ATP Oil & Gas: Both Value and Momentum

ATP Oil & Gas Corporation (ATPG) is small ($178 million market cap) oil and natural gas acquisition, development, and production company engaged (mostly) in the Gulf of Mexico. It also has a significant presence in the North Sea.

Competitors in the Gulf include Apache (APA), Forest Oil (FST) and Newfield (NFX).

Reserves: ATP Oil & Gas Corporation’s estimated net proved reserves on December 31, 2008 were 713.6 billion cubic feet equivalent. At $4 per 1000 cubic feet this works out to a reserve value of $2,582 billion or roughly $70 a share. The reserves were “comprised of 321.7 billion cubic feet of natural gas and 65.3 million barrels of crude oil.” or approximately 2/3 oil and 1/3 natural gas by value. For more detailed reserve reports see the Ryder Scott reports for the Gulf area here and the North Sea area here (pdf formats). A press release on March 2, 2009 claimed that ATPG replaced 214% of its oil and gas production in 2008 (see here).

Financials: Total cash is $215 million or $5.97/share. Note, that as of March 25 cash per share is more than the share price. Total debt is $1.37 billion. Trailing PE is 1.46 and forward PE is 5.37. Of course, forward PEs are only estimates and can be wildly off. $472 million in recent asset sales have boosted the cash position, so debt should be manageable in today’s low oil and gas price environment.

Insiders: According to Yahoo Finance there are no publicly reported insider sales since the first of the year. There has been over $900,000 acquisitions and purchases since the first of the year.

Summary: Reserve data, financials, and insider transactions all look bullish to me. Both oil and gas have been rising the last few weeks. Even as I write this post, ATPG is on a tear. The stock bottomed at $2.75 in early March. Now, on March 25, at over $5 a share, it is up over 80%. With close to $70/share in reserve value, the stock still seems significantly undervalued. This could be both a resource and momentum play.

The company seems to have weathered to the 2008 oil and gas price downturn well with asset sales and decreased production.

It should be noted that, due its large Gulf of Mexico presence, ATP Oil & Gas is susceptible to hurricane damage. The company claimed that Hurricane Ike in 2008 had “minimal impact”.

Disclosure: Long ATPG

Comments

[gca1:]

I agree with your analysis. ATP had 2008 earnings per share of $3.43/share and cash flow of $13.17/share. While 2008 was a banner year for most oil and gas companies, the company is well positioned for a turnaround in the market. The company recently reported that proved and probable reserves PV-10(based upon three year strip pricing) were $4.7 billion while long-term debt was $1.2 billion or approximately four times debt.

The stock is cheap now, but with gas at $7.25, which some folks believe is a reasonable target, the company is very undervalued.

Mar 26 06:30 AM

[tizod:]

I agree with this but I also think in fairness the debt payments must be considered and should have been noted. These payments pose more of a risk than a hurricane. Debt payments could stress ATPG if the access to new capital is cut off, and it is why it sells for less than cash on hand - things could quickly run dry. With credit a bit better (than when ATPG was at 3) and some asset sales that were made, I do think the debt could be expected to be manageable if things do not turn significantly worse in the credit/oil market than they are today. I predict oil and gas are safe - credit I have no idea.

If that holds true, ATPG is a great play. I for one held shares that dropped a fair amount, and added recently.

Mar 26 07:34 AM

[Respirate:]

Price is up 50% in less than 5 trading days since the news. Given recent market volatility do you think there may be a better entry point?

Mar 26 11:15 AM

[A1:]

Not a good analysis. No-one values reserves at the current market price. Reserves in the ground are always valued at a fraction of the market price. Look at Chesapeake Energy (CHK), for example. CHK has 12 trillion cubic feet of proven reserves of gas. Its enterprise value is $25.5 billion. This works out to an enterprise value of $2.125/thousand cubic feet of reserves. The enterprise value of ATPG is $1.86/thousand cubic feet of reserves. So, CHK's EV/Mcf is only 14% higher than ATPG's. Given the difference in the financial strength of the two companies, it's hard to see that ATPG is undervalued at all.

A1

Mar 26 10:56 PM

[Bruce Vande...:]

I think everyone understands that "reserves in the ground" do not translate to market price. Obviously, there is lifting, storage, distribution costs, etc. That is why ATPG is not selling for $70/share.

EV/Mcf is a good value parameter and CHK may also be a value, However, a direct comparison of CHK to ATPG is not valid.

CHK is primarily land based, extracting most of its gas from "tight" shale formations which, I believe, have higher lifting costs. I have read that shale wells, despite all the recent press, deplete quicker, necessitating regular repeat horizontal drilling to maintain flow.

Also, ATPG has a much higher oil/gas ratio than CHK. Oil is currently appreciating, while gas prices are stagnating near record lows.


