10 Upcoming Catalysts for ATP Oil and Gas

I've written twice before about ATP (ATPG). With the rapid increase in oil prices I thought it important to update the change in value to ATP's assets and therefore the value per share.

Here is an updated NAV:

	Jun 09 - strip prices
Current Assets	265,803,000
Current Liabilities	(249,857,000)
Long Term Debt	(1,324,927,000)
Net Proceeds from Innovator	0
Value of ATP Titan	500,000,000
Value Canyon/Gomez/Tele pipelines	242,000,000
PV 10 Oil and Gas (@$67 oil)	5,475,500,000
Tax on oil sales	(1,916,425,000)
ATP share of Innovator MLP	150,000,000
	3,142,094,000
Shares	35,979,000
Value per share	87.33
Stock price	8.90
Upside	981.25%

NOW THE CATALYSTS

So what might help the stock market recognize some of this value? Have a read of the following, some or all of which are going to occur in the next 7 months.

1. Sale of the Gomez pipeline. This is the pipeline system at ATP’s largest producing development. Expect $85mil in cash coming into ATP and further debt reduction. This one will also help with the EBITAX debt covenant and is a reason why someone looking only at the Q1 production run rate might not appreciate that ATP will be in compliance with all covenants all of 2009. Per Al Reese, CFO, at public presentations, this is in progress (meaning it is agreed between parties and documents being prepared) and we can expect it to be completed this year.
   
2. Sale of 49% of the ATP Titan. This is ATP’s brand spanking new floating production unit. The cost of which is north of $500mil and was a big reason for the debt ATP has. I believe there is no doubt that an ATP Innovator type deal will be done with this. (ATP MLP’s its other floating production unit in Q1 of this year by selling half to GE and raising $150mil.) GE is on record with the Houston Business Journal as being interested in both the Titan and ATP’s next unit the Octobuoy which will deploy at another large project (Cheviot) in the North Sea. CFO Reese is on record as saying that it is a matter of “when and not if” the Titan is monetized. This will result in another $250mil plus coming back into the company for further debt reduction and cash strength.
   
3. ATP is considering bringing in a partner brought in on Telemark. Telemark is ATP’s next big step up. An oil field in the GOM that will come on production at the end of this year. It is a big one, projected to reach 32,000 barrels of oil per day within a year of start up. Per Scotia Waterous ATP is looking to raise up to $460mil by bringing in a partner on Telemark. Check the Scotia Waterous website if you are interested in reading about the offering.
   
4. ATP is also considering bringing in a partner brought in on Cheviot. The property is similar in size to Telemark so again could raise hundreds of millions in cash for ATP. Leland Tate in a presentation mentioned that there is significant exploration potential in addition to what is known at Cheviot.
5. Sale of Canyon Express Pipeline. This Pipeline is very valuable as it is the only pipeline in place that could service the eastern GOM. There have been sizable discoveries in the region in the past two years. I expect that ATP will hold onto it as it will be a great source of fee income going forward, but it could let it go for $200mil plus (estimated replacement cost) if it decides it'd rather have the cash to speed up development elsewhere.
6. Sale of Telemark Pipeline system. Brand new pipelines for the Telemark development. The cost of these are $160mil and could be monetized like the Gomez pipeline is going to be in the near future. The Deepwater GOM is a frontier lacking in infrastructure and this pipeline will be attractive. Building of this is another reason for ATP taking on debt. Selling it will return capital to the company.
   
7. Here is the big one. Telemark is about 7 months away from commencing production. Telemark will peak at 32,000 BOE per day within one year and will produce enough cash flow (using strip prices) to pay off virtually all debt in one year. I can’t imagine being short ATP shares and waiting for this to start throwing off $750mil to $1bil in cash flow in a year. It is a game changer and the clock is ticking.
   
8. Share buyback program is approved. ATP has patiently waited to start buying shares. Once the cash flow from Telemark starts flowing at the end of 2009 the short sellers can enjoy bidding against ATP to try and purchase shares.
   
9. Continued appreciation in ATP's asset values and cash flows as oil prices increase. Why would they increase?
   - Opec cut 4.2mil barrels, demand is only down 2.4mil barrels.
- Economy will improve demand will increase.
- Supply destruction has occurred as countless capital has not been spent on development that was needed just to keep world production flat.
- Inflation is unavoidable, listen to Buffett...you can't increase money supply by this magnitude and not have it.
- World population continues to increase, developing countries continue to need more oil.
- World's largest oil fields are in serious decline, this is going to show up as capital hasn't been spent to try and stem this problem.
10. Short covering. Over 20% of the available float is short. At some point it will get uncomfortable being short shares with this kind of upside. Please read my earlier article that covers ATP's debt which is intelligently structured. I believe fear over debt of all kinds is what has pushed shares down to this level.

