I wrote just last week about ATP Oil and Gas and the likelihood of a rapid near term stock price increase due to some clarity arriving on the likely government response to the BP spill. Here is the article:
http://www.gurufocus.com/news.php?id=101862
By rapid share price increase, I was thinking over the next couple of months. But over the first half of just last week after I wrote the article I looked like a genius as the stock price rocketed up from $11 to $14.70 at one point on Thursday.
Then came Friday though, and a 16% plunge on the second quarter earnings release where ATP missed analyst earnings estimates by a wide margin. Genius no more, and perhaps a fool.
So who is the fool ? Me or Mr. Market ?
The next couple of months will answer that for us, but with respect to the big reaction on the quarterly earnings results I think it is clearly Mr. Market does not have a grasp of what is and what isn’t important.
First the Quarterly Disappointment
ATP was way below all analyst estimates for the quarter. And from the analyst reports that I have read there were two main reasons for this:
1) ATP expensed $78 million of costs related to prior financings
2) ATP began expensing interest that had previously been capitalized as the Telemark field commenced production in the quarter
I’ll be honest with you. I don’t really follow what the analysts are saying as more often than not they are more useful as a contrarian indicator. And I’m more interested in cash flows than GAAP earnings anyway. Combine that with some suspect quality in their work (see my article on the $9 per share error JP Morgan made in their prior ATP analysis http://www.gurufocus.com/news.php?id=100222) and there is good reason to do your own work.
But I have to say, that when you are a publicly traded company you need to play ball with the analysts that are covering your company. The fact that the analyst community was unaware of this big refinancing charge and the change in interest capitalization methodology is ATP management’s fault, not the fault of those covering the company. ATP should have been proactive and they could have avoided this big earnings miss, and ATP investors could have avoided a 16% drubbing.
Neither of these items changed the attractiveness of ATP as an investment. Heck, the refinancing charge was part of really terrific news which was that ATP had restructured their debt so that there are no maturities until 2015 and no financial covenants.
So a note to the folks at ATP. You have been doing this a long time. Give us the heads up on accounting items like this so that we don’t have these huge misses.
Another Gripe With Management
ATP’s second quarter production was 21,300 barrels of oil equivalent a day or 1.94 million BOE for the quarter. On June 4 ATP issued production guidance for the quarter of 2.0 million to 2.5 million BOE for the quarter. In other words they missed the low end of guidance. They didn’t miss it by much, but they missed it again. And the guidance they gave was after they already had the data for two of the three months in the quarter.
So another note to the folks at ATP. Nobody cares if you produce 1.94 million BOE or 2.14 million BOE for the quarter unless you tell them that you will be above 2 million BOE for the quarter. So for the love of Pete, please, please start giving yourself a margin of safety when providing guidance. Or don’t provide guidance. I can’t even imagine how many dollars lower the stock price is than it would be without these production guidance misses that are completely insignificant in the grand scheme of things for a company that is well on the way to rapid production growth.
Mr. Market Doesn’t Understand What is Important
Now I lay the blame for the 16% selloff squarely at the feet of ATP management for surprising everyone with accounting items that could have been laid out months ago. But that doesn’t mean that I think the market reaction is rationale.
I ask you to consider which is more important:
1) A one-time expense relating to a refinancing that was hugely positive for the company
2) Clarity on government legislation which makes it clear that ATP will have a future in the Deepwater Gulf of Mexico, clarity without which the stock price was cut in half
Because if you are selling ATP at $11 or $12 you are basically saying that the fact that ATP missed one quarterly earnings estimate due to a refinancing charge is more important than clarity on the entire future of the company.
ATP was a $23 stock prior to the BP oil spill. The fear of government action drove the price down to these levels. So should you be selling at $11 based on a quarterly earnings disappointment or buying at $11 because the next five years seem much more like they did when the stock was 100% higher 3 months ago.
Impact of Government Legislation
There was plenty of discussion on the proposed government legislation on the ATP quarterly call and they pretty much confirmed what I have written about before.
