ATP Oil and Gas - Imminent Bankruptcy

It appears that ATP Oil and Gas will be forced to restructure via a bankruptcy filing in the coming weeks, the Wall Street Journal is reporting.  Shares are trading well into penny-stock territory, at just $0.36.  Negotiations are said to be ongoing with senior creditors, and the company delayed its second quarter filing until matters become more clear.  The company will obtain a $600 million loan to remain liquid during legal proceedings.

At this point it’s unclear what, if anything, might be left over for the disheartened – and now impoverished – owners of the common stock.  The stock once traded at well above $50, and it’s a harsh reminder that “debt” can be the cruelest four-letter word in the English language.

My original write-up on ATP Oil and Gas is here.

Disclosure: At the time this article was published, the author was long ATP Oil and Gas options.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

ATP Oil and Gas - Looming Bankruptcy?

Shares of ATP Oil and Gas have been further pummeled in recent days, as many investors – and bondholders – believe that the threat of bankruptcy has increased from possible to likely.  Though the largest chunk of ATP’s debt doesn’t come due until 2015, the worry is that the company will not be able to make its interest payment in November of this year.

Bloomberg reported yesterday that a group of bondholders has interviewed advisors about the best way to approach a restructuring.  In addition, Streetinsider.com reported today, “According to Bloomberg, a group of bondholders are forming a group following delay in payment of interest on held debt.”  This appears to be a mistake, however, as the Bloomberg article says nothing of an actual delayed payment, it only addresses the fear among some bondholders that it will be unable to make the next $89 million debt payment come November.  Adding to fears were reports earlier in the week that ATP has hired Jefferies to assist them in their efforts to avoid a cash crunch.  The company hasn’t responded to requests for comment.

According to past comments from management - perhaps something has since changed - between now and November, the company expects to: 1) complete a sleeve shift on the A1 well at Telemark; 2) close a deal to finance/monetize the Octubouy platform; and, 3) bring 16.2 mboe/day of oil-heavy production at Clipper by late September/early October.  (If Clipper meets expectations the company could be producing around 45 000 boe/day.  Assuming a $50 cash flow margin, ATP would be generating over $800 million in cash flow, not including royalties and overrides.  The key question, though, is how much cash will belong to ATP including these claims on their cash). 

The company has continued to be able to add to liquidity in recent weeks, though on less attractive terms.  Fears of bankruptcy are nothing new for ATP, fears that have so far not come true.  However, without discovering what - if anything - has changed, its impossible to tell whether these are the last dark days before a new dawn, or if the company is doomed.

My original write-up on ATP Oil and Gas is here.

Disclosure: At the time this article was published, the author was long ATP Oil and Gas options.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

ATP Oil and Gas - Workover Success at Telemark

Though it came a week or so later than promised, ATP Oil and Gas delivered today on its pledge to increase production at the Mississippi Canyon Block 941 A-2 well.  Initial flow rates were 4000 boe/day, with a very attractive 90% of it in the form of oil.  Better still, the well is expected to produce in a range of 4000-5000 boe/day. 

Based on past statements, the company will now complete a sleeve shift on the A-1 well over the next few days.  If and when that occurs, the ATP will likely have achieved added production at the top end of the targeted 4000-7000 boe/day range.

Given the problems that have plagued the company at Telemark, it remains to be seen whether production meets expectations.  However, long-suffering ATP shareholders have reason to be cautiously optimistic, given the recent success in Israel, as well as today’s announcement.

My original write-up on ATP Oil and Gas is here.

Disclosure: At the time this article was published, the author was long ATP Oil and Gas options.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

ATP Oil and Gas - Exploration Success in Israel

Frazzled shareholders of ATP Oil and Gas received good news Monday, as the company announced success at its Shimshon well in offshore Israel.  The press release wasn't long on details, but the company discovered natural gas as hoped for.  Natural gas is a regional market, and the European and Asian markets currently offer significantly higher prices than the depressed North American one. 

The exploratory drilling represented a cheap, high-upside call option for the company.  Indeed, management has suggested that success in the Mediterranean has the potential to double the company's reserves, which are already strikingly large and valuable compared to its market capitalization.

It's unclear at this point how and when the cash-strapped company will proceed with developing its newfound asset, but more color will come in the third quarter, the company said.  However, since a portion of the company's liquidity is tied to the value of its reserves, it may mean added access to cash in the not-too-distant future.

If the company is able to successfully complete its Telemark workovers (they pledged to do so before June 30th, and, not for the first time, have failed to deliver on time) and its crucial Clipper wells, then the company is only suffering from a short-term liquidity crunch.  If not, there are fatal threats to its long-term solvency, though as long as they remain current on their interest payments, not until 2015.

