Looking Back at a Stock Pick That Stunk

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Today we're going to take a look at a stock that was supposed to set the world on fire in 2010, but didn't. That would be my selection of ATP Oil & Gas (Nasdaq: ATPG  ) for our Best Stocks for 2010 series.

I gave ATP the thumbs-up a year ago around $19 a share. Today, it trades hands for $16 and change. That's roughly a 15% drop, compared with a market that's up around 12%. So that stings a bit. Let's review my thesis and see where I screwed up.

Prepare for liftoff?
At the time of my pick, this offshore oil and gas player had sunk a ton of money into a new development hub at Telemark in the deepwater Gulf of Mexico. With first production about to kick off, this looked like just the catalyst that ATP needed to tackle its strained finances. Between the new high-impact wells coming online, and a monetization of the Telemark infrastructure, I figured ATP could cover its capital budget, keep its vendors and creditors happy, and possibly reduce its debt load. The two biggest risks I identified were that ATP would face problems either in turning its new wells on without a hitch, or in monetizing the ATP Titan.

In February, investors took a dim view of ATP, as fourth-quarter production was found lacking. The stock closed as low as $13. The first Telemark well subsequently came on, materially increasing production. The market liked that a lot, taking the stock to around $23 in mid-April.

And now for something completely terrible
A few days later, something unexpected happened elsewhere in the Gulf. Transocean's (NYSE: RIG  ) Deepwater Horizon rig burst into flames and sank to the ocean floor.

The fallout from this horrendous accident has made life tough for ATP and peers like Cobalt International Energy (NYSE: CIE  ) . A moratorium was imposed, and a series of confusing new regulations were drafted. Despite the moratorium being lifted in October, deepwater permits are still very difficult to come by.

In light of the circumstances, ATP has muscled through the balance of 2010 almost remarkably well. The company monetized the ATP Titan, adding an instant $150 million of liquidity. The firm then completed its second Telemark well, which has both bumped up production and allowed an additional $100 million to be drawn on the new asset-backed credit facility.

The final assessment
Without a doubt, the biggest stumbling point for ATP in 2010 was something completely beyond its control: BP's (NYSE: BP  ) alleged gross negligence (according to partner Anadarko Petroleum (NYSE: APC  ) ) at Macondo, the site of the rig explosion and subsequent oil spill.

I couldn't have seen that one coming, but that's the point of demanding a big margin of safety -- not just to protect against the known risks, but the unforeseeable ones as well. At $19 per share, I didn't adequately safeguard myself against adverse outcomes beyond the specific ones I identified. On the other hand, anyone buying shares below $10 after the oil spill had a lot of protection built in.

I expect ATP's stock to perform much better in the year ahead. The firm's on firmer footing financially, and early results out of the Telemark hub look very strong. The real wildcard is probably the U.S. government, which still hasn't granted ATP its next permit.

In conclusion, I got the price and timing of this pick wrong. Otherwise, it was a great call.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool owns shares of Transocean. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2010, at 8:25 PM, AAOI wrote:

    Great post mortem. It looks likes those permit approvals may be just around the corner (finally)...

  • Report this Comment On December 29, 2010, at 8:26 PM, Thulasidas wrote:

    An objective analysis. Thank you fool for this frank discussion. Appreciate ur professionalism.

    An unmistakable fool strength & quality .thank you fool & fool community.



  • Report this Comment On December 29, 2010, at 8:55 PM, ValuePEG wrote:

    Toby, nice recap, but you did skip a couple important things that also happened in 2010. They eliminated all covenants as they replaced their senior secured loan w/ a $1.5B bond issue, although it was rather costly and can't be called for 3 years, but did eliminate a potential issue. They've been hinting that their ACNTA as of YE2010 should be over $5B allowing them an additional $350M credit on their Senior Term Loan. Lastly they picked up Entrada for a song on the last GOM auction, this promising asset should be fairly easy to bring online as there is nearby infrastructure that they should be able to tie into (obviously for a fee).

    Going forward it is very true that they are dependent greatly on the U.S. Government and issuance of permits as 2/3 of their current assets are in the GOM. But they're not just simply sitting idly by, on 12/20/10 they sent a letter to Obama/Salazar/Bromwich and published it in the Houston Chronicle, Wall Street Journal and Times Picayne that I know of bringing the foot dragging to public forefront.

    Furthermore they still have Cheviot in the N. Sea and have been courted by projects in other countries because of their technical skills & experience in deep-water. They just announced a tentative deal in Israel that would more than double their current Proved and Probable reserves if it goes through. The point is that they still have options.

    So all I would say Toby is just hang in there, I don't believe you picked the wrong stock just possibly the wrong year (2011 let's try it again) due to unforeseen 3rd party issues (BP - DeepWater Horizon).

  • Report this Comment On December 29, 2010, at 11:36 PM, awallejr wrote:

    I can't imagine anyone foreseeing the BP olilspill, A really good discussion can be found here:

    I still think your $19 price will prove profitable, especially with oil now trading over $90. I do like selling puts still. Sold some Jan 2013 20s for $9 each. I just view it as free money (although not to sound too cocky since there are always risks, as we saw with Horizon).

  • Report this Comment On December 30, 2010, at 7:52 PM, RWRocks wrote:

    One didn't need to anticipate the BP oil spill - one needed awareness that the stock price of a heavily leveraged small cap could drop like a stone with any adverse event. The heavy volume of selling as the stock price crossed $20 in the wrong direction should have cued many of us to dump the stock, no matter what we thought of the company. I'm no TA chartist, but I managed to nail the bottom simply because the panic/computer selling stopped, and picked up plenty at 9 a share. If only I have been so smart when the stock was headed that way originally.

  • Report this Comment On December 31, 2010, at 10:04 AM, kurtj3 wrote:

    Toby, you're being too hard on yourself. Your stock pick got a direct hit from a major Black Swan, yet only declined 15% yoy? Not bad at all. Without Macando, the stock price would have easily been in the 20's, if not the 30's by now.

    Barring another Black Swan event, your $19 buy price should be looking good at the end of 2011. Please keep giving us your insights and analysis of ATP.

  • Report this Comment On January 01, 2011, at 7:51 AM, mesapet wrote:

    In hindsight, the drop in BP and the oil service industry was predictable, just like the drop in the banking industry was predictable for those aware of subpriime mortgages and related paper.

    What is not recognized is that the entire market is dependent on the price of oil which OPEC is able to extort. When it hit $140/bbl, our entire economy went into a tailspin, including the oils which were profiting by the high priced oil. Although I had anticipated the stock market drop, I never thought that everything would fall as it did. So the question is, what is the DOE and Chu going to do about controling the level of oil imports, which enables OPEC to control our entire market, even if they are not aware that they do so?

  • Report this Comment On January 01, 2011, at 7:26 PM, ValuePEG wrote:


    #1 - How does a 2008 drop in the market & oil have anything to do with a 2010 stock pick that failed due BP's incident, and the governments overreaction shutting down the GOM.

    #2 - In hindsight everything is predictable, too bad we aren't able to make investments that way. I guess if we all could do that it would be a self feeding loop and we still wouldn't get anywhere, maybe the ramifications would just compound in such a way that the universe would simply implode - ROFL - Just saying.

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