1) The certificate of financial responsibility limit is going to be kept manageable for producers
http://www.gurufocus.com/news.php?id=102204
2) Even if legislation were to make it tougher on small producers, that legislation likely would not legally be allowed to apply to existing leases (which comprise 100% of ATP ‘s value)
http://www.gurufocus.com/news.php?id=100057
3) The moratorium at worst seems likely to end in November if not earlier with ATP being the single most likely company to get approval first thanks to the subsea isolation device, two blind sheer rams on the mudline and a surface blowout preventer on the ATP Titan.
An interesting note from the conference call was that senior level officials from the bureau of ocean energy management have requested to visit the ATP Titan next week. This is at their request after junior level officials have viewed the additional safety measures on this state of the art production facility.
Every day it seems more likely that ATP and other producers are going to emerge from this relatively unchanged. The overall public sentiment against the drilling moratorium should help drive public policy. Check out this article:
http://www.washingtonpost.com/wp-dyn/content/article/2010/08/08/AR2010080802628.html
Turning Point in Capital Expenditures
Capital spending in the first half of 2010 was again quite large as the final installations on the ATP Titan were completed. Total capex was over $500mil. Guidance for the second half drops dramatically to around $100 million that will be funded by ATP and another $40 million or so under a vendor financing arrangement.
And I believe this marks an important turning point. For the last 3 years ATP has had to put almost all of its cash into the $700 million ATP Titan and the $200 million of related Telemark pipelines. As ATP has been cash strapped, that meant that they didn’t have the funds to drill wells and grow production. Now that the infrastructure spending is over cash can be directed at drilling wells which will quickly ramp up production. In other words, a quick return on investment.
With that cash going into drilling here is what is upcoming with respect to wells that will add to production within the next year (assuming the moratorium ends):
Mirage well #1 at Telemark – 7,000 to 10,000 BOE per day
MC 754 at Gomez – 5,000 BOE per day
Mirage well #2 at Telemark – 7,000 BOE per day
Morgus well #1 at Telemark – 7,000 BOE per day
MC 710 #9 well – 5,000 BOE per day
MC 710 #10 – 5,000 BOE per day
That is a lot of production being added to a company that is currently producing about 21,000 BOE per day which is actually up a great deal already from the 14,000 BOE per day in Q4 2009.
Shareholders will finally see the benefits of laying down all that infrastructure once ATP directs cash towards drilling these wells.
Still Short on Cash
As at the end of the second quarter ATP still is not in a position where it has the cash to do all of the things it wants to do. That will change if things go according to plan. And here are the main components of the plan to get then to the completion of Cheviot without additional funding:
1) Complete MC941#3 – This is an oil well that is supposedly going to produce 7,000 to 10,000 BOE per day. With current production at 21,000 BOE per day this is going to provide a lot more cash flow.
2) ATP Titan Monetization – Per the conference call ATP believes that this could happen quite soon, although a specific timeline was not provided. This should bring in $200 million to $350 million in cash to the balance sheet. Obviously this could fund a huge part of what ATP wants to do.
3) Octabouy Vendor Financing – The Chinese company Cosco/Sinosure who is manufacturing the Octabouy production unit is going to complete it on payment deferred basis. ATP basically said that while the ink isn’t dry on the contract, the deal was essentially done. This will take $600 million out of the Cheviot capex requirement and I would look for the Octabouy to be rolled directly into an SPV when complete which would then reimburse the Chinese company.
4) Partner on Cheviot – ATP indicated that it is their intention to bring in a partner to help them complete Cheviot. While this would certainly give away some upside, it would be much smarter than trying to fund the entire project.
5) Part two of Titan monetization – Look for the equity piece of the Titan SPV to eventually be rolled out with cash being netted by ATP.
6) The first lien term loan that ATP secured in Q2 has room for another $350 million of financing as ATP’s reserve value increases. The reserve value will increase this year as Entrada and Blythe are added and the reserve value calculation is done reflecting higher oil prices.
