Investment Analysis: ATP Oil & Gas (ATPG) – An Undervalued Stock with Major Price Altering Catalysts Imminent

Posted on 02/09/10 at 11:47pm by Above Average Odds Investing

The following is Above Average Odds Investing’s first guest post. As part of our mission to search for and uncover only the most attractive opportunities for the bargain hunting investor, we intend to showcase several guest write-ups going forward – but only when we feel the investment analysis/opportunity in question is particularly compelling and worthy of your attention. The first in this series is provided by Seeking Alpha Contributor Devon Shire, who is a chartered accountant in offshore banking and who has also happened to have written one of the most compelling investment write-up’s we have seen in a long time. Here’s Devon’s idea:

ATP’s (ATPG) Telemark project is on the verge of commencing production and is about to transform the company. It has been three years in the making, and it hasn’t been easy for the company to finance a $1.5 billion dollar project through the worst financial market crisis of a generation, the worst oil price collapse top to bottom ever, and a downstream pipeline shut in of 50% of production for 4 months due to the 2008 hurricanes.

But ATP has done it. The ATP Titan is complete but for a few finishing touches and the first well, which is a big one (7,000 barrels of oil per day, accounting for a 50% increase in ATP production) is drilled, completed and has had the production tubing run. And after riding through this journey as a shareholder of the company I am extremely excited about the very near term for both the company and the stock price.

The best news for me, and for you, is that the recent market selloff and incorrect reaction to what should have been viewed as a positive news release is giving us a chance to buy shares at $13 instead of the $20 that they were at 4 weeks ago. And to be honest, I’d be writing this article even if the shares were still at $20 because I believe they are that undervalued.

Does the market know this is coming?

	BOE / Day
Nov-09	13,667
Dec-09	13,667
Jan-10	18,333
Feb-10	21,667
Mar-10	31,667
Apr-10	31,667
May-10	40,167
Jun-10	40,167
Jul-10	40,167
Aug-10	44,667
Sep-10	44,667
Oct-10	44,667
Nov-10	49,167
Dec-10	49,167
Jan-11	59,167
Feb-11	59,167
Mar-11	59,167
Apr-11	59,167
May-11	59,167
Jun-11	59,167
Jul-11	59,167
Aug-11	59,167
Sep-11	59,167
Oct-11	59,167
Nov-11	59,167
Dec-11	69,167
Jan-12	68,667
Feb-12	68,167
Mar-12	67,667
Apr-12	67,167
May-12	66,667
Jun-12	66,167
Jul-12	65,667
Aug-12	65,167
Sep-12	64,667
Oct-12	69,667
Nov-12	74,667
Dec-12	74,667

ATP had this table in a graph in their presentation on Friday, February 5, 2010. The size and speed of the ramp up is even clearer in graph format. (The webcast and the slides are available here.) I knew this change was coming because I’ve been putting the numbers in spreadsheets repeatedly for months. But even for me it was a wake up call. Look at how this company is about to change with Telemark coming on production. It is not a subtle or gentle change.

Please understand that this graph doesn’t represent a 5 year plan that is going to take all kinds of capital investment. The $1.2 billion needed to get this project ready to go has been spent. This is development of proven reserves, not exploration. The risk was financing this project, not the production of the oil.

Gerry Schlief of ATP said at the February 5, 2010 presentation:

All of the weather sensitive risky work on the Titan is done…at this point we are basically tightening screws and putting on the final touches.

He was extremely confident that they would be producing by the end of Q1.

To get a sense for what this project means to ATP, consider that ATP average daily production in 2009 was 16,000 barrels of oil per day. They are going to be up to 30,000 barrels per day in just a couple of months and over 60,000 barrels per day somewhere around the end of 2010. Yes that is 60,000 vs 16,000. The impact on revenue and cash flows is even more dramatic, as Telemark is 75% oil versus current company production of just less than 60% oil. Yes, read that again. More dramatic than the quadruple in production that is coming. This just isn’t the same company once Telemark is on production.

Valuation

So production is increasing rapidly, but is that increase in production reflected in the share price?

I’ve looked at what the value of ATP shares should be every way that I can over the past 15 months. To me it’s never been difficult to see the huge undervaluation of the net assets here. The difficult part has been trying to determine if ATP could come up with the cash needed to complete Telemark. I thought they could, and I was correct.

