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Devon Shire
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Author of the value investing newsletter detailing the formation of the "Punch Card Portfolio" (http://valueinvestorcanada.blogspot.com/). Devon Shire is an accountant and an investor with 15 years experience managing a private portfolio. Devon Shire's preferred portfolio management... More
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  • Atwater 63 Flow Test Results Tomorrow
    Looks like ATP will release well results in the presentation slides for Enercom on their website in the morning tomorrow.

    Here is the press release.

    http://phx.corporate-ir.net/phoenix.zhtml?c=123846&p=irol-newsArticle&ID=1391396&highlight=
    Tags: ATPG
    Feb 16 2:00 PM | Link | Comment!
  • ARE YOU READY FOR A SHORT SQUEEZE ? – ATP HAS MULTIPLE CATALYSTS TO TRIGGER A BIG ONE

    ARE YOU READY FOR A SHORT SQUEEZE ?  – ATP HAS MULTIPLE CATALYSTS TO TRIGGER A BIG ONE

     

    I’ve written twice before about ATP Oil and Gas.   The first time I focused on the valuation of the company and more importantly on their ability to handle their long term debt.  The second time I wrote I focused on the impressive investment that they have made in long lived infrastructure.  Please read both articles for a full background.  I will cover the debt again later as I believe it to be by far the most misunderstood and important aspect to the ATP story.  The grotesque undervaluation of the net assets of the company at $8 a share is obvious, so it doesn’t take much of an effort but I do touch on it again below as I believe a conservative appraisal of ATP’s net assets is 10 times the current $8 per share.

    This time I also wanted to write about the next 7 months for ATP and how this might impact the considerable amount of shares sold short.

    Short Interest

    As of May 15, 2009 there were 5,700,000 were sold short.   There are about 36,000,000 shares outstanding and 7,000,000 or so of those are held by insiders.  That means that more 19.65% of the available float is currently short.  

    A further 4,000,000 shares are held by Peter Seldin’s Centennial Associates who is a long term owner.   If we back those out of the float along with the shares held by insiders (mostly Chairman and CEO Bulmahn) and we have an available float of 25,000,000 shares.  That means that 22.8% are short.

    Why are they Short ?

    Quite honestly, at this point I don’t know.   With oil at $147 last summer shorting a highly leveraged independent oil and gas producer with a small float makes a lot of sense to me.  For those who were short last summer and rode the stock down from $40 to $3 this was a great trade.  They were helped by a few hedge funds who appear to have been forced to liquidate.

    An example of this may have been West Coast Asset Management a concentrated value investing hedge fund for whom ATP was a core position.   As late as October 8, 2009 WCAM presented ATP as a stock idea at the Value Investing Congress.  Here is a related link http://seekingalpha.co....  At that time they referred to the $13.40 share price as “Absurd”.  By the end of December they had fully sold off their position with the stock never above $13.40 during this period.   So this may have been a real blood in the water short during this period as I don’t think these boys wanted to sell.

    At this point though the risk of being short appears enormous given ATP’s current Net Asset Value and what that Net Asset Value will be if oil continues to go up.   Those still short ATP must be counting on ATP not being able to handle their debt.  So I will revisit that debt again.  I believe ATP is quite capable of surviving and thriving with their current debt structure.  I think being short ATP with oil prices rising is very risky bet with very poor risk versus reward.

    REVISIT ATP DEBT

    I’ve written much of what follows in my original article.  But getting comfortable with the debt is so crucial here that it merits another detailed look.  I apologize for the repetition, but as I have said the Net Asset Value is many, many multiples of today’s stock price so the undervaluation is obvious.  If you can get comfortable with the debt the rest is easy.   The situation has only gotten better since I originally wrote as oil prices are now up to almost $65 which is a price at which ATP’s deepwater plays are very economical.

    The debt itself as of last reporting on Dec 31, 2008:

    Tranche B-1 $1.05 bil maturing 2014

    Tranche B-2 $ $326mil maturing 2011

    So no near term maturities that are pressing.  The nearest maturity is in 2011 and they actually expect to have that tranche fully repaid by the end of this year.  That will mean no debt maturities facing them until 2014, so now rollover risk.

    How about payment terms ?

