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ATP OIL & GAS CORP ATPG
March 31, 2011 - 1:29am EST by
flubber926
2011 2012
Price: 18.44 EPS $0.00 $3.00
Shares Out. (in M): 51 P/E 0.0x 6.1x
Market Cap (in $M): 937 P/FCF 0.0x 8.2x
Net Debt (in $M): 2,200 EBIT 0 650
TEV ($): 3,137 TEV/EBIT 0.0x 4.5x

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Description

This is a follow-up on ATP Oil and Gas.
 
Due to the 50 character limitation we could not post this as comment and we'd like to share the recap of a recent meeting that we had with ATP's management.
For all of those not familiar with ATP we'd like to refer you to reaux1318 post last summer.
 
We recently met with management and candidly discussed our two main concerns with ATP:
1. Leverage (of course)
2. Concentration in GOM (and risks associated with that i.e. hurricanes)
 
To our surprise there is a plan to de-lever and it is now it in its early stages of implementation. To our understanding the plan is to spin-off the Infrastructure (at a value of around $1.1bn) and have a third party dilute ATP's ownership of the newco. The goal is to raise around $900mm and reduce net debt. This should be a 2011 event if ATP got a permit (which recently happened), oil prices remain above $85/barrel and in general the equity and debt markets remain open for business.
 
If management actually executes on this it could be a mayor catalyst for the equity.
 
As for Israel, we were told as soon as the licenses were approved they would come out with a full disclosure of the funding and plans. The timeframe for this being mid-april. We were told to expect only about $20mm expenditure related to this new project in 2011. This could be a huge cheap call option that could potentially double ATP's actual reserves. But again, we won't know the exact impact until 2012.
 
If Israel is half as good as it could be, concentration in the GOM would no longer be an issue.
 
As for permits, we were told the two Telemarks would be first followed by Clipper. Those should add 19,000 BOE of daily production. Gomez should be a 3Q-4Q event and thus it's 10,000 BOE would materialize in the first half of 2012.
 
As for cash flow, at current oil prices, those 19,000 incremental barrels should generate roughly 350-400mm by themselves on an annualized basis. If we assume an average incremental production of 15,000 BOE for the second half of 2011, we should get close to 150mm FCF in the second half or about roughly $3 per-share.
 
In our estimate the company has ample liquidity to get bring those 19,000 incremental BOE to production.
 
We agree with reaux1318 that ATP is now over the hump, and baring a hurricane, the market should start recognizing this company's value. Our fair value estimate today is well over $40/share and it could significantly grow from there. (The company's NAV deducting debt using PV-10 for proven and probable reserves is north of $60 after-tax with oil at $95).
 
I guess the question I have no answer for is what are the 16mm shorts seeing that we are not? Frankly we see limited downside from here and huge upside because of the operational leverage this company has and would be really scared being short ATP in this environment. Obviously these shorts aren't...

Catalyst

1. Another permit
2. Further disclosure on Israel (capital requirements from ATP and size of venture)
3. 1Q2011 results 
4. Credible de-leveraging plan
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    Description

    This is a follow-up on ATP Oil and Gas.
     
    Due to the 50 character limitation we could not post this as comment and we'd like to share the recap of a recent meeting that we had with ATP's management.
    For all of those not familiar with ATP we'd like to refer you to reaux1318 post last summer.
     
    We recently met with management and candidly discussed our two main concerns with ATP:
    1. Leverage (of course)
    2. Concentration in GOM (and risks associated with that i.e. hurricanes)
     
    To our surprise there is a plan to de-lever and it is now it in its early stages of implementation. To our understanding the plan is to spin-off the Infrastructure (at a value of around $1.1bn) and have a third party dilute ATP's ownership of the newco. The goal is to raise around $900mm and reduce net debt. This should be a 2011 event if ATP got a permit (which recently happened), oil prices remain above $85/barrel and in general the equity and debt markets remain open for business.
     
    If management actually executes on this it could be a mayor catalyst for the equity.
     
    As for Israel, we were told as soon as the licenses were approved they would come out with a full disclosure of the funding and plans. The timeframe for this being mid-april. We were told to expect only about $20mm expenditure related to this new project in 2011. This could be a huge cheap call option that could potentially double ATP's actual reserves. But again, we won't know the exact impact until 2012.
     