All of my valuation approaches arrive at a pretty conservative value per share of $60 or more. Shares today are around $13 down from $20 a month ago. There is considerable upside to my $60 figure, as based on existing evidence it appears the Telemark reserves are likely to be increased significantly as more information is gathered through production.

Valuation Approach #1 – Cash Flow/EBITA multiple

Here are my revenue and EBITA estimates using the production profiles provided by ATP (See their website for production profiles of Gomez, Telemark, Cheviot to arrive at the oil/gas mix). I assumed $75 oil and $6 gas in 2010, $80 oil and $6 gas in 2011 and $85 oil and $6 gas in 2012.

	Total	Estimate	Oil	Gas
Year	Revenue	EBITA	Price	Price

2010	813,152,700	650,522,160	75	6
2011	1,197,285,600	957,828,480	80	6
2012	1,533,745,800	1,226,996,640	85	6

I’ve looked at the analysis done by several other people and if anything my numbers are actually light as I’m using more conservative production numbers than ATP has provided at their most recent presentation. My numbers use prior, more conservative estimates that I had made regarding production.

So to ballpark where ATP might be valued in the future I’ll use EBITA of $1 billion as it is where they will be running 2011/2012:

3 x $1bil = $3bil enterprise value
4 x $1bil = $4bil enterprise value
5 x $1bil = $5bil enterprise value
6 x $1bil = $6bil enterprise value

Net debt of the company on Dec 31, 2009 (see their latest presentation page 32) is about $1.1bil

My estimate using this method then is:

$4.5 bil ent value (4.5x EBITA)
($1.1bil) net debt
$3.4bil divided by 56,000,000 fully diluted shares = $60.71 per share

Here is link to a spreadsheet that was posted on the internet with ATP’s production numbers that calculates EBITA.

Valuation Approach #2 – Value per Flowing Barrel of Oil Equivalent

There are lots of variables. But per the Morningstar recap of the XTO/XOM transaction:

We presently expect 2009 average daily production of 2.89 billion cubic feet equivalent (82% natural gas). This prices the deal at a little more than $85,000 per flowing barrel equivalent. None of these measures appear unusual to us compared with other recent transactions.

If you look at the graph in the February 5, 2010 ATP presentation you will see that production hits about 60,000 barrels of oil equivalent for ATP around the end of 2010 and stays there, with Cheviot coming on production as Telemark starts to decline.

60,000 barrels x $85,000 = $5.1 billion
Less the net debt of $1.1bil
$4billion divided by 56,000,000 fully diluted shares = $71.42

Valuation Approach #3 – Net Asset Value using PV10 of Oil/Gas Production

ATP recently issued a press release updating the PV10 value of its proved and probable reserves using Dec 31 strip pricing.

The reserve numbers that ATP provides are prepared independently by 3rd party reserve engineers.

PV10 of proved and probable is $6.4 billion. Proved alone is $4.0 billion.
Value of reserves $6.4bil
Plus value of infrastructure $1bil
Less estimate of taxes 35% of PV10 $2.2bil
Less net debt $1.1bil
$4.1bil divided by 56,000,000 = $73.21

Note that the infrastructure consists of:

ATP Titan $680mil cost 50 year useful life just deployed
Telemark Pipelines cost $160mil
Canyon Express Pipeline replacement value $200mil
50% Interest in ATP Innovator $150mil

You are going to have to do your own thinking on how to include the infrastructure in the valuation. All of it has long term value. The two floating production units (Titan and Innovator) can be moved to other location and have long useful lives. The pipelines are always going to have value because there is little infrastructure out in the Deepwater and as development continues south and east these pipelines will be hooked into to transport production. Whether you include at the full amounts or less than that I’m not sure. I know it has value.

Conclusion on Value

To me the value of the assets less the debt is pretty obvious. They have over 200 million barrels of oil equivalent that is almost 60% oil. They have $1.2 billion dollars in infrastructure that has long term value. Do your own work on it and I think you will come up with something in the $5 billion type range for the assets whether you look at what someone might pay for it now or the value of the cash flows from production discounted back to today.

What I don’t factor in, but what is enormously important, is to be aware of the competitive advantage ATP has out at the Gomez and Telemark hubs. I value this company using the known reserves. I don’t apply any sort of estimate for future growth. There will be considerable reserve growth at these two hubs as ATP has the only game in town in the area surrounding Gomez and Telemark.

