ATP Oil and Gas – Now Is the Time to Buy, Rapid Near Term Rise in Share Price Seems Likely

Here is the point of this article. ATP Oil and Gas shares were at $24 in April before the BP oil spill. The share price dropped to $11 because of justifiable concern that the government might kill smaller Deepwater companies like ATP. On Friday the House passed their proposed offshore drilling bill that will not materially alter the value of ATP. So now that the reason for the selloff is gone, how quickly does the share price rebound ? Pretty quickly I bet, because there are also very significant positive company specific catalysts coming in the very near term. ATP will more than likely be a huge winner over the next month.


I’ve followed ATP Oil and Gas extremely closely for a couple of years. I started buying in the fall of 2008 at prices as high as $16 (which at that time was down from over $50) and got really long in the spring of 2009 well under $10 when the company was presumed dead by the stock market.


As of April 2010 this had been the most lucrative investment I had ever made as the company had muddled through the oil price collapse, the credit and capital market freeze up with the share price returning to $23. And despite this large run up in share price I had no intention of selling as the company was on the cusp of huge production gains and balance sheet improvements.


Then, late in April BP blew out their Macondo well and the share price of ATP dropped from $23 down to $10.56 as of Friday. And I have to say the share price dropped for good reason. The government halted drilling and was threatening legislation that could drive small companies like ATP out of the Deepwater. With ATP’s future in doubt because of unknown government action I certainly wasn’t buying shares at $10 even though I had liked them previously at $23.


Now however, the government fog that has been hanging over ATP is beginning to lift. And as this fog is lifted the share price of ATP could rebound extremely quickly. Remember the recent share price collapse was not related to ATP activity, but rather due to unknown government reaction.


On Friday we started to learn what the resulting government action will be. And it doesn’t appear that it is going to have a material impact on the value of ATP. Here are the details:


1) The bill passed on Friday in the House raises the financial responsibility requirements from $150 million to $300 million. This is a number that ATP can easily handle. The financial responsibility requirement was the big issue facing. Should it have been raised to a number that ATP couldn’t handle they would not have been able to drill additional wells.


2) And while the economic liability for offshore drillers was raised from $75mil to unlimited in the House an amendment was also passed (and passed overwhelmingly) that would allow for small producers to pool their resources to show that they have the financial ability to continue drilling.


3) The house further passed an amendment to end the deepwater drilling ban. Why should rigs that meet all of the increased safety measures sit idle for an arbitrary 6 month period ?





The Senate still has their bill to work through and the opposition they are facing from Republicans, oil state Democrats and Blue Dog Democrats may mean that they can’t actually pass anything.


The short interest on ATP swelled to over 30% of the outstanding float after the BP spill as holders of ATP’s new $1.5bil debt issue rushed to hedge their position. Now that the concern over the future of ATP is not threatened by government action you have to think that quite a few of these short sellers will need to re-think their position.


ATP itself has been operating pretty well even while Macondo was spilling into the Gulf. Here is a list of things you need to know, which include significant upcoming catalysts:


1) In 2010 ATP has already increased production by 70% from 14,000 BOE per day in Q4 2009 to 24,000 BOE per day currently. Within weeks if not days ATP will add production from their second Telemark well which is projected to add roughly 10,000 BOE per day which is an increase of another 40%. This would mean ATP production is 34,000 BOE per day in Q3 2010 vs 14,000 BOE per day in Q4 2009.


2) While the BP well was spilling in May ATP announced that it had further improved their debt structure by replacing an existing bank facility with one that has no financial covenants. After this restructure ATP is fully covenant free and has over $300 million in liquidity and no required debt repayments until 2014.


3) A second big upcoming catalyst is the drop down of the ATP Titan into a subsidiary SPV which will refinance this giant production platform and net ATP another $200million to $350 million in cash. With this ATP will be fully funded through the completion of the Cheviot development at which point production will be up to almost 70,000 BOE per day.