On Mar 26 10:56 PM A1 wrote:

> Not a good analysis. No-one values reserves at the current market
> price. Reserves in the ground are always valued at a fraction of
> the market price. Look at Chesapeake Energy (seekingalpha.com/symbo...),
> for example. CHK has 12 trillion cubic feet of proven reserves of
> gas. Its enterprise value is $25.5 billion. This works out to an
> enterprise value of $2.125/thousand cubic feet of reserves. The enterprise
> value of ATPG is $1.86/thousand cubic feet of reserves. So, CHK's
> EV/Mcf is only 14% higher than ATPG's. Given the difference in the
> financial strength of the two companies, it's hard to see that ATPG
> is undervalued at all.
>
> A1

Mar 27 10:38 AM

[risingmorni...:]

Great analysis. I agree with some of your points.
The company has a standardized measure of $1.1B, which is a good 6X current market-cap. This is the future cash flow (Revenue less production and development costs) discounted to current levels at 10% cost of capital.
Further, the company has two fields coming online in 2010 and 2011 with reserves of 189 Bcfe and 238 Bcfe. These could drive volumes in the two years post 2009.
On the negative side, the company's undeveloped reserves of the 713 Bcf reserves stand at 600 Bcf from ~150,000 acres. Of this, 83,000 acres need to be returned to the government if there is no development over 2009-2012. Given the current cash flows a lot of this land could go to the government and some of the undeveloped reserves with it. The key question for investors is, how much? The company officials will be the only ones best placed to answer this.

Mar 27 09:53 PM

[joshuat:]

You missed what I consider a few key factors.

First, they have a 98% success rate in turning undeveloped into developed .

Second, they have about $1B in infrastructure. this infrastructure is strategically placed (more on that next paragraph). It is nearly all new, with a 20-40 year life ahead of it.

Their fields are strategicially placed. They have formed 'hubs' in the GOM and North Sea. This has several benefits. First, of course, is transportation. One piece of infrastructure is enough for several fields. they have a pipeline, which they acquired more or less as a 'freebie', that will not only serve many of their fields, but which they can lease to other companies. It is one of their most untalked about, but valuable assets.

Much of the oil/gas has very, very low extraction costs. Much of what they have now is sunk costs, meaning they can extract oil and make a profit at $20 oil. Of course it is not strategic to pump more than you have to at those prices, but the point is they can make their debt payments at low oil prices.

There debt was renegoitated last summer. $600MM due in 2001, the remainder in 2014. The $600MM is now very close to being paid off - the debt covenents required that 75% of all asset sales go towards debt reduction. After this, they are good to 2014.

No, we can't value companies based on price of assets in the ground, exactly. However, the SEC rules are pretty comprehensive, and they take into account lifting costs, transportation to market, etc. It's not an abstract number at all. ATP made asset sales in the North Sea this past fall - at roughly PV-10 numbers. This year's PV-10 numbers are based on oil prices at the end of December. A healthy bump in the price of crude and gas will see the PV-10 value shoot up dramatically.

Cash flow: they just announced a $150MM deal with GE to partnership for 1/2 of one of their platforms, which they paid $300MM to build. GE has announced that they want to do more deals with ATP. While we don't want them to give up the company (more on that below), we sure do want them to have a way to generate cash flow if they need it.

ATP will not be giving away the company. They maintain 100% control on all their infrastructure and wells, even when they have sold partial interest. This allows them to control cash flow. If they need cash, they can pump more. If prices are low, they can hold back. When cash is flowing, they can do more development. Etc. All without another company limiting what they do.

The CEO just made a 80K share purchase on the open market at $3.47.

The company has announced a share buyback program. The debt covenant required that the debt be paid down first. They are now in a position to start the buyback program. At these valuations, it is the among the best use of company money.

Growth: no one ever talks about the ATP growth story. It's a growth company, yet everyone just talks about reserves. Actually, I value based on reserves too,as it's deeply conservative, but look at the growth story! They have consistently grown reserves (they had an over 200% replacement rate for reserves in 2008) and grown infrastructure.

Worse case scenerio: Obviously hard to figure out. But each share of stock represents about 7 boe. 7 barrels of oil for five bucks.

They have a billion in infrastructure, and the GE deal proves that they can get their money back. But assume fire sale prices on developed reserves and infrastructure, and I submit the stock still has value if they were to blow debt covenants, the banks play hardball, and the company shuts the doors.

But the reality is that they have announced they see no reasonable way to blow their debt covenants in 2009 (obviously there's a way for *any* company to fail), oil/gas prices are trending up, they keep announcing deals with third parties, their short term (2011) debt is now nearly paid off, their DD&A is low, they are reasonably well hedged at higher than current market prices.

Could a worldwide calamity, with oil dropping to $3, kill this company? Sure. You'll want to have some no debt, consumer staples companies in your portfolio as a hedge against that (though, really, can you hedge against a depression except by selling puts?) This shouldn't be your only stock. But the risk/reward calculation seems very favorable to me.

Disclosure: long on this stock.

Mar 28 09:09 AM