Opportunities in smallcaps header image 2

A pretty good bull-case for ATP Oil & Gas (ATPG)

October 13th, 2010 · No Comments

Once we started a lengthy analysis on this (which we never came round to finishing). A lot has happened, but cash-flow should increase nicely..
Rather than finishing our (now outdated) own research, we found this from a long-time bull. The one thing we can think of to be slightly less bullish is the high level of debt (but that looks still quite manageable) and the RSI of 80, suggesting some kind of pause could be imminent (if you look at that graph, it looks like $18 might provide a little resistance).

ATP Oil & Gas: Good Times Are Just Beginning
Devon Shire

There are events that are positive for companies and then there are events that transform companies. Monday ATP Oil and Gas (ATPG) had an event that has completely changed the company.

The company announced first production at its second Telemark well. The first zone is already producing at 7,000 BOE per day (this is an oil well) and they will be commingling this with a second zone which should push total production to 10,000 BOE or more.

Consider what this means for ATP’s revenue and cash flow:

The entire company production prior to adding this Mirage well was roughly 21,000 BOE per day, weighted 60% oil and 40% gas.

Rough estimate of the revenue from this production:

21,000 BOE x 60% = 12,600 BOE of oil per day

21,000 BOE x 40% = 8,400 BOE of natural gas per day

Revenue per year:

Oil – 12,600 x 365 x $70 = $321,930,000

Gas – 8,400 (50.4Mcfe) x $4 = $73,584,000

Total Revenue from existing production = $395,514,000

Rough estimate of revenue from Mirage well added Monday:

Oil – 10,000 x 365 x $70 = $255,500,000

So while production increases an enormous 10,000/21,000 = 48%, the increase in revenue and cash flows is even larger, $255mil/$395mil = 65%.

It pays to be an oil producer. And ATP has 5 more significant producing wells coming on soon.

And the pressure readings and flow test results don’t just mean that production will be better than advertised, it also means the reservoir is likely larger than expected.

I wrote in late August about a short squeeze coming:

The stock price then was $11 and we are now at $15. I believe the good times for shareholders are just beginning. As I’ve said many times, the big spending for ATP in the Gulf of Mexico to put in the pipelines and $700 million floating production unit is done. Now every dollar spent goes towards drilling a well, and that money quickly turns into increased cash flow and production increases.

50% of the float is still short. ATP has more financing than it needs with the recent ATP Titan deal. And on the very near horizon (within one year) for ATP are the following wells (things could get very interesting quickly):

MC754 – Expected to add 4,000 BOE in Q4 (already drilled)

Second Mirage well – 7,000 BOE per day

First Morgus well – 7,000 BOE per day

Gomez well at MC711 – 5,000 BOE per day

Second Gomez well at MC711 – 5,000 BOE per day

The lifting of the drilling moratorium will also likely be a big catalyst for ATP. I suppose that is obvious given they have another 30,000 BOE per day of production coming from locations where 100% of the required infrastructure is already in place.

Before the BP spill, ATP was trading at $23 with production at less than 20,000 BOE per day and no clear plan for financing future projects.

Now production is over 30,000 and financing for the indefinite future is in place with the Titan monetization and this massive cash flow increase. The share price however is $15.

So there is a 50% upside just to get back to pre-BP spill levels, and those levels were not expensive.

The BP spill delayed the production ramp up, but it is here now. At over 30,000 BOE per day and the MC754 well being added this quarter, ATP will have tripled its 2010 exit production run rate.

With ATP’s much improved and still rapidly growing production, more than enough financing and 50% of the float still short, there likely aren’t many stocks poised for a more rapid move upwards.

Disclosure: Long ATPG

Tags: ATPG