    If Israel is half as good as it could be, concentration in the GOM would no longer be an issue.
     
    As for permits, we were told the two Telemarks would be first followed by Clipper. Those should add 19,000 BOE of daily production. Gomez should be a 3Q-4Q event and thus it's 10,000 BOE would materialize in the first half of 2012.
     
    As for cash flow, at current oil prices, those 19,000 incremental barrels should generate roughly 350-400mm by themselves on an annualized basis. If we assume an average incremental production of 15,000 BOE for the second half of 2011, we should get close to 150mm FCF in the second half or about roughly $3 per-share.
     
    In our estimate the company has ample liquidity to get bring those 19,000 incremental BOE to production.
     
    We agree with reaux1318 that ATP is now over the hump, and baring a hurricane, the market should start recognizing this company's value. Our fair value estimate today is well over $40/share and it could significantly grow from there. (The company's NAV deducting debt using PV-10 for proven and probable reserves is north of $60 after-tax with oil at $95).
     
    I guess the question I have no answer for is what are the 16mm shorts seeing that we are not? Frankly we see limited downside from here and huge upside because of the operational leverage this company has and would be really scared being short ATP in this environment. Obviously these shorts aren't...

    Catalyst

    1. Another permit
    2. Further disclosure on Israel (capital requirements from ATP and size of venture)
    3. 1Q2011 results 
    4. Credible de-leveraging plan

    Messages

    SubjectBoard members selling
    Entry04/04/2011 02:08 PM
    Memberhao777
    What do you make of directors selling stock (Brisback on 1/6; Longnecker on 2/17; Karow on 3/30)?
    SubjectShort Thesis?
    Entry04/27/2011 07:39 PM
    Memberrjm59
    I was pretty surprised to see the short interest increase after the permit was granted, is anyone here short ATP??  Would really really love to hear what the thesis is?  Is there some off balance sheet liability or something that nobody has brought up here yet?
    Thanks!
    SubjectRE: RE: RE: ATPG Discussion from Other Topics
    Entry08/03/2011 04:02 PM
    Membersugar
    They have less than $1 billion in proved developed reserves. Sorry for not being more precise. The sale value of PUDs offshore is a fraction of their pv-10 value. And actually, the likely sale value of offshore PDP reserves is less than their pv-10 value as well.
     
    I'm not saying ATP is necessarily a bad way to bet on higher oil prices or increased drilling activity in the Gulf. I'm saying there is no margin of safety. If you tried to match assets and liabilities today, there would be a significant mismatch. What you need to believe is that management will successfully transition non-producing assets into producing assets. Given their high levels of leverage, volatile commodity prices, historical difficulty bringing projects in on time and on budget, and regulatory uncertainty, that should not be a foregone conclusion.
     
    I would also suggest reviewing ATP's full operating history, comparing management guidance to actual performance. Yes, the company has successfully transitioned 2P reserves to 1P reserves. But they have also delivered projects years late, substantially over budget, and at lower-than-forecast production levels. And not just in the past year or so since Macondo, but over the life of the company.
     
    Also, I agree that there is infrastructure value there, but how much is certainly a question. Especially if you are counting on ATP transitioning 2P reserves to 1P reserves, they will need to keep the infrastructure in place for a lot longer than they are anticipating. And, taking into account their operational track record, you may need to account for a lot lower residual infrastructure value.
    SubjectRE: Any new thoughts?
    Entry10/31/2011 11:23 AM
    Membergs0709
    It looks like they have a circa 90m funding gap in 2012. For a 500m market cap company that's substantial. They'd most likely need to tap equity markets to close it, or have a "restructuring event", either way the equity is not a buy here.
    Subjectbonds down 18% to 48
    Entry06/08/2012 10:16 AM
    Memberjgalt
    Which, with the 1st lien, is about $9 / BOE.
     
    PV-10 / 1st lien plus 2nd lien at market price = 3x, so in theory you're well covered. The company recently paid cash divs on its preferred stock.
     
    Any thoughts?
    SubjectRE: RE: bonds down 18% to 48
    Entry06/08/2012 01:07 PM
    Memberjgalt
    No, I don't account for all the senior claims, which are tough to tally up. I think it's a very interesting risk/reward because like you, I don't think they'll file; but if they do, I expect this security to end up with a very good (if not full) recovery over time.
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