Summary of Catalysts

By my calculation all of the above could bring in almost $1.5bil in cash to ATP. And that has nothing to do with the huge cash flow that is going to come from Telemark production. ATP will pick and choose which monetizations they do and only select those where they like the prices. I am fully confident that several of them will get done as ATP has already monetized $630mil of assets at excellent prices over the past year.

One of these could trigger a short squeeze. Imagine what several of them will do.

Disclosure: I own shares of ATP

Comments

[Devon Shire]

Good news already.

Catalyst #3 realized, but better. ATP's vendor (drillers) are accepting a limited net profits interest of up to $300mil in place of cash payment for the cost of drilling the remainder of Telemark.

Much better way to fund this than giving up ownership in the property. Also nice to see that the vendor has confidence in the property for it's future payments.

Info from company presentation slides for today's conference.

Also appears catalysts 1 & 2 are on track per the comments.

And #7 now also very secure as Telemark is still on schedule for the end of the year.

2009 Jun 03 08:39 AM

[[e-mail]]

Buy Jan(2011) 10 calls and sell Jan 7.5 puts for max leverage .


On Jun 03 08:39 AM Devon Shire wrote:

> Good news already.
>
> Catalyst #3 realized, but better. ATP's vendor (drillers) are accepting
> a limited net profits interest of up to $300mil in place of cash
> payment for the cost of drilling the remainder of Telemark.
>
> Much better way to fund this than giving up ownership in the property.
> Also nice to see that the vendor has confidence in the property for
> it's future payments.
>
> Info from company presentation slides for today's conference.
>
> Also appears catalysts 1 &amp; 2 are on track per the comments.<br/>
>
> And #7 now also very secure as Telemark is still on schedule for
> the end of the year.

2009 Jun 03 09:22 AM

[speeddaimon]

Devon,

I appreciate the information, however, due to reading SA consistently, I have become wary of certain things. Specifically, anonymous authors who only shill for one stock, people who link to their blog every single time they comment, large financial institutions who appear to be making an awful lot of money in a bad economy, and anything involving Ben Bernanke's open mouth.

As such, I've also taken a look at ATP, it seems like a decent enough company, morningstar rates its profitability at an F, but its growth at an A, and it appears to be spending 90-115% of its earnings on CapEx, a good sign for future growth. I will continue watching this company based on your recommendation and research, but I think I'm going to hold off on buying for a bit.

2009 Jun 03 11:22 AM

[kewlhand]

Your logic is impecable, but oddly UNG is down 8% today as I speak!! Any guesses as to why?

2009 Jun 03 11:24 AM

[Devon Shire]

Thanks for the comment.

I won't hide my motive for writing. I'm a shareholder and I'm tired of my shares being valued by Mr. Market at about 10% of what I think they are worth.

Check out what I've written. Let me know what you agree with and disagree with. I'd welcome an intelligent discussion. I'm trying to be objective, but with a vested interest you never know what you might convince yourself is and isn't true.

Thanks for the interest.


On Jun 03 11:22 AM speeddaimon wrote:

> Devon,
>
> I appreciate the information, however, due to reading SA consistently,
> I have become wary of certain things. Specifically, anonymous authors
> who only shill for one stock, people who link to their blog every
> single time they comment, large financial institutions who appear
> to be making an awful lot of money in a bad economy, and anything
> involving Ben Bernanke's open mouth.
>
> As such, I've also taken a look at ATP, it seems like a decent enough
> company, morningstar rates its profitability at an F, but its growth
> at an A, and it appears to be spending 90-115% of its earnings on
> CapEx, a good sign for future growth. I will continue watching this
> company based on your recommendation and research, but I think I'm
> going to hold off on buying for a bit.

2009 Jun 03 11:29 AM

[Devon Shire]

No idea. I have a long term opinion on oil going up over the next few years, natural gas is always volatile.

Day to day movements are just noise.


On Jun 03 11:24 AM kewlhand wrote:

> Your logic is impecable, but oddly UNG is down 8% today as I speak!!
> Any guesses as to why?

2009 Jun 03 11:30 AM

[Karl Glazier]

Why are 2010 earnings estimates only $.79 ?

2009 Jun 03 11:31 AM

[Devon Shire]

No idea. I only look at cash flow. They are trading less than one times this year's cash flow, so like less than .5 next year.