In short, this was much needed good news, but white-knuckled shareholders are impatiently waiting for more of the same from Telemark in the coming days.

Disclosure: The author was long ATP options at the time this article was published.

My original write-up on ATP Oil and Gas is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

ATP Oil and Gas - The New CEO Resigns

Many frustrated shareholders of ATP Oil and Gas believe that poor management is to blame for the company’s sub-par performance, and were relieved and heartened last week when the company announced the arrival of a new CEO.  The feeling was short-lived.  Yesterday, ATP announced that the new CEO, Matt McCarroll, has left the company because the two sides were unable to agree on an employment contract.  ATP’s stock fell by 9% Friday, and Bloomberg reported that the company’s May 2015 bonds fell to 45.75 cents on the dollar to yield nearly 50% in intra-day trading.

It’s unclear what the company’s next move will be.  Presumably Chairman Paul Bulmahn will return to the CEO role, at least in an interim position.  The company may have made the initial change because of a lack of faith in Bulmahn, or out of a sense that McCarroll was such a rare and special talent that ATP was willing to adapt itself around him.  If it’s the former, then the company will likely begin a search for a permanent CEO immediately; in the latter case, it’s possible that ATP will stick with Bulmahn indefinitely.  The latter seems more likely, given the abrupt nature of Bulmahn's resignation, and that it coincided with McCarroll becoming available after selling his company. 
Often, a company's number two officer is a leading candidate for the CEO position when the incumbent moves on.  Based on recent developments, however, it seems safe to assume that President Leland Tate is not in the running to be the next CEO.

At minimum, this episode makes ATP management look unprofessional.  In addition, a pending change at the top is a distraction.  After all, management's time, attention and energy are among any company's most precious resources.  Without more detail, though, it’s difficult to draw many firm conclusions, but anxious shareholders will be in a state of uncertainty for the immediate future.

(My original write-up on ATP Oil and Gas can be found here).

Disclosure: The author was long ATP options at the time this article was published.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

ATP Oil and Gas - A New CEO

As noted earlier, ATP Oil and Gas had a lackluster first quarter, which prompted one analyst on the conference call to ask whether a leadership change was needed.   Since the question was directed at the three most senior leaders themselves, the question seemed more rhetorical than literal.  However, CEO Paul Bulmahn assured the frustrated analyst that he was not closed-minded about making changes at the top.  He wasn’t kidding.

On Friday, ATP announced that Matt McCarroll has joined the company as CEO.   According to the press release, McCarroll was the founder and CEO of “Dynamic Offshore Resources, LLC, a private company that focused on acquiring and developing properties in the Gulf of Mexico,” which was recently sold for $1.3 billion.  The press release also includes other background information, and creates a plausible impression that McCarroll has had an excellent career and is highly regarded within the industry.  Of utmost importance, he has experience operating in the challenging conditions of the Gulf of Mexico.  He must be reasonably confident that the company will remain a going concern, too, since he paid $5 million for 1 million shares in the company, though details on the precise terms of the deal will only become clear over time.

There has been scant coverage in the media on the move, so investors can only make an educated guess about what happened behind the scenes.   Clearly, the company’s production delays and operational missteps must have been a large factor in the decision, and the change doesn't come entirely as a shock.

Nobody could interpret the abrupt change in the company's highest office as an example of long-term succession planning, and most similar instances are cases of the CEO being forced out, even if assurances are made that the departure was due to pressing "personal reasons."  But there's reason to at least wonder if Bulmahn relinquished the CEO position willingly.  Bulmahn is the founder, largest shareholder and remains the Chairman of ATP, and may have been able to hold onto the CEO position if he’d wanted to.  This may have been a rare case of a CEO falling on his sword for the good of the company. 

Should the new CEO decide that significant changes need to be made on the operations side of the business, he will have a less difficult time making them than Bulmahn would have, since Bulmahn has ties with other senior managers in the company that go back decades and personally “hand-picked” some of them.   Wise and patient investors will be wary of major changes of on the financial side, though, either in terms of personnel or philosophy.  CFO Al Reese has proven that he’s extremely creative and resourceful and has managed to keep the company afloat –  though, admittedly, with little margin for error  –  without capitulating and doing a massively dilutive financing that would wipe out shareholders’ upside in the company.