Q2 Had An Asset Sale That May Have Slipped Under the Radar
In the second quarter ATP sold the deep rights under MC 348 for an undisclosed amount of cash and a 10% ORRI in the property. What is interesting is that they retain a 10% ORRI up to the point where Deepwater Royalty Relief expires, at which point the ORRI decreases to 1.67%.
Now why is that interesting ? Because Deepwater Royalty Relief is the suspension of royalty payments on Deepwater discoveries for the first 87 million BOE produced. MC 348 has had roughly 17 million BOE produced on it which would give ATP a 10% interest in 70 million BOE. At $80 oil that is 7,000,000 x $80 = $560 million of income without any related expenditure.
Given the terms of the agreement I think it is quite likely that the 3rd party involved plans to produce more than 70 million BOE from the property as the property obviously has a target very similar to what was discovered next door:
“Mar. 2010 - Shell made an oil discovery in the eastern Gulf of Mexico on the Appomattox prospect, which is positioned in 7,217 feet (2,200 meters) of water. Drilled by the Deepwater Nautilus, the discovery well reached a total depth of 25,077 feet (7,643 meters) and encountered roughly 530 feet (162 meters) of oil pay. Shell then drilled an appraisal sidetrack well to a depth of 25,950 feet (7,910 meters) and encountered roughly 380 feet (116 meters) of oil pay. The operator plans to further appraise the find this year. Appomattox is located on Mississippi Canyon Blocks 391 and 392, and Shell operates the prospect with an 80% interest while Nexen holds the remaining 20%. “
What Could Make the Picture Clearer Quickly
There are several things that could make the situation for ATP much better (or worse if they don’t happen) very quickly
1) MC941#3 comes on production at the suggested rates. ATP indicated it will be this quarter and it better be at least 7,000 BOE per day
2) The Titan monetization
3) Announcement of the Octabouy capex deferral
4) Early end of the drilling moratorium
I like many other shareholders will be sitting and holding our breath as we wait for #1 and #2 both of which could really happen almost any day.
http://www.gurufocus.com/news.php?id=101862
By rapid share price increase, I was thinking over the next couple of months. But over the first half of just last week after I wrote the article I looked like a genius as the stock price rocketed up from $11 to $14.70 at one point on Thursday.
Then came Friday though, and a 16% plunge on the second quarter earnings release where ATP missed analyst earnings estimates by a wide margin. Genius no more, and perhaps a fool.
So who is the fool ? Me or Mr. Market ?
The next couple of months will answer that for us, but with respect to the big reaction on the quarterly earnings results I think it is clearly Mr. Market does not have a grasp of what is and what isn’t important.
First the Quarterly Disappointment
ATP was way below all analyst estimates for the quarter. And from the analyst reports that I have read there were two main reasons for this:
1) ATP expensed $78 million of costs related to prior financings
2) ATP began expensing interest that had previously been capitalized as the Telemark field commenced production in the quarter
I’ll be honest with you. I don’t really follow what the analysts are saying as more often than not they are more useful as a contrarian indicator. And I’m more interested in cash flows than GAAP earnings anyway. Combine that with some suspect quality in their work (see my article on the $9 per share error JP Morgan made in their prior ATP analysis http://www.gurufocus.com/news.php?id=100222) and there is good reason to do your own work.
But I have to say, that when you are a publicly traded company you need to play ball with the analysts that are covering your company. The fact that the analyst community was unaware of this big refinancing charge and the change in interest capitalization methodology is ATP management’s fault, not the fault of those covering the company. ATP should have been proactive and they could have avoided this big earnings miss, and ATP investors could have avoided a 16% drubbing.
Neither of these items changed the attractiveness of ATP as an investment. Heck, the refinancing charge was part of really terrific news which was that ATP had restructured their debt so that there are no maturities until 2015 and no financial covenants.
So a note to the folks at ATP. You have been doing this a long time. Give us the heads up on accounting items like this so that we don’t have these huge misses.