By this I mean that they have already invested hundreds of millions of dollars in infrastructure that is needed to produce from the Deepwater. They have the pipelines and they have the floating production units. That means that the nearby blocks are really only economical for them to acquire and develop as they control the infrastructure. No other developer can pay what ATP can for a lease block near these hubs and still be anywhere near as profitable. Creating this infrastructure was very expensive and stretched ATP, but it’s paid for now and make no mistake, it is going to create value for shareholders through future reserve growth.

There is also reason to be optimistic that the blocks they already control have considerable upside that is not factored into my valuation. Here is what I know to have potential to increase ATP’s reserves at the properties they already own:

Atwater 63 – This is part of the Telemark hub. There were 5 wells drilled on this property by the prior owners. None of those wells established water contact. So what that basically means is that we know it is bigger than ATP has currently recorded in its reserve numbers. We just don’t know how much bigger. It might be 10% bigger. It might be 300% bigger. Currently ATP has 20 million barrels of oil equivalent booked as reserves at Atwater 63.
Morgus – This is also part of the Telemark hub. The size of the reservoir at Morgus like Atwater 63 is not fully delineated. The discovery well has a very nice pay sand that is filled to the base and the delineation well is drilled too far downdip to find the oil water contact. Since the oil water contact is unknown, ATP can only book proven reserves to the base of the sand in the original well. Also, they can only carry one sand thickness (about 150’) down structure as the probable reserves even though there is some seismic evidence that the oil water contact is much deeper. That means the reservoir at Morgus could be much larger than what is on the books. Additionally, there is an adjacent fault block to the east that is untested, which is highly prospective since it sits between two known productive fault blocks. The next fault block to the northeast sits on another lease and is known as the Crosby field. Shell (RDS.A) is producing that field right now and flowing it back to some facilities they have way to the north. This untested block could add a substantial amount of reserves to the Morgus field if it is productive.
ATP acquired–in January–a 100% working interest in MC 710 which is immediately adjacent to MC 711. The acquisition of MC 710 provides ATP with the opportunity to further expand the Gomez Hub. If you care to listen to the ATP presentation from Feb 5, 2010 that is on their website you will find that they are quite optimistic about this block.

You get the point. The reserves around these blocks are going to increase. None of that is factored into my valuations of $60 per share plus. And those increased reserves are incredibly profitable for ATP as they are going to be acquired very inexpensively and the only additional cost for ATP is drilling. And should someone else discover oil and gas near these hubs they will connect to the ATP Innovator or the ATP Titan for production which means ATP will earn processing fees and likely get an equity interest in the property as well.

Why is ATP So Undervalued ?

So what is the problem then ? Why is the stock market valuing the existing assets and the known future growth at such a discount ?

I will start a little way back in time to explain how ATP’s share price became undervalued. Then I will focus on a recent selloff that provides us with an even better bargain at exactly the right time.

The summarized answer to this question though is that there was never much doubt about ATP’s net asset value. The doubt was whether they could maintain the liquidity and have access to the cash needed to make sure they stuck around to realize the value from those assets. There was once reason for that doubt. There no longer is. They have reached the finish line, Telemark is set to produce.

ATP’s share price was in the $40 to $55 range for most of 2006, 2007 and the first half of 2008. Three external events and two internal events then drove the share price down, and down for good reason. These events occurred starting in June 2008. They consisted of:

The worst financial crisis in a generation closed the capital markets.
The worst collapse in oil/gas prices ever, occurred.
Hurricanes Ike and Gustav badly damaged downstream pipelines and the Gomez hub which represented almost half of ATP’s production was shut in for 4 months.
Right before the worst of the financial panic, the start of the oil collapse and the hurricanes, ATP took on a $600mil “asset monetization” tranche of debt that over the past year and a half did it’s best to strangle the company (I’ll explain how shortly).
While the asset monetization debt was strangling the company ATP had also to find a way to continue developing Telemark which was essential to getting production and cash flow back to where it needed to be.

In June 2008, as ATP was really starting to ramp up Telemark spending, they entered into a $600mil “asset monetization” tranche of debt in addition to their regular $1bil debt tranche. This was too much debt for ATP to carry, but their plan at the time was to take on this debt to continue funding Telemark development and then pay it down very quickly by selling off pieces of assets.

At the time they took on the $600mil debt, they had already had interested parties in a data room to look at buying pieces of certain ATP properties. Hard as it is to believe now with the share price at $13 after having been as low as $2.78, ATP management was frustrated at the then stock price of $40 per share. They thought the asset sales would showcase the value of the ATP property portfolio. If they sold off 10% of their assets for x, then the market could figure out that 100% of their assets are worth 10x.

