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ATP Oil & Gas Co.
Dilution Purchased Certainty?

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By kurtj3
September 24, 2009

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Swizzled has convincingly demonstrated that this company is worth EITHER somewhere around $70, OR zero. They either survive to realize their net asset value, or they crash and burn.

What follows is a very simplified model of such a binary event.

When the market was telling us that $5 was a fair price for ATPG, then we can infer that the market thought that the chances of survival were about 7%. (0 x .93 + 70 x .07)

When the market was telling us that $10 was a fair price, we can infer that the market thought the chance of survival was about 14%.

At $20, the in implied chance of survival is about 28%.

Those of us who have invested in ATPG did so because we believe the $70 net asset value number, and more importantly, we believed that the chance of survival was much higher the numbers above.

But the problem was the uncertainty. We may have thought the chances of survival were 80% or even 90%, but we couldn't be too sure. Those kinds of things are much more difficult to estimate with precision than a $70 net asset value.

But where are we today? The dilution is costly, no question. But what it purchased the company is certainty. As Swizzled opined, the debt covenants are off the table. The balance sheet is dramatically strengthened. The chances of this company going to zero? Unless I'm misreading things, they seem to be approaching zero. At this point, a hurricane or an operation hiccup would hurt, but I don't think they would destroy the company.

So ignore the potential upside to reserves or the price of oil, and knock down the net asset value because of the dilution. If this is no longer a binary event, it's hard to fathom that a fair price could be anything less than $50.

A few days ago, ATPG was like a gambling game which seemed to be heavily stacked in our favor - but we still had a chance to lose big. Today, it seems more like an opportunity to purchase dollar bills for a quarter.

Anyone else looking around the house for a few extra quarters?

What am I missing?

Kurt
Very long ATPG