On May 10th, ATP Oil & Gas (ATPG) reported Q1 results. Our firm has held a position in the company since last May and saw positives in its Q4 results. However, we were disappointed in the company's Q1 results, and were not consoled by the fact that management was as disappointed as we were.
We needed to be reassured that ATPG could 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 $140 million net from term loans issued and $124.5 million from profit interests and overriding royalty interests in its oil and gas properties during Q1 2012. ATP Oil & Gas ended the quarter with $224 million in cash and made a $90 million interest payment on May 1, eight days before releasing Q1 results. We can see that in the short term, ATP Oil & Gas will be able to survive as a going concern.
We were displeased that the company continued to lose money. ATP Oil & Gas incurred a loss of $2.83 per share, which exceeded consensus estimates and the prior year's loss of $2.34 per share. This was due to a steeper-than-expected revenue decline of 12%, partially offset by a 7% reduction in operating expenses.
We noticed that the company lost $58.97 million on its derivative hedges activities during the quarter. Derivative losses increased from $50.26 million in Q1 2011. With the recent decline in crude oil prices since February, we expect that ATP Oil & Gas will be able to reverse this in Q2.
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Source:Bloomberg LP.
During Q1 2012, ATP Oil & Gas 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 Oil & Gas receives cash up front and sells an option to enter into a swap at a later date. The company received $13 million in first quarter 2012 net inflows from the sale of derivative contracts offset by payments to settle derivative contracts due in Q1 2012. ATP Oil & Gas has added a net 97,550 Bbls of crude oil prepaid swaps versus Q4 2011 levels. It received $87.9 milion of cash advances from the prepaid oil swaps in 2011 and another $29.5 million in net prepaid swaps executed in Q1 2012. ATP Oil & Gas is obligated to pay market prices at the time of settlement, which may result in a gain or loss for the company.
Net capex for ATP Oil & Gas increased from $88 million in 2004 to $848 million in 2007 and then declined to a low of $410 million last year. We are disappointed not only that the company planned $400-$500 million in capex for 2012, but that it spent $197.2 million in capex in Q1. We would like the company to sell some more properties to bolster liquidity and to fund its capex program, rather than borrowing additional funds at a high interest rate or sell overriding royalty interests. Maybe ATP Oil & Gas could sell royalty trusts in its properties, like Sandridge and Chesapeake. In the first quarter the company incurred capex primarily for the natural gas well in Israel, which included pre-ordering of equipment, things of that nature in order to start the well in the second quarter, and also Clipper. Clipper is scheduled to have the pipe laid in the third quarter; there was some pre-ordering of equipment that was required to be incurred in the first and the second quarter.
While we were glad that ATP Oil & Gas produced 2 million barrels of oil equivalent, which exceeded the revised projections of management, it was still down from 2.34 million barrels of oil equivalent in Q1 2011. On a year-over-year basis, ATP Oil & Gas saw 7.2% production gains in natural gas production from its Gulf of Mexico properties, which was more than offset by a 39% decline in North Sea natural gas production and a 21.44% production decline in oil and condensate.
Source: Q1 Press Release.
We were displeased that the executives received $3.7 million in bonuses in Q1, even though the company lost money. While we expect that the bonuses were probably earned for 2011's increase in revenues and reduction in losses, we believe that due to the poor performance in Q1 2012, maybe the bonuses should have been scaled back or deferred.
The company was able to increase cash flows from operations to $100.9 million in the prior quarter, vs. $86 million in Q1 2011. We are expecting the third and fourth quarters as the company has successfully drilled and completed two deepwater wells at Clipper, which are scheduled to produce after the pipeline is laid and connected up. ATP Oil & Gas continued the work-over of a Telemark well to increase its production -- an effort that hopefully will be successful during the second quarter -- in addition to the completion and beginning production of the fourth well at Telemark.
In addition to the $155 million loan secured in March, the company recently raised $80 million through the sale of an overriding royalty interest on its Gomez Gas Field. The company also received $100 million through the sale of an overriding royalty interest on the Clipper oil and gas field near the end of the quarter and paid $60 million in payments for other long-term obligations other than debt.
The company has minimal debt redemptions until 2015 ($36.6 million in the current portion of long-term debt maturing in 2012) and ended Q1 2012 with nearly $225 million in cash. We are encouraged that management holds nearly 15% of the outstanding stock, including 12% by founder T. Paul Bulmahn. We believe that management has an interest in ATP Oil & Gas' success.
We like the company's drilling efforts in the Shimshon offshore gas well in Israel. ATP Oil & Gas has a 40% interest in Shimshon and is the project operator. The Shimshon field contains 2.5 trillion to 3.4 trillion cubic feet of natural gas reserves, of which 0.9 to 1.2 TCF are ATP Oil & Gas' net share. Production from these fields in the Mediterranean will mean easy supply to the European and Asian markets. In those local markets, natural gas currently trades around $6.50 per thousand cubic feet, which is phenomenal, considering the $2-$2.50 per thousand cubic feet prices we are seeing in the U.S.
Finally, ATP Oil & Gas 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.
In conclusion, we maintain our holding in ATP Oil & Gas, especially since it is so close to its 52-week low. We don't expect it to decline much further. To expand on our previous recommendation, we were recommending ATP Oil & Gas to investors with a willingness and ability to tolerate volatility and risk associated with this company. We believe that such investors should steadily accumulate shares of the company, or its preferred stock (ATPGP.PK), especially during down days in the market.
We believe that ATPG and ATPGP.PK can be considered an implied collar in the independent oil and gas production sector, as ATP Oil & Gas has an active hedging program. According to Bloomberg Finance LP, analysts are projecting that the company will reduce Q3 losses (excluding gains and losses from derivatives) to $0.21 per share vs. $1 per share of losses in Q3 2011. We believe that ATP Oil & Gas should consider new management or putting the company up for sale, as the company has over $4.2 billion of proved reserves and $7.3 billion of proved and probable reserves. We feel that another company or management team could make better use of the assets, as well as ATP Oil & Gas' deferred tax assets.
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.
