ATP Oil and Gas (ATPG) - $17.50 was listed as one of 13 companies that received notice they could resume deepwater activity without any additional environmental review, according to a statement by the Bureau of Ocean Energy Management [BOEM].
A total of 16 wells were designated in the notice, which came with the following caveat:
The 13 companies won't be required to revise their exploration plans if an updated estimate of the most oil that would be released in an uncontrolled spill is less than the amount included in spill-response plans on file with the bureau. If the worst-case discharge estimate is higher, further reviews will be conducted…the 13 companies that received the notice are: ATP Oil & Gas Corp.; BHP Billiton Petroleum [GOM] Inc.; Chevron USA Inc.; Cobalt International Energy; ENI U.S. Operating Co. Inc.; Hess Corp.; Kerr-McGee Oil & Gas Corp.; Marathon Oil Co.; Murphy Exploration & Production Co.-USA; Noble Energy Inc.; Shell Offshore Inc.; Statoil USA E & P Inc.; and Walter Oil & Gas Corp.
On the surface, this is great news for ATPG, but more clarification is needed. Management is looking for BOEM approval for six projects: 2 new wells at Telemark, 2 new wells at Gomez, final drilling of a natural gas well at Telemark and a pipeline tie-in of a previously drilled well. So the question remains – Which one, two or three of these projects gets the green light?
According to a Bloomberg article, Mr. Curtis Trimble, an analyst at MKM Partners, believes ATPG will be allowed to drill the two Telemark wells under the newest, selected guidelines. If this is the case, by mid-year Telemark wells #3 and #4 should increase production from an estimated 2010 exit rate of 28 mboe/d to upwards of 42 mboe/d. This number is critical to APTG as 42 mboe/d will generate operating cash flow that will fully fund current capital expenditure plans for 2011.
As all E&P investors should know, when overall production generates ocf that exceeds cap ex, the game is permanently shifted in favor of the company as exterior financing is no longer an issue. If Mr. Trimble is correct, ATPG is on the cusp of this seismic change.
In addition to determining which projects fall under the new guidelines, there is the question if new maximum spill estimate calculations will exceed previously filed containment plans. If the new calculations exceed previously filed containment plans, the project will be removed from this preferred permit list and the company is required to file a new containment plan – as in go to the end of the permit line.
While these are still unknowns in the matrix of getting back to increasing production, the fact that ATPG was included in this select list of just 16 projects is a testament to their state-of-the-art production platform, the Titan, and their business model of reworking assets over new exploration. More on the industry leading technology used on the Titan can be found in an article from last summer: http://seekingalpha.com/article/210741-atp-oil-and-gas-american-ingenuity-at-work-for-a-safer-gom
When the entire GOM drilling activity iced over in the aftermath of the Macondo blow-out, ATPG was taken out back, shot in the head and, for some, left for dead. 62% of reserves are in the GOM, and the company's long-term survival is based on at least two or three of these six projects producing cash flow. The shut-down of the GOM affected ATPG much more than the average Gulf oil producer.
As I like to say, for many investors, ATPG had become a “Missouri” stock – show me the money. As share prices slid from $21 to $9 after the spill and implementation of the drilling moratorium, investors were increasingly shorting the stock and weaker longs were exiting. ATPG had virtually moved its headquarters to Bragg City, Missouri (population 189) until such time as cash flow improved dramatically. Improvement would come only with additional drilling permits. November article for more information here: http://seekingalpha.com/article/236091-atp-oil-gas-above-average-risk-controversy-and-potential-reward
Is ATPG on the cusp of acquiring these permits? Further clarification over the next few days, either at investor presentations already scheduled or through a company press release, should be forthcoming. When ATPG increases production to 42 mboe/d and becomes ocf minus cap ex positive, investors will allow the company to “move” back to Houston, and it will no longer be a “Missouri” stock. Share prices should then have a realistic opportunity of exceeding $28 - $30, up from its current $17.
If, upon receiving additional clarification, the road to higher production is not on the short-term horizon, it could be a cold, snowy winter in Bragg City. The next few days and weeks will be quite interesting, and potentially quite profitable for longer-term investors.
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.
Disclosure: I am long ATPG.
Additional disclosure: I have been a shareholder since 2007