Why ATP Oil May Not Go Bankrupt

Jul.30.12 | About: ATP Oil (ATPAQ)

ATP Oil and Gas (ATPG) stock was down 40% in past two days after a Bloomberg article in which two bond holders mentioned they had interviewed potential advisors, ostensibly for a possible bankruptcy or restructuring. However, management has a track record of unconventional asset monetization in difficult environments; the company has valuable assets available for sale; and the major tranche of ATP's debt is covenant-lite. These factors point to the possibility of ATP avoiding bankruptcy. Also, ATP has not in fact missed an interest payment or necessarily triggered a bankruptcy filing, and its next interest payment isn't due until November.

ATP has been in tight liquidity situations before. Particularly, in late 2008/early 2009, ATP traded like it was going bankrupt, and needed to sell assets to survive. Management was able to sell assets in time, contrary to expectations that the company would go bankrupt. They successfully kept the company out of bankruptcy despite oil prices going as low as $35 and despite a world economic crisis that substantially reduced available funding for oil asset deals. The world economic environment may not be fantastic at the moment, but WTI is currently around $90 and there is substantial funding available for oil related investments.

ATP does have substantial assets available for sale, joint venture, or other similar type transaction to raise liquidity. In addition to billions of dollars of proved developed and undeveloped reserves, ATP has over a billion dollars of oil infrastructure assets that it could sell or joint venture. The infrastructure assets seem to be the more likely sale candidates. Focusing on the infrastructure assets, ATP has about $600 million of value in the Titan (using just over half the book value number), $150 million in the Innovator (using GE's deal last year as a mark) and $250 million of value in the Octabuoy (about 50% of what they've spent on it so far). Selling a portion of these assets, or all of them in a package deal to an infrastructure fund or distressed investment firm, would generate significant liquidity and push off any question of bankruptcy

Key to this argument, it appears that ATP's debt covenants allow the company to sell infrastructure assets. That being the case, since the current liquidity and oil price environment is dramatically different from ATP's previous near-death experience, it seems likely that they will proceed with an asset divestiture (or NPI or JV or something along those lines) rather than going with a Chapter 11 filing.

Additional considerations

Managements' large personal ownership of stock incentivizes them to keep the company out of bankruptcy. Also, the MLP market is thriving, particularly the "midstream" MLPs which could absorb some of ATP's equipment, and the offshore drilling equipment companies have also done well recently, such as Diamond Offshore (NYSE:DO), Noble Corp (NYSE:NE), SeaDrill (NYSE:SDRL) and to a lesser extent Transocean (NYSE:RIG).

Also, in bankruptcy processes, often former equity holders will get up to 5% of the value of the new company - considering the almost $2 billion in debt against the company, 5% of that would be $100 million, higher than the current $70 million market cap. So perhaps even in a bankruptcy scenario, equity holders might not do terribly from the current stock price level. And the company issued at $35 million unsecured convertible note at the end of June, which may not have sold if the company looked likely to go bankrupt soon.

And, in speaking to other investors about ATP, it appears there have been some misconceptions about how proved reserves are calculated - the value of the infrastructure is not factored into proved reserve value, there is no double counting of ATP's reserves, so ATP could in fact divest its infrastructure assets and still have its full proved reserves. ATP would of course need to contract the assets to be able to use them to develop its undeveloped reserves, but those contracts would likely need to be in place to sell the assets. Perhaps this is driving some selling activity, as if ATP could not divest infrastructure without impairing reserves, it would be in an even more challenging situation.

Word of Caution

Please note, I'm not saying ATP won't go bankrupt. It could go into Chapter 11 tomorrow. I'm just saying it might not, and sharing some of the reasons why. This is important because the stock seems to be pricing in a high probability of bankruptcy. If the company doesn't go bankrupt, it seems likely that the stock price could rebound significantly. It is an interesting risk/reward trade, considering the stock was trading 6 times higher than its current price two months ago.

One last consideration - if ATP doesn't go bankrupt, it is expected to bring on production later this year from Clipper, which should substantially improve its cash flow situation and perhaps could help it be re-valued in line with its proved reserves and infrastructure, instead of being valued as a distressed investment. So the potential upside from ATP not going bankrupt is meaningful, and it seems possible and maybe even likely that ATP will sell assets and not go bankrupt.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.