ATP Oil & Gas: Growth Rate, Valuation Outweigh Risk

Last Friday, ATP Oil and Gas (ATPG) fell over 11% after announcing their current quarter's oil and natural gas production is averaging 260 MMcfe. This is down from 300 MMcfe, which the company briefly hit at the end of 2007.

This being the case, if ATP can sustain only 260 MMcfe, it will still demonstrate 47% growth over 1st quarter 2008. So how can a company which demonstrates 47% growth lose 11% of its value in one day? It's a classic case of ATP's management over promising and under delivering. In hindsight, ATP management was overly aggressive in promoting the potential and promise of taking daily production up to 300 MMcfe to end 2007. Even though ATP is averaging 47% growth in production over 1st quarter 2008, the Street was expecting ATP to keep the run rate at 300 MMcfe for a 2008 growth rate of 70%.

So where does this leave ATP? ATP's 4th quarter production of 218 MMcfe brings their 2007 average daily production level to 178 MMcfe. If ATP only maintains the current lower level of production at 260 MMcfe for 2008, it will represent annual growth of 47%. These numbers by themselves are phenomenal in a market where the majors are seeing single digit declines in production. What makes the story more compelling is the valuation. Through the first three quarters of 2007, ATP reported over $9.00 in cash flow. With 4th quarter being their best producing quarter, you have to conclude that full year 2007 cash flow will come in over $12.00.

If we know current production is running at 260 MMcfe, and assume ATP sustains this level, we can conclude 2008 cash flow will come in roughly 50% higher at $18.00. Nevermind the potential catalyst of ATP getting its production back up to 300 MMcfe. ATP is a company set to grow at nearly 50% in an industry that rarely trades less than 4.0 times cash flow. 4.0 x $18 equals a $72.00 stock. That's my target. While ATP does have a significant debt load and the oil and gas exploration business always carries exploration risk, the growth rate and valuation are too deep to ignore.

Disclosure: none

Comments

[RWRocksOn:]

ATP doesn't do exploration, it does development. That's the competitive advantage of the company!

2008 Nov 02 10:21 PM