The farther away from the BP oil spill we get the less anyone cares. Imagine how distant the memory is going to be a year from now. Fortunately I believe there is still a tremendous opportunity in the stock prices of a number of companies to profit from a giant overreaction to a 1 in 50,000 well event.
This week Bureau of Ocean Energy Management, Regulation and Enforcement Director Michael Bromwich publicly stated that it is highly unlikely that the government will extend its ban on deep-water exploration after it expires on November 30. In fact Bromwich said that he expects to make recommendations on how to lift the moratorium by the end of September. Those recommendations will include a swath of new mandates governing the design and cementing of offshore wells in response to the vulnerabilities revealed by the Deepwater Horizon accident.
Bromwich makes his statements after the conclusion of an eight city informational gathering process on offshore drilling. Bromwich was quoted as saying that he was encouraged that the nation is better prepared to deal with another oil spill than it was on April 20. He vowed to try and make the new rules very clear and concise so as to avoid a situation similar to the current delay in shallow water permitting which has been slowed by much confusion over new standards.
So the moratorium is going to end soon. The independent producers of the Gulf of Mexico are going to go on with their business. Regulations are going to be stricter and permitting surely slower for a while, but business has not changed materially for these companies. Now consider the following stock prices:
ATPG
Stock Price April 20 - $22.62
Stock Price Current - $12.20
Increase to get back to April 20 Price – 85%
SGY
Stock Price April 20 - $18.42
Stock Price Current - $12.55
Increase to get back to April 20 Price – 47%
CIE
Stock Price April 20 - $13.82
Stock Price Current - $8.92
Increase to get back to April 20 Price – 54%
Before the BP spill I was a shareholder of ATP. I now own all 3 of these companies. I’ve spent considerable time following the back and forth surrounding the government legislation of the industry and am comfortable that there will not be a material change to the roll of the independent producers in the Gulf of Mexico.
Why am I comfortable ? To understand that you need to understand the relevant issues.
1) Unlimited liability. For weeks I listened to people tell me that an unlimited liability cap would be the end of the independent producer in the GOM. What I couldn’t get people to understand is that all companies have always had unlimited liability. Yes, there is a cap on the amount that a company would have to pay in terms of economic damages (think fisherman out of work, vacant beach hotels etc) but there has never been a cap on the amount a company has to pay for spill cleanup, environmental penalties, and all damages at the state level.
2) Certificate of financial responsibility or COFER – This has always been the key issue. This is the amount that an oil producer must prove it has access to or coverage for prior to being allowed to drill. Initially after the spill there was some noise about increasing this from the current $150 million to $2 billion. Eventually the Congress settled on a proposal to increase this to $300 million AND put in a provision to allow for pooling of funds by independent producers. In other words the bill that the Congress passed works just fine for the independent producers because that is their intention. Even the Government was able to figure out that the independent producers are essential to the United States.
3) Any Changes Could Never Have Applied to Existing Leases – The value of these companies rests in the value of the leases they currently have title to, not future leases they might obtain. The leases they have title to are contracts with the government that can’t be broken. Should something be passed to try and limit the existing leaseholder from acting on these existing contracts the American taxpayer would be on the hook for tens of billions of dollars of liability for breach of contract (think of the money these companies have invested to develop these leased properties)
Why Does The Government Want to Keep the Independent Producer in the GOM ?
- In 2009 they account for 200,000 plus jobs and that is expected to grow to 300,000 plus by 2020
- Result in $38 billion in economic activity and growing
- Provide $10 billion in federal and state tax revenues and growing
- Independents hold majority interest in 81% of producing leases
- Independents hold majority interest in 66% of all GOM leases
We have seen that time and again the time to buy stocks is when there is an overreaction to a highly visible event. As Bill Miller says “If it is in the headlines it is in the stock price”. Fortunately at this point in time there really isn’t much doubt that the government fallout from the BP spill has not materially decreased the value of the independent producers. Yet the stock prices of these companies have been slow to recover. I don’t know the stock prices of these companies will recover slowly over the next six months as the BP spill fades away, or if they jump 50% on the day the moratorium ends.
What I do feel confident of is that the intrinsic value of these companies is not much different today than it was the day before the BP spill, yet the stock prices are down significantly. And if you do a deep dive on these stocks you will find that they were far from overvalued before the BP spill happened.
No single company benefits from the end of the moratorium as much as ATP Oil and Gas. Just prior to the moratorium starting ATP had just finished installing a $700 million production platform that would result in production just from that property alone tripling the entire company production of Q4 2009.
Here is what ATP has lined up in terms of production once the moratorium officially ends. Remember all the infrastucture is now in place so the big work is complete:
Q4 2009 production - 14,000 BOE per day
Q2 2010 production - 21,000 BOE per day (brought first Telemark well on)
Then add
Telemark well #2 Mirage - 7,000 BOE per day (being completed right now was drilled pre spill)
Gomez MC 754 well - 4,000 BOE per day (already drilled and completed)
Telemark well #3 Mirage - 7,000 BOE per day (will take 60 days after moratorium lift)
Telemark well #4 Morgus - 7,000 BOE per day (60 days after final Mirage well)
Gomez MC 711 well - 5,000 BOE per day
Another Gomez MC 711 well - 5,000 BOE per day
These wells are all expected to be on production by the end of 2011.
So from a start point in 2010 of 14,000 BOE per day ATP should reach nearly 50,000 BOE per day next year. The BP spill has been an unwelcome delay, but only a delay.