Looking back on it now, the idea to sell off slices and slivers of the properties to showcase value was a pretty solid one. The idea to first take on this “asset monetization” tranche to bridge the period before the assets were sold was however a very, very bad one. Well, that isn’t exactly true. It was very, very bad because immediately after they took on the debt it was followed by a financial panic, an oil and gas price collapse and two hurricanes that destroyed their cash flow for four months.

The financial panic meant that any suitors for the properties couldn’t obtain financing for an acquisition. And the collapse in oil and gas prices meant that even if they could find someone with cash who was looking to buy, they weren’t looking to pay a reasonable price.

The asset monetization tranche wasn’t just a problem because of its poor timing. It was extraordinarily bad because it had a requirement that 75% of any proceeds from asset sales had to go towards repaying this tranche of debt. In other words, should something happen to ATP’s cash flow (such as a damage from a hurricane) they couldn’t do much in the way of selling off assets to help liquidity because most of the proceeds from any sale had to go to debt repayment first.

The following is something of a month by month time line of events as they unfolded which I think helps understand why the share price ended up at such a discount as against the value of the assets:

Spring 2008: ATP Share price $40s – ATP puts all major properties (worth billions) in a data room and invites interested parties to bid on pieces of assets. The plan is to accept the best bids for pieces of the properties to help the stock market understand what the value of 100% of the properties are. This is in an effort to get the market to increase its valuation of ATP shares from the $40 to $50 range they have been stuck in for a couple of years to what ATP management believes is a more appropriate and higher share price.
June 2008: ATP share price $40s – Debt ramped up to $1.6 billion, but $600 million is the asset monetization tranche which ATP plans to repay fairly quickly. They have already had parties in the data room and have a good idea that there is significant interest at good prices.
Aug 2008: ATP share price $30s– At an Enercom presentation, ATP tells the world that they have learned through data gathering (production, seismic etc.) that their properties actually contain 78 million more barrels of oil equivalent than the 150 million barrels the December 2007 reserve reports had described. That is an increase of 40% and that’s on top of an already undervalued share price !! This falls on deaf ears as the world is now starting to fall apart, oil prices are heading south, and ATP as a highly leveraged oil producer, becomes a popular short-selling target. Note that subsequent reserve reports at year-end Dec 2009 and Dec 2010 have confirmed the increase in reserves of 40%.
Sep 2008: ATP share price $20s – Hurricanes Ike and Gustav hit. No damage to ATP properties, but the downstream pipelines are damaged. Belief at the time was that Gomez (main GOM producing property) and the shelf properties would only be down for a few weeks.
Sep 2008: ATP share price $16 – Cue the financial panic. If you are planning to raise funds from the financial markets you can now forget that for the next 9 months. The capital markets are closed. All of a sudden selling those assets to pay down the asset monetization tranche of $600mil became an obvious problem.
Oct 2008: ATP share price $12 – ATP sells 80% of its producing Wenlock/Tors property in the UK for a very nice price (north of $6.50 per proven Mcfe) resulting in proceeds of about $430 million USD (the sale was in GBP). By the time the sale closed, ATP received something like $400mil USD due to the big USD increase caused by the flight to safety. In retrospect, it was a great accomplishment to close this for a good price in the middle of the meltdown, but giving up that much production proved to be a problem as the Gomez pipeline closure lasted much longer than ATP had been told by the 3rd parties repairing the pipelines.
Oct 2008: ATP share price $7 – Gomez and much of the GOM shelf are still shut in as the pipeline damage is much worse and repairs much slower than expected (Gomez eventually put back on production Jan 19, 2009). At this point, with Gomez shut in and because Wenlock/Tors production–which was something like 25% of ATP’s total production–has been sold, ATP is now operating with a fraction of the production volume it had only months ago. Its cash flow is gone. And remember, selling assets doesn’t help much because the asset monetization debt takes the proceeds. Of course who could sell assets in October 2008 anyway?
Nov 2008: ATP share price $5 – oil and natural gas prices now really accelerate their collapse down to levels that don’t work for almost all non-Opec producers. The oil that ATP was selling in the $100s months before when they made their plans for Telemark and the asset monetizations, is now in the $30s, natural gas down from $12 to $3. Not only is their production a fraction of what it was, so is the price they are selling that production at.
Dec 2008: ATP share price $5 – $400mil Wenlock deal closes, but 75% of those proceeds, $300mil, have to go towards repaying the asset monetization tranche so ATP doesn’t get much help for its liquidity from that. They monetize their hedges for about $100mil with oil almost at the very bottom. Excellent timing and very useful in allowing them to keep spending what they need to.
