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ATP Oil & Gas Corporation
We initiate coverage on ATP Oil & Gas Corporation (Symbol: ATPG), with a ‘Hold’ recommendation,
despite the fact that the weighted average valuation (based on DCF, NAV and Comparative valuation)
for the company is indicating an upside of 85% from the current price level of $8.14/share. While the
company has been exhibiting improving operational efficiency in terms of increasing EBITDAX margin,
on the back of better cost control and high crude oil price realization, excessive leverage makes the
company susceptible to elevated default risk, especially if the demand/oil prices drop significantly on
the backdrop of the faltering global economic growth, thus acting as a deterrent for significant upside
potential. Our recommendation is based on the premises that despite the existence of the demand
side risk, we expect the oil prices to remain at elevated level for the rest of 2012, mainly on account of
the escalating geopolitical tension that is unfolding in the middle eastern region, especially in Iran,
which has the potential to aggravate the supply side disruption in days ahead and hence would
prevent crude oil prices to correct significantly from the current level of $125/bbl on Brent. However,
we feel that post 2012, i.e., 2013 onwards, there is a significant possibility of oil prices coming down,
as the economic conditions weaken further in western Europe on the back of massive austerity
measures and China experiences a hard landing on the back of faltering export demand.
Rationale for Recommendation
Though significant upside looks capped, downside also seems limited on the back of
high oil prices and possibility of production ramp up: In the context of the current
geopolitical environment we feel that the oil price would remain at elevated level for the rest of
CY 2012, with full year average to hover near $123/bbl in Brent. In addition to this, with 4th well
in Telemark Hub coming into production, work-over in 2nd& 5th well in Gomez to boost yield
further and Cheviot to start production from the 4th quarter of CY2012, the company is expected
to produce 32 Mboe/day in 2012, compared to ~25 Mboe/day in the previous year, signifying an
increase of production by 28% per day, thus boosting profitability and cash flow.
NASDAQ-GS ATPG
Market Price/share $ 8.14
Market Cap. $ 420,694,850
Free Float (M) 39.60
52 Week High $ 19.2599
52 Week Low $ 5.53
Dividend Yield (%) NA
Beta 1.53
Face Value $0.001
Shareholders Pattern Percentage
Institution 50.60
Insider 13.88
ATP’s business model is less risky compared to other E&P players: As ATP primarily
acquires proved undeveloped assets (PUD) in the Gulf of Mexico, Mediterranean Sea and North
Sea, as such, its success rate in the past has remained very high of 98% and we expect that the
company, due to its vast pool of experience, would be able to maintain such impeccable strike
rate in the future as well.
Owns working interests in reserves with significant potential: As on 31st December 2011, company owned proved and probable reserves of 194.4 MMBoe, out of which 65% consisted of oil reserve. The strip PV-10 of these reserve has been estimated at $7.3 billion. Independent appraisers gave pre-tax SEC PV-10 estimate at $4.2 billion, for the Proved only reserve.
Extensive expertise in operating Deep-water well: The company has been ranked 4th in deep-water exploration and production operation in Gulf of Mexico wellbores. This expertise has enabled the company to explore new global opportunities.
Extensive investment in a fleet of re-usable floating deep-water infrastructure: The
investment of $1 billion made by ATP in floating rigs enables the company to maintain flexibility in its deployment schedule and enables it to exploit opportunities without time and cost overrun.
Extensive plan to boost liquidity in the company: The management has taken series of measures in the form of execution of overrides, expansion of 1st lien, overrides on clipper pipeline, entering into swap deal and the intention of entering into sale and lease back on Octobuoy, etc., to infuse $ 815 million of liquidity in the company.
Key Risks to Our Recommendation
Resolution to the Iranian & Middle Eastern Problem: Oil faces a significant downside risk if the
Iranian and Middle Eastern problem dissipates and the supply normalizes.
Global, especially Chinese & European, growth concerns cause oil demand to collapse: Oil
prices will correct significantly if the Chinese & European growth falters very significantly. On top of that
if the US too loses its recently found nascent growth momentum, oil prices would be set for a crash,
especially if supply side issues gets sorted out in the mean time.
