ATP Oil & Gas: Where I Went Wrong

| About: ATP Oil (ATPAQ)

Today we're going to take a look at a stock that was supposed to set the world on fire in 2010, but didn't. That would be my selection of ATP Oil & Gas (Nasdaq: ATPG) for our Best Stocks for 2010 series.

I gave ATP the thumbs-up a year ago around $19 a share. Today, it trades hands for $16 and change. That's roughly a 15% drop, compared with a market that's up around 12%. So that stings a bit. Let's review my thesis and see where I screwed up.

Prepare for liftoff?
At the time of my pick, this offshore oil and gas player had sunk a ton of money into a new development hub at Telemark in the deepwater Gulf of Mexico. With first production about to kick off, this looked like just the catalyst that ATP needed to tackle its strained finances. Between the new high-impact wells coming online, and a monetization of the Telemark infrastructure, I figured ATP could cover its capital budget, keep its vendors and creditors happy, and possibly reduce its debt load. The two biggest risks I identified were that ATP would face problems either in turning its new wells on without a hitch, or in monetizing the ATP Titan.

In February, investors took a dim view of ATP, as fourth-quarter production was found lacking. The stock closed as low as $13. The first Telemark well subsequently came on, materially increasing production. The market liked that a lot, taking the stock to around $23 in mid-April.

And now for something completely terrible
A few days later, something unexpected happened elsewhere in the Gulf. Transocean's (NYSE: RIG) Deepwater Horizon rig burst into flames and sank to the ocean floor.

The fallout from this horrendous accident has made life tough for ATP and peers like Cobalt International Energy (NYSE: CIE). A moratorium was imposed, and a series of confusing new regulations were drafted. Despite the moratorium being lifted in October, deepwater permits are still very difficult to come by.

In light of the circumstances, ATP has muscled through the balance of 2010 almost remarkably well. The company monetized the ATP Titan, adding an instant $150 million of liquidity. The firm then completed its second Telemark well, which has both bumped up production and allowed an additional $100 million to be drawn on the new asset-backed credit facility.

The final assessment
Without a doubt, the biggest stumbling point for ATP in 2010 was something completely beyond its control: BP's (NYSE: BP) alleged gross negligence (according to partner Anadarko Petroleum (NYSE: APC)) at Macondo, the site of the rig explosion and subsequent oil spill.

I couldn't have seen that one coming, but that's the point of demanding a big margin of safety -- not just to protect against the known risks, but the unforeseeable ones as well. At $19 per share, I didn't adequately safeguard myself against adverse outcomes beyond the specific ones I identified. On the other hand, anyone buying shares below $10 after the oil spill had a lot of protection built in.

I expect ATP's stock to perform much better in the year ahead. The firm's on firmer footing financially, and early results out of the Telemark hub look very strong. The real wildcard is probably the U.S. government, which still hasn't granted ATP its next permit.

In conclusion, I got the price and timing of this pick wrong. Otherwise, it was a great call.

Disclosure: No positions