This is the fifth in a semi-regular series entitled “Powerball” ideas. ”Powerball” ideas are basically lottery tickets with a value basis. Most likely scenario, these ideas will crash and suffer huge permanent capital losses. However, if the ideas work out, you’ll likely make 4-5x your money, maybe more. It’s basically speculation with a value twist. Enjoy, and beware!
Before I begin this post, let me say that ATP is involved in off shore drilling. This is a complicated industry and I am by no means an expert. Please do your own research.
ATP, much like Urbana Corp, is a stock that has burned seemingly every value blogger/investor. It’s been the subject of no less that four VIC write ups (from newest to oldest: here, here, here, and here) as well as an excellent write up over at above average odds. I especially recommend the above average odds write up, but the crux of all of the write ups is similar: ATP is about to start substantial production from their Telemark project, which will result in huge cash flows. Once the well goes operational, ATP will basically be able to self fund and begin reducing its massive leverage.
So far, however, the thesis hasn’t happened. Telemark was supposed to have three wells operational by the end of 2010, but they are only just completing the third well. This delay has seriously strained ATP’s cash flow and caused them to continue to add to their already massive leverage.
The second big problem is that a huge portion of their proved reserves are natural gas reserves, and natural gas prices are currently at an all time low compared to oil.
However, the flip side of these problems is that this is a company with extremely valuable assets that is facing a liquidity crunch and is incredibly leveraged to a commodity at basically all time lows. Both of those statements create huge uncertainty and really scream “value possibility!”
So let’s start by putting their prospective problems into prospective. The most recent PV-10 (see description here) for ATPG came from their investor presentation found here. In it, they use current strip pricing and their proved reserves from 12/31/2010 (their 10-K) to arrive at a PV-10 of $6.6B. Their total capex for next year should be $75m-125m, with their own cash outlay for capex next year between $40m-100m according to their most recent 10-Q (See page 41). In other words, the market is fretting over a funding gap equal to less than 2% of ATPG’s PV-10.
Speaking of PV-10, slide 20 of the presentation linked above puts the potential value of ATPG into prospective. Assuming they are worth their PV-10, the company would have an EV between $5.8B-7.6B. With $2.4B in debt and other obligations, this would put their market cap between $2.6-3.7B (the difference in ranges is from converts) versus a current market cap of $400m. And remember- this ignores the $1b or so in infrastructure they own! This is why bulls keep pointing to a potential per share value over $40.
And even if ATPG finds themselves crunched for liquidity, their assets are very high quality with tons of upside. It shouldn’t be hard for them to find partners willing to purchase interests in some of their wells to give them the cash they need to survive. And with more Telemark wells and improved production expected for 2012, it’s possible ATP is finally in a position to start funding themselves.
So now that we’ve discussed the upside, let’s discuss the downside a bit further- leverage. ATP is ginormously, ridiculously leveraged (yes, that’s the technical term for it). Their most recent balance sheet shows total assets of $3.4B versus total liabilities of $3.1B. That leaves just $300m in value for the equity… all of which is taken up by $115m in noncontrolling interest and $300m in preferred stock. In other words, their common equity book value is very negative.
In addition, they have a huge working capital deficit, plus tons of operating leverage (more production from wells = higher margin and cash flow, less = rapidly deteriorating margins) AND leverage to changing commodity prices. And remember this- lower commodity prices = lower cash flow. Lower cash flow = more potential dilution and more likely liquidity crunch, plus less value for asset sales. Vicious circle if it happens.
Hopefully, at this point, it’s pretty clear why ATPG is a powerball pick. Potentially substantial value from their assets combined with huge leverage and upside. It truly is a case where you will either make multiples of your money or have a zero.
However, I wanted to point to one additional possibility that I think is even more interesting than the common: preferred stock (you may remember I really like preferred stocks, especially NCT and GKK). ATP has a class of preferred stocks (ATPGP, prospectus found here) with a par value of $100, annual divs of $8.00 (8% yield on par) and conversion to common at $22.20 common share price.
The preferreds currently trade for $39.00 per share. In other words, they trade for over 60% discount to par and over 20% yield. Plus, in the event ATP can actually get production going and realize its upside (~$40 per share), the preferreds would take place in the bulk of that upside! So, with preferreds at $39, you can participate in basically all the upside of the common, with additional downside protection (the equity is below you in the capital structure) and the huge dividend yield- don’t fully discount this, as ATP is current on their preferred dividends currently.
An interesting play here would be a form of capital structure arbitrage- say long 3 shares of preferred and short 10 shares of common. I don’t profess to be an expert on shorting and the cost to borrow, but assuming the cost is not outrageous, the dividend from the preferreds would more than cover the cost of being short and you would basically profit in any scenario short of the preferreds and commons being completely wiped out. In an upside scenario, the preferreds would run up basically with the common (they’d come out a bit behind), but since you’re more exposed to the preferreds and are collecting dividends (of 20%!) you’d do very well. If the shares were flat, you’d either come ahead on the dividend or come ahead because a flat share price for a prolonged period would mean the preferreds had to rise in price (as the preferreds at this level imply high probability of bankruptcy). If the company went bankrupt, you’d have a huge profit on the common and hopefully some recovery on the preferreds, leaving hopefully some profit.
