I snuck out early today for a round of golf. When I got back I found ATP had jumped 11% in the last 30 minutes of trading.
Why ? A correction came out from JP Morgan relating to their Monday downgrade of ATP for which they placed at $10 price target.
And to say the correction is material is a wee bit of an understatement.
On Monday JP Morgan had warned investors that ATP would need an additional $500mil of external capital over the next 2 years. JP Morgan explained that the market did not understand just how much of ATP's revenues over the next 2 years would be going to pay for net profits interests the company had sold to 3rd parties. When you consider that the entire market cap of ATP is currently $500mil......well them needing another $500mil of cash from external sources is rather disturbing.
After this news ATP shares dropped 15% on Monday and Tuesday.
Fast forward to today and it turns out that it is JP Morgan who doesn't understand how much of ATP's revenue would be going to it's net profits partners. JP Morgan issued the following correction which I found on a message board on the internet:
"On Tuesday, July 13, we published a note on ATPG titled, “Trading at a
Premium; Financing Needs Likely Greater Than Market Thinks;
Downgrading to Underweight.” In that note we made an error of
approximately $450MM in our calculation of ATPG’s financing needs.
• Double counted re-payments for overrides and net profits interests.
We model ATPG’s overrides (ORRIs) and net profits interests (NPIs)
and attempt to calculate the cash flow impact of these financial
transactions. ATPG re-pays a "principal" portion and an "interest"
portion for these financings. We double counted the principal portion of
repayments for years 2010 and 2011. The magnitude of this error is
around $450MM.
• Adjusted model for error. The attached model adjusts for the above
mentioned error. In our July 13 note, we stated that it appeared that
ATPG would need $500MM of external capital. This model corrects
that error and reduces that need to $50MM"
Are you kidding me ? You double counted something that is the size of the entire company market cap ? You made an error that is equal to the size of the entire market cap of the company !! Instead of needing $500mil, ATP actually only needs $50mil ? In other words, they basically do not need any help from anyone in funding capex ? That is quite a mistake.
Coming up with $50 mil shouldn't be much of a problem as ATP has a refinancing deal for the Titan that should occur in the near term which will provide the company with at least $200mil or more. They also have recently revised a debt facility that allows for an additional $350mil of room under it.
I will give JP Morgan credit though for doing the right thing and correcting this error. They could easily have let it fade away and come out with a new report in 6 months. And hey, everyone makes mistakes.
Speaking of mistakes. The same JP Morgan analyst made another whopper in April when they issued their first report on ATP. In that report they used a production profile that was dated before ATP discovered 30 million barrels of proved reserves at Mirage.
How big was that error ? Well they took 30 million barrels of oil that were going to be produced in the 4 year window that the Titan is at Mirage and ignored them. And then also moved up the capex related to the Titan relocation by 3 or 4 years which also had a material impact on their value per share. I'll let you calculate the PV impact of this, but it is safe to say it is an even larger error than the one today.
So I guess lesson for the day is don't trust anyone else's analysis no matter what company letterhead it is written on.
With this correction getting circulated tomorrow, the BP well being capped, the Titan monetization happening soon, the MC941 #3 well set to come on in weeks (and raise production by up to 33%) and a 30% plus short interest.........ATP shares could have quick move up in the next couple of months if the government can stay out of the way.
Disclosure: Long ATPG