The company should not cave to short-term, short-sighted shareholder pressure because of its disappointing stock price.  CEO's ought to hold a large block of their company's stock, and McCarroll's large purchase will align his interests with shareholders'.  However, the recent ATP press release states that he bought his block of stock directly from the company, which implies a 2% dilution to existing shareholders.  Hopefully, ATP's "equity offering" at the stock's current low price is a sign only of the desire to demonstrate the new boss's commitment, not a softening of their stance against a significant equity issuance.

The next few quarters will be very interesting ones for shareholders, both in terms of likely new production and any changes of direction operationally or philosophically.

(Here is my original write-up on ATP Oil and Gas).

Disclosure: The author was long ATP options at the time this article was published

Source: Company press release

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

 

ATP Oil and Gas - First Quarter 2012 Update

On Thursday, not for the first time, ATP Oil and Gas reported a disappointing quarter.  The stock closed down by nearly 10%, and lost slightly more Friday.  On the conference call, one analyst lambasted the executives for underperformance and demanded meaningful management change.  There's little doubt that he spoke on behalf of many unimpressed shareholders.

Though production for the quarter was within management's prior guidance, it was lower than in the year-ago period, and the second quarter figures to be lower still.  The stock's swan dive, however, probably resulted from reported troubles with the Telemark workovers.  Specifically, a piece of tubing is stuck in the A2 well, and they're having difficulty dislodging it.  Though management reaffirmed their expectation for a boost to production of 4-7 mboe/day by the end of the second quarter, it was a stomach-churning reminder to shareholders that the debt-addled company has little room for error.  Either the Telemark field is not the gem it was made out to be, or the steaming analyst was correct in his judgment of the ATP operations team.

Still, if the workovers are successful, production is expected to reach 29-32 boe/day.  When the Clipper wells come on line early in the fourth quarter - everything remains on schedule - production should reach 45-48 boe/day, and the company will be generating cash flow well above capex requirements.  With two wells at Gomez, one small-fry at Tors, and possibly more at Entrada in 2013, the company stands to increase production substantially in the not-too-distant future.

While operations caused more headaches, there was continued progress on the financing side.  Al Reese, the miracle-working CFO, secured added liquidity - the cash balance reached $225 million - and made further progress on financing and monetizing the Octabuoy platform.  At minimum, it seems likely that ATP will strike a deal to offload the last few hundred million dollars of capital spending onto a partner.

In an earlier post, I mapped out ATP's road to 2015.  Though littered with obstacles, if the company is able to bring the next few wells online and close one or more significant financial deals, shareholders will be handsomely rewarded.  However, a crushing debt load means the company has little room for error, in a challenging, unpredictable business.  It's no wonder the company’s shares are almost evenly split between longs and shorts.

Sources: 2012 Q1 conference call, press release, available at http://www.atpog.com/

Disclosure: The author was long ATP options at the time this article was posted.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog

ATP Oil and Gas - Value or Value Trap?

Put simply, ATP Oil and Gas is wildly, grossly, shockingly undervalued...if it doesn't go bankrupt.  How high is the value?  How big is the "if"?

The Value

Most oil and gas producers trade at or near their net asset value (NAV) over time (NAV is typically defined as the dollar value of 2P reserves, plus cash and investments, minus long-term debt).  In ATP's case, however, there's a Grand Canyon-sized gulf between NAV and market value.  At year end 2011, ATP's 2P reserves were valued at $7.3 billion, NAV was about $4.4 billion, while market value is presently a mere $325 million or so.  NAV is around $85 per share, but the shares currently change hands for under $7.  What accounts for such a striking discrepancy?  In a word: debt.

Debt - The Big "If"

The company's debt load is crushing, and it's accompanied by large interest payments.  At year end 2011, overall debt was $2.935 billion, with net debt at $2.882 billion.  Interest expense for 2011 was $299 million.  The large amount of debt includes the confusing presence of royalties and overrides, which many investors detest.  Fortunately, the vast majority of the company's debt doesn't come due until 2015, and the obligations have no significant maintenance covenants.  The royalties and overrides pay out over time as the company produces.  Though expensive, they have the advantage of transferring some risk to third parties, and they don't mature in a large chunk as bonds do.  As long as ATP remains current on its interest payments, management has several years to resurrect the company and its stock.

From Here to 2015

At current production levels, the company stands no chance of retiring its debts, which would leave it with a range of bad options, including a massively dilutive equity financing or even bankruptcy.  But current levels of production are poised to jump sharply, and soon.  Indeed, there are several near-term catalysts, and the company's long-term future will become much clearer over the next year.

The Catalysts

1) Increased production from existing wells

At the recent IPAA conference, the CFO said that the company expects 4-7 mboe/day of incremental production in Q2 2012 from two workovers at existing wells.