Another Gripe With Management
ATP’s second quarter production was 21,300 barrels of oil equivalent a day or 1.94 million BOE for the quarter. On June 4 ATP issued production guidance for the quarter of 2.0 million to 2.5 million BOE for the quarter. In other words they missed the low end of guidance. They didn’t miss it by much, but they missed it again. And the guidance they gave was after they already had the data for two of the three months in the quarter.
So another note to the folks at ATP. Nobody cares if you produce 1.94 million BOE or 2.14 million BOE for the quarter unless you tell them that you will be above 2 million BOE for the quarter. So for the love of Pete, please, please start giving yourself a margin of safety when providing guidance. Or don’t provide guidance. I can’t even imagine how many dollars lower the stock price is than it would be without these production guidance misses that are completely insignificant in the grand scheme of things for a company that is well on the way to rapid production growth.
Mr. Market Doesn’t Understand What is Important
Now I lay the blame for the 16% selloff squarely at the feet of ATP management for surprising everyone with accounting items that could have been laid out months ago. But that doesn’t mean that I think the market reaction is rationale.
I ask you to consider which is more important:
1) A one-time expense relating to a refinancing that was hugely positive for the company
2) Clarity on government legislation which makes it clear that ATP will have a future in the Deepwater Gulf of Mexico, clarity without which the stock price was cut in half
Because if you are selling ATP at $11 or $12 you are basically saying that the fact that ATP missed one quarterly earnings estimate due to a refinancing charge is more important than clarity on the entire future of the company.
ATP was a $23 stock prior to the BP oil spill. The fear of government action drove the price down to these levels. So should you be selling at $11 based on a quarterly earnings disappointment or buying at $11 because the next five years seem much more like they did when the stock was 100% higher 3 months ago.
Impact of Government Legislation
There was plenty of discussion on the proposed government legislation on the ATP quarterly call and they pretty much confirmed what I have written about before.
1) The certificate of financial responsibility limit is going to be kept manageable for producers
http://www.gurufocus.com/news.php?id=102204
2) Even if legislation were to make it tougher on small producers, that legislation likely would not legally be allowed to apply to existing leases (which comprise 100% of ATP ‘s value)
http://www.gurufocus.com/news.php?id=100057
3) The moratorium at worst seems likely to end in November if not earlier with ATP being the single most likely company to get approval first thanks to the subsea isolation device, two blind sheer rams on the mudline and a surface blowout preventer on the ATP Titan.
An interesting note from the conference call was that senior level officials from the bureau of ocean energy management have requested to visit the ATP Titan next week. This is at their request after junior level officials have viewed the additional safety measures on this state of the art production facility.
Every day it seems more likely that ATP and other producers are going to emerge from this relatively unchanged. The overall public sentiment against the drilling moratorium should help drive public policy. Check out this article:
http://www.washingtonpost.com/wp-dyn/content/article/2010/08/08/AR2010080802628.html
Turning Point in Capital Expenditures
Capital spending in the first half of 2010 was again quite large as the final installations on the ATP Titan were completed. Total capex was over $500mil. Guidance for the second half drops dramatically to around $100 million that will be funded by ATP and another $40 million or so under a vendor financing arrangement.
And I believe this marks an important turning point. For the last 3 years ATP has had to put almost all of its cash into the $700 million ATP Titan and the $200 million of related Telemark pipelines. As ATP has been cash strapped, that meant that they didn’t have the funds to drill wells and grow production. Now that the infrastructure spending is over cash can be directed at drilling wells which will quickly ramp up production. In other words, a quick return on investment.
With that cash going into drilling here is what is upcoming with respect to wells that will add to production within the next year (assuming the moratorium ends):
Mirage well #1 at Telemark – 7,000 to 10,000 BOE per day
MC 754 at Gomez – 5,000 BOE per day
Mirage well #2 at Telemark – 7,000 BOE per day
Morgus well #1 at Telemark – 7,000 BOE per day
MC 710 #9 well – 5,000 BOE per day
MC 710 #10 – 5,000 BOE per day
That is a lot of production being added to a company that is currently producing about 21,000 BOE per day which is actually up a great deal already from the 14,000 BOE per day in Q4 2009.