Shrinkage in global liquidity: The Company faces significant default risk if the company is unable to
arrange for external fund at competitive cost, as internal cash generation is far from adequate to meet
its debt obligations.
Changes in regulations: The Company operates under significant government regulation. Any change
in regulation by the countries under whose jurisdiction the company operates may lead to significant
financial loss for the company going forward.
Company brief
Incorporated in 1991, ATP Oil & Gas Corporation is engaged in the business of acquiring and developing proved but undeveloped (PUD) properties with the objective of extracting crude oil and natural gas. The company predominantly has oil and gas assets in Gulf of Mexico and North Sea. However, the company has recently acquired 40% working interest in Israel. The offshore field has estimated 2.5-3.4 Tcf of gas reserve. As on December 31, 2011, the Company had estimated net proved reserves of 118.9 MMBoe, of which, approximately 75.9 MMboe (64%) were in the Gulf of Mexico and 42.9 MMBoe (36%) were in the North Sea. The reserves were comprised of 78.6 MMBbls of oil (66%) and 241.5 Bcf of natural gas (34%). ATP’s natural gas reserves are split between the Gulf of Mexico with 57% share and the North Sea with 43% share. Of the total proved reserves, 8.3 MMBoe (7%) were producing, 19.0 MMBoe (16%) were developed and not producing and 91.6 MMBoe (77%) were undeveloped. ATP’s average working interest in its properties as on December 31, 2011 was approximately 81%.
Project details
ATPG has presence mainly in three geographies where it is engaged in exploration and production of oil
and gas from offshore oil fields. The company has significant presence in Gulf of Mexico (from where it
generates 96% of its production) and North Sea (generating 4% of its production). Recently, the
company has acquired 40% working interest in Mediterranean Sea off the coast of Israel. The field is
estimated to have 2.5 to 3.4 TCF of natural gas reserve.
The following graph shows the reserve status of these fields:
Reserve Distribution (in MMboe)
Source: Company Presentation
Gulf Of Mexico (deep
water), 125.2
Gulf Of Mexico (shelf), 5.3
North Sea, 63.9
Gulf of Mexico
The following diagram shows the area of activity in GoM by ATPG
Source: Company Presentation
Gomez Hub
This well is field is being operated using ATP Innovator platform. The field was acquired in 2003 and commenced its first production in 2006. The well is still producing from initial zones at the water depth of ~3,000 ft. There are approximately six wells on production. The DOCD for well MC 711#9 and #10 has been approved on January 20, 2012 for exploration, and exploration work is set to commence from late 2012-early 2013. Well MC 710 received its exploration plan in November 15, 2011. The hub has proved reserve of 19.5 mmboe. Telemark Hub In this hub, well MC 941, MC 942, & AT 63 were acquired in 2006. Following this, the company acquired AT19 & AT 62 wells in 2008. The company operates in these wells with a 100% WI. The Initial production was started in March 2010 at the Telemark Hub. In 2011, three wells were already in production, however recently the 4th well MC 942#2 has also been brought under production. The hub is estimated to have proved reserve of 38.8 MMboe. Clipper Hub ATPG acquired this hub back in 2008. Pioneer Natural Resources discovered this field in 2005. It is under the water depth ~3,450 ft and the company operates with a 100% Working Interest (WI). So far two wells, viz., GC 300#2 (completed in July 2011) and GC 300#4 (completed in December 2011) has been flow tested and a pipeline to third party platform is scheduled to be operational from Q3 2012. First production is expected from both wells by late 3Q2012 or early 4Q2012. Flow test resulted in 22.1 MBoe/d of recovery rate. The hub has proved reserve of 8.2 MMboe.
Entrada The field was acquired in 2010. It is at the water depth of ~4,550 ft. Previous drilling indicated the presence of logged hydrocarbons in 7 Well bores. Currently the company operates I this field with 100% WI and the development is currently scheduled for in 2013-2014. The company has made application for Development Plan in accordance with recent regulations and is currently in process. The hub is estimated to have a proved reserve of 1.9 MMboe.
