Gulf of Mexico operator ATP Oil & Gas (Nasdaq: ATPG ) has had a rough year, with its stock having fallen more than 62%. With 2012 around the corner, should long-term investors worry? Will swimming against the tide of common wisdom help here?
The drilling moratorium in the Gulf, following BP's (NYSE: BP ) Macondo oil spill last year, has been slowly easing. But smaller companies with core operations in this region have felt the brunt of the crackdown -- as has ATP.
Before the tragedy, ATP had planned to develop and start production from three additional wells in the Telemark Hub and two more from the Gomez Hub by the end of 2010. As of September, only two of these wells -- in the Telemark Hub -- were producing. Production from the third well is slated to start in January. As for the two wells in the Gomez Hub, drilling permits have yet to be granted. But ATP is highly leveraged, and speculators are beating the stock down over its debt.
It's clear that the market thinks this exploration and production company will go bankrupt in the near future. With a debt-to-equity of 647%, and with nearly 38% of the total outstanding shares currently shorted, things do look pretty scary. But first, let's briefly review this year and see what could work for ATP in 2012.
Total production in the third quarter rose 14% year over year, with oil and liquids contributing to a solid 37% growth. The two additional wells in the Telemark Hub have contributed to production growth. However, operating costs have been higher because of additional restrictions following the Macondo incident. ATP has been badly handicapped in terms of operating cash flows.
But does that all signal the beginning of the end? I doubt it. First, as production activity increases, there's a very good chance that output from these new wells will increase. Current production rates have yet to meet expectations, but 2012 could see a good chance of increased production from existing wells, because the third and fourth wells in the Telemark Hub have performed as expected and the initial rates have been encouraging.
Second, the company last week successfully finished testing the second Clipper well, which is expected to add 9,000 barrels of oil, as well as 4.6 million cubic feet of gas (Mmcf) per day, to total production. In all, the Clipper wells have combined test rates of more than 3,600 barrels of oil equivalent per day (Boe/d). In other words, these two wells are capable of increasing production by a whopping 164% from current levels. There's currently no reason not to expect a production rise from these wells in 2010.
The ATP Titan, the company's floating drill platform, along with Diamond Offshore's (NYSE: DO ) Diamond Victory and SeaDrill's (NYSE: SDRL ) West Sirius, are capable of drilling to a depth between 25,000 feet and 37,500 feet. The Clipper wells will be connected to the Murphy Oil (NYSE: MUR ) -operated Front Runner production facility by the third quarter next year.
A few weeks back, ATP sold of some of its deep drilling rights in one of its Telemark Hub properties for an estimated $26 million, which should definitely take care of any short-term fears over liquidity and working capital. And with high crude prices becoming the norm, fears of a cash crunch and illiquidity should be taken care of.
The company has simultaneously been drilling more than a few wells, so the high leverage is no surprise. But the production growth should equip management to finance its debt obligations due in 2015.
The Gulf of Mexico is definitely not for the faint-hearted. The region is populated by the Big Oil companies with vast resources to fall back on. Yet Noble Energy (NYSE: NBL ) has recovered, and I don't see why ATP can't follow in its footsteps.
Foolish bottom line
Short-term investors and speculators have been rocking the boat for some time now. I'd say this could be the best time to accumulate a few more shares. Speculators have created an atmosphere of uncertainty and fear, and I'd say it's more the case of greed for short-term returns. We at The Motley Fool will help you stay up to speed on the top news and analysis on ATP Oil & Gas. You can start by adding the company to your watchlist.
However, if you're looking for other great stocks to profit off the energy boom, check out The Motley Fool's special report, "3 Stocks for $100 Oil" -- for free.