ATP Oil & Gas: What the Market Just Missed

Sep.29.10 | About: ATP Oil (ATPAQ)

I’ve been a shareholder of ATP Oil & Gas (ATPG) for quite some time. If you have been following the company I’m sure you have come across one of my articles before.

Monday was a great day for us shareholders as ATP announced the monetization event on the ATP Titan that we had long been looking for. The deal they struck on the Titan has provided them with another $350 million of liquidity to go along with the $350 million of additional funding that will be available on their senior term loan and $200 million of cash. Happy times, especially with the first Mirage well coming on production in days.

However, I missed a big piece of news on Monday that I think Mr. Market also missed. And this piece of news is quite significant to the value per share of ATP.

Here is the news release that I’m referring to:

CALGARY, ALBERTA--(Marketwire - Sept. 27, 2010) - In the first quarter of this year, we made a significant discovery in the deep-water Gulf of Mexico at Appomattox, located in Mississippi Canyon blocks 391 and 392. Drilling activities resulted in an oil discovery with excellent reservoir quality following an exploration well and two appraisal sidetracks. Based on the results of this drilling, our estimate of recoverable contingent resource for this discovery exceeds 250 million barrels of oil equivalent with upside potential. Once drilling resumes in the Gulf of Mexico, we plan to further appraise Appomattox.

Appomattox is the third discovery in the area following earlier discoveries at Shiloh and Vicksburg. Our drilling plans also include further appraisal at Vicksburg which is located six miles east of Appomattox and has the potential to be co-developed. We have a 25% interest in Vicksburg and a 20% interest in Appomattox and Shiloh. Shell Offshore Inc. operates all three discoveries.

"We are excited with the results of the wells drilled to date and Appomattox has the potential to be our best discovery in the Gulf of Mexico so far," commented Marvin Romanow, Nexen's President and CEO. "Once drilling resumes in the Gulf, we will continue appraisal of the field in order to determine ultimate reserves and move towards development plans which potentially include a new hub.

Tim Chatten of Nexen investor relations also added:

"We see this as a fabulous discovery for us and there's some upside opportunity that we would like to pursue upon the moratorium being lifted," Chatten said. "We like this. We see more upside. We'd be happy to move on this as quickly as we can."

This is significant news for ATP shareholders for a couple of reasons.

1) ATP sold its interest in the deep resource rights in Mississippi Canyon 348 which touches the Appomattox discovery for an initial override of 10.005% on production and $15 million of cash up front. My understanding is that ATP’s override expires once federal royalty relief on the property is used up which would be after about 70 million BOE. That means that ATP will receive revenue (and no cost of production) from the production of approximately 10% of 70 million BOE. That is 7 million BOE x $60 (estimate) or $420 million of cash flow that is coming to ATP because of this deal.

When you consider ATP has a market cap of just over $600 million, an additional $400 million plus in cash flow is a big contribution.

2) Appomattox is now the third big discovery in that area of the Eastern Gulf of Mexico. The nearest and longest gas pipeline in that region is 51% owned and operated by ATP. That is the Canyon Express pipeline which has 500 million cubic feet a day of capacity. As these properties get developed that pipeline is going to provide ATP with another high margin income stream through transport fees to go with the Appomattox ORRI.

So it has been a great week for ATP shareholders and things are going to get even better shortly with the big jump in production coming from Mirage.

And in case you haven’t been following the news, the government intends to lift the drilling moratorium “soon”. See the linked articles here and here.

It seems to be all coming together finally for ATP (it has been a long few months post BP spill). Loads of liquidity, the unexpected value creation surprise with Appomattox, production about to jump in a big way with Mirage and the government interference ending. With 50% of the float short things could get interesting quickly.

Disclosure: Author is long ATPG