Drilling Down on ATPG
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On slide 6 of ATP Oil & Gas' (NASDAQOTH: ATPAQ.PK) September 12th presentation at the Rodman & Renshaw Annual Global Investor Conference, ATP values their shares at up to $116. With shares trading around $7.5 the market obviously does not believe the valuations presented at the conference. With such a discrepancy in prices, I thought a closer look at the company was warranted.
ATP provides two valuations in the presentation, the first using SEC oil and gas prices the second using current strip prices. In the first valuation, the company claims the value of its assets at $5.8 billion ($1 billion in infrastructure, $2.2 billion in probable PV-10 reserves, and $2.6 billion in proved PV-10 reserves). Netting out $2.3 billion in debt and dividing by shares outstanding, gives a value of around $68 per share. Using current strip prices, assets are valued at $8.3 billion ($1 billion in infrastructure, $3.3 billion in probable PV-10 reserves, and $4.0 billion in proved PV-10 reserves), which implies a share price of $116.
So why does the market not believe these numbers? ATP's valuation is only correct if they are able get the assets out of the ground without diluting shares, issuing new debt, or selling off assets. If ATP is unable to produce enough oil and gas to meet their interest payments, they would be forced to raise capital. However, current share prices imply (using the $5.8 billion asset valuation) an additional 3.1 billion in debt raises, a dilution of shares by 815% (raised at $7.5 a share), or $3.1billion in asset sales. These situations all seem far fetched, but keep in mind that equity would most likely be raised below current prices and assets would be sold for less than their value to the company (most of ATP's assets are cast offs that larger oil companies found unprofitable for them).
The last piece of information that adds to the puzzle is the over $2 million worth of shares bought by director Burt Adams in the second half of last year. If ATP were thinking of diluting shareholders, it seems odd that an insider would buy such a large stake in the company. Thus, this information leads me to believe that management believes no dilution is necessary to keep the company running.
So what does all this information tell me? I believe that management is too optimistic in its company's prospects. ATP management has historically over-promised and under-delivered, and I am skeptical, like the market, that ATP will be able to produce enough oil and gas to meet interest payments.
However, with that said, the market may still be overly pessimistic on the name. When discounting the asset values above and comparing with similar companies, there could be value in ATP's shares. Overall, the situation is too confusing for me to take a position, but at current prices I would be more inclined to play to the long side with options, taking a small position and defining my risk.
I do not have positions in any of the companies mentioned in this post.
