This week, we are expecting ATP Oil & Gas Corporation (ATPG) to report results. We are expecting to see continuation of the progress the company made in Q4 2011 to continue in Q1 2012.
We needed to see that the company would be able to survive as a going concern, as investors were concerned that the company would not even be able to survive long enough to pay its bills. We were pleased to see that ATP Oil & Gas received a $155M term loan arranged through Credit Suisse on March 9th, 6 days before it released Q4 EPS. We were also pleased that the company burned through less cash from operations (including the impact of net capital expenditures) in Q4 versus the average cash burn incurred in Q1-Q3 2011. Q4 2011 saw the company generate operating cash flows of $68.46M, which exceeded the $43M average from Q1-Q3 2011. ATPG spent $98.7M in net CapEx during, roughly in line with the previous three quarters.
Areas In Which We Would Like to See Improvements
Source: 2011 Annual Report.
We were displeased that the company continued to lose money. However, the Company's Q4 loss per share of ($.56) was better than the ($0.79) loss per share consensus estimate from the analysts covering ATPG. The majority of the $28.5M Q4 loss to ATPG common shareholders was from Redeemable Minority interests ($9.7M) and Preferred Stock Dividends ($6.3M) versus $12.5M after tax loss from operations.
Source: 2011 Q4 Press Release.
We noticed that ATPG lost $47.16M on its derivative hedges activities during the quarter. That was especially tough for us to see because if ATPG had not incurred losses on derivatives and hedges during the quarter the company would have earned $18.65M, resulting in its first profitable quarter since Q1 2009.
ATPG had a small gain on natural gas hedges, which was more than offset by the $52.7M of derivative losses on oil and condensate contracts. During Q1 2012, ATPG entered into "swaption" agreements amounting to a net 365,000 Bbls in 2013 at an average strike price of $96.50 in January 2012. ATP receives cash up front and in exchange the counterparty receives the option to enter into a swap at a later date. The company received $14.7 million in net cash advances from commodity price derivative contracts in fourth quarter 2011 and has received $19.4 million net so far in first quarter 2012. In addition to standard swaps, ATP entered into a crude oil prepaid swap transaction during fourth quarter 2011 for 146,400 barrels at a price of $100.41. Subsequent to fourth quarter 2011, ATP has added a net 306,000 Bbls of crude oil prepaid swaps at an average price of $98.36. During future settlement months, ATP will deliver cash to the counterparty based on prevailing market prices, which may be higher or lower than those paid to ATP.
Source: Morningstar Direct.
After seeing a rapid run-up in Net CapEx from $88M in 2004 to $848M in 2007, Net CapEx has declined to a low of $410M last year. We still would like to see Net CapEx decline to the point where it is approximately equal to depreciation, depletion and amortization amounts accrued by the company and as such we were disappointed that ATPG is planning $400-$500M in CapEx. ATPG sold $27M in oil and gas properties last and we think that the company may need to sell some more properties to bolster its liquidity position, rather than having to borrow additional funds at a high interest rate. We noted that the company raised $180M in 2012 through the sale of overriding royalty interests.
Source: Morningstar Direct.
ATPG's 2011 natural gas production decreased by 9.85% versus natural gas production levels in 2010. Despite the fact that hydraulic fracturing has caused natural gas prices to decline to $2.26/MMBTU, we would like to see that ATPG natural gas production levels remain close to 2011 levels. We were especially concerned that North Sea natural gas production levels declined by over 37% and 33% in the Q4 and 2011 periods because the company was able to realize ~$8.50/MMBTU from this area during the quarter and throughout the year. We were disappointed that Q1 2012 production is expected to decline to 1.8-1.9 Million Barrels of Oil Equivalent, down from 2.28MBoe in Q4 2011.
