Ken Peak is one of my favorite CEOs. He follows the Buffett model which in that your shareholders are your partners, and you work for them. I think that is a rare quality to see in a CEO these days.
Compare Peak to the CEO of ATP Oil and Gas which is actually one of my favorite investments. This year Contango had to write-down the value of its reserves. Peak responded with the following:
“The downward reserve revision is an enormous personal disappointment. I know full well the complexities and numerous uncertainties of reserve estimation, especially early on in a field’s production history. Moreover, the impact of a downward revision is particularly acute when all the Company’s reserves are in essence concentrated in one reservoir. I have full confidence that our reserve estimates were prepared in a careful, conscientious manner and fully consistent with SEC and SPE guidelines. Nonetheless, it is right that the economic pain of this downward revision be shared, therefore, neither myself nor any Contango employee will receive a bonus or stock options for the fiscal year ending June 30, 2010.”
Just unbelievable. It wasn’t even Peak’s fault or the fault of any employee that these reserves were reduced. But shareholders have been let down and Peak and his small team reduce their compensation as a result.
Shareholder friendly indeed.
Then compare this to ATP CEO Paul Bulmahn. ATP took on too much debt prior to the financial panic and in 2009 managed to barely squeak through the credit crisis by diluting shareholders and using creative financing. I actually think they did a great job managing through the crisis, but make no mistake it was head management’s fault for getting into a tight spot by overleveraging the company. Despite having to heavily dilute shareholders in 2009 Mr. Bulmahn and his Board of Directors thought it acceptable to pay him a $2.9 million bonus. For a cash strapped company, we could have used that money elsewhere.
Mr. Bulmahn’s actions are the norm, not the exception. The exception is Peak. Strangely I have a large investment in ATP and not in Contango. The reason is simple, the shares of ATP are selling at a steep discount to the future value of its cash flows. The shares of Contango are more fairly priced.
I’ve written quite a few articles on ATP and believe that the next 12 months are going to be exceptionally rewarding for shareholders. They are finally out from under the burden of their heavy debt load. They haven’t reduced the debt, but they have effectively reduced their leverage by raising cash flow significantly to better match it. And that already increased cash flow is going to be increasing further in large steps as more wells are brought on production.
For 3 years ATP added virtually no production as all spending had to go into the infrastructure at the Telemark hub. Production and cash flow suffered enormously. Now that infrastructure is complete and all cash spent will almost immediately result in production and cash flow growth. Not just at Telemark, but also at their Gomez hub.
I’ve compared Telemark to building an apartment complex. For 3 years all you do is take on debt and build the apartment. Then one day the apartment is done and all of a sudden you have a gush of cash coming in the door via rent payments. Well, for the last 3 years ATP has been building their apartment and now they are just beginning to get paid their rent. And with the additional reserves found at Mirage they will receive more rent than expected when the project was planned.
Investing is about looking out the windshield, not using the rearview mirror. ATP’s financial statements tell you what they have been doing which is adding debt and spending money. If you look out the windshield you can see that the spending is largely done, and they are already beginning to collect the cash that the spending was meant to generate.