February 2009: ATP share price $3 -even with Gomez back on production there is very little cash coming in the door because oil is selling for next to nothing as is natural gas. ATP can’t do anything to immediately increase production by way of drilling some new wells to increase production as the cash flow that they do have really has to go towards the completion of the ATP Titan for Telemark. They can’t sell any properties at anything other than rotten prices to help raise cash, either because all of the players in their industry are also cutting back on spending drastically or can’t access financing. ATP management somehow resists the urge to give away any properties on the cheap.
March 2009: ATP share price $3 – A flicker of hope in the dark, ATP somehow, at the darkest moment of the financial crisis, manages to sell a 50% interest in the ATP Innovator to GE at a respectable price of $150 million. The original cost on the Innovator was $300mil. An accomplishment to get this done but it doesn’t do much for liquidity as 75% of this has to go to repay that nasty “asset monetization” tranche of debt.
May 2009: ATP share price $7 – Creative financing at its best and maybe what was the key moment in getting ATP through their challenge. ATP management strikes a deal with its key vendors to perform $200 million of the work on Telemark for $200mil of future production revenue from the property. Good deal for both parties, ATP can now go full bore with Telemark to get it going in early 2010 and the vendors get to keep their assets busy. Note that this agreement by the vendors also shines a light on the quality of the Telemark property, as these vendors have agreed to take on full production risk in exchange for hundreds of millions of their services. If Telemark doesn’t produce as expected, these guys don’t get paid. So you can bet they gave the Telemark reserve data and production profiles a fine toothed comb before agreeing to this.
June 2009: ATP share price $8 – the capital markets loosen a little bit and ATP raises about $75mil by issuing common shares. Painful dilution to be sure at these prices given the value of their net assets, but Telemark is now going full steam ahead and the cash is needed. Of course that asset monetization tranche eats 25% of the cash per the debt agreement.
Early September 2009: ATP share price $12 – the Ocean Victory drilling at the Mirage block of the Telemark hub finds 266 net feet of pay which is triple what the original well found. This turns out to be almost 30 million BOE of proven and probable reserves and is a big increase in value per share and provides a catalyst for ATP shares to move higher.
Late September 2009: ATP share price $20 – ATP takes advantage of a much higher share price and raises $225 million from an equity issuance and convertible preferred issuance as well as $80 million from the sale of the Gomez pipelines. Again painfully dilutive given the net asset value per share, but this large chunk of cash really puts the company on more solid ground.
November 09 through January 10: ATP share price $16 to $20 – ATP now has the cash to do some work in addition to Telemark. It performs a recompletion at Gomez and drills a well at Canyon Express. Now they have set the stages for production increase not just from Telemark but also from Gomez and Canyon Express.
January 2010: ATP share price $16 to $20 – ATP sells a royalty interest in Gomez for $140 million which almost finally fully eliminates the asset monetization debt .
February 2010: ATP share price $13 down from $20 just a few weeks ago – ATP announces excellent news for shareholders. Telemark is on schedule to produce before the end of March, they have added $140 million of cash from the Gomez royalty interest, have added over 20 million barrels of proven reserves in their year end reserve report, are on track for a monetization of an interest in the ATP Titan for hundreds of millions and have added 5,000 barrels of production per day from Gomez. In other words, they told the world that they have officially weathered the storm, their production is about to explode upwards from Telemark, and have a huge cash inflow from the sale of the Titan coming to further strengthen their financial position. But there was one negative thing. They were one month later than expected completing the well at Gomez so production will miss Q4 targets that were supplied at the last earnings call. The stock market ignores the information about the huge future production increase being secure and the half a billion dollars of oil reserves added (likely value of 23 million of proved reserves added) and the share price tumbles to $13 because they were a few weeks later than expected on one well.

ATP Management

My personal investing belief is to never invest in any company unless the man steering the ship has pretty much all of his own assets at risk alongside shareholders.

This is true for ATP obviously or I wouldn’t have invested. The CEO and Chairman Paul Bulmahn founded the company in 1991 and started operations in his own living room. He is the largest individual shareholder, owning roughly 12% of the company. He has a huge personal fortune as well as his personal pride and ego on the line with ATP, so he is truly an owner/manager.

