ATP Oil & Gas Co.
Dilution Thoughts

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By Swizzled
June 18, 2009

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I posted the following on the yahoo board. For some reason it makes me feel better to know that at least some facts or at least thoughts with supporting evidence are posted there.

Thought I'd post it here as it is the only place where it might generate some intelligent discussion.

I've been posting here on ATP for a while now and certainly own plenty of shares.

I was surprised by the equity offering so I decided to do some digging to try and understand it better. Management did a roadshow to raise interest in the equity offering during which they explained why they were issuing shares. I believe that the message that we will get in upcoming public presentations will be something similar to the following.

1) Once the decision had been made to keep a 100% working interest in Telemark and the agreements with Diamond and others put in place ATP became fully locked into a development schedule. That means that they need to have the cash to make sure the development stays on schedule. At this point with $70 oil and all properties producing this is not an issue. But should oil reverse back to $40, or another hurricane shut down Gomez later in the year there could be a need for additional cash to complete Telemark. Management likely did not want to risk the possibility of having to rely on the capital markets three months from now should then need additional cash in the case of a hurricane or oil collapse. And who can blame them given the equity markets have been closed for almost a year prior to recently opening up.

So this is equity offering is a case of taking the known pain now (nasty dilution) to make sure there isn't worse pain later in case of an unexpected event (hurricane or oil reversal) or another capital market seizure.

Personally as a shareholder I appreciate making the error on the side of caution. Yes we have been diluted, but our net asset value per share is still somewhere around $70.

2) Why not sell assets instead of dilute ? Well it's a matter of timing. I believe the asset monetizations that have been discussed are still on track. The problem for raising cash is that the Titan sale, or the Telemark Pipeline sale are both not going to occur until late this year once the Titan is on site. They are going to result in big dollars coming back to the company and big debt reduction, but are not going to supply the desired cash buffer over the next 3 months while further capex spending has to occur.

Now, they could sell other assets, but to raise $60mil in cash they would need to sell something worth close to $300mil due to the debt covenant requirement to use 75% of proceeds to pay down the 2011 debt.

3) So my conclusion is this. I wish there hadn't been dilution, but I would much rather have that than not have a cash buffer heading into hurricane season. I still peg net asset value close to $70 per share (and likely to increase as oil and NG prices continue to improve).

And there is real reason to be excited. Gomez pipeline will still be sold in the next month or two. And Q4 is going to be fantastic with ATP Titan cash ($250mil to $300mil) and soon after more from the Telemark Pipeline ($160mil).

Oh, and there is also the matter of production doubling next year (stepping up at the beginning of the year) with Telemark.