Shareholders will finally see the benefits of laying down all that infrastructure once ATP directs cash towards drilling these wells.
Still Short on Cash
As at the end of the second quarter ATP still is not in a position where it has the cash to do all of the things it wants to do. That will change if things go according to plan. And here are the main components of the plan to get then to the completion of Cheviot without additional funding:
1) Complete MC941#3 – This is an oil well that is supposedly going to produce 7,000 to 10,000 BOE per day. With current production at 21,000 BOE per day this is going to provide a lot more cash flow.
2) ATP Titan Monetization – Per the conference call ATP believes that this could happen quite soon, although a specific timeline was not provided. This should bring in $200 million to $350 million in cash to the balance sheet. Obviously this could fund a huge part of what ATP wants to do.
3) Octabouy Vendor Financing – The Chinese company Cosco/Sinosure who is manufacturing the Octabouy production unit is going to complete it on payment deferred basis. ATP basically said that while the ink isn’t dry on the contract, the deal was essentially done. This will take $600 million out of the Cheviot capex requirement and I would look for the Octabouy to be rolled directly into an SPV when complete which would then reimburse the Chinese company.
4) Partner on Cheviot – ATP indicated that it is their intention to bring in a partner to help them complete Cheviot. While this would certainly give away some upside, it would be much smarter than trying to fund the entire project.
5) Part two of Titan monetization – Look for the equity piece of the Titan SPV to eventually be rolled out with cash being netted by ATP.
6) The first lien term loan that ATP secured in Q2 has room for another $350 million of financing as ATP’s reserve value increases. The reserve value will increase this year as Entrada and Blythe are added and the reserve value calculation is done reflecting higher oil prices.
Q2 Had An Asset Sale That May Have Slipped Under the Radar
In the second quarter ATP sold the deep rights under MC 348 for an undisclosed amount of cash and a 10% ORRI in the property. What is interesting is that they retain a 10% ORRI up to the point where Deepwater Royalty Relief expires, at which point the ORRI decreases to 1.67%.
Now why is that interesting ? Because Deepwater Royalty Relief is the suspension of royalty payments on Deepwater discoveries for the first 87 million BOE produced. MC 348 has had roughly 17 million BOE produced on it which would give ATP a 10% interest in 70 million BOE. At $80 oil that is 7,000,000 x $80 = $560 million of income without any related expenditure.
Given the terms of the agreement I think it is quite likely that the 3rd party involved plans to produce more than 70 million BOE from the property as the property obviously has a target very similar to what was discovered next door:
“Mar. 2010 - Shell made an oil discovery in the eastern Gulf of Mexico on the Appomattox prospect, which is positioned in 7,217 feet (2,200 meters) of water. Drilled by the Deepwater Nautilus, the discovery well reached a total depth of 25,077 feet (7,643 meters) and encountered roughly 530 feet (162 meters) of oil pay. Shell then drilled an appraisal sidetrack well to a depth of 25,950 feet (7,910 meters) and encountered roughly 380 feet (116 meters) of oil pay. The operator plans to further appraise the find this year. Appomattox is located on Mississippi Canyon Blocks 391 and 392, and Shell operates the prospect with an 80% interest while Nexen holds the remaining 20%. “
What Could Make the Picture Clearer Quickly
There are several things that could make the situation for ATP much better (or worse if they don’t happen) very quickly
1) MC941#3 comes on production at the suggested rates. ATP indicated it will be this quarter and it better be at least 7,000 BOE per day
2) The Titan monetization
3) Announcement of the Octabouy capex deferral
4) Early end of the drilling moratorium
I like many other shareholders will be sitting and holding our breath as we wait for #1 and #2 both of which could really happen almost any day.