Again, all of this is high risk / high reward. But those preferreds do look quite tempting at today’s levels….
Disclosure- Long Urbana, NCT, and GKK. No current position in ATPG or ATPGP.
Before I begin this post, let me say that ATP is involved in off shore drilling. This is a complicated industry and I am by no means an expert. Please do your own research.
ATP, much like Urbana Corp, is a stock that has burned seemingly every value blogger/investor. It’s been the subject of no less that four VIC write ups (from newest to oldest: here, here, here, and here) as well as an excellent write up over at above average odds. I especially recommend the above average odds write up, but the crux of all of the write ups is similar: ATP is about to start substantial production from their Telemark project, which will result in huge cash flows. Once the well goes operational, ATP will basically be able to self fund and begin reducing its massive leverage.
So far, however, the thesis hasn’t happened. Telemark was supposed to have three wells operational by the end of 2010, but they are only just completing the third well. This delay has seriously strained ATP’s cash flow and caused them to continue to add to their already massive leverage.
The second big problem is that a huge portion of their proved reserves are natural gas reserves, and natural gas prices are currently at an all time low compared to oil.
However, the flip side of these problems is that this is a company with extremely valuable assets that is facing a liquidity crunch and is incredibly leveraged to a commodity at basically all time lows. Both of those statements create huge uncertainty and really scream “value possibility!”
So let’s start by putting their prospective problems into prospective. The most recent PV-10 (see description here) for ATPG came from their investor presentation found here. In it, they use current strip pricing and their proved reserves from 12/31/2010 (their 10-K) to arrive at a PV-10 of $6.6B. Their total capex for next year should be $75m-125m, with their own cash outlay for capex next year between $40m-100m according to their most recent 10-Q (See page 41). In other words, the market is fretting over a funding gap equal to less than 2% of ATPG’s PV-10.
Speaking of PV-10, slide 20 of the presentation linked above puts the potential value of ATPG into prospective. Assuming they are worth their PV-10, the company would have an EV between $5.8B-7.6B. With $2.4B in debt and other obligations, this would put their market cap between $2.6-3.7B (the difference in ranges is from converts) versus a current market cap of $400m. And remember- this ignores the $1b or so in infrastructure they own! This is why bulls keep pointing to a potential per share value over $40.
And even if ATPG finds themselves crunched for liquidity, their assets are very high quality with tons of upside. It shouldn’t be hard for them to find partners willing to purchase interests in some of their wells to give them the cash they need to survive. And with more Telemark wells and improved production expected for 2012, it’s possible ATP is finally in a position to start funding themselves.
So now that we’ve discussed the upside, let’s discuss the downside a bit further- leverage. ATP is ginormously, ridiculously leveraged (yes, that’s the technical term for it). Their most recent balance sheet shows total assets of $3.4B versus total liabilities of $3.1B. That leaves just $300m in value for the equity… all of which is taken up by $115m in noncontrolling interest and $300m in preferred stock. In other words, their common equity book value is very negative.
In addition, they have a huge working capital deficit, plus tons of operating leverage (more production from wells = higher margin and cash flow, less = rapidly deteriorating margins) AND leverage to changing commodity prices. And remember this- lower commodity prices = lower cash flow. Lower cash flow = more potential dilution and more likely liquidity crunch, plus less value for asset sales. Vicious circle if it happens.
Hopefully, at this point, it’s pretty clear why ATPG is a powerball pick. Potentially substantial value from their assets combined with huge leverage and upside. It truly is a case where you will either make multiples of your money or have a zero.
However, I wanted to point to one additional possibility that I think is even more interesting than the common: preferred stock (you may remember I really like preferred stocks, especially NCT and GKK). ATP has a class of preferred stocks (ATPGP, prospectus found here) with a par value of $100, annual divs of $8.00 (8% yield on par) and conversion to common at $22.20 common share price.
The preferreds currently trade for $39.00 per share. In other words, they trade for over 60% discount to par and over 20% yield. Plus, in the event ATP can actually get production going and realize its upside (~$40 per share), the preferreds would take place in the bulk of that upside! So, with preferreds at $39, you can participate in basically all the upside of the common, with additional downside protection (the equity is below you in the capital structure) and the huge dividend yield- don’t fully discount this, as ATP is current on their preferred dividends currently.
An interesting play here would be a form of capital structure arbitrage- say long 3 shares of preferred and short 10 shares of common. I don’t profess to be an expert on shorting and the cost to borrow, but assuming the cost is not outrageous, the dividend from the preferreds would more than cover the cost of being short and you would basically profit in any scenario short of the preferreds and commons being completely wiped out. In an upside scenario, the preferreds would run up basically with the common (they’d come out a bit behind), but since you’re more exposed to the preferreds and are collecting dividends (of 20%!) you’d do very well. If the shares were flat, you’d either come ahead on the dividend or come ahead because a flat share price for a prolonged period would mean the preferreds had to rise in price (as the preferreds at this level imply high probability of bankruptcy). If the company went bankrupt, you’d have a huge profit on the common and hopefully some recovery on the preferreds, leaving hopefully some profit.
Again, all of this is high risk / high reward. But those preferreds do look quite tempting at today’s levels….
Disclosure- Long Urbana, NCT, and GKK. No current position in ATPG or ATPGP.