North Sea The following diagram shows the area of activity in North Sea by ATPG
Source: Company Presentation
Cheviot
The field is expected to come for production from 2014, with an anticipated peak production of 25
MBbls/d and 50 MMcf/d. The management, in the 4th quarter conference call, has guided that the
production from this field is expected to commence from 4th quarter of 2012. ATP operates with a 100%
WI and has already filed field development plan in April 2011. The field is estimated to have 38.9
MMboe of proved reserve.
Mediterranean Sea
The following diagram shows the area of activity in North Sea by ATPG
Source: Company Presentation
Shimshon
The company operates in this field with a 40% working Interest. The company expects to conduct initial drilling by Q2 2012, possibly by May 2012, as rigs have already been contracted for this purpose, as informed by the management in the conference call. ATPG works in this field along with its partner Isramco Negev, with ATP’s portion of $24 - $29 million. The field is estimated to have natural gas reserves of 2.5 - 3.4 TCF.
Business Model & Strategy
ATP Oil & Gas follows a very unique business strategy, whereby it targets and acquires those properties which have proved reserve but have not been developed. It likes to acquire acreages, which are either near discovered and producing assets or in close proximity to developed markets for oil and natural gas. The company also likes properties which have infrastructure in place, such as pipeline, production/processing platforms, etc., or is so positioned that it would not be too difficult to install its own pipeline for oil and gas evacuation. The company prefers to acquire those properties, which despite having proved reserve, might not be strategic for the larger companies. As such to enhance focus on strategic assets large companies sell off such assets, often at a cost which might be less than even the exploration and development costs incurred by the previous owner. Given the strategy of acquiring properties that contain proved reserves, or where previous drilling by others indicated the presence of recoverable hydrocarbons, the company’s operations typically are lower risk than other exploration-focused companies operating in Gulf of Mexico and North Sea. As the company has the strategy of operating almost all of the properties in which it acquires a working interest, the company has significant influence on planning and timing of project development and
execution. Moreover, due to its asset acquisition policy practically all of the properties have previously defined and targeted reservoirs, resulting in the elimination of development plan and the time needed in typical exploration efforts to locate and determine the extent of oil and gas reservoirs. In addition to this, the company has pioneered the Hub concept of production. The company has already invested over $1 billion in infrastructure at Gomez and Telemark Hubs development and more than $492 million in Cheviot Hub development. This has endowed the company with a competitive edge to expand its interest in those areas over other production companies that do not have such investments.
Industry overview & Outlook Soaring oil prices and a perpetually increasing global demand for energy are creating a ripe environment for the oil & gas exploration & production E&P industry to increase its spending and ramp up production. Historically the E&P market has experienced relative underinvestment, but as growing global energy demand puts pressure on supply capacity, new capital will be needed to find more oil & gas, and to boost production. With the oil price once again at a high price, oil company revenues are increasing and the rewards of investing in E&P for the time being looks lucrative. In 2010 the global oil & gas exploration & production market was worth $434.3bn. It is estimated that the industry would generate revenue of $4.28 trillion in 2012. This is up from $3.03 trillion in 2007, yielding growth of 7.1% per annum. Revenue is expected to expand by 0.3% in 2012, but that modest growth follows extremely large gains over the previous two years, when prices surged. Most of the gain in revenue over the five years through early 2012 is due to increases in oil and gas prices well in excess of the general inflation rate. However, industry performance has been highly volatile over this period. The industry's profit is expected to be $3.29 trillion in 2012 and it will contribute about 5.0% to global GDP. As per the survey conducted by Lumsden & McCormick, LLP, among CFOs of US based E&P companies, the reason for this growth expectation for 2012 are attributable to factors as depicted in the following pie chart:
Source: Lumsden & McCormick, LLP Report
While on the back of high oil prices the industry growth is expected to be buoyant in 2012, the industry faces multiple challenges, which has been depicted in the following pie chart. The chart presents the result of survey conducted by ‘The Economist Intelligence Unit’ among oil & gas industry participants.
