A Closer Look at ATP Oil and Gas Corp.'s Q4

 |  Includes: ATPAQ, CICOF
by: Devon Shire

I’ve been asked by a few people to provide a recap of ATP Oil and Gas Corp.'s (ATPG) Friday conference call to discuss Q4 earnings. There really wasn’t much new in the call (which is good as that means everything is on track) but the information that I found interesting is below.Click to enlarge

Titan Monetization – ATP left the time frame for this fairly open. The official guidance is that they expect it to be done sooner rather than later. There seems to be no doubt that the deal will get done and it seems that they have the resources to allow them to do it on their terms. My understanding is that they are in talks with several different parties. With the proceeds look for the remainder of the “asset monetization” debt tranche to be repaid. According to ATP, the structure would be to put the Titan into a subsidiary and then flow the proceeds of the monetization up into the parent company. Once the asset monetization tranche is repaid, ATP will likely be able to look at restructuring the remaining debt at better rates.

Octabuoy Monetization – This is the $600 million floating production unit that is being built for the Cheviot property that is scheduled for production in 2012. The hull is currently being built in China by Cosco (OTCPK:CICOF) who have agreed to defer payment until mid 2011, which has allowed ATP to free up $99 million of cash this year. Per the conference call it sounds like a similar deal is in the works for the topsides and that the Octabuoy may be funded through an SPV during the construction phase. This is really quite significant obviously as this will greatly reduce ATP’s 2011 capex spending on Cheviot and will make certain the project stays on schedule.

Production Increases in Q1 2010 – Q4 production was referred to as being lousy but much has already improved since then.

  • Q4 2009 Production – 13,600 BOE per day
  • Late January – Added 4,600 BOE per day at Gomez #4 well
  • March 11 – Added 2,500 BOE per day at Canyon Express
  • Remainder of March will add – Another 2,500 per day at Canyon Express
  • Remainder of March will add – First Telemark well at 5,000 to 8,000 BOE per day
  • Production increases over remainder of 2010 – being very very careful on forecasting. (The comment was that the intend to make absolutely sure we don’t over-promise.)

So where ATP entered 2010 at 13,600 BOE per day they leave Q1 2010 at over 30,000 BOE per day.

Telemark - There should be one additional Telemark well per quarter for the rest of 2010. They made that comment that there was a reasonable chance that they could reach the ATP Titan’s 25,000 barrel of oil capacity on the first three wells instead of needing all four. If that turns out to be the case I’d look for them to minimize production at AT63 so that they can focus on production at Morgus/Mirage.

Gomez MC710 – The most exciting new news for shareholders was likely the first public comments made abou the new lease block at MC710 which is right beside Gomez. ATP has recently received a new set of 3D seismic on MC710 and they made the comment that it appears to be a mirror image of Gomez (MC711). This would be fantastic news obviously as Gomez so far has provided ATP with roughly 50 million of proved and probable reserves. As all of the infrastructure is already in place and controlled by ATP at Gomez this will be very high margin production should it occur. The plan is to drill MC710 in 2011 and it would contribute to production in the last half of 2011. They sounded quite excited about the property.

Gomez Production Additions – It sounds like there should also be production additions at Gomez from the #9 well which will come on in early 2011 and MC754 which has been drilled already (ATP just picked up an increased interest in MC754 and now controls the property) and should come on production later in 2010.

A Partner on Cheviot? – Comment was made that they had spoken to a potential partner on the Cheviot property. If they did sell an interest in Cheviot and with the capex on the Octabouy not coming out of cash flow ATP could actually find itself with some cash flow in 2011 that would have to find a home other than Cheviot development.

Improved Credit Metrics – Question was asked as to whether Telemark production would allow for flexibility in debt financing ? The response was that they intend to sell Titan and pay off B2 tranche. After that gone, total debt under $1bil offers a lot more flexibility in the term loan market and other markets in being able to put in SPV debt. Likely see in 2010 or 2011 a different debt structure for the company likely at lower cost.

Year end 2010 Production and EBITAX – Still looks like this is going to be a very different company at the end of 2010. In fact it has already changed with the Gomez/Canyon Express production increases. Simple recap of where production should exit the year

  • 2009 Year end production – 13,600 BOE per day
  • 2010 Q1 Exit Rate of production – 30,000 BOE per day (added 1 well Gomez, 3 at Canyon Express, first Telemark well)
  • 2010 Q4 Exit Rate of Production – 53,000 BOE per day (this is the 23,000 non-Telemark production plus the 30,000 coming from Telemark which is 25,000 oil plus 5,000 gas)

This will mean annual run rate of revenue over $1bil per year vs the $250mil or so in Q4 2009 and EBITAX somewhere between $800mil and $900mil assuming oil prices slightly lower than current.

Question About Timing of CEO Share Sale – The CEO had to handle a difficult question about the timing of his share sale in early January at which point in time he knew the company was badly missing Q4 production guidance. His response was that he felt that the important news concerning the future of the the company was that Telemark was still on schedule and not a deferral of Q4 production. I happen to agree with the CEO’s point that the status of Telemark is many times more important than a production deferral. That said I also think it was just ridiculous to not be able to see that it was a bad idea to sell shares after such a quarterly production miss. I believe there was no evil intent here and that the CEO is fully aligned with shareholders and committed to ATP, but I think is was very poor judgement to sell when he did.

Final Comments – I’m thrilled with where the company currently stands. Here is why:

  1. Production will have more than doubled the Q409 production rate by the end of March.
  2. Telemark is just days away from production.
  3. Titan monetization will happen and ATP isn’t rushed into it.
  4. Could hit Titan capacity on only 3 wells instead or 4 which means at capacity sooner and will stay there for longer.
  5. Financing of the Octabouy with Cosco (OTCPK:CSCMY) is huge news for freeing up cash flow in 2010 and 2011.
  6. Very excited about MC710 at Gomez, big upside I wasn’t aware of a week ago.
  7. Good chance at less expensive debt being in place by year end.
  8. Oil for Telemark being is hedged in the $80s.
  9. The are 11 million shares short on a very small float as of last count. These guys have bet that ATP wouldn’t get Telemark completed. They bet wrong. As production continues ramping up there are 11 million shares that are going to have to be purchased.
  10. Not only is production set to double YOY in 2010, but it looks likely that it could double YOY again in 2011.

Disclosure: Author long ATPG