The analysts on this company had it at a strong buy at $50 and as a sell or hold at $3.

Telemark is huge in significance. It will ramp up quickly peaking at 33,000 BOE per day in 2011. Will more than double production next year. And produce over $4 billion in sales over it's life using today's strip prices.


On Jun 03 11:31 AM Karl Glazier wrote:

> Why are 2010 earnings estimates only $.79 ?

2009 Jun 03 12:20 PM

[peachberry_tea]

Hey Devon,

Thanks for another informative post.

I was wondering what your thoughts were on short term oil prices. There's been a bit of talk about oil inventories and that there's a bit of speculation behind the recent increase in oil prices. Predicting short term pricing is a sucker's game, yes, but just wanted your thoughts on it anyway because you seem like you'd be fairly informed with this sort of thing.

Thanks again

2009 Jun 03 01:57 PM

[Devon Shire]

Honestly, I have no clue short term.

The one fact that sticks out to me is that OPEC cut something like 4 million barrels per day and demand is down 2.4 million barrels per day. That has to reduce supply.

It may be that while we seem to have enough oil in the States right now, the rest of the world has a tighter market. I read somewhere that Asia is undersupplied (they are impacted by OPEC cuts) and have had to buy more from Africa than they usually do.

But I don't know. Sooner or later it has to go up. OPEC production is way down, non-OPEC supply is being impacted severely by the credit crunch and commodity collapse.

I'm very happy to see Diamond Offshore willing to put their money on the line with respect to Telemark. Huge validation.

Thanks for the question. Bottom line is I'm not nearly smart enough to answer.


On Jun 03 01:57 PM peachberry_tea wrote:

> Hey Devon,
>
> Thanks for another informative post.
>
> I was wondering what your thoughts were on short term oil prices.
> There's been a bit of talk about oil inventories and that there's
> a bit of speculation behind the recent increase in oil prices. Predicting
> short term pricing is a sucker's game, yes, but just wanted your
> thoughts on it anyway because you seem like you'd be fairly informed
> with this sort of thing.
>
> Thanks again

2009 Jun 03 02:45 PM

[BFOWLER]

I like the ATPG story very much, however fail to understand the logic of filing a $200 million shelf registration (see company's SEC filings on website). Has management commented on this? With a market cap of about $300 to $350 million, issuing $200 million of new equity at anywhere near stock prices thus far in 2009 would be disastrous. Among other things, this certainly flies in the face of a stock purchase plan. Surely management does not plan to issue new equity in the near future if it can possibly be avoided. Some clarification here might be useful.

2009 Jun 03 03:52 PM

[Devon Shire]

I don't know why they filed the shelf. I would be shocked if common shares were issued at these prices as management owns 20% of the company and would be diluted terribly.

It is especially unlikely given the vendors picking up $300mil of drilling costs on Telemark to be repaid out of future production.

Maybe they are looking at a pref share offering, they have used this in the past. Maybe they are just getting one filed so they can move quickly if the share price moves up significantly.

Also consider they have other large sums of cash coming in over the next 9 months. Gomez pipeline $85mil, Titan MLP $260mil, Telemark pipeline $160mil. CFO as recently as today reaffirmed that these are going to happen.

With the arrangement for vendor pick up of drilling costs today and their 20% stake in the game I am inclined to think that I'm not going to be diluted.

And the amazing thing is that even if I am, half of the $87 I think these shares are worth is still $40 plus with huge dilution.

Thanks for the comment.


On Jun 03 03:52 PM BFOWLER wrote:

> I like the ATPG story very much, however fail to understand the logic
> of filing a $200 million shelf registration (see company's SEC filings
> on website). Has management commented on this? With a market cap
> of about $300 to $350 million, issuing $200 million of new equity
> at anywhere near stock prices thus far in 2009 would be disastrous.
> Among other things, this certainly flies in the face of a stock purchase
> plan. Surely management does not plan to issue new equity in the
> near future if it can possibly be avoided. Some clarification here
> might be useful.

2009 Jun 03 05:10 PM

[Offering]

Devon,

I enjoy your writing. And have looked at the stock and actually put on a trade. The issue of the shelf offering really needs to be addressed. I actually pulled some of my shares from a trade because of this and $WTIC being overbought. I have seen what the delusion has done to stocks like DPTR. ATPG at $8.5 becomes $4.25 overnight. That's a ton and I mean real risk just put into this trade with that shelf.....I have few thoughts to the shelf. Some of the proposed asset do not have buyers or at prices desired. Which means funds will be needed. Or they just want some insurance to keep the company floating if Oil and the asset sales go sour....Managment needs very specific comments $200MM offering...Your point is well taken about even $40 a share with the offering. But we may go to $4 per share first........