Increase in Oil & Gas Prices
32%
Discovery of significant new resource plays
25%
New production technology
16%
Demand for oil & Gas12%
Access to Capital or
Credit7%
Mergers & Acquisitions
4%
Others4%
Industry Growth Drivers for 2012
Source: The Economist Intelligence Unit’ Survey Report
A survey conducted by Lumsden & McCormick, LLP, among the CFOs of the top E&P companies in the US, also reveals that 2012 is going to see more investment in natural gas compared to oil. The reason being the industry stalwarts expect that the US domestic as well as the global demand for natural gas will outweigh the demand for oil in the coming year. In the survey, forty percent of CFOs plan to increase their capital investment in unconventional resources, such as shale plays, compared to the 10 percent who will increase investment in domestic and foreign offshore exploration operations. The greatest number of survey respondents (29 percent) also note that they will focus on unconventional resources as a way to increase value for stakeholders. The following graph shows the areas for increased capital spending in 2012
Source: Lumsden & McCormick, LLP Report
16%
15%
14%
10%9%
9%
8%
8%
7%4%
Top 10 Barriers to Growth
Rising operating cost including insurance premium
Shortage of skilled professionals
Increasing Regulation
Limited access to capital/finance
3%7%
40%
27%
Offshore Exploration in US waters
Offshore exploration in foreign waters
Exploration in non-conventional
areas, like shale gas
More environmentally
friendly exploration & processing technologies
Areas for Increased Capital Spending in 2012
Oil Price Outlook for 2012
We feel that the international oil prices are going to remain elevated in 2012 and early 2013. We base
our conclusion on the premises of the following rationale, which are enumerated in the ensuing
paragraphs:
a) We expect the ongoing crisis going on in the Persian Gulf and especially Iran to escalate significantly going forward. The ongoing ostentatious threats, sanctions, embargoes and the shadow war currently ongoing on, have heated up the situation further and given the fact that Iran is walking a very thin line, further aggravation of the situation may lead Iran to impose blockade of the Straits of Hormuz, even if it is only for a very limited period of time. The short-term consequences, however, would still be dramatic, with the possibility of oil price to set new all-time-high levels of up to USD 200, would not be very hard to imagine.
b) Receding reserve and lack of new oil finds make oil prices susceptible to significant upside risk in
the face of geopolitical tensions. Lately we have observed that with the exception of Saudi Arabia, no country holds any significant reserve capacities. However, since Saudi Arabia has never exceeded the barrier of 10 million barrels/day mark on a sustainable basis, we are exceedingly skeptical if the country can actually produce 12.5 million barrels/day. Risks are that it will take a supply side crunch to find out whether the alleged reserve capacity actually exists to the extent proclaimed. At any rate, the decision of IEA to tap the strategic reserves during the Libya crisis is a clear indicator of the strained supply situation.
c) On top of these, it goes beyond saying that we do not see any impending possibility of alternate
fuel substituting oil any sooner given the current investment volumes and lip service. On the other hand, in the long run, as forecasted by Julian Simon, high oil prices do cause shifts in efficiency and technology. However, this theory can also be challenged considering the possibility of the operation of ‘Jevons Paradox’.
Competition & Competitive Advantage
As it has been mentioned earlier in this report that ATPG is an independent oil and gas exploration and
production company, as such it competes with all the major and independent oil and natural gas
companies for property equipment, labor acquisition and also financial resources, as the industry is
highly capital intensive in nature. In US alone there are more than 14,000 oil & gas companies, many of
them are small businesses, active mainly in the United States. However, only about 10 biggest dealers
account for one-third of all production as suggested by the data released by Natural Gas Supply
Association and the U.S. Energy Information Administration.
Even though, companies like Exxon Mobile, Chesapeake Energy, Anadarko, Devon Energy, etc., are much
larger and have substantially greater financial and other resources, the company maintains competitive
edge against these big players on account of its strategy to invest only in PUD assets, which are non
strategic to big players and are too big for small players to bid for. The primary advantage of the
company lies in acquiring assets at lower cost from the mineral interest owners and in the investment, it
has already made in floating rigs. This enables the company to deploy these rigs with minimum wastage
of time. This strategy also helps the company to saves cost in drilling exploratory wells as it acquires
properties, which already have proven reserve. These coupled with its experienced workforce in drilling
and operating offshore oilfield development and production are a few attributes that this company has,
which differentiates it from the other smaller or even larger players operating in this line of business.