The other key players are CFO Al Reese and President Leland Tate. Mr. Reese has been with Mr. Bulmahn from the very beginning and Mr. Tate joined ATP in the late 90s and also has decades of experience.

When a company gets close to the edge like ATP did through 2009, obviously fault has to end up at the feet of senior management. And that is certainly the case here. They took on too much debt. But there was an incredible amount of bad luck involved as well. Their intention was to quickly reduce the debt added in June 2008 from $1.6 billion to $1 billion through asset sales. Imagine taking on that debt with the intention of repaying it quickly and then within a month or two having the financial panic, 2 hurricanes that decimate production and oil prices collapse like never before. Having all 3 of those external events happen at the same time is truly unbelievable.

I will criticize them for putting too much debt on the company. But I won’t criticize them for how they worked their way out of the problem. They did not panic and sell assets for horrible prices. They engineered some very creative financing methods to minimize the dilution of value through equity issuance. They did an excellent job of lifting their hedges at the bottom of oil prices and at the same time keeping their natural gas hedges in place. Think about what they accomplished during this period. They reduced debt by almost $600mil and at the same time funded the development of a property that is going to triple or quadruple the production of the company.

They also obviously have a skilled team when it comes to acquiring properties. Gomez has been a home run. They started with 15 million BOE of reserves and it has turned into more like 60 million through extensions and add-ons. And Telemark is already proving to be the same. They had about 40 million of proved and probable at the time they acquired it and it is already up to 73 million with more to come. Leland Tate and his team have created huge shareholder value with Gomez and Telemark, both of which were acquired for next to nothing.

Recent Company Update

I started writing this article about a week ago. The timing couldn’t have been better as the recent sell-off down to $13 has provided an even better bargain just as we have received an update that Telemark is in the final countdown to production.

I previously mentioned the recent press release by the company that provided an update. The stock price sold off within seconds of it hitting the wire. I found the speed of the selling incredible. As it was, it dropped literally within seconds. It took me 3 times and at least twenty minutes to read through the press release because of the amount of information in it. I know this company very well, and the fact that others thought they understood it well enough to sell within about 10 seconds is ridiculous. It’s also ridiculous because the stock sold off on extremely positive news.

Here were the main points from the press release :

Telemark which will transform the company is on schedule for production this quarter. I thought this was the most important part of the press release.
The monetization of the ATP Titan is still on track. ATP is planning to bring in a partner to own part of their floating production unit. This is going to bring at least $300mil of capital back to ATP that it currently has invested in the Titan. It has a huge impact on ATP’s financial health.
The company added 20 million barrels of proved reserves in 2009 which roughly translates to $10 per share of increased value for shareholders. I estimate this using about $25 per barrel which is likely very conservative given no incremental spending is needed to retrieve this oil and because it will be produced very quickly. $10 per share increase in reserves on a $16 stock price.
ATP strengthened their balance sheet by $140mil by selling an overriding royalty on Gomez production.
They amended at a cost of $9mil the debt covenants to include economic gains on sales of assets in 2009 so that the covenants will never be an issue again. Obviously, it’s good that these covenants are gone from the picture. But embarrassing as well, because they had to do this before and obviously didn’t get enough of a change. But to be clear, this amendment takes any covenant issues completely out of the picture for good.
ATP missed Q4 production guidance because the commingling of a Gomez well was completed 6 weeks later than they had guided and because they had not completed clearing ice blockage at their Canyon Express property by year end as expected. Note that the Gomez well was finished in January and is producing better than expected and that Canyon Express will come on in February.

ATP got slammed by the analysts covering the company for this press release and the stock got punished. I’m not going to spend much time on it because I think it is just ridiculous. ATP told us they added $10 per share of value through an increase in proven reserves and the stock market is more concerned with whether the Gomez commingling was finished November 20 or January 10. There isn’t even a loss of revenue, it’s just that it happened 6 weeks later. How can that outweigh the importance of another 20 million barrels or proved reserves, or finding out Telemark is on schedule, or that they improved their balance sheet by $140mil ?

I’m happy to add to my position at $13 instead of $20. I haven’t bought any shares since they reached the NPI agreements with the vendors in May 2009. I was nervous about Telemark being on schedule and after this press release and the very detailed update at the February 5, 2010 Credit Suisse conference I am certain we will see first oil near the end of March.