    The $1.05 bil tranche requires a payment of $2.63mil per calendar quarter until September 2013, and payments of $249.4mil thereafter.

    The $326mil (now $296mil) requires no payments other than interest until maturity.

    So the payment terms are very friendly as well.  I won’t spend a lot of time on it, but with $100mil of cash on hand at the end of Q1 2009 and likely another $250mil of cash flow in the last 3 quarters of 2009 (projected using current commodity prices and ATP hedging) they won’t have any trouble making their required debt and interest payments which will be about $90mil over the rest of the year (ATP has only 64 employees so other expenses including lease expenses are also quite manageable). About half of ATP’s $300mil 2009 capex program was spent in Q1 so they aren’t going to be strained by it over the final 3 quarters.  Cash on hand and cash flow will be further bolstered by further asset monetizations which are detail in the catalyst section below. Starting in 2010 cash flow is going to increase in a big way as their largest field is brought on production.

    And the real key is that they operate 100% of the properties so they can reduce capex as necessary to match cash flow and capex. 

    Based on the above information it is clear ATP will not have any problems meeting debt and interest payments.

    Now we know they have no near term maturities to worry about and no problem making scheduled payments. The last thing to consider are the debt covenants.  These covenants are:

    Minimum Current Ratio Greater than 1 : 1

    Net Debt to EBITAX Less than 3 : 1

    EBITAX to Interest Expense Greater than 2.5 : 1

    PV10 of PDP (using strip pricing) to net debt of greater than 0.5 to 1

    PV10 Proved plus 50% pre-tax Probable of greater than 2.5 to 1

    What is management’s take on the covenants ? 

    I have heard Al Reese (CFO) publicly state twice that they fully expect to be in compliance with covenants through all of 2009.  They further provided this guidance in the Q1 results.  And that was with considerably lower oil prices.  So that provides some comfort, but let’s have a detailed look at these.

    Minimum Current Ratio Greater than 1 : 1

    At year end had current assets of $265mil and current liabilities for debt covenant purposes of about $200mil (excludes derivatives, asset retirement, current long term debt).    No problem.

     

    Net Debt to EBITAX less than 3 : 1

    In prior quarters the company was not anywhere close to missing this one due to the high commodity prices.  This year will be a little closer due to lower energy prices in Q1 specifically.  One thing to note that is going to help on this is the $119mil gain on the sale of UK gas assets in Q4 2008.  This is going to be included in this calculation for the next 3 quarters (uses a rolling 4 quarter EBITAX figure).   We can expect another gain on sale coming in the next few months as the Gomez pipeline is being monetized which will further strengthen their ability to comply with the EBITAX covenant.   With this gain on sale included, further debt reduction from the Gomez Pipeline and Titan sales and with oil now up to $64 (they are pretty well hedged on natural gas) my calculations show that they will (as they have continually indicated) be in compliance.

    EBITAX to Interest Expense Greater than 2.5 : 1

    The prior covenant will trip them up before this one does.  By my calculations they should be fine on this one.  So refer to the prior covenant for the bigger concern.

    PV10 of PDP (using strip pricing) to net debt of greater than 0.5 to 1

    Not an issue.  You can look at the numbers but the have no problem here.

    PV10 Proved plus 50% pre-tax Probable of greater than 2.5 to 1

    This one scared the pants off me in Q4 2008 as prices were plunging.  As it turned out they were fine on this covenant.  The PV10 for the reserves for this covenant was $3.7bil, net debt now is down close to $1bil now which would mean the PV10 for this only needs to be $2.5bil.  They have lot’s of clearance as oil prices have risen almost 50% since year end.

    To summarize the covenant issue, I believe that the one EBITAX covenant could come close in Q4 if commodity prices stay low for the entire year.  However there are several things happening that will likely make this into a non-issue:

    1)   &nbs... The company is in the middle of a continuing and already successful (even in this environment) asset monetization program which is likely to further reduce debt

    2)   &nbs... Further gains on sale in the monetization process (specifically the Gomez Pipeline which we already know about) will increase the EBITAX number involved in the covenant calculation

    3)   &nbs... Increased oil prices are greatly improving the revenue line

     

    What if they did miss a covenant ?