Financials Snapshot Amounts in $ ‘000
P&L Consolidated 2011 2012E 2013E 2014E 2015E 2016E
Total Operating Revenue 687,208 1,045,316 898,408 760,287 693,114 856,554
Total Operating Expenses 534,515 695,619 627,197 633,304 582,857 660,636
Operating Profit/Loss 152,693 349,697 271,211 126,983 110,257 195,918
Interest Expenses & Other Financial Charges 326,411 373,293 386,943 320,474 282,970 306,129
Profit Before Tax -147,209 6,404 -85,732 -163,491 -142,713 -80,211
Net income for ordinary share holders -210,482 -15,071 -135,178 -236,543 -209,457 -127,981
EPS Estimate in $ -0.29 -2.62 -4.58 -4.06 -2.48
Balance Sheet Consolidated 2011 2012E 2013E 2014E 2015E 2016E
Assets
Total Current Assets 187,143 368,448 268,224 257,464 159,720 237,560
Net Oil & Gas Properties 3,137,421 3,203,773 3,198,808 3,071,907 3,069,059 3,024,411
Other Assets 64,210 51,836 48,898 46,136 58,063 49,854
Total Asset 3,388,774 3,624,058 3,515,931 3,375,507 3,286,842 3,311,824
Liabilities
Share Holder's Equity 166,389 151,318 16,140 -220,403 -429,861 -557,841
Temporary Equity 115,820 115,820 115,820 115,820 115,820 115,820
Total Debt & Other Obligations 2571950 2661950 2751950 2842450 2990649 3088943
Total Current Liabilities 534,615 694,970 632,021 637,640 610,233 664,902
Total Liabilities 3,388,774 3,624,058 3,515,931 3,375,507 3,286,842 3,311,824
Cash Flow Consolidated 2011 2012E 2013E 2014E 2015E 2016E
Total Cash Flow From Operating Activities 197,091 385,430 379,718 269,278 297,394 128,983
Total Cash Flows From Investing Activities -399,753 4,581 -129,876 1,722 -223,409 145,452
Total Cash Flows From Financing Activities 112,049 -305,712 -319,362 -252,893 -157,690 -230,754
Increase/decrease in cash & cash equivalent -89,017 84,299 -69,520 18,107 -83,705 43,681
Opening Cash Balance 154,695 65,678 149,977 80,457 98,564 14,859
Closing Cash balance 65,678 149,977 80,457 98,564 14,859 58,540
Revenue/Cash Flow Generation Required to Sustain Debt Servicing
2012 2013 2014 2015 2016
Revenue 1674146 1492802 1593751 1228171 3653319
Cash Flow 617293 630943 564474 526970 550129
Valuation (in $/share basis)
Market Approach (EV/EBITDAX based) 29
DCF 23
NAV 13
Wt Average (80% weight to NAV and 10% each to DCF and MA)
15.6
Major Financial assumptions
P&L
Revenue: 2012 revenue has been calculated taking 32 Mboe/day production per day. For 2013,
10% decline rate has been assumed. In 2014 new fields are going to come on stream so 5%
increase in production has been assumed (assuming poor demand environment) i.e., 30
mboe/day. For 2015, 6% decline rate has been assumed and in 2016 assumed the company
would produce 32 mboe/day. For realization please refer to the pricing deck in the excel sheet in
Revenue (driver sheet) tab. For gas revenue, conversion rate of 1 mcf to 1 mmbtu has been
used. Revenue is assumed to be net of hedge. The difference between market price and the
realization for gas produced out of North Sea is assumed to be because of lower calorific value
(probably because of the fact that it is lean gas so 3% discount has been allowed).
Lease operating expenses: It is considered on the basis of lease expenses/boe. Have taken 15
compared to 14 in 2011 because the management has guided for higher workover cost in 2012.
