Has ATP Oil & Gas Become the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if ATP Oil & Gas (Nasdaq: ATPG  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at ATP Oil & Gas.


What We Want to See


Pass or Fail?

Growth 5-year annual revenue growth > 15% 14.1% Fail
  1-year revenue growth > 12% 75.7% Pass
Margins Gross margin > 35% 77.8% Pass
  Net margin > 15% (57.4%) Fail
Balance sheet Debt to equity < 50% 647.1% Fail
  Current ratio > 1.3 0.55 Fail
Opportunities Return on equity > 15% (77.3%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
  Total score   2 out of 9

Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.

Since we looked at ATP Oil & Gas last year, the drilling company has lost a point as its long-term revenue history reflected a slowdown. But with the Gulf of Mexico still reeling from the after-effects of the 2010 oil spill, the company needs to get moving and start producing the potential that investors see in it.

Deepwater drilling is a lucrative niche, one which ATP's Titan rig aims to take advantage of. The business has been so successful lately that players Seadrill (NYSE: SDRL  ) and the Ocean Rig spinoff of DryShips (Nasdaq: DRYS  ) have been building ships as fast as they can. With all the opportunities from new finds in deep water and high oil prices supporting the greater costs, companies with drilling capacity look to be in a very strong position.

For ATP, though, its highly leveraged balance sheet forces the company to face the huge challenge of managing its massive debt obligations. Although the company has repeatedly said it doesn't plan to miss any payments, delays from the Gulf drilling moratorium pushed back its production schedule.

Given its difficulties in managing its finances, the most likely scenario for ATP may be a buyout. Both ExxonMobil (NYSE: XOM  ) and Noble Energy (NYSE: NBL  ) have extensive Gulf operations that could easily absorb ATP's debt and expenses. To achieve perfection on its own, ATP needs to start producing quickly and demonstrate to creditors that its assets aren't just valuable but also accessible in the short term.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

ATP Oil & Gas is undoubtedly a risky stock. If you'd prefer some less volatile investments, we've got some other ideas you might like better. Please accept this invitation to receive the Fool's latest special report absolutely free. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

Click here to add ATP Oil & Gas to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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 has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (4)

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 January 27, 2012, at 11:28 AM, gcmagone wrote:

    Seadrill (SDRL) is a leading offshore driller that has a great growth potential plus, pays an 8%+ dividend.

  • Report this Comment On January 27, 2012, at 2:55 PM, Ventureshadow wrote:

    If ATPG does not get bought out, when (and if) its new big wells start pumping it will become a 10-bagger. Stockholders rarely get to enjoy such a feat. As you say, a buyout is more likely.

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