Friend of the blog Devon Shire (of the excellent Canadian Value) offers us his thoughts on what we believe remains one of the most attractive opportunities in the market today. Enjoy!
ATP Oil & Gas Announces First Production at Second Telemark Well
There are events that are positive for companies and then there are events that transform companies. Today ATP Oil and Gas 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:
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 today
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.
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. There is a big move ahead of the stock just to get to $23. And $23 was cheap by any measure.
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 $80 oil and $6 gas in 2011 and $85 oil and $6 gas in 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 is about $1.2bil
My estimate using this method then is:
- $4.5 bil ent value (4.5x EBITA)
- ($1.2 bil) net debt
- $3.3 bil divided by 56,000,000 fully diluted shares = $58.92 per share
Here is link to a spreadsheet that was posted on the internet with ATP’s production numbers that calculates EBITA.
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 $1.2bil
- $3.9billion divided by 56,000,000 fully diluted shares = $69.64
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 $1.2bil
- $4.0bil divided by 56,000,000 = $71.42
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.