Is Offshore Israel Expansion a Good Thing for ATP Oil and Gas?

Includes: ATPAQ, NBL
by: Devon Shire

If you want a company that provides concentrated exposure on the development of Oil and Gas Reserves in the Deepwater Gulf of Mexico, then ATP Oil and Gas (ATPG) is the company for you.

ATP doesn’t explore for oil and gas in the Deepwater, it only develops and produces reserves that it has acquired from other companies. The idea is to minimize operational risk by taking the exploration risk out of the equation.

However, one risk that ATP can’t take out of its business model is the risk of government actions negatively impacting operations. As I’m sure you already know, that is exactly what has happened to ATP over the past 12 months, as Deepwater drilling permit approval has been non-existent.

Partially in response to this new Gulf of Mexico business environment-- and partially because opportunity came knocking, ATP has decided to make a move into other parts of the world. As the company recently disclosed and as I detailed for Seeking Alpha, the first new location is offshore Israel.

Offshore Israel has drawn some attention in recent years because of an enormous natural gas discovery by Noble Energy (NYSE:NBL) in the Leviathan field. The Leviathan field is believed to contain over 16 trillion cubic feet of natural gas which would make it the largest discovery in the world in roughly ten years.

The licenses that ATP is rumored to be involved with offshore Israel are also expected to be quite large. Some additional details were released today by Israeli firm Isramco, who according to Isramco is ATP’s partner on the field.

As prepared by independent reserve evaluators Lockwood and Associates the reserves at the Isramco / ATP Shimshon lease are:

High Estimate – 3.4 TCF

Best Estimate – 2.3 TCF

Low Estimate – 1.5 TCF

Now this is just one of five licenses ATP is reported to be involved with. And I think it is safe to say that with reserve numbers of this size ATP is going to be a very different company going forward than I would have expected.

To put the size of the Israeli prize in perspective, all of ATP’s current proven and probable reserves total roughly 1.2 TCF. By adding a 50% interest in just this one license, ATP could be doubling its proven and probable reserves. With the other 4 licenses that ATP is going to be involved with offshore Israel, a significant majority of ATP’s reserves could suddenly be found offshore Israel. That is some immediate diversification away from the Gulf of Mexico.

I like the diversification, I really do. And the fact that these Israeli firms came to ATP for help developing these reserves suggests the terms might be quite favorable to ATP.

But I’m not ready to run around high fiving my fellow ATP shareholders because of this news.

ATP has had a long inventory of projects to develop for some time. By likely doubling its reserve base with this Israel expansion, that inventory just got a lot longer. What ATP has also long had is a lack of cash and cash flow to develop this long inventory of projects. What good is another project added to your list if you don’t have the money to develop it ?

Here is a list of the projects ATP currently already has in front of it:

  • Completing the Telemark Hub (two additional wells to finish drilling)
  • Two additional wells at the Gomez hub
  • An attractive Gomez exploration target that ATP has suggested has the potential to double Gomez reserves
  • The Cheviot field in the North Sea (a billion dollar plus project)
  • The Entrada field in the Deepwater GOM
  • The Clipper field in the Deepwater GOM
  • The Blythe field in the North Sea
  • The Skipper field in the North Sea

You can see that ATP has no shortage of things to do. And from the cash flow modeling I’ve done, assuming that Cheviot gets developed after the next four wells at Telemark and Gomez, I don’t see where ATP has a nickel to spare for a large scale Israeli venture.

I’m sure ATP management has a plan to fit all of this required capital spending together, and I look forward to seeing it. Knowing the folks at ATP I’m sure there will be some creative financing involved.

I have to admit though, that my brain keeps telling me that -- for shareholders, the best result here would be a sale of the company. Because of the hefty debt load it carries ATP currently trades at a steep discount to the value of its net assets. An acquirer could pay a hefty premium to the current share price and still get oil weighted reserves at a very attractive price.

ATP shareholders would get a nice premium to the current share price (I think an acquirer could quite easily pay a 50% to 100% premium), as well as the removal of the considerable risk involved in getting these reserves developed.

We should get some color on all of this fairly soon on the Q4 conference call.

Disclosure: I am long ATPG.