Here are 3 presentations the company did this week which are interesting:
http://phx.corporate-ir.net/phoenix.zhtml?c=123846&p=irol-irhome
This week Bureau of Ocean Energy Management, Regulation and Enforcement Director Michael Bromwich publicly stated that it is highly unlikely that the government will extend its ban on deep-water exploration after it expires on November 30. In fact Bromwich said that he expects to make recommendations on how to lift the moratorium by the end of September. Those recommendations will include a swath of new mandates governing the design and cementing of offshore wells in response to the vulnerabilities revealed by the Deepwater Horizon accident.
Bromwich makes his statements after the conclusion of an eight city informational gathering process on offshore drilling. Bromwich was quoted as saying that he was encouraged that the nation is better prepared to deal with another oil spill than it was on April 20. He vowed to try and make the new rules very clear and concise so as to avoid a situation similar to the current delay in shallow water permitting which has been slowed by much confusion over new standards.
So the moratorium is going to end soon. The independent producers of the Gulf of Mexico are going to go on with their business. Regulations are going to be stricter and permitting surely slower for a while, but business has not changed materially for these companies. Now consider the following stock prices:
ATPG
Stock Price April 20 - $22.62
Stock Price Current - $12.20
Increase to get back to April 20 Price – 85%
SGY
Stock Price April 20 - $18.42
Stock Price Current - $12.55
Increase to get back to April 20 Price – 47%
CIE
Stock Price April 20 - $13.82
Stock Price Current - $8.92
Increase to get back to April 20 Price – 54%
Before the BP spill I was a shareholder of ATP. I now own all 3 of these companies. I’ve spent considerable time following the back and forth surrounding the government legislation of the industry and am comfortable that there will not be a material change to the roll of the independent producers in the Gulf of Mexico.
Why am I comfortable ? To understand that you need to understand the relevant issues.
1) Unlimited liability. For weeks I listened to people tell me that an unlimited liability cap would be the end of the independent producer in the GOM. What I couldn’t get people to understand is that all companies have always had unlimited liability. Yes, there is a cap on the amount that a company would have to pay in terms of economic damages (think fisherman out of work, vacant beach hotels etc) but there has never been a cap on the amount a company has to pay for spill cleanup, environmental penalties, and all damages at the state level.
2) Certificate of financial responsibility or COFER – This has always been the key issue. This is the amount that an oil producer must prove it has access to or coverage for prior to being allowed to drill. Initially after the spill there was some noise about increasing this from the current $150 million to $2 billion. Eventually the Congress settled on a proposal to increase this to $300 million AND put in a provision to allow for pooling of funds by independent producers. In other words the bill that the Congress passed works just fine for the independent producers because that is their intention. Even the Government was able to figure out that the independent producers are essential to the United States.
3) Any Changes Could Never Have Applied to Existing Leases – The value of these companies rests in the value of the leases they currently have title to, not future leases they might obtain. The leases they have title to are contracts with the government that can’t be broken. Should something be passed to try and limit the existing leaseholder from acting on these existing contracts the American taxpayer would be on the hook for tens of billions of dollars of liability for breach of contract (think of the money these companies have invested to develop these leased properties)
Why Does The Government Want to Keep the Independent Producer in the GOM ?
- In 2009 they account for 200,000 plus jobs and that is expected to grow to 300,000 plus by 2020
- Result in $38 billion in economic activity and growing
- Provide $10 billion in federal and state tax revenues and growing
- Independents hold majority interest in 81% of producing leases
- Independents hold majority interest in 66% of all GOM leases
We have seen that time and again the time to buy stocks is when there is an overreaction to a highly visible event. As Bill Miller says “If it is in the headlines it is in the stock price”. Fortunately at this point in time there really isn’t much doubt that the government fallout from the BP spill has not materially decreased the value of the independent producers. Yet the stock prices of these companies have been slow to recover. I don’t know the stock prices of these companies will recover slowly over the next six months as the BP spill fades away, or if they jump 50% on the day the moratorium ends.
What I do feel confident of is that the intrinsic value of these companies is not much different today than it was the day before the BP spill, yet the stock prices are down significantly. And if you do a deep dive on these stocks you will find that they were far from overvalued before the BP spill happened.
No single company benefits from the end of the moratorium as much as ATP Oil and Gas. Just prior to the moratorium starting ATP had just finished installing a $700 million production platform that would result in production just from that property alone tripling the entire company production of Q4 2009.
Here is what ATP has lined up in terms of production once the moratorium officially ends. Remember all the infrastucture is now in place so the big work is complete:
Q4 2009 production - 14,000 BOE per day
Q2 2010 production - 21,000 BOE per day (brought first Telemark well on)
Then add
Telemark well #2 Mirage - 7,000 BOE per day (being completed right now was drilled pre spill)
Gomez MC 754 well - 4,000 BOE per day (already drilled and completed)
Telemark well #3 Mirage - 7,000 BOE per day (will take 60 days after moratorium lift)
Telemark well #4 Morgus - 7,000 BOE per day (60 days after final Mirage well)
Gomez MC 711 well - 5,000 BOE per day
Another Gomez MC 711 well - 5,000 BOE per day
These wells are all expected to be on production by the end of 2011.
So from a start point in 2010 of 14,000 BOE per day ATP should reach nearly 50,000 BOE per day next year. The BP spill has been an unwelcome delay, but only a delay.
Here are 3 presentations the company did this week which are interesting:
http://phx.corporate-ir.net/phoenix.zhtml?c=123846&p=irol-irhome