This is a tiny company adding two world class projects. The first one Telemark is basically fully paid for and the next one Cheviot now has the funding lined up. ATP took on a big challenge trying to fund these two Deepwater hubs, but it appears that the government is going to stay out of the way and allow them to finish. To give you and idea of ATP might be worth:


All of my valuation approaches arrive at a pretty conservative value per share of $60 or more. Shares today are around $11 down from $24 in April.


Valuation Approach #1 – Cash Flow/EBITA multiple


Here are my revenue and EBITA estimates using the production profiles provided by ATP (See their website for production profiles of Gomez, Telemark, Cheviot to arrive at the oil/gas mix). I assumed $80 oil and $6 gas in 2011 and $85 oil and $6 gas in 2012.




So to ballpark where ATP might be valued in the future I’ll use EBITA of $1 billion as it is where they will be running 2011/2012:

• 3 x $1bil = $3bil enterprise value
• 4 x $1bil = $4bil enterprise value
• 5 x $1bil = $5bil enterprise value
• 6 x $1bil = $6bil enterprise value

Net debt of the company is about $1.2bil


My estimate using this method then is:

• $4.5 bil ent value (4.5x EBITA)
• ($1.2bil) net debt
• $3.3bil divided by 56,000,000 fully diluted shares = $58.92 per share

Here is link to a spreadsheet that was posted on the internet with ATP’s production numbers that calculates EBITA.[url=http://www.samtibbs.com/4.html][/url]


Valuation Approach #2 – Value per Flowing Barrel of Oil Equivalent


There are lots of variables. But per the Morningstar recap of the XTO/XOM transaction:


We presently expect 2009 average daily production of 2.89 billion cubic feet equivalent (82% natural gas). This prices the deal at a little more than $85,000 per flowing barrel equivalent. None of these measures appear unusual to us compared with other recent transactions.


If you look at the graph in the February 5, 2010 ATP presentation you will see that production hits about 60,000 barrels of oil equivalent for ATP around the end of 2010 and stays there, with Cheviot coming on production as Telemark starts to decline.

• 60,000 barrels x $85,000 = $5.1 billion
• Less the net debt of $1.2bil
• $3.9billion divided by 56,000,000 fully diluted shares = $69.64

Valuation Approach #3 – Net Asset Value using PV10 of Oil/Gas Production


ATP recently issued a press release updating the PV10 value of its proved and probable reserves using Dec 31 strip pricing.


The reserve numbers that ATP provides are prepared independently by 3rd party reserve engineers.

• PV10 of proved and probable is $6.4 billion. Proved alone is $4.0 billion.
• Value of reserves $6.4bil
• Plus value of infrastructure $1bil
• Less estimate of taxes 35% of PV10 $2.2bil
• Less net debt $1.2bil
• $4.0bil divided by 56,000,000 = $71.42

Note that the infrastructure consists of:

• ATP Titan $680mil cost 50 year useful life just deployed
• Telemark Pipelines cost $160mil
• Canyon Express Pipeline replacement value $200mil
• 50% Interest in ATP Innovator $150mil

You are going to have to do your own thinking on how to include the infrastructure in the valuation. All of it has long term value. The two floating production units (Titan and Innovator) can be moved to other location and have long useful lives. The pipelines are always going to have value because there is little infrastructure out in the Deepwater and as development continues south and east these pipelines will be hooked into to transport production. Whether you include at the full amounts or less than that I’m not sure. I know it has value.


The point on valuation is that it certainly isn’t $11 which is what the share price is today. With the government action unknown I could not buy shares as we didn’t know if ATP would even be able to continue to operate. Now that the government fog is lifting, these shares are obviously undervalued.


Key points:


1) House bill does not drive ATP and other independents out of the Deepwater


2) ATP is fully funded for completion all the way through Cheviot


3) Big production and asset refinancing catalysts coming


4) Huge short interest whose thesis appears broken


5) No financial covenants, no debt repayments until 2014