RE: The Revelation of VelvetcrushrOdd post, but good to hear sensible negative counterpoints. Paying attention to valid contradictory evidence helps keep from falling in love with a stock, which usually ends in tears when it happens...
Having said that, if these are the strongest criticisms against ARN I can live with that. I would respond to some of these points:
1. That is valid - ARN doesn't outline capital costs associated with waterflooding. However, at their AGM, the head geologist was very clear that waterflooding was essential to getting those reserves. And to get to point 3 at the same time, they said waterflooding for that well would be required within 18 months, and I presume others drilled down south. If one wants to model an NPV based on development of the entire land base, it would be essential to add a capital cost for waterflooding. But that doesn't mean it would be a big deal. They still don't know if it would be one or two injectors per section, or whether there would be 3, 4, 5, or 6 wells to ultimately drain the rock. That will depend on how tight it is; no one expects uniformity across the entire area. So it could be difficult to model those costs and say it will automatically add 500k per well or something. But it is a valid point that capital will be required. Also, for those that weren't at the AGM, Arcan mentioned that the south well had pressure of I think 20kpa vs 8kpa for unit wells. So the large initial decline suggests tight rock (right geologists out there?) but it does confirm good pressures, and OOIP was confirmed as well. Type logs in the area suggest the wells will chug away forever, so we have to see what production levels off at after water flooding. That will take some time.
2. I'm not sure how you can estimate an NPV with such accuracy without making some pretty wild assumptions about production curves on wells that are max 9 months old. Of course if you have as much experience in the area as Arcan does, analyzing the performance of every well bore over several townships, you would be in a better position to do so (and perhaps Velvetcrushr is). This "discrepancy" doesn't concern me, just as waterflood costs don't concern me, because I'm waiting to see what GLJ has to say. They will have a number for both these components, and any prospective purchaser will pay for what GLJ forecasts, but sadly not us board posters. Otherwise I'd be rich.
3. I wouldn't say production "utterly collapsed", it fell off substantially as almost every other HZMSF well has done in North America. The unit wells did not fall off as fast because of water support, which Arcan has said will be necessary. To take the decline curve of this well in isolation greatly understates the potential of the area; first of all, it is the first HZMSF well in the area, so much is to be learned; second, ARN stated it would require waterflooding; third, vertical well production in the area confirms that this zone can produce for decades at low rates (i mentioned a well in an earlier post that has produced nearly flat since 1983). Most observers acknowledge the large amount of OOIP, the question is how much and how fast it gets liberated. And to do some basic math without too many assumptions, 150 b/d for 7 years is nearly 400,000 bbls. You can PV that however you like, it's still a great return.
4. Agree ARN has extended itself a bit, but as I said last post this is a new world where juniors are paying $4million for a well and going it alone. That is risky in itself. So they are between a rock and a hard place. You say 1 well per month won't support the valuation - what are they supposed to do? Farm it out? Put the company up for sale? And 12 wells a year, if they average even say 150 b/d at the end of the year, would add more than 2000 b/d of light oil (obviously some wells would be more flush); at a conservative first year netback of $35 that's cash flow of $2 million per month -surely not bad for a $48 million investment in drilling? (Yes, I know, add capex for waterflooding - but in that case I suspect production would average more than 150 b/d too, but I can't quantify that...)
At any rate, I think most posters on this board have adopted a conservative estimate when trying to evaluate the company, but that can still get to numbers much higher than $5/share. For example, take many of ARN's parameters (180 mm bbls potentially recoverable, 220 locations, 600kb/well recoverable) and add a risk factor of 50% - you'd still get a per share potential value much higher than $5. Of course if you haircut them all by 50% you could justify a price less than $4, but then I'd question why you'd ever consider investing in the stock in the first place..
Anyway, good comments Velvetcrushr and you bring up some valid concerns, in an appropriately dramatic way. I think we need to see a reserve report to answer a lot of them, to the extent a reserve report can settle the issue. It will in the sense that someone will pay hard cash based on GLJ numbers as opposed to a corporate presentation. Time will tell, all you can do is place your bet. Fee free to short it if your analysis tells you to!
Oops my 5 year old is up. Have to go. Sorry, no time for editing...
opg210