An Oil Stock in the Short Sellers' Sights

Faith is the bird that feels the light and sings when the dawn is still dark.
-- Rabindranath Tagore

The ATP Oil & Gas (NASDAQ:ATPG) faithful are getting to feel like that songbird of which the Bengali poet and Nobel laureate spoke.

First production from the firm's deepwater Telemark field, which promises to more than double 2009 production in 2010, is on schedule for later this quarter. Despite this critical fact, relayed in the middle of a decidedly confusing press release last week, skepticism swirls around the stock. Shares are beaten down, and short interest is running high. Even InterOil (NYSE:IOC), which is a real lightning rod, doesn't have this big of a target on its back.

If anyone doubts the commercial potential of ATP's Telemark field, which now sports 49.3 million barrels of proved reserves, I'm not aware of such an argument. I also can't believe that anyone short the stock is betting against the firm's technical capabilities, given the trail of world records and accolades ATP leaves in its wake. Ultimately, I believe it's more a matter of timing.

The timing of cash flows is critical here, because of ATP's very significant debt load. Along with outfits like SandRidge Energy (NYSE:SD) and Venoco (NYSE:VQ), this is one of the most highly leveraged mid-sized oil and gas players. ATP's operational concentration on a handful of hugely capital-intensive offshore projects makes financial risk even more acute. Between creditors and service providers, the company owes a lot of people a lot of money. Some vendors, like Diamond Offshore (NYSE:DO), have accepted a net profits interest in future production in lieu of cash payments, but others are rumored to be getting impatient. See Oilexco's death last year as an example of what can happen when vendor good will goes bad.

In this context, I think we can see why the reaction to last week's press release, which contained mostly good news, was so brutal. While Telemark is on schedule, there were delays at other projects that tanked fourth-quarter production volumes. The company didn't come out and say this in the release, so you had to read between the lines.

Elsewhere in its press release, ATP detailed additional steps taken to shore up the firm's liquidity position and ensure that the firm stays within its debt covenants throughout 2010. This could be interpreted as a positive, proactive development, but the moves were taken by others as a sign that the company is in trouble. In this way, the release was much like a Rorschach test.

Being that I sang about ATP in our best stock for 2010 series, I'm obviously inclined to see the light here. At the same time, I think that even those with the deepest faith in this firm should consider taking out some insurance in the form of a protective put. It's a small price to pay to avoid the dreaded P-LOC.