I’ve written three previous times about ATP Oil & Gas (ATPG) this year (see here, here and here). I’m going to keep this one brief because I believe the case for very significant stock price appreciation over the next year is getting pretty obvious.
There are three parts to this story.
- A huge increase in production is beginning right now
- The balance sheet will continue to improve
- There will be more reserve growth (there always is with ATP)
Production Will Be Triple Current Levels Nine Months from Now
I’m going to talk about production in terms of millions of cubic feet of gas equivalent per day. But be aware that ATP is already almost 60% oil producing and is only going to move more towards oil.
Current daily production: About 100 million cubic feet a day. 59% oil, 41% natural gas.
By the end of June 2010, daily production is going to be somewhere around 300 million cubic feet a day. Here is how it gets there. There are six big wells coming on production
- Gomez sleeve shift – The company is currently working on a recompletion of a well at their largest producing property called Gomez in the Gulf of Mexico. Once finished, this is going to add the equivalent of 30 million cubic feet a day of production, about 75% oil. Source of the size of this increase is ATP President Leland Tate in the last earnings call
- Canyon Express – The company is currently drilling a well that will be completed in Q4 of this year at their Canyon Express property. These Canyon Express wells are big producers. It is 100% natural gas, but will be in the region of 50 million cubic feet a day, which ATP will have a 50% share of. Source of the size of the Canyon Express well is again Leland Tate at an early 2008 conference.
- Mirage well #1 – This will be the first producing well from the long awaited Telemark hub. ATP has been developing this property for 3 years. This has been drilled to total depth and will come on very early in 2010 or in a best case scenario at the end of 2009. This well is expected to produce at a rate of 30 million cubic feet a day and is almost 80% oil. The rate of production was disclosed by ATP president Leland Tate on their Q3 2008 conference call. Although I should mention that the company found pay area three times the size of what they expected when this was drilled (see recent press release) so I might be vastly understating the rate it will be produced at.
- Morgus well #1 – The second producing well at the Telemark hub. It has been drilled down to something like 13,000 feet and had casing set. The final completion will be drilled from the ATP Titan and expect it to start producing in the first quarter of 2010. It is also expected to produce at 30 million cubic feet a day and is again almost 80% oil. Again the source for this rate of production is Leland Tate on the Q3 2008 conference call.
- Mirage well #2 - The second producing well at the Telemark hub. It has also been drilled down to something like 13,000 feet and had casing set. The final completion will be drilled from the ATP Titan and expect it to start producing in the first quarter of 2010. It is also expected to produce at 30 million cubic feet a day and is again almost 80% oil. Again the source for this rate of production is Leland Tate on the Q3 2008 conference call.
- Atwater 63 well – this will be through a subsea connection to the ATP Titan. This will be drilled in December and first production is expected before the end of June 2010. This is a bigger well, with first production expected to be at a rate of 42 to 60 million cubic feet a day and is 75% plus oil. The source again is Leland Tate on the Q3 2008 conference call.
So total all of those up and you are looking at incremental production of about 200 million cubic feet a day, likely 75% of it oil. This is on top of the current 100 million cubic feet a day of company production. That means by the end of Q2 2010 ATP will have about 300 million cubic feet of production which is triple the current level.
That is a pretty noteworthy increase.
From a revenue perspective, assuming strip pricing which is pretty flat on the oil front right now, that is going to take them from an annual run rate of $300mil to more that $1.1bil as you get both the triple in production and an increase in percent of production that is oil from 59% to closer to 65%.
My estimate is that about 75% to 80% of this revenue gets through as cash flow from operations for ATP. So that is about $900mil of cash flow from operations, which is about $17 per share. The current share price for ATP is $16.45.
The really great part is that they have another project called Cheviot in the North Sea that is on schedule for 2012 production that is going to result in a similar increase in production.
The Balance Sheet Will Continue to Improve
ATP management found out this year that they had too much debt for $40 oil and $4 natural gas at their current rate of production. The price has been some dilution of shareholders as management worked to get the balance sheet back in shape and continued with progress on Telemark.
The recently raised $300mil of cash through the sale of a pipeline at Gomez for $80mil, and the issuance of $140mil of convertible pref and $90mil of common shares.
