Tired of Storm Risks, ATP Oil and Gas Expands Into Offshore Israel

Includes: APC, ATPAQ, BP, NBL
by: Devon Shire

ATP Oil and Gas (ATPG) - with virtually all of its 26,000 barrels a day of production coming from roughly 4 large wells in the middle of the hurricane infested waters of the Gulf of Mexico - has entered into an agreement to try to diversify its production globally.

That is probably a good idea, as having all production concentrated in the Gulf of Mexico could be operationally risky. Now where did they just expand into again…..oh right, the very relaxing location of Offshore Israel.

From where ATP is setting up shop you might even get a nice line of sight to the Gaza strip or Lebanon.

ATP informed investors of the entry into Israel today:

ATP Oil & Gas Corporation (ATPG) is expanding its deepwater operating and infrastructure expertise to offshore Israel. Subject to approval of the Ministry of National Infrastructures (MNI), ATP has signed agreements to acquire five licenses, of which two are pending, in approximately 4,000 feet of water.

T. Paul Bulmahn, Chairman and CEO stated, “The strategic use of our deepwater technical expertise in Israel is one facet of ATP’s global diversification plan. Each license offers an attractive opportunity in the Levantine Basin which is emerging as a prolific area. The recently announced discoveries in offshore Israel totaling approximately 25 Tcf of natural gas have demonstrated a significant catalyst for the offshore hydrocarbons sector. ATP’s ability to enter this area during the early stages of exploration and development is a great testimony to our expertise and commitment to worldwide offshore acquisition and development. This also enhances our future ability to acquire and develop desired proved undeveloped assets in this region. Israel is working towards energy independence and security of its natural resources by encouraging domestic offshore exploration and production.

ATP will operate all its licenses with working interests ranging from 40% to 50%. Upon the award of the licenses, expected before the end of March 2011, ATP will discuss its estimated capital program projected to be minimal in 2011 and resource potential for the acquisitions. “

I’m a fairly long term shareholder of ATP having first bought shares as they were plummeting in the fall of 2008. This news, while interesting, doesn’t really matter that much to me one way or the other. The important thing for ATP is getting drilling permits in the Gulf of Mexico in the very near term. Any move into Israel is likely to be a few years away.

There has actually been some encouraging news on the permitting front, with the head government official Michael Bromwich making the following statements on February 12:

“I'm on the record as saying that I expect deep-water permits to begin to be granted before the end of the second quarter,” Michael Bromwich, director of the bureau, said in a meeting with the Houston Chronicle editorial board.

“But I now think we're going to see them, I hope, in the next several weeks.”

So you have the head dog publicly stating a couple of weeks. I don’t see much reason for him to say that unless he really expects permits in a couple of weeks.

A resumption of drilling in the Gulf of Mexico Deepwater is crucial to ATP, which spent an enormous amount of money for a relatively small company to build a $700 million floating production unit called the ATP Titan and lay the necessary pipelines costing $200 million at ATP’s Telemark Hub. At this point ATP’s balance sheet bears the burden of carrying the debt involved with financing such a huge project, but ATP’s cash flow statement has yet to enjoy the fruits of the spending because of the drilling shutdown.

Once drilling resumes ATP has 4 large wells that will come on production quickly due to already having put the necessary infrastructure in place. So the company just needs to finish drilling them and tie them into the infrastructure. In the Deepwater where the prizes are large, the infrastructure is by far the most expensive part of a project.

Two of the wells are at Telemark, which will complete ATP’s initial development plan for the project. ATP currently has two wells on production at Telemark. The first well at block Atwater 63 was a bit of a disappointment, producing at 4,000 barrels of oil equivalent. The second well at the Mirage block, however was a great success with initial production over 12,000 barrels of oil equivalent per day.