    The company is going to be current with all payments, has ample assets as security for the loan and has a game changing field coming on production right at year end, so I think even if they did miss this one covenant a lender would be silly to act on it.  Why do something when there is no risk of non-repayment.

     

     

     

    THE HUGE RISK THE SHORT SELLERS ARE TAKING -  NET ASSET VALUE

     

    As you can see from the above recap I think ATP has control of their debt situation.  Take a look at it yourself and let me know what you think.  Now let’s look again at what a share of ATP is worth if they do as I suggest have a handle on the debt.

     

    3 Ways to Look at Value

     

    Net asset value Estimates:

    1) PV 10 of Proved and Probable

    Per independent 3rd party Dec 08 analysis, ATP has $4.7bil of proved and probable reserves. Less estimate of tax to be paid on sale of these reserves $1.6bil. Add to that $1bil in infrastructure and deduct $1.1bil of net debt

    Total is $3.0bil / 36mil shares = $84 per share

    Oil is up almost 50% from the date this PV10 calculation was done.  The $84 figure is actually likely too low.

    2) Acquisition rule of thumb

    Common rule of thumb in the industry is that value per barrel of oil is $20. ATP has 250mil barrels of oil equivalent.

    $20 times 250mil = $5bil.  Take off $1.6bil or so of taxes on this.
    Plus $1bil of infrastructure, less $1.1bil of net debt

    Total is $3.3bil / 36mil shares = $91 per share

    3) Value based on recent company asset sales

    We have two of these to work from. Most recent is the sale to EDF of 9% of ATP's oil and gas reserves for $400mil.

    If 9% equals $400mil then 100% of oil and gas reserves would be worth $4.4bil

    Value of oil and gas $4.4bil

    Take off $1.6bil or so for taxes.
    Value of infrastructure $1bil
    Less net debt ($1.1bil)

    $2.7bil / 36mil common shares = $75 per share

    The other transaction was last July when oil prices were peaking. They sold half of one percent of their reserves for $80mil. This would imply that at these prices the total value of reserves is $16bil. I'm not going to quantify that in per share terms but you get the idea.

     

    CONCLUSION ON VALUE

    Above are 3 different ways to look at the value of an ATP share.  Every one of them suggests that the value is $75 or higher.  I think I’ve been pretty objective in doing these calculations.

    So with respect to the short interest…&helli... a risk to be taking !  A net asset value that is 10 times the current stock price and a company that is in current good standing with their lenders and appears to be able to continue to be in good standing going forward.

    And I haven’t even discussed the idea that the value of ATP’s assets are likely going to increase as oil continues to rebound.

    So again.  Have a hard look at that debt.  I think they can handle it.  If they can the upside here is huge.

     

    NOW THE CATALYSTS

    So what might trigger the short squeeze ?  Have a read of the following, some or all of which are going to occur in the next 7 months.   Think about how uncomfortable it might get to be short shares that are worth 10 times the current stock price with these actions that ATP currently has underway.

     

    1)   &nbs... Sale of the Gomez pipeline. This is the pipeline system at ATP’s largest producing development. Expect $85mil in cash coming into ATP and further debt reduction.  This one will also help with the EBITAX debt covenant and is a reason why someone looking only at the Q1 production run rate might not appreciate that ATP will be in compliance with all covenants all of 2009.   Per Al Reese CFO at public presentations, this is in progress (meaning it is agreed between parties and documents being prepared) and we can expect it to be completed this year.

    2) Sale of 49% of the ATP Titan.  This is ATP’s brand spanking new floating production unit.  The cost of which is north of $500mil and was a big reason for the debt ATP has.  I believe there is no doubt that an ATP Innovator type deal will be done with this (ATP MLP’s it’s other floating production unit in Q1 of this year by selling half to GE and raising $150mil).  GE is on record with the Houston Business Journal as being interested in both the Titan and ATP’s next unit the Octobuoy which will deploy at another large project (Cheviot) in the North Sea.  CFO Reese is on record as saying that it is a matter of “when and not if” the Titan is monetized.  This will result in  another $250mil plus coming back into the company for further debt reduction and cash strength.