2) Monetization of Octabuoy Platform

Management believes they will sign a deal in the next couple of quarters to monetize the Octabuoy platform, which is currently being constructed and is expected to be deployed in the North Sea in 2014.  The company has suggested that a deal could be worth several hundred million dollars.

3) New production at Clipper

Of the soon-to-come catalysts, new production at Clipper will have the biggest impact.  Better still, the odds of success on schedule are high: after all, the two wells are both drilled, completed and have been tested at 16.2 mboe/day (62% oil).  The company expects the wells, which will be tied into a third party production platform, to come online early in Q4 2012.

4) New production at Gomez

Drilling is predicted to begin on two wells at Gomez starting in late 2012, though they're largely first-half 2013 events.  Each well is estimated to produce 5 mboe/day.

If all of these efforts are successful, in about a year ATP will be a transformed company.  It would presumably be producing about 50-55 mboe/day.  Assuming the lower end of that range, and a $50 netback, the company could be earning $900 million in cash flow (pre-tax).  This figure is well above ATP's ongoing capex program, which will allow the company to begin paying down its heavy debt burden, and would "unlock" some of the interest payments and convert them to cash flow.  At minimum, the enhanced financial strength will likely allow ATP to refinance its debt, likely at a more palatable interest rate.

On surer footing, the company will be able to develop its properties at Entrada in 2013-14.  In 2014, the company will begin production at Cheviot in the North Sea.  Peak production at the Octobouy platform is expected to be 25 mboe/day of oil, plus 50 mmcf/day of gas.  If current exploration in Israel yields results, there will be tremendous potential in the future.  Though exploration brings high risks, especially for a company that usually only develops proven reserves, success could add significant reserves and production.  Indeed, the company believes it could double current reserves.  CFO Al Reese has said the company expects production to reach 80 000 boe/d by 2015.  Assuming a $50 netback, ATP would be generating $1.46 billion in CF per year (pre-tax) at that rate.   

If all goes according to plan, where could the company be by the end of 2015?  Assuming a modest 6x multiple on CF of $1.5 billion, ATP would command an enterprise value of $9 billion.  Assume further that the company still owes $1 billion in net debt, leaving it with a market value of $8 billion.  Assuming 64 million shares outstanding (up from 51 million today), the company's share price would trade at $125.  This is high, to be sure, but not outlandish.  After all, the other customary measure of value, NAV, currently values the company at $85-90/share, on the present 51 million share count.

The Smaller "If"s

For this "road map" to lead to a financially sound business and a high-priced stock, many things must go right; more accurately, many things that can go wrong must not.  Some of the "if"s that might go wrong include: hurricanes in the Gulf of Mexico, which can disrupt both drilling and existing production; the chance that another prominent spill occurs in the Gulf and cannot be swiftly contained; regulatory, legal and compliance challenges; the inevitable technical difficulties of drilling in the deepwater; swings in commodity prices; macroeconomic and financial turmoil etc. 

These potential pitfalls are not hypothetical, either: all of them have already affected the company, and in a big way.  In fact, these past few years the company has been living "Murphy's Law," where everything that can go wrong, does.  Still, the almost-in-the-bag catalysts, if realized, will buy time and flexibility to withstand the inevitable future challenges.  Offering further safety, the company could partially monetize its other two platforms (both have already been partially monetized), sell reserves, bring in partners etc.

To Invest or Not to Invest?

In my judgment, the odds that ATP files for bankruptcy by 2015 are less than 25%.  Being very conservative, however, let's assume that they're 1 in 2.  If the company executes, and enjoys a little good luck, as outlined above, the stock could realistically reach $125 over several years.  For safety's sake, assume a more modest $75, though.  Using those assumptions, and adjusting for risk, what's the stock worth?  A 50% chance of gaining $68.50 ($75 minus the current $6.50 share price) is worth $34.25, minus a 50% chance of losing the entire $6.50/share ($6.50 x .5=$3.25) = $31.  A nearly five-for-one return over several years would be welcome in anyone's portfolio.  But beware: ATP is an all-or-nothing stock, and there is a real chance that it could plummet all the way to zero.

Disclosure: At the time this article was published, the author was long ATPG stock and options

Sources: ATP 2011 10K, Corporate Presentations, available at www.atpog.com

There's ongoing commentary on ATP Oil and Gas: a first quarter 2012 update; the arrival of a new CEO; the abrupt resignation of the new CEO; exploration success in Israel; workover success at Telemark; renewed fears of bankruptcy; imminent bankruptcy

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.