The next two wells are expected to be rougly 7,000 barrels of oil equivalent each per day. This means that the capacity on the ATP Titan will likely be hit without maximizing production from the fourth well. Both of the two remaining Telemark wells are actually pre-drilled to 13,000 feet and therefore much of the drilling work toward a total depth of 20,000 feet is already done.

The other two wells waiting for drilling permits are at ATP’s Gomez Hub and also are expected to be 5,000 barrels-plus per day. With current company production at 25,000 boe/day you can see how important these four wells are to ATP as they alone will almost double ATP’s production.

As a shareholder I haven’t been too worried about the exact timing of a drilling resumption. I felt that it would happen at some point this year as common sense would have to win out eventually. There have been 50,000 plus wells drilled in the Gulf of Mexico in American waters and we had one BP spill. Clearly this is something that can be done safely and anyone with their head out of the sand is aware that the United States needs as much domestic oil production as it can get. Permits have to come soon.

Now what about these leases in Israel ? Although not core to any current investment thesis for ATP, which is clearly based on a rapid ramp up of Gulf of Mexico production, the Israel expansion could be intriguing.

Although ATP didn’t release the details the fields that ATP had been rumored to be signing up for included the Myra and Sarah licenses as well as the Daniel license and Shimshon permit.

The Myra and Sarah permits previously belonged to a company called Shaldieli Ltd, which carried out a reverse merger with Israeli Petroleum Company in August. Shaldieli at that time indicated that the Myra lease could have 3.12 trillion cubic feet of natural gas and Sarah could have 1.65 trillion cubic feet of natural gas. Shaldieli also indicated that on an unrisked basis they could be worth $7 billion.

Now I’m an oil man (please picture me as Daniel Day Lewis in ”There Will Be Blood”), but if you are going to produce natural gas these days it is certainly better to do it close to Europe where pricing is much more robust. So that makes these natural gas properties more attractive.

And these are big numbers for ATP. If ATP has close to 50% of these properties it is a big step change in the size of the company’s reserves. 50% of 5 trillion cubic feet of gas is 2.5 trillion cubic feet. All of ATP’s reserves currently add up to just over 1.2 trillion cubic feet (although over 60% weighted to oil).

How did ATP get the opportunity to get in on the ground floor of developing these potentially massive gas fields? I believe because of its unique amount of Deepwater experience. You may be surprised to learn that ATP has drilled the fourth most Deepwater wells in the Gulf of Mexico trailing only BP, Shell (NYSE:RDS.A) and Anadarko (NYSE:APC).

My understanding is that after ATP put together some slides presenting the number of wells drilled in the Deepwater per company at an Enercom conference this summer it started getting some interesting phone calls from around the world. I don’t think anyone in the industry or even ATP executives themselves previously realized that the company was above some of the major oil companies in terms of Deepwater experience. The presentation slides changed that.

It seems there are quite a few proven reservoirs of oil and gas reserves located in Deepwater locations around the world held by companies or countries with little experience in developing a Deepwater property. And if the reservoir isn’t absolutely massive a company isn’t going to get any help from the first three companies on the list (BP, Shell and Andarko) to develop a small or mid sized oil or gas field. But you might get some help from ATP. So the telephones at ATP started ringing and the voices on the other end had some different accents.

So the Israel deal might not be the last that ATP does internationally.

Make no mistake though, the very near term and the Gulf of Mexico is what is important to ATP. The company desperately needs to raise its production and cash flow to a level that matches its debt load.

I think that production increase is coming soon and if it does the share price might move upward to better match the value of ATP’s oil and gas assets. With the next 4 wells on production ATP will have an annual EBITA of well over $1 billion, which should justify an enterprise value well over $4 billion. That would suggest the value of ATP shares could be north of $40 vs $18 today.

And with another big project in the North Sea in the on deck circle the production and EBITA growth may continue upwards from there. Still a risky company with a lot of debt, but if $100 oil sticks around ATP over the next 5 years is going to make for some happy shareholders.

Disclosure: I am long ATPG.