Mark

2009 Jun 03 08:37 PM

[Devon Shire]

Thanks for the comment.

I don't know the plan for the shelf. I do know a few things though and they all lead me to believe they aren't going to dilute me at this low stock price

1) CEO and Chairman Paul owns 20% of this company. A company he started in his living room in 1991. Do you really think that after building this into a very successful company (and yes despite the stock price they are very successful) that he is going to give away half his ownership interest ?

2) They just raised almost $300mil in what amounts to an interest free loan from their vendors. I can't imagine that they would then turn around and then give away half the company for $200mil.

3) We basically know there is a lot (and I mean a lot) of cash that is going to be coming into the company in the next 9 months via infrastructure monetization. Gomez Pipeline is $85mil and they have offers. Al Reese is on public record so many times saying that this will get done that I have no doubt about it. He has done exactly as he said with Wenlock, and the Innovator. The Titan will go into an MLP, again they have said this so many times publicly that I have no doubt. This is another $260mil. Today Al mentioned that the Telemark pipeline would be next once they start producing (which has been assured by the Diamond deal) which will be another $160mil. So there is what another $500mil that they are going to raise which makes me very much doubt that they would give away half the company for $200mil

3) Canyon Express Pipeline They aren't rushing to monetize this. It has a replacement value of $200mil and is in a very strategic location. They have been approached (per Al today) by people about it. Surely they would sell this before giving away half the company for $200mil.

So I just don't see it happening. I think a pref share offering which they used around the time Gomez was about to ramp up would be more likely, but it might not be doable in today's market.

Or perhaps they just want a shelf in place in case the stock price comes up and they want to take advantage of it.

And again this stock is priced like they can't raise capital. So an equity raise would actually be good news to people who think the assets here are only worth $8.

I've got some faith in management. They are owners and act in shareholders best interests.


On Jun 03 08:37 PM User 425298 wrote:

> Devon,
>
> I enjoy your writing. And have looked at the stock and actually put
> on a trade. The issue of the shelf offering really needs to be addressed.
> I actually pulled some of my shares from a trade because of this
> and $WTIC being overbought. I have seen what the delusion has done
> to stocks like DPTR. ATPG at $8.5 becomes $4.25 overnight. That's
> a ton and I mean real risk just put into this trade with that shelf.....I
> have few thoughts to the shelf. Some of the proposed asset do not
> have buyers or at prices desired. Which means funds will be needed.
> Or they just want some insurance to keep the company floating if
> Oil and the asset sales go sour....Managment needs very specific
> comments $200MM offering...Your point is well taken about even $40
> a share with the offering. But we may go to $4 per share first........
>
>
> Mark

2009 Jun 03 10:22 PM

[maxiedog]

Thanks for the detailed analysis; your long interest is a strong motivation of course but it is great to get your well-argued insights without having to DMOR. A great start point for research on a compelling opportunity. The shelf is a potential problem of course. Have you access to the company principals to just directly ask them why they think it necessary?

2009 Jun 04 02:01 AM

[Mayascribe]

Compelling debate here! If the author's numbers hold true about the 200MM, then the ATP CEO would be nuts to dilute his 20% stake by half. Especially if he believes his stock will increase by three or four fold by this time next year. With the 300MM now in hand he can clean up the balance sheet right now (that would be a great sign!). With the $1 billion plus future cash he can buy back shares assisting in the appreciation market cap value, increasing his own wealth all along the way.

The possibility of indirect dillution through a preferred share offering, though, could be of concern. With an extra $200MM right now, he could leverage up again against the "guaranteed" coming revenues, and build another floating rig or two, and then sell a 49% share in each of those a few years down the line when oil likely will be higher priced than now.

I'm a share owner, and thanks to the debate here (and my own out loud thoughts), I will be closely watching where the 300MM lands in ATP's next quarterly balance sheet.

My last curiosity is to give myself some homework and look far into the past of ATP's balance sheet and history of offerings. Could pick up a sign or trend there.

2009 Jun 04 02:34 PM

[Devon Shire]

Thanks for the comment.

I have spoken to CFO Al Reese, but before the shelf was filed. He was very professional and I don't think he would comment on it without having commented publicly previously.

Do some digging and poke some holes in my analysis or confirm some of it if you agree. I certainly appreciate other opinions.


