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