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This Stock Is a Two-Bagger

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This past summer, the BP (NYSE: BP  ) disaster brought down the entire oil and gas sector. Hurt worst were drillers in the Gulf of Mexico such as ATP Oil & Gas (Nasdaq: ATPG  ) and Callon Petroleum (NYSE: CPE  ) . While Callon's stock has risen more than 35% since early June, ATP's stock has been on a tear, increasing from about $9 per share to more than $18 today -- a two-bagger in nine months. While past performance is not indicative of future results, I believe ATP Oil & Gas is still a two-bagger from here.

100% return
Finding the two-baggers of tomorrow means looking where others aren't -- steering clear of some of the most popular stocks, and focusing on the future, rather than the past. The sweet spot for finding two-baggers is among small-cap stocks. These are underfollowed by analysts and investors alike, making them the perfect hunting ground. ATP fits the bill -- the company is only followed by five analysts. Compare that to ExxonMobil (NYSE: XOM  ) , which is covered by 20!

Sustainable competitive advantage
Unlike most oil exploration and production companies, ATP does no exploring. It only develops proven areas. This is a lower-risk strategy than E&Ps like Hyperdynamics (AMEX: HDY  ) and China North East Petroleum (AMEX: NEP  ) are taking, since it significantly reduces the risk of drilling and coming up dry. ATP's real competitive advantage is its experience drilling in deepwater. This advantage was recently on display when ATP announced it was acquiring partial ownership of five licenses in Israel's Levantine Basin for a minimal fee in exchange for operating the licenses. Without ATP's proven track record of success in deepwater drilling, this deal would never have happened.

ATP is sitting on large proven reserves of oil and gas. Using the industry standard PV-10 for valuing proved and probable reserves, and assuming a value of $1 billion for ATP's in-place infrastructure, you get a total value of $7.7 billion. Subtracting $2.3 billion for taxes on the PV-10 and ATP's debt of nearly $2.5 billion, you get an equity value of $2.9 billion. That's more than three times the current equity value of $935 million, a huge margin of safety.

Everything is finally falling into place. In the fourth quarter of 2010, ATP produced an average 24.9 MBoe per day, and this quarter the firm has expanded production at its Gomez hub bringing current production up to 29 MBoe per day.

Furthermore, great news came last Friday when the Bureau of Ocean Energy Management, Regulation, and Enforcement announced ATP was given permission to finish a well at its Telemark Hub known as MC 941 No. 4. This is only the third permit for deepwater drilling in the Gulf of Mexico since the moratorium was "lifted." If permits are finally being issued, we will hopefully soon see a permit for the fourth well at Telemark. From the day the permit was issued, the well should begin producing oil in 90-100 days, meaning cash will hit the balance sheet in the third quarter. Additional drilling is the big catalyst here. As more permits are issued, cash starts hitting the balance sheet, and probable reserves turn into proved reserves, investors should begin to fully value ATP.

My Foolish takeaway
If you are looking for a pure speculative bet on oil prices, something like Direxion Daily Energy Bull 3X (NYSE: ERX  ) , which is up 200% since June, could keep outperforming if oil prices continue rising. If betting on oil isn't your thing, ATP is a smart, leveraged bet that I expect to be a two-bagger with or without rising oil prices.

Where is the next two-bagger?
To get the two-baggers of tomorrow, you need to search for undervalued companies that have a sustainable competitive advantage. In a special free report titled "The Only Energy Stock You'll Ever Need," we reveal a company set to profit from booming oil prices. Get instant access by clicking here -- it's free. There's no guarantee that the stock will be a two-bagger, but it is poised for greatness.

Dan Dzombak can be found on his Twitter account: @DanDzombak. He owns LEAPS on ATP Oil & Gas.

The Fool owns shares of ExxonMobil. 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.

Read/Post Comments (5) | 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 March 21, 2011, at 5:27 PM, dojodan444 wrote:

    I bought CPE for 1.59 so it's well beyond a "double bagger" for me ;)

  • Report this Comment On March 21, 2011, at 11:27 PM, Glycomix wrote:

    Why did ATP's share price double? I can't find any reason in its finances.

    ATP's profit margin was -73.53% in 2010. Its net earnings per share was -$6.86. It's been in the hole for the past two years and promises to make a 2 cent per share profit next year.

    Perhaps ATP's management are wonderful offshore oil men who have a knack for losing money?

  • Report this Comment On March 22, 2011, at 8:06 AM, HDYFAN wrote:

    HDY will be a TEN BAGGER++ imo. Doublers are dull city. LOL.

    Get some guts and go for the multi-BILLION barrel wildcatter HDY !!!!!!!!!

    Actually for many of us, HDY has already been way more than a ten bagger. Big smiles.

    Good luck, speculate wisely...diversify.

  • Report this Comment On March 22, 2011, at 9:59 AM, LondonPorter wrote:

    I'm really tired of reading Motley Fool's uninformed yet persistent coverage of HDY. If the stock is so high risk, then simply ignore it. That would be logical. But, no, consistently HDY is the subject of article after article. Why the obsession? Methinks Motley Fool doth protest too much.

  • Report this Comment On December 29, 2011, at 1:19 PM, kkflash wrote:

    The Fool's comment about NEP's strategy being high risk is simply not true. Both the Durimu oil field purchase in 2011, and the Jilin field purchase just announced for 2012 include already producing wells, and substantial proven reserves. Characterizing NEP as a high-risk E&P is simply inaccurate, as their strategy is actually quite low-risk. The risk is further reduced by the fact that they use no leverage, and are able to finance their growth from current cash flow.

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