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ATP Oil & Gas: Bargain Buy or Value Trap?

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To really understand a stock, you just have to get down and dirty, break out your pencil, and really weigh the risk-versus-reward potential of the company you're following. Let's look at the good and the bad at ATP Oil & Gas (Nasdaq: ATPG  ) , to see whether the stock is a good value or a potential money pit.

The good
ATP shareholders can breath a sigh of relief this week after news that federal regulators granted Noble Energy (NYSE: NBL  ) the first permit to begin deepwater drilling since April's disastrous spill in the Gulf of Mexico. ATP's specialty is in deepwater drilling, and as fellow Fool Dan Dzombak points out, it ranks fourth behind only Royal Dutch Shell (NYSE: RDS-A  ) , BP (NYSE: BP  ) and Anadarko (NYSE: APC  ) in total deepwater wellbores in the Gulf of Mexico. Its experience here could be its ticket to being gobbled up by a larger rival.

A lot of buzz has also been created about ATP purchasing five new permits off the coast of Israel in what could be another huge oil field find. What I think investors are truly undervaluing, though, are ATP's natural gas reserves. The disconnect we're witnessing between oil and natural gas pricing simply can't last, and natural gas prices should rally in the not-so-distant future. ATP looks well-positioned to capitalize on any rally in natural gas prices.

The bad
A high level of short interest isn't going to give you a foolproof way of determining if a stock is going to head lower, but ATP's short interest of 43% is astronomically high and could signal trouble ahead. Short-sellers have been piling onto the company especially hard after the drilling moratorium in the Gulf since 62% of ATP's proven reserves of oil are located in the Gulf.

Perhaps the driving force behind the high short ratio is ATP's mountain of debt. The company's debt to equity ratio stands at a blistering 6.25, and it faces paying back roughly $1 billion in loans in the next two to four years. The company will likely just issue more debt to retire these loans, but this vicious debt cycle could indeed be ATP's demise.

The takeaway
ATP's value really comes down to a question of whether it's worth taking on a company loaded with debt for the chance at finding the next mega oil field. I feel the answer here is yes; the company is worth the risk. You could easily find high gross margins above 80% and less debt from rival Cimarex Energy (NYSE: XEC  ) , but the experience and potential for a large find is simply too strong with ATP. Its natural gas reserves also seem critically underappreciated. If you've been teetering, it may not hurt to take another look at ATP Oil & Gas.

What are your thoughts on the future of ATP Oil & Gas? Share them below in the comments section and consider adding the stocks mentioned here and your own personal holdings to My Watchlist.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article, but would love to shoot a shotgun into the ground and have a bubbling crude come up. You can follow him on CAPS under the screen name TMFUltraLong. The Fool owns shares of Noble. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy that is more valuable than Texas tea.

Read/Post Comments (5) | Recommend This Article (11)

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 March 07, 2011, at 11:14 AM, attila33301 wrote:

    Nice start for the article, but it's missing the analysis part:

    - how is this company conducting the business (low risk - not exploring, only developing proven fields),

    - why are they loaded with debt and will they continue to mount it (spent on ATP Titan, the first deepwater dry tree drilling and production hull built in the US - finished and operational),

    - what's their production cost comparing to industry,

    - what's the current trend of their debt (actually going down by reducing first lien interest rate)...

    With additional analysis, future of this company becomes (almost) clear picture.

    Anyway good start, just needs to be finished.

  • Report this Comment On March 07, 2011, at 1:21 PM, ValuePEG wrote:

    I'm really not sure how you could get almost every bullet point and conclusion wrong but still come out with the same overall point that ATP is undervalued but you did.

    #1 - ATP's reserves are predominantly oil the majority being 70+% oil, with the near end of life Canyon Express 99+% NG being the primary exception. ATP's current 2P reserves are ~60% oil.

    #2 - All the fields in Israel are targeting huge NG reserves. their interest in 3 Myra/Sara/Shimshon have 3.2-4.0 TCF of Possible reserves, the deal is however pending approval by the Israeli Ministry of National Infrastructures.

    #3 - Their net debt/equity ratio is 2.2, their expected EBITDA after they get the next 2 Telemark wells online is roughly $1B, so debt will not be a major issue once permits are issued.

    #4 - The short interest skyrocketed after the Macondo incident last year but has been declining since August.

    #5 - ATP is currently well positioned to take advantage of higher oil prices, as long as permits are issued and oil stays at $80/bbl or above they should be able to rake in loads of cash.

    #5A - Once the Israel government approves the deal ATP will be well positioned to profit from Israel's move to become self-sufficient and double their natural gas consumption over the next 10 years.

    It is noteworthy that you did get the point right about their deep-water drilling experience, and that this will continue to bring new projects to their doorstep.

    So there current issues are strictly tied to the lack of permitting in the GOM where they have several pending projects, but their future explosive capability is tied to Israel not to mention their Cheviot project in the N. Sea.

  • Report this Comment On March 07, 2011, at 2:41 PM, attila33301 wrote:

    [re on ValuePEG's comment]

    Your points are correct, but it looks like I was not clear. Sorry. Here's my clarification:

    ATPG is more than clear "buy" -- once you get all facts clear. This article was step in right direction: ask all right questions, and then give the answers. Well, some questions and most of the answers are missing. But the start was clear and perfect: before you go into any stock, you should ask yourself if there's any unmanageable debt.

    In this case, my only question is "will this stock go over $40 in 2011?"

    Let me clarify: ATPG is not exploring, they are using state of the art technology and possibly the lowest production cost in industry (based on reusable platform) to get the most valuable resource of our time with no security issues at all.

    Their only problem/foe is US government. ATP Titan has all security measures demanded by government already built-in -- based on design it can even handle hurricanes of "Katrina" strength. Yet, first deep-water permit went for the field that's 46.5% owned by BP?

    Even Bromwich will have to admit all facts quite soon, so ATPG is clear buy.

  • Report this Comment On March 07, 2011, at 9:19 PM, CFischer wrote:

    The Motley Fool has really sunk to a new low.

    What used to be a website that provided useful information has now turned into an article mill. It's the same thing

    1) Catchy, provocative title

    2) Name as many companies as possible so it comes up in search results

    Providing any insight is totally optional, which is not surprising, since most of the authors are novices. Almost none of whom have professionally managed money or a worked as an analyst, and I doubt any of them even are working with a significant portfolio of their own.

  • Report this Comment On March 07, 2011, at 11:52 PM, CFischer wrote:

    > ATP's value really comes down to a question of whether it's worth taking on a company loaded with debt for the chance at finding the next mega oil field. I feel the answer here is yes; the company is worth the risk. <

    So the author is showing how clueless he is, that he doesn't even know what ATP's business model is. ATP isn't in the exploration business, so I'm guessing they won't be finding any "mega oil fields." They develop proven reserves that purchase.

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