There is more improvement coming. According to CFO Al Reese, they will have a deal finalized later this year to bring in a partner on the ATP Titan (the brand new floating production unit with a 40 year useful life that is about to be deployed at Telemark). They did a similar deal on the ATP Innovator in March of this year with GE. If the Titan deal is structured the same we should expect proceeds of about $300mil and ATP will keep 50% and control of the floating unit (they don’t give up any of the ownership of the reserves at the location). I’ve been following this company very closely and Al has told shareholders several times about deals that he believed would be completed and they have subsequently delivered as advertised.
And there is more than that. We can expect that once Telemark is producing (early 2010) that the Telemark pipeline will also be monetized like the Gomez pipeline just was. Proceeds for the Telemark pipeline according to Al will be $160mil. He told us proceeds for the Gomez pipeline would be $75mil to $80mil and they were in the end $78mil.
So that is $750mil of cash that is being added to the balance sheet. $300mil of it already received. The company had net debt of $1.2bil at the end of June, so bringing in $750mil in cash puts them in very good shape.
I think down the road as some point we could very well see the infrastructure vehicle that these assets have been put into taken public. ATP will still have a 50% interest in these assets through the entity, the value of those assets will be $150mil of the Innovator and $300mil of the Titan. That will be another $450mil of value hiding within the company.
There Will Be Additions to Reserves in the Year End Reserve Report
ATP is a company that has always rapidly grown reserves. Up to 2005 this growth came through acquisition. Since then is has come through extensions at there large Deepwater properties. This year is going to be no exception.
Here is the detail from the drilling of the first well to total depth at the Telemark Hub:
As previously announced, ATP experienced outstanding results with the MC 941 #3 well that was drilled to total measured depth of 20,043 feet. The MC 941 #3 well encountered approximately 266 net feet of logged hydrocarbon pay as compared to the discovery well (the Vastar MC 941 #1 sidetrack 1) that encountered approximately 87 net feet of logged hydrocarbon pay. These additional pay sands will increase production and the proved and probable reserves at the Telemark Hub.
That was the Mirage block. I found this very exciting because it was the portion of the Telemark hub where I didn’t expect upside reserve revisions. There is real potential for more significant upside at both Morgus and Atwater (the other two blocks).
With respect to Morgus, the size of the reservoir is not fully delineated. The discovery well has a very nice pay sand that is filled to the base and the delineation well drilled too far down dip to find the oil water contact. Since the oil water contact is unknown, ATP can only book proven reserves to the base of the sand in the original well.
Also, they can only carry one sand thickness (about 150’) down structure as the probable reserves even though there is some seismic evidence that the oil water contact is much deeper. That means the reservoir at Morgus could be much larger than what is on the books.
Atwater 63 is the same as Morgus. The size of the field has not been fully delineated, so they know it is bigger, the just don’t know how much bigger. It could be significant and they have been pretty excited about it.
So there you have it. Production to triple, revenue and cash flow to almost quadruple, another $450mil of cash being added to the balance sheet and significant reserve additions coming.
But Does the Current Share Price Already Reflect All of This?
The short answer is no.
I showed earlier that the cash flow per share once Telemark is ramped up is going to be somewhere around $17 with the current share price being only $16.45. A more sensible multiple would be 5x which would imply a share price of $85. You could argue that the multiple should be even higher given the Cheviot development is going to mean another step change up in production in 2012.
You can also look at this on a reserve basis.
- PV10 of 2P reserves is $5.3bil
- Value of infrastructure is $1bil (and it is being unlocked)
- Net debt is ($1.2bil)
- Total is $5.1bil / 56mil shares (assuming pref is converted) = $91 per share
So a couple of ways to value it both suggest $80 plus. I’m more conservative, I think more like $65 but I also believe that is a number that is going to grow considerably as we learn more about Telemark and the reserve upside as well as have oil and natural gas prices work in our favour.
The balance sheet has been holding the stock price down. With $750mil of cash added to it and production increasing, I think the stock market will start valuing the assets this company controls more appropriately.
Disclosure: I am a shareholder of ATP Oil & Gas