What sets ATP Oil and Gas (ATPG) apart from larger independent exploration and production competitors Andarko (NYSE:APC) and Apache (NYSE:APA) is significant growth. Investors in the oil and gas space have already forgotten that ATP was nearly a takeover target after General Electric (NYSE:GE) took a look at buying the company last summer. A large part of the value of the company comes from its infrastructure, which, while significant and valuable on a standalone basis, provides a platform that many competitors in the industry are missing. Using replacement cost method for ATP's rigs, the company's flagship rig, Titan, would fetch in the ballpark of $600 million alone. An additional barrel of oil production in the gulf for ATP costs next to nothing now that most major pipeline and well-head initiatives are in place. With Titan financed and other major rigs already drilling or prepped to drill, ATP has further development of positive cash flows to look forward to over the next year.
The company turned cash flow positive in the first quarter but reported an earnings per share loss on May 10 due to oil well depletion allowances and capital asset depreciation and amortization. We think the real upside will come, surprisingly, from the credit markets, as ATP's production engine stabilizes its debt situation. Quarter 1 exit production was in the range of 25,000 BOE. The EPS loss on this production number was -1.04 vs. an "expected" -.60 from analyst consensus. As we pointed out last year (as did many other independent traders, to their credit) analyst opinion on smaller E&Ps like ATP only show major investment banking ignorance of the industry and offer little to investors looking to learn about these types of companies. The market for ATP's bonds, however, is more discriminating, and after a large offering just before the British Petroleum (NYSE:BP) debacle last year, ATP bondholders are anxious to hear guidance on the ratings situation from S&P and other ratings agencies.
These agencies will likely keep a close eye on cash flow growth at the company, and, with a predominantly oil well and predominantly natural gas well, respectively coming online at Telemark over the next six months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.