Idea: Oil & Gas Production - ATP Oil and Gas [ATPG]

ATP Oil and Gas [ATPG]

Business: ATP are an oil and gas production company. They buy leases where they drill and operate oil and gas wells, mostly in the Gulf of Mexico and the North Sea.

Investment Thesis: ATP, along with lots of other Gulf of Mexico oil producers, had a huge setback from the Deepwater Horizon spill. Since drilling and production is ATP's business, the moratorium has prevented them from growing.

Buy Catalyst: The Federal Moratorium on new drilling in the Gulf is being lifted, and new permits are being issued. ATP's value will increase significantly as they complete new wells and begin production.  The big opportunity was during the spill, but the drilling moratorium has extended the opportunity. The BOEM issued ATP's permit Friday Mar 18.

Why this is a good idea

• Price is discounted because ATP's business has been at risk due to the Gulf spill and drilling moratorium. This is about to resolve itself.
• New wells are about to come online (Telemark) for production.
• ATP owns and operates deepwater drilling rigs (Titan, esp.) which are in high demand.
• ATP is a small-cap stock ($980M) with lots of room for growth.
• Management is seeking to develop other oil-producing locations in Israel that aren't drilled-out like the Gulf and North Sea.
• Long-term, the price of oil has and will continue to rise, increasing the revenue of producers like ATP.
• ATP produces a significant amount of natural gas, which is currently at historic low prices in the U.S.  Another long-term upside as usage and price eventually rise.

Downside: These guys had some serious cash flow problems because they couldn't operate their Titan and other drilling rigs during the moratorium, and couldn't move it elsewhere because it was (and remains) under contract. They did some creative financing and used the rig as security for a $150M revolving credit facility, which kept them afloat but also adds a big debt load.

Why this is a bad idea

• ATP is in a "do or die" situation where they have mortgaged their production equipment for cash, and must start producing in order to pay that back. Silver lining: another company mortgaged their plants and equipment and has done very well in the last few years.
• The company has significant debt (>3x market cap), and is currently losing money. I believe that Q4 was a "kitchen sink" quarter (get all the bad stuff in the same quarter's results), which will make future results look better.
• Drilling is very capital intensive, and bad wells, accidents or other unforseen costs can easily push costs up and beyond available capital.
• Q4 included a $20M expense for "pipeline hydrate remediation" that was billed as one-time. More unplanned expenses could come up.

Sell Catalyst: ATP are drilling in the Gulf and North Sea, which are well-explored areas. Production will decline and eventually become un-economical even with higher oil prices.

I bought this at: $17.35 on Mar 17, 2011

Links: 
Most recent earnings call (Q4 2010)
George Fisher Article - Above average risk, controversy and potential reward (Nov, 2010)

George Fisher Article - Above average risk, controversy and potential reward, Part II (Mar, 2011)