels per day. This increase provides an order of magnitude of the results of the Fuhrman Mascho development drilling project.
TWST: What are your challenges? What worries you?
Mr. Terry: The challenges to our business, in our particular case, are relatively few. Obviously there is the challenge of the marketplace. How is crude oil going to be priced? How is natural gas going to be priced? But other than that, Arena has positioned itself, through the properties that we have acquired, to fairly accurately predict the results that we will get in our development drilling programs. Of the 385 wells that we have drilled in Fuhrman-Masco, we've had no dry holes. The dry hole risk is practically non-existent. So we can essentially remove that from our thinking. The risk then becomes: how good is the well going to be? Is it going to be an average well of 40,000 net barrels or is it going to be better than the average or in some cases slightly less than the average?
The greatest challenge, I think, will be in the marketplace and what happens to the price per barrel and the price per Mcf. At current rates of $120 plus, we have excellent margins. Our total cost per barrel is under $35. So we have excellent margins with which to work. We've been able to grow our production and as a result our cash flow has grown and our value has grown. The challenge is predicting pricing in the future.
The other challenge that we have identified is the challenge of attracting, maintaining and retaining a good technical staff. The industry is encountering resurgence in terms of activity and an associated demand for technical people. Technical professionals — engineers, geologists, land and geo-physical people — are very much in demand. There are not enough of those individuals to go around so it's incumbent upon Arena Resources to continue to be able to attract such personnel and formulate strategies to keep them and then draw some younger people into our business as we proceed.
TWST: How does the balance sheet look to you?
Mr. Terry: Our balance sheet is extremely strong. Arena is somewhat unique in that we have zero debt. Our company has always maintained a relatively conservative philosophy and we feel that if we can manage debt, we can focus on developing the properties that we now have, and also be poised to take advantage of future acquisition opportunities. We are positioned very well.
TWST: Please give us the two or three most compelling reasons as to why an investor should be buying shares in your company.
Mr. Terry: The most compelling reason that I can give is based on the history of the company. One of the easiest ways to predict what Arena is going to do is to review what we have done, because our inventory of drilling locations and activity out in front of us is basically a repetition of what we have done over the past four years. I mentioned earlier that we have about 1,900 locations remaining to be drilled at Fuhrman-Mascho. That is a predictable pattern of growth for the future.
We started developing at Fuhrman-Mascho the first year using one drilling rig. The second year we employed two rigs, the third three and the fourth four. We will continue to stage our future development similarly. As we move forward, if five acre spacing is justified, Arena's potential locations will increase in direct proportion. We also have secondary recovery opportunities at Fuhrman-Mascho, and, in addition, there is a shallow Yates gas zone development that will begin in mid-year 2009. As a result of these opportunities, Arena will continue to be able to generate the kind of numbers that we have generated over the past several years.