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Like a moth to a flame this week I found myself listening to the most recent presentation from ATP Oil and Gas (ATPG). I am a former shareholder with no real interest in ever being one again, yet I can't help but tune in to what ATP is up to.

ATP is one of those companies that has a story that is either going to make shareholders buying stock today very happy, or very sad. ATP has saddled itself with an enormous debt load in relation to its current cash flow. The key word for the hopeful being current, because ATP does have the oil reserves in its possession to ramp that cash flow up significantly.

That is if the debt doesn't do them in first.

ATP has an interesting business model. As a relatively small company ATP targets offshore oil and gas properties that are too small for the majors and large independents to bother with, yet too expensive to develop for the smaller producers.

Why is ATP as a smaller producer able to develop these properties? Because ATP is willing to borrow more money than anyone else is. Is ATP reckless with its balance sheet? I think probably. But for twenty years the company has been operating this way and made its founder pretty darn wealthy.

ATP explains the enormous balance sheet leverage it uses as being sensible because the company does no exploration work. ATP focuses exclusively on acquiring on the cheap proven oil and gas reserves that the big boys don't want and developing them. In other words ATP can use more leverage than most oil companies because the company knows that the cash it is spending is going to result in cash flow. ATP isn't spending tens of millions on exploration wells that could result in no financial return.

Well, until now, that is. And actually ATP isn't spending a lot of money, the company is going to spend about $30 million on its 40% share of an exploration well offshore Israel. $30 million isn't a lot even for a cash starved overleveraged company like ATP.

In case you haven't heard, there has been some pretty interesting exploration work going on offshore Israel.

Noble Energy (NYSE:NBL) recently announced the following upgrade to a property it has been drilling:

HOUSTON, Dec. 19, 2011 /PRNewswire/ -- Noble Energy, Inc. today announced results from its Leviathan appraisal well in the Amit license offshore Israel. The successful Leviathan #3 well, located more than three miles east of the original Leviathan discovery, encountered approximately 290 net feet of natural gas pay in multiple intervals. The reservoir thickness and quality were greater than anticipated and the gas/water contact was confirmed at the well location.

Charles D. Davidson, Noble Energy's Chairman and CEO, said, "The results of the appraisal well are very encouraging and validate our seismic modeling and petrophysical interpretation of this substantial resource. This positive outcome has led to an increased gross mean resource estimate of 17 trillion cubic feet (Tcf) with a range of 14 to 20 Tcf. We already have project teams in place identifying commercialization options and screening field development concepts.

The Leviathan discovery isn't the only big prize that Noble has found. On its Tamar block Noble has recorded a gross resource estimate of almost 9TCF and in December Noble announced another 7TCF discovery offshore nearby Cyprus.

These are mind boggling numbers.

ATP is a small company but one with a large amount of Deepwater oil and gas production experience. That experience led to ATP getting in on a big target of its own offshore Israel as the owners of the block did not have the experience to move forward without help.

ATP has an interest in three blocks offshore Israel: Shimshon, Daniel East and Daniel West.

In mid 2012 ATP and its partner Isramco Negev will drill an exploration well on the Shimshon property. ATP has a 40% interest and the cost to ATP is estimated to be between $25 million and $29 million.

The potential of this Shimshon exploration target as laid out in this ATP presentation is 2.5 to 3.4 TCF of gross natural gas which would be 0.9 to 1.2 TCF net to ATP.

At the end of December 2010 ATP's total booked reserves were as follows:

  • Proved reserves - 126 million barrels
  • Probable reserves - 85 million barrels
  • Total Proved and Probable reserves - 211 million barrels

Should the Shimshon exploration well turn out to be successful and ATP end up with close to 1TCF of natural gas it would basically double the size of ATP's reserves. And the global price for natural gas is much higher than the depressed price here in the United States, so it would much more valuable than if discovered in the Gulf of Mexico.

Of course ATP would then have to somehow come up with its share of the cash to develop the Shimshon property, but a successful result would certainly give ATP a big asset to play with.

ATP always has a good story to tell, a story about being on the cusp of a large production increase that is about to effectively deleverage the balance sheet. Maybe someday that story will become reality.

Source: ATP Oil And Gas - A $30 Million Hail Mary On A Trillion Cubic Feet Of Natural Gas