On Jun 04 02:01 AM maxiedog wrote:

> Thanks for the detailed analysis; your long interest is a strong
> motivation of course but it is great to get your well-argued insights
> without having to DMOR. A great start point for research on a compelling
> opportunity. The shelf is a potential problem of course. Have you
> access to the company principals to just directly ask them why they
> think it necessary?

2009 Jun 04 03:41 PM

[Devon Shire]

Thanks for the comment.

Just to be clear, the $300mil isn't in hand right now. What Diamond is doing is basically drilling now and accepting payment after Telemark starts producing. So it is basically an interest free loan with Diamond expressing confidence in the prospects of this very significant development.

I think looking at ATP's past balance sheets would be a good idea. They are very creative at raising capital and have managed a significant debt load for their entire existence.

The key is that they do development not exploration. It is a risk aversion business plan.

On Jun 04 02:34 PM Mayascribe wrote:

> Compelling debate here! If the author's numbers hold true about the
> 200MM, then the ATP CEO would be nuts to dilute his 20% stake by
> half. Especially if he believes his stock will increase by three
> or four fold by this time next year. With the 300MM now in hand he
> can clean up the balance sheet right now (that would be a great sign!).
> With the $1 billion plus future cash he can buy back shares assisting
> in the appreciation market cap value, increasing his own wealth all
> along the way.
>
> The possibility of indirect dillution through a preferred share offering,
> though, could be of concern. With an extra $200MM right now, he could
> leverage up again against the "guaranteed" coming revenues, and build
> another floating rig or two, and then sell a 49% share in each of
> those a few years down the line when oil likely will be higher priced
> than now.
>
> I'm a share owner, and thanks to the debate here (and my own out
> loud thoughts), I will be closely watching where the 300MM lands
> in ATP's next quarterly balance sheet.
>
> My last curiosity is to give myself some homework and look far into
> the past of ATP's balance sheet and history of offerings. Could pick
> up a sign or trend there.

2009 Jun 04 03:45 PM

[Mayascribe]

Thanks for the reply, Devon. It seems from reviewing the past balance sheets that indeed ATP has carried debt for some time, with a sidnificant increase in the past couple of years. I don't necessarily look at this as a bad aspect. In fact, with exploration down worldwide, it may turn into a major positive, especially when Telemark's spigots turn on.

The real key to this company is how they manage their cash flow here forward.

####

I'm also interested in Stone Energy Corporation (SGY). This oil company's stock price is parallel to ATP's. But the situation is vastly different, as they suffered big and expensive damage to their platforms and pipelines due to hurricanes in the Carribean. Reparations are on target. The Fool has it rated 5 stars like ATP.

Maybe you can branch out a little and investigate SGY as it's stock is down about 8 fold to ~$9.00 from $72.59 fifty-two weeks ago.

Thanks, again!

2009 Jun 04 07:41 PM

[Devon Shire]

The ramp up in debt in the past couple of years was related to building long lived infrastructure relating to the development of Telemark and Gomez. They have a $520mil floating production unit in the ATP Titan, a $300mil floating unit in the ATP Innovator, $160mil of pipelines at Telemark.

So the debt went into assets that have value and long lives. They are selling pieces of the floating units to bring that capital back into the company and they are selling off the pipelines for the same purpose. Look for all of the 2011 debt to be gone by the end of this year.

I've heard SGY mentioned a few times. My understanding is that it is debt they took on for an acquisition at exactly the wrong time that has really punished them. I'm pretty happy with ATP at this point as I think management is doing a really great job through this period and has their incentives completely aligned with me as a shareholder.


On Jun 04 07:41 PM Mayascribe wrote:

> Thanks for the reply, Devon. It seems from reviewing the past balance
> sheets that indeed ATP has carried debt for some time, with a sidnificant
> increase in the past couple of years. I don't necessarily look at
> this as a bad aspect. In fact, with exploration down worldwide, it
> may turn into a major positive, especially when Telemark's spigots
> turn on.
>
> The real key to this company is how they manage their cash flow here
> forward.
>
> ####
>
> I'm also interested in Stone Energy Corporation (seekingalpha.com/symbo...).
> This oil company's stock price is parallel to ATP's. But the situation
> is vastly different, as they suffered big and expensive damage to
> their platforms and pipelines due to hurricanes in the Carribean.
> Reparations are on target. The Fool has it rated 5 stars like ATP.
>
>
> Maybe you can branch out a little and investigate SGY as it's stock
> is down about 8 fold to ~$9.00 from $72.59 fifty-two weeks ago.
>
>
> Thanks, again!

2009 Jun 05 10:24 AM