This past summer, the BP (NYSE: BP) disaster brought down the entire oil and gas sector. Hurt worst were drillers in the Gulf of Mexico such as ATP Oil & Gas (Nasdaq: ATPG) and Callon Petroleum (NYSE: CPE). While Callon's stock has risen more than 35% since early June, ATP's stock has been on a tear, increasing from about $9 per share to more than $18 today -- a two-bagger in nine months. While past performance is not indicative of future results, I believe ATP Oil & Gas is still a two-bagger from here.

100% return
Finding the two-baggers of tomorrow means looking where others aren't -- steering clear of some of the most popular stocks, and focusing on the future, rather than the past. The sweet spot for finding two-baggers is among small-cap stocks. These are underfollowed by analysts and investors alike, making them the perfect hunting ground. ATP fits the bill -- the company is only followed by five analysts. Compare that to ExxonMobil (NYSE: XOM), which is covered by 20!

Sustainable competitive advantage
Unlike most oil exploration and production companies, ATP does no exploring. It only develops proven areas. This is a lower-risk strategy than E&Ps like Hyperdynamics (AMEX: HDY) and China North East Petroleum (AMEX: NEP) are taking, since it significantly reduces the risk of drilling and coming up dry. ATP's real competitive advantage is its experience drilling in deepwater. This advantage was recently on display when ATP announced it was acquiring partial ownership of five licenses in Israel's Levantine Basin for a minimal fee in exchange for operating the licenses. Without ATP's proven track record of success in deepwater drilling, this deal would never have happened.

Undervalued
ATP is sitting on large proven reserves of oil and gas. Using the industry standard PV-10 for valuing proved and probable reserves, and assuming a value of $1 billion for ATP's in-place infrastructure, you get a total value of $7.7 billion. Subtracting $2.3 billion for taxes on the PV-10 and ATP's debt of nearly $2.5 billion, you get an equity value of $2.9 billion. That's more than three times the current equity value of $935 million, a huge margin of safety.

Catalysts
Everything is finally falling into place. In the fourth quarter of 2010, ATP produced an average 24.9 MBoe per day, and this quarter the firm has expanded production at its Gomez hub bringing current production up to 29 MBoe per day.

Furthermore, great news came last Friday when the Bureau of Ocean Energy Management, Regulation, and Enforcement announced ATP was given permission to finish a well at its Telemark Hub known as MC 941 No. 4. This is only the third permit for deepwater drilling in the Gulf of Mexico since the moratorium was "lifted." If permits are finally being issued, we will hopefully soon see a permit for the fourth well at Telemark. From the day the permit was issued, the well should begin producing oil in 90-100 days, meaning cash will hit the balance sheet in the third quarter. Additional drilling is the big catalyst here. As more permits are issued, cash starts hitting the balance sheet, and probable reserves turn into proved reserves, investors should begin to fully value ATP.

My Foolish takeaway
If you are looking for a pure speculative bet on oil prices, something like Direxion Daily Energy Bull 3X (NYSE: ERX), which is up 200% since June, could keep outperforming if oil prices continue rising. If betting on oil isn't your thing, ATP is a smart, leveraged bet that I expect to be a two-bagger with or without rising oil prices.

Where is the next two-bagger?
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Dan Dzombak can be found on his Twitter account: @DanDzombak. He owns LEAPS on ATP Oil & Gas.

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