Don’t get me wrong, I was upset by the Gomez recompletion being late. I think my reaction was likely exacerbated by the stock market reaction. I contacted the company immediately afterward and actually had a chance to speak with CFO Reese. I would describe him as being extremely frustrated with the stock market reaction to the press release. He thought that this press release was one that contained perhaps the best news the company had ever announced at one time. I think the fact that the stock market thought bringing one well on 6 weeks late was more important than adding 23 million barrels of proved reserves was the most frustrating to him. And it is hard to not see where he is coming from.

Recent Stock Sales By the CEO and CFO

In late December CFO Reese sold about 65,000 shares which represent 20% of his holdings. In early January CEO Bulmahn sold about 900,000 shares which represent 12% of his holdings.

It certainly didn’t please me to see these insider sales and I think that was also part of why I contacted the company. Of course there never is a good time for the CEO or CFO to sell shares according shareholders.

CFO Reese hasn’t ever really sold off any shares since the company went public. But his share sales actually didn’t surprise me. I knew that he had built a new house in 2009, something he committed to in 2007. When he committed to the house he had planned to sell a few shares to pay for it. When 2009 rolled around and the share price was in the dumper he took on debt instead of selling shares. So I’m not going to judge him too harshly for raising some cash to get rid of personal debt he didn’t want in the first place.

CEO Bulmahn’s share sale is more annoying to me. I’m not concerned about him dumping shares, nor do I see it as a sign there is something wrong (in fact it is likely a very good sign nothing is wrong unless he enjoys legal action). I just think that when the company is in the final stages of completing a project of this magnitude the CEO doesn’t need to be selling shares. I guess when you are inside the company you don’t understand that the market and investors take something like this and assume the worst. I feel he should have waited until after Telemark was complete.

I asked CFO Reese about Bulmahn’s sale and he said it was for tax reasons. He also made sure to point out that there is no good time for a CEO to sell shares, but that it is bound to happen sometimes. Bulmahn has sold a few hundred thousand shares every couple of years so this sale was not unusual. His last transaction was actually a purchase in March of 2009. He still has $80 million plus invested alongside shareholders, a lot more than that if the share price increases. His heart and soul are in this company so I’m not worried about whether he is aligned with me as a shareholder. I just wish he could have waited a few more months.

Potential Risks

1) Hurricanes – My number one risk 6 months ago would have been liquidity or access to cash. Gomez and Telemark are both out in the Gulf of Mexico. Gomez has been through several severe hurricanes and suffered minimal damage. The real damage is done close to shore on the shelf to the downstream pipelines which means ATP’s properties can’t produce into them. There is loss of production insurance to mitigate this risk and by the time the 2010 hurricane season rolls around ATP is going to have a much different looking balance sheet and a shut in would not be so damaging.

2) Oil prices – ATP is required by their debt covenants to be 60% hedged, and they have always been pretty aggressive hedgers. Deepwater producers aren’t attractive at $30 oil though, so if that is where you think it is going, ATP is not for you. Both Gomez and Telemark have had such dramatic reserve increases that they will prove economic at much better oil prices than most Deepwater properties. I’m very bullish on oil so exposure to oil prices suits me just fine.

3) Debt – ATP is still carrying debt. The asset monetization tranche is very close to being paid off and will be gone completely as soon as the Titan is monetized in the very near future. But be aware that they will always carry some debt as they have a very low operation al risk profile. ATP’s reduced operations risk comes from only acquiring proved reserves where they can access pre-existing data from prior drilling and can accurately forecast production. ATP also controls all of the properties that it is involved in so that they can control the timing of all capital expenditures.

4) Telemark doesn’t produce as expected or is delayed – I think this is extremely unlikely. If it happens, the risk is dilution through either convertible debt or equity. The reserve data has been examined by ATP’s vendors who agreed to accept payment out of production (if the vendor isn’t an expert at reading the data they will have employed engineers who are), the production profiles are prepared by 3rd party reserve engineers, ATP released the images of Mirage/Morgus/Atwater at an analyst meeting last August and aren’t shy about letting people peek under the hood. As far as a delay goes, I encourage people to listen to the conference presentation from February 5, 2010. They’ve got a handle on this. There will be oil late in March.

5) Titan monetization doesn’t happen – This inflow of cash in the next couple of months is important in helping the balance sheet as Telemark production rockets up. CFO Reese has been so public about his confidence in getting this done that I really have no concern here. He did exactly as he said with Wenlock, the Innovator and Gomez in the year that I have been following them closely. I asked him about it when we spoke and my understanding is that they have negotiations on with 4 or 5 different parties. The structure of the deals are different. They basically know the deal will be with one of those parties, but they aren’t 100% sure which party or which structure at this time. CFO Reese also mentioned that they are already in talks about the Octobuoy. I get the impression that the way the Octobuoy construction is going to be financed will be much less taxing on ATP ‘s cash flow and balance sheet. Problems with the Titan monetization could increase the risk of dilution.

