ATP Oil & Gas Co.
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By JustMee01
August 25, 2009

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Hello All,

I'm interested in ATP and I'd like to post what I think I know about them, and see if I have a clue! I'm not very familiar with oil stocks in general, so I'd like to just throw out what I've learned and let those who know shred, rebut, clarify, refute, laugh at, or perhaps, verify. It also contains a few questions. I'd appreciate responses to any of them, if they merit a response, LOL. I'll apologize in advance for the length and abundance of questions...

Company background:

ATP is an oil and gas E&P with operations in the North Sea and Gulf of Mexico. The majority of their operations are deepwater Gulf operations off the coast of Louisiana. According to the US MMS, deepwater reserves are becoming increasingly critical to develop as demand increases and shallow water reserves are diminished. This has led a push to deeper and deeper water as the oil companies try to expand reserves, while projects in deepwater have simultaneously become more feasible as oil prices have increased. ATP does not however seem to be involved in deepwater exploration, and instead focuses on acquisition and development of known reserves. They have 3 major properties in that region: Gomez, the Canyon Express Hub and the Telemark Hub. In addition, they have a partial interest in Clipper. The major North Sea property is Cheviot. They produce both oil and natural gas, although product mix varies from property to property. The largest reserves are in Cheviot, but that appears to be primarily natural gas. Telemark, not yet producing, contains the largest mixed oil and gas reserves, almost twice as large as Gomez, and four times the size of the Canyon Express Hub reserves. Gomez, and Canyon Express are the only producing properties. I cannot find the size of Clipper's reserves.

Their business model appears to me to be to obtain properties that are either producing or worthy of production, but have been deemed marginal by other companies for whatever reason (insufficient size of reserves, inability to commit resources because of other projects, insufficient cash for development, etc.). They prefer having operating control, to reduce outside pressure on development and capex. They consider this lower risk than deepwater exploration, since the properties they acquire are already known to contain proven reserves, and they can control costs and deploy resources according to their availability.

(Question: Who are their most comparable competitors. There's a wide disparity of size in the industry and a lot of specialization. Who else plays in their space?)

The cause of share pressure:

It seems that in addition to the recession that hit everyone, ATP had a few things providing a headwind. They have significant debt, and the debt market seized up at the same time that some of their subordinate debt matured. In addition to that, oil and gas prices slipped precipitously. Finally, Gomez was down for an extended period of time due to damage to a NG pipeline that services the field. All of this appears to have led to the market viewing ATP with more skepticism, and combined with oil's slide pulled the stock south. Retirement of some of that debt still appears to provide some headwind for the company. In contrast, oil prices recovering have obvious benefits on valuation.

Their response:

ATP responded by attempting to sell some assets, monetize others, retired subordinate notes by refinancing, and raised capital through a secondary. To provide cash for operations and allow a smoother process of selling assets, ATP refinanced the subordinate debt by obtaining a $0.6B Asset Sale Facility. Under terms of this loan, they received additional cash proceeds, but are required to observe a number of debt covenants tied to minimum coverage requirements. Foremost of these are limitations on capex and mandatory retirement of this debt with a percentage (75%) of all future asset sale proceeds.

In addition, ATP sold a percentage interest in the ATP Innovator (49%), a floating rig servicing Gomez, to GE, forming a Limited Partnership that operates the Innovator. ATP is managing partner and retains all rights to the Gomez field, paying a per unit fee to GE. Once Gomez has been tapped, the Innovator will be deployed elsewhere and operated under terms of the limited partnership. A similar arrangement is being considered for the Titan, a new partially submersible rig just completed that is currently set for deployment to the Telemark Hub. GE is also said to be interested in Titan, as are other parties according to management. No arrangements have been made as yet. Sale of partial interest (80%) in UK properties also provided cash in 2008. ATP remains operating partner in these properties, but with a minority interest. With their recent asset sales, almost half of the Asset Sale Facility has been retired, leaving $330M outstanding ($1.37B including the 2014 term loan as well).

Management is limiting capex to available cash. Asset sales will be used to pay down 2011 debt, with 75% of all asset income targeted for debt retirement as required by the covenants. Management made no commitment to pay down any additional debt, however (at least in the last CC). They have $1.05B in 2014 debt on the books as well. Their comment was that they were comfortable with their leveraged position, due to the limited risk they carry due to their acquisition and development strategy.

They are also reducing cash outlay by deferring drilling costs. Oil drillers are lagging in business and have agreed to defer payment, instead agreeing to later payments from production once the wells are up.

(Question: Is this debt any cause for concern for anybody here? I realize Oil E&P is a high capex business and high debt is common.)

Near-term catalysts:

1. Gomez back up. Last year, production was limited by Gomez repairs for half of the year, following hurricane damage. Production at Gomez will be up as the repairs are complete. This is essentially guaranteed.

2. Titan ATP Titan is complete and a partial interest may be sold. The Titan cost $650M and proceeds of a partial interest, could net sufficient funds to retire a significant portion of the remaining 2011 debt. This removes the near term credit market problems from consideration, as the remainder of ATP's debt load is not due until 2014. Removal of this uncertainty should benefit shares. Cash from this sounds promising, as GE has already been mentioned in more than one article as having interest, and management outlined that they are not the only potential suitors.

3. Inflation. As we exit the recession oil prices should rise as supply is depleted, and inflation fears due to our fiscal stimulus should pressure the dollar and raise oil and commodity pricing. Oil prices rising will have obvious benefits. But, the natural gas market in disarray, how will the poor pricing of natural gas offset those benefits? Oil companies are a natural inflation hedge. This is uncertain, but the tide seems to be rising. Nat gas prices are dropping precipitously, however, which complicates the picture.

4. Increased production. Telemark will be coming online in the future. Telemark reserves are significantly larger than Gomez reserves, and drilling has been underway. Titan, now complete and ready for deployment, will be headed to Mirage/Morgus to complete these wells and begin Telemark production. With Telemark-their largest oil reserve- coming to production and Gomez returning to full production, revenues should be up considerably. Telemark reserves are nearly twice as large as Gomez, so oil output will rise considerably between Telemark coming online and Gomez returning to full output. Swizzled's earlier post predicts tripled oil production in 2010, and that's good enough for me...

(Question: How fast does a field come to full output? It seems from the AR that they can complete drilling in the time frame of approximately a quarter. The MMS website also shows Telemark projected to produce in 2010, but Morgus/Mirage producing in 2009, which confuses me. Aren't Morgus/Mirage part of the Telemark Hub? Will we see Telemark producing in 2010, or is late 2009 actually a possibility. )

(Does output necessarily correlate with reserve size? I can imagine that fields may produce at different rates and for different durations, independent of the size of the reserve. I have also read that GOM fields deplete rapidly. How long will a field actually produce?)

Thanks for reading. Any comments or answers to my naive questions would be greatly appreciated...