The Thrill Ride Thats ATPG

Like roller-coasters?  Then you will love high-beta ATP Oil and Gas Corporation (ATPG). After bottoming around 2.5 in early 2009 it rocketed up to 23 by April of this year.  But, by mid May it was back below 8.3. Currently bouncing around in the 11 - 12 range.  Consider yourself warned!  This stock is not for the faint of heart.

Why the huge drop since April?  Well, the BP spill disaster suddenly brought into question the feasibility of deep water drilling.  ATPG has invested heavily in deep water rigs such as its 7-story ATP Titan at its Telemark Hub.  Since the companies focus in the last few years has been deep water many investors apparently feel ATPG is in trouble

ATPG is also highly sensitive to oil prices, oil prices which are now considerably off  April's high of $87/barrel.  Now, throw in high debt invested in deep water rigs and you have a recipe for extreme uncertainty.   Since the company's main focus is in the Gulf of Mexico (they also have a North Sea presence) the shock waves of the disaster are severely rocking ATPG.

This perfect storm of a drilling moratorium, the almost certainty of increased regulations, lower oil prices, and high debt has combined to swamp ATPG's stock.  However, even perfect storms subside eventually and the U.S. really needs oil.  Any oil!  Deep water oil is one of the few oil frontiers left in North America, perhaps the world. The BP disaster gushes up to 60,000 barrels a day. The oil is spewing up under its own pressure, pressure so strong even the industry's best engineers can't tame it.  This has been going on for two months and looks like it will be going on for a considerable time yet.  We need this stuff.  Trouble is we need it in tankers, not the ocean.

Although ATPG had no part in the disaster it will surely be affected by drilling moratoriums and inevitable  increased regulations. Recently a 6 month moratorium was put on deep water drilling.  Louisiana wants it lifted sooner. Those who know how government operates say it will be a year or more before it is suspended. Markets hate uncertainty.

In a press release on June 4 (see release here in its entirety) ATPG provides an update on how the company is affected by the drilling moratorium.  Two wells at the Telemark Hub and one natural gas well at the Canyon Express Hub originally scheduled for 2010 will have completion and production pushed back to 2011.

The company sold $1.5 billion senior secured second lien notes in April.  Most was used to refinance debt with approximately $131 million to increase liquidity.  Capital Expenses of between 50 to 100 million will be saved due to the suspension of the three wells while moratorium costs are estimated at under $30 million.  ATPG has show resilience in managing debt in the past, having gotten through low oil and stock prices in early 2009.

Right now anti drilling fever is at a peak as oil executives are grilled by Congress on TV.  Oil prices are low due to dollar strength.  The anti drilling chorus will probably decrease over time, especially as Americans see increasing gasoline prices due to supply curtailment.  Considering the unaddressed deficit situation situation in the U.S. will probably drive the U.S. dollar considerably lower over time.  These longer term trends will work to the advantage of ATPG.

ATPG has done well.  In 2009 it replaced 376% of production with new reserves.  The company claims to have a 98% success rate in bring production from fields.  ATPG does not do exploring, rather they purchase properties with proven reserves, then bring them into production 

Oil prices appear to be heading up long term (but possibly down in the short term due to recessionary factors).  The moratorium on drilling will be removed eventually.  Uncertainty and risk?  Yes!  But the potential for large  price increases in ATPG stock while the downside is limited.  My advice wait for a big down day in the price of oil then buy!

The roller coaster ride isn't over.  If you want to buy I recommend the dips (big ones), then be prepared to bail at the peaks.  Its kind of like Six Flags and Las Vegas combined.