An Energy Multibagger in the Making

When we last checked in on ATP Oil & Gas (Nasdaq: ATPG), a big piece had just fallen into place for the highly leveraged oil and gas producer. That was the monetization of the ATP Titan, a massive piece of deepwater infrastructure whose construction consumed a great portion of the company's cash flows in previous years.

The Titan monetization immediately added $150 million of liquidity. Following the end of the third quarter, ATP brought online its second well at the Telemark Hub (where the Titan platform is located). This achievement will allow the company to draw down a further $100 million, most likely by year end.

This $250 million infusion will go a long way toward carrying ATP to the point at which it is finally cash flow positive. Another major factor is the production from this latest Telemark well, which averaged 8,200 barrels of oil equivalent (boe) of production per day in October, and exited the month producing 12,200 boe per day. Management made a point not to simply extrapolate the latter figure going forward, but this well will do wonders for average production in the fourth quarter.

The impact of this well on ATP's cash flow will be even more significant, given the 86% oil weighting. Only 58% of total third-quarter production, which averaged 21,100 boe per day, came from oil and condensate. These liquids continue to command a huge premium to natural gas, which explains the moves by onshore folks like Chesapeake Energy (NYSE: CHK) and Devon Energy (NYSE: DVN) to get as oily as possible.

Despite the deepwater drilling moratorium, which really threw a wrench in the plans of independents like ATP and Cobalt International Energy (NYSE: CIE), this company has skillfully managed its two major risks for 2010: managing its debt load and bringing Telemark wells online without a major hitch.

As I look ahead to 2011, the hurdles appear far less steep. The company will be able to draw down $50 million for each of the next two Telemark wells, and the term loan closed in June allows for a $350 million expansion in borrowing capacity, based on increasing reserve values. ATP doesn't have any current plan to draw on that facility, but it's nice to have the cushion.

While BP (NYSE: BP) has shown us that the improbable can and does happen from time to time in this business, I'm feeling more confident than ever about ATP's prospects.