Shares of ATP Oil & Gas (ATPG) are rebounding from a recent three year low of $3.68. The stock slid some 40%, from $5.93, within days of CEO Matt McCarroll's recent resignation. McCarroll was named CEO on June 1 of this year, and the announcement of his resignation citing the parties' inability "to reach a mutually agreeable employment agreement" was made only a week later, on June 8. McCarroll was to replace CEO T. Paul Bulhman, who is now stepping back in as acting CEO until a second replacement can be found.
Prior to this leadership debacle, ATP was already a struggling company. Shareholder perception over McCarroll's temporary tenure at the helm of this once-promising producer and the company's poor growth prospects are bound to keep share prices suppressed for the near future.
Dependence on GOM Contributing to Struggle
ATP resumed production at its Titan platform in the Gulf of Mexico earlier this week, which was halted due to Shell's (RDS.A) temporary closure of the rig's pipeline, enacted so that Shell could connect a new platform to the same infrastructure. ATP is now expecting completion on its nearby Mississippi Canyon 941 A-2 well by the end of June, and is indicating that the well will be placed into production immediately. ATP counts heavily on its Gulf of Mexico production for its revenues, so much so that the company is bringing a lawsuit against the U.S. for "improperly and illegally" suspending offshore drilling in the wake of BP's (BP) Macando blowout.
The suspension of offshore drilling did impact ATP considerably, since 64% of its proven reserves are located in Gulf of Mexico deepwater. In its suit, ATP claims that the company "incurred significant financing costs to obtain working capital to replace revenue ATP lost from delayed production," for which it seeks $68 million in damages. I think it is unlikely that ATP will prevail in court on its challenge to the U.S. government's authority to protect the environment. At best, I think this move might roll in to a class action lawsuit joined by other Gulf of Mexico producers, which would see ATP's potential damages significantly reduced.
Stepping into Political Disagreements on the Mediterranean
Recent aggressive announcements by the government of Turkey suggest that ATP, along with competitors Total SA (NYSE: TOT) and Noble Energy Incorporated (NYSE: NBL) among others, may not be able to explore future production opportunities in Turkey. Turkey is reacting negatively to bids placed by global producers to Greek Cyprus for offshore licenses in the Mediterranean.
The government of Turkey claims the northern third of the island of Cyprus, and believes that the remainder of the island, known as Greek Cyprus, does not have the authority to license oil and gas production. Since ATP is also drilling in Israel, where estimates are that the Shimshon block could hold between 1.5 and 3.4 tcf, it is unlikely that Turkey will consider doing business with ATP anytime in the near future. This cuts ATP off from another potential area of growth, since pipelines controlled by Turkey carry a significant percentage of oil and gas destined for western Europe, not to mention that Turkey itself is a major energy importer, relying on imports for nearly 90% of its oil needs.
Unlike most of its competitors, ATP's production numbers are actually dropping. For the first quarter of 2012, ATP reported production of 2.0 mmboe, a significant drop from the 2.3 mmboe reported in the first quarter of 2011. This resulted in a drop in revenues amounting to $20 million, a big hit for ATP that contributed to its overall net loss per share of $(2.83). ATP's significant derivatives losses also drove these poor results.
ATP is doing little to reassure shareholders that it is on a track for recovery, as it gives guidance that its second quarter production could be anywhere between 1.6 and 2.3 mmboe, a significant range. ATP also has $2.1 billion in long term debt, which amounts to approximately seven times its market cap of $301.5 million. While none of this debt is maturing in the near term, this overhead casts doubt on ATP's long term growth prospects. The way that ATP's debt is structured, however, means that as it increases its production it must also increase its repayments through overriding royalty interests and net profits interests, meaning that nominal production increases will not help ATP out of its current situation. ATP already expects that between 30 and 40% of its 2012 revenue will be put towards paying down these instruments, which with its lower production numbers in the first quarter indicates that ATP will not be reporting gains per share until at least 2013.
ATP has a history of building out where infrastructure is weak, which the company believes gives it an edge over competitors since it is able to acquire licenses without the competition seen on hot plays. However, in my view this is hurting rather than helping ATP, as it has little leverage to convince the infrastructure to come to it when areas of higher demand are pushing up prices and therefore profits for infrastructure builders in other areas. I think that this is part of the reason Shell did not hesitate to shut down ATP's Titan service for a full two weeks.
ATP is hoping that a substantial reduction in capital expenditures, as several of its large projects reach completion, will be the foothold it needs to climb to profitability. However, its abortive attempt at replacing its CEO and its debt structure suggest that it will take more than reduced expenditures to send ATP on a growth trajectory. While it is expanding in the North Sea and the Mediterranean, the earliest production increases from these projects are not expected until 2014.
ATP is currently trading around $5. This suggests that shareholders are recovering from the abrupt departure of CEO McCarroll, but without a dividend and a solid growth plan to make up for its considerable downside risk ATP is still a risky trade.