Please refer to excel sheet in Cons-P&L, BL, CF tab row 12 for details.
Exploration expenses have been taken as a percentage of operating revenue as maintained in
2011.
Administrative expenses has been considered at $45000000, as in the conference call the
management guided that this expense is going to remain more or less same level in 2012 as it
was in 2011. I extended that assumption till the whole of explicit projection period.
DD&A expenses have been taken on per boe basis.
Impairment cost has been taken as a percentage of operating revenue.
Accretion to debt obligation has been assumed to remain in $17000 and later $17500 till 2016.
The average of the last 4 years of other non-recurring operational expenses has been taken and
assumed to remain constant till 2016.
Average rate applicable for the last 3 years as a percentage of long term obligation has been
taken and applied consistently over the explicit projection period.
The deferred and current tax rate for 2011 has been taken as a percentage of PBT and is applied
consistently over the explicit projection period.
Balance Sheet
Receivable has been calculated as a percentage of revenue. Average of last 3 years ratio value is
taken to remain constant and has been applied accordingly in calculating receivable for the
explicit projection period. The same approach has been adopted for calculating other current
assets
Other assets have been assumed to be 2% of revenue and has been calculated accordingly.
Payable has been calculated using the average of the ratio payable to operating expenses from
2009 to 2011.
Other liabilities has been showing increasing trend. Conservatively I have taken other liabilities
to operating expenses at 35% and applied in calculating other liabilities consistently over the
explicit projection period.
Deferred financing, the cost that is incurred in issuing long-term debt (even ORRI & NPIs), which
are capitalized has been showing rising trend. I have calculated this cost as a percentage of debt
issued for 2010 and 2011, taken the average of it and applied consistently over the explicit
projection period.
Long-term debt obligation: In the post Q42011 earnings conference call, the management laid
out plans to boost liquidity using ORRIs and expansion of 1st lien to the extent of $335 million
and in the annual report, it was mentioned that the company would make repayment of $244
million in terms of NPI repayment and ORRI repayment during the year. I have assumed that the
company would continue to issue net debt of 91 million each year over the explicit projection
period.
Asset Retirement Obligation: I have assumed in 2012 and 2013, $35 million and in 2014, 2015 &
2016 $35.5 million will be transferred to current liabilities, while $17 million and $17.5 million
will be transferred from the P&L, translating in net reduction of $18 million each year over the
explicit projection period.
Valuation
Market Approach
ATPG uses successful effort method of accounting. I have used EV/EBITDAX as a valuation parameter. EBITDAX is EBITDA before exploration costs for successful efforts companies. As for full cost firms, exploration costs are embedded in depreciation and depletion, so EBITDAX equalizes both accounting types, and hence makes comparison more compatible. Exploration costs or dry hole cost in ATPG is represented by the accounting head impairment of asset and I have added that to EBITDA to arrive at EBITDAX.
The data for EV of comparable companies has been taken from Yahoo Finance site, and EBITDA has been used as proxy of EBITDAX for these companies.
NAV
Only proved reserve has been considered in the calculation of NAV. This data has been obtained from the Collarini Reserve Report given in the ATPG website. From 2017 onwards, a decline rate of 10% has been assumed in production.
Discount rate used is 10% as per SEC guideline.
From 2012 to 2020, 0% tax rate has been assumed because I assumed from 2021 onwards the company would start earning profit in the PBT level and not before that. Thus, ATPG would be eligible for tax payment post 2020. Effective rate of tax has been taken at 42% (as American Oil & Gas companies pay at that rate) as per the latest API report titled ‘Putting Earnings into Perspective Facts for Addressing Energy Policy’ published in January 2012.
DCF
Required rate of return assumed at 30% with risk free rate assumed at 2% in line with yield of
10-year treasury note & risk premium assumed at 28%, mainly on account of very high leverage
& high default risk that the company has.
The future cash flow of the company will be dependent on accretion of producing reserve, since
oil is a scares resource, one cannot assume the company to grow its cashflow perpetually at
certain rate. So I kept the terminal cashflow to be constant for perpetuity.
Terminal cashflow has been assumed to be at a