Areas We Can See That Progress Is Being Made
ATPG received the Safety in Seas award from the National Ocean Industries Association. The company was recognized for its corporate culture of safety of offshore energy workers. And in recognition of the engineering we employed in designing safety redundancies into a deep water platform three years in advance of the BP Macondo tragedy. ATPG's safety emphasis exceeded what other companies were doing in the Gulf of Mexico as well as government requirements. Back in 2007-2008 ATPG designed the Titan with two blowout preventers. ATPG designed it to be a true state-of-the-art facility.
The company generated 25% revenue growth in Q4 2011 versus 2010, on the strength of higher oil prices, which were partially offset by a slight decline in oil production and lower prices on natural gas. For the year, the company enjoyed 57% revenue growth, helped by higher oil production and oil prices, which was partially offset by lower natural gas prices and production. The average price per barrel for the company's oil price increased from $72.94 at the end of 2010 to $98.98 in 2011, as turbulence in the Middle East (Arab Spring) more than offset economic weakness in Europe and Japan. The company's $687.2M revenue in 2011 was an all-time company record and exceeded the previous peak of $618M in 2008.
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Source: 2011 Annual Report.
The company was able to reduce operating expenses to $87.3M in Q4 2011 from $192.2M in Q4 2010. Expenses for Fiscal Year 2011 increased by 12%, or $57.3M, and expenses excluding depreciation, depletion and amortization declined by $20.6M. Reduced expenses for operating leases, impairment of oil and gas properties, drilling interruption costs and increased revenue in Q4 2011 and FY 2011 versus Q4 2010 and FY 2010 enabled the company to generate positive operating income for the first time since 2008.
Source: 2011 Annual Report.
In addition to the $155M loan secured in March, the company recently raised $80M through the sale of an overriding royalty interest on its Gomez Gas Field. The company also received $100M through the sale of an overriding royalty interest on the Clipper oil and gas field near the end of the quarter.
ATPG is also a party to the lawsuit against BP (BP) and is pursuing a claim against BP, having recently filed a lawsuit against the company with other plaintiffs. Despite the lawsuit, ATPG works with BP to accomplish a number of things on a regular basis. And when BP had its spill, ATPG was very quick to release some of its vessels to help them, and to do everything it could to help them, even though BP has yet to compensate them for that as well. In short we see it continuing to work with BP as though the lawsuit has not taken place and to pursue the legal remedies against BP as if ATPG did not have a working relationship with BP.
The company has minimal Debt Redemptions until 2015 ($33M in current portion of long-term debt maturing in 2012) and ended Q1 2012 with over $200M in cash.
Source: 2011 Q4 Press Release.
Finally, ATPG reported a year-end 2011 SEC pre-tax PV-10 value of $4.2 billion for proved reserves and $7.3 billion for proved and probable reserves compared to $2.6 billion and $4.8 billion, respectively, at year-end 2010. This increase is primarily a result of pricing, but other factors include timing and an increase in oil and NGL reserves.
Source: 2011 Q4 Press Release.
In conclusion, we recommend ATPG to investors looking for a potential turn-around story in the oil and gas production area. According to Bloomberg Finance LP, analysts covering ATPG have increased Q1 quarterly estimates on the company from a loss of $0.605 per share in November to a loss of $0.32 per share yesterday. Analysts are also projecting that the company will reduce losses per share to $2.15 in 2012 from the $4.12 incurred in 2011. Finally, we are also encouraged by ATPG's drilling efforts in the Shimshon offshore gas well in Israel. ATPG has a 40% interest in Shimshon and is the project operator. The Shimshon block sits atop 2.5 trillion to 3.4 trillion cubic feet of natural gas reserves, of which 0.9 to 1.2 TCF are net to ATP. Production from these fields in the Mediterranean will mean easy supply to the European and Asian markets. In the local market, natural gas currently trades around $6.50 per thousand cubic feet, which works in its favor, considering the $2.26 per-MCF prices we are seeing in the U.S.
Disclaimer: Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this report. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.
Disclosure: I am long ATPG.