Catalysts to Rocket the Stock Price Are Imminent

I hope I did a decent job of selling you on the undervaluation. I don’t think it is difficult to see that 200 million barrels of oil equivalent and $1.2 billion dollars of long lived infrastructure are worth 4 billion or 5 billion. Especially when you consider that both Gomez and now Telemark are completely developed.

The exciting part though is that there are huge catalysts on the horizon that will start this stock price moving up, and moving up quickly in my opinion. Perhaps within a couple of weeks.

Here is what is coming:

Flow testing the Atwater 63 well. Per the conference on February 5, 2010, ATP expects flow testing this month. This is going to get the stock market’s attention. ATP guidance says this well will produce at a rate of about 7,000 barrels per day. When you consider the entire company produced at a rate of 13,600 barrels per day in Q409 you have to think a 50% production increase on the prior quarter is a decent catalyst ! The flow test will also confirm for everyone that Telemark is real and the $1.2bil ATP has invested in it is actually going to finally result in some cash flow. So look for 7,000 barrels per day from a flow test late this month.
Titan monetization. I don’t know when it will happen but I am expecting it to be sometime around first production from Telemark. If it is an Innovator type deal this will be about $300mil of cash brought back to ATP. That radically improves their balance sheet. I would look for this late in March or maybe early April.
Canyon Express brought back on production. There are 3 wells currently shut in at Canyon Express as the company clears some ice from the pipeline. These will add another 3,000 barrels of production per day. Again this is significant for a company that produced 13,600 barrels per day in Q4.
First production from Telemark. The flow test results signal that Telemark is here, first production announcement will also excite investors. As of Friday last week, they were very confident about production in late March. This was just after getting hammered for being late on a well in Q4. I think they must know they have it in hand for March.
The details of the Atwater 63 well. Remember that Atwater 63 has had 5 prior wells drilled by the previous owner. None of those found water contact. If this well comes on at much higher rates than the 7,000 barrels per day ATP has suggested, we might get confirmation that this reservoir contains upside that is not currently recognized in the reserve report.
First production from the second well, which is at Mirage. This is the property where ATP found 30 million more barrels of oil equivalent than they previously had in the reserve reports. The guidance on production from this well months ago was for about 4,000 barrels a day. I think that is quite likely given the reservoir is much larger than what was previously known, that this well comes on a much better rate than that. They expect this well about 45 days after Atwater 63, which would suggest some time in May.
I think the table from before says it all. Telemark has arrived.

	BOE / Day
Nov-09	13,667
Dec-09	13,667
Jan-10	18,333
Feb-10	21,667
Mar-10	31,667
Apr-10	31,667
May-10	40,167
Jun-10	40,167
Jul-10	40,167
Aug-10	44,667
Sep-10	44,667
Oct-10	44,667
Nov-10	49,167
Dec-10	49,167
Jan-11	59,167
Feb-11	59,167
Mar-11	59,167
Apr-11	59,167
May-11	59,167
Jun-11	59,167
Jul-11	59,167
Aug-11	59,167
Sep-11	59,167
Oct-11	59,167
Nov-11	59,167
Dec-11	69,167
Jan-12	68,667
Feb-12	68,167
Mar-12	67,667
Apr-12	67,167
May-12	66,667
Jun-12	66,167
Jul-12	65,667
Aug-12	65,167
Sep-12	64,667
Oct-12	69,667
Nov-12	74,667
Dec-12	74,667

Summary

ATP has been investing in Telemark for 3 years, and the total investment is $1.2 billion. During that time, all of this investment has not resulted in a drop of oil or an Mcf of gas being produced. But believe it or not, when you complete a project of this size, and turn on the tap, the rewards of patiently investing and developing appear quickly.

The stock market is not aware of this huge transformation. You can’t see this 4, 5 or 6 time increase in revenue and cash flow coming from a stock screen. In fact, by every ratio you can imagine, ATP looks awful in a stock screen. You have to know the company to know what is coming. When the revenue and cash flow from Telemark appear to the world, ATP is going to be re-priced in a hurry.

If you want to jump on before this news starts coming out, you likely have a 2 or 3 week window