This week, we saw Apache (NYSE: APA ) agree to buy Devon Energy's (NYSE: DVN ) Gulf of Mexico shelf properties in a classic countertrend move. Everybody else seems to be focused on either onshore resource plays or the deepwater -- or both, if you're Anadarko Petroleum (NYSE: APC ) . (As we're going to press, Apache has announced a large deepwater-focused acquisition, but I'll pick that up in a separate article).
You may recall that in our Best Stocks for 2010 series, I made a pitch for ATP Oil & Gas (Nasdaq: ATPG ) . ATP has a mix of offshore properties, some conventional and some deepwater. There are key differences between the Apache transaction and the ATP assets, but it's not a terrible comparison, as long as we keep those differences in mind. I know I'm not the only one who's curious to see how ATP's valuation stacks up.
Apache jumped on it
Here are some key attributes of Apache's $1.05 billion acquisition:
- Expected average 2010 production of about 19,000 barrels of oil equivalent (BOE) per day
- Proved and probable reserves of 41 million BOE and 42 million BOE, respectively
- Both reserves and production are roughly half oil and half natural gas
That first bullet allows us to calculate a price paid per flowing barrel of roughly $55,000. This is a shorthand metric that you see used more often among Canadian analysts, but as with Mike Myers and ice hockey, it's something that I'm willing to embrace as an American. There are at least two issues to keep in mind, though.
One problem with the flowing barrel metric is that, given current commodity prices, an asset package that produces all oil is worth a whole lot more than one producing a mix of oil and natural gas. We illustrated this valuation chasm by comparing the acquisition of oily Arena Resources (NYSE: ARD ) by SandRidge Energy (NYSE: SD ) to the gassy divestiture by Talisman Energy (NYSE: TLM ) . "Barrels of oil equivalent" are only equivalent in the sense of energy content.
Second, two companies can have comparable current production levels but wildly different production growth rates. That certainly comes into play in this case.
Drilling down on ATP's production
ATP's production is very much a moving target, so pinpointing average production for 2010 is tricky. The company exited January at a rate of 17,000 BOE/day, is now producing at 27,000 BOE/day, and is targeting a year-end exit rate of 48,000 BOE/day. I'm expecting average production somewhere in the neighborhood of 30,000 BOE/day.
Applying the $55,000/day metric, we get an enterprise value of $1.65 billion. After subtracting net debt of roughly $1.1 billion, we get a value of around half the current market cap. There are reasons for ATP investors to take heart, however. First, ATP's production in 2010 will be 64% oil, which argues for a higher metric than $55,000 per day. Second, average production is headed much higher in 2011, to perhaps twice the rate we'll see this year. Adjusting our inputs for these two considerations can get us to two or three times the current share price.
This potential should be better reflected in a reserve-based metric, as ATP has a lot of proved undeveloped reserves on the books that won't see the light of day for many years. Let's see how ATP's valuation compares to Apache on that front.
How much is that barrel in the ground-o?
Apache allocated its purchase price among proved reserves ($16.76/BOE), probable reserves ($5.94/BOE), and other acreage ($241/acre). By that measure, ATP's 135 million BOE of proved reserves and 77 million BOE of probable reserves would be valued at $2.72 billion.
The reserves alone suggest a share value of around $32, and that assigns zero value to ATP's extensive infrastructure and other acreage. Investors are seemingly reluctant to give ATP anywhere close to full credit for its reserves, which may be the right call, given ATP's leveraged capital structure and very low percentage of proved developed producing reserves.
The Foolish bottom line
All told, ATP may no longer be in "best buy" territory, but it doesn't look terribly expensive at today's price, either. I see room for a double in the stock price over the next 18 months or so if the company hits its production targets. For some, that's still a big "if," and I agree that plenty of risks remain. (Forecasts point to a busy hurricane season, for example.) So far so good, though.