    3) ATP is considering bringing in a partner brought in on Telemark. Telemark is ATP’s next big step up.  An oil field in the GOM that will come on production at the end of this year.  It is a big one, projected to reach 32,000 barrels of oil per day within a year of start up.  Per Scotia Waterous ATP is looking to raise up to $460mil by bringing in a partner on Telemark.  Check the Scotia Waterous website if you are interested in reading about the offering.

    4) ATP is also considering bringing in a partner brought in on Cheviot. The property is similar in size to Telemark so again could raise hundreds of millions in cash for ATP. Leland Tate in a presentation mentioned that there is significant exploration potential in addition to what is known at Cheviot.

    5) Sale of Canyon Express Pipeline. This Pipeline is very valuable as it is the only pipeline in place that could service the eastern GOM.  There have been sizable discoveries in the region in the past two years.  I expect that ATP will hold onto it as it will be great source of fee income going forward, but they could let it go for $200mil plus (estimated replacement cost) if they decide they'd rather have the cash to speed up development elsewhere.

     

    6) Sale of Telemark Pipeline system.  Brand new pipelines for the Telemark development.  The cost of these are $160mil and could be monetized like the Gomez pipeline is going to be in the near future.  The Deepwater GOM is a frontier lacking in infrastructure and this pipeline will be attractive.  Building of this is another reason for ATP taking on debt.  Selling it will return capital to the company.

    7) Here is the big one.  Telemark is about 7 months away from commencing production.  Telemark will peak at 32,000 BOE per day within one year and will produce enough cash flow (using strip prices) to pay off virtually all debt in one year.   I can’t imagine being short ATP shares and waiting for this to start throwing off $750mil to $1bil in cash flow in a year.  It is a game changer and the clock is ticking.

    8) Share buyback program is approved.  ATP has patiently waited to start buying shares.  Once the cash flow from Telemark starts flowing at the end of 2009 the short sellers can enjoy bidding against ATP to try and purchase shares.

    9) Continued appreciation in ATP's asset values and cash flows as oil prices increase. Why would they increase ?

    - Opec cut 4.2mil barrels, demand is only down 2.4mil barrels
    - Economy will improve demand will increase
    - Supply destruction has occurred as countless capital has not been spent on development that was needed just to keep world production flat
    - Inflation is unavoidable, listen to Buffett..you can't increase money supply by this magnitude and not have it
    - World population continues to increase, developing countries continue to need more oil
    - World's largest oil fields are in serious decline, this is going to show up as capital hasn't been spent to try and stem this problem

     

    Summary of Catalysts

    By my calculation all of the above could bring in almost $1.5bil in cash to ATP.  And that has nothing to do with the huge cash flow that is going to come from Telemark production.  ATP will pick and choose which monetizations they do and only select those where they like the prices.  I am fully confident that several of them will get done as ATP has already monetized $630mil of assets at excellent prices over the past year.

    One of these could trigger a short squeeze.  Imagine what several of them will do.

     

     

    Conclusion

    Assets less debt here are worth at least $75 a share.  The current share price is $8.  It is very tough to dispute that unless you think oil is going back to $40 permanently.  I believe that I have shown that ATP has no problems with handling their debt going forward with their existing cash on hand and cash flow.  Have a look for yourself, I have tried to be completely objective.  With the monetizations that are likely to occur the debt will clearly not an issue.

    For what it is worth ATP shares from 2005 to September 2008 ranged from $20 to $50 being over $30 virtually the entire period.  Much of this period had oil prices lower than they now are and ATP had a much lower amount of reserves, infrastructure and cash flow.  ATP is actually worth far more now than it was during this entire period where the market valued the shares at 4 to 7 times today’s share price.

    So I ask you to join me as a shareholder and come along for a short squeeze.  Telemark is 7 months from production.  The short sellers have to cover before it commences or they will literally be fighting ATP to buy back shares.   Study the debt, if you think the company has this under control you stand a good chance of making multiples of your investment.  If oil is on the fast train back to $100 like I believe it is, then all of my numbers regarding value per share have been greatly understated. 

    Again, net asset value of 10 times today’s price (more if oil keeps going up).  Debt structured in an intelligent manner and being regularly reduced.

    Thanks for reading.

    I own shares of ATP Oil and Gas Corporation.

     

     

     

     

    May 28 2:11 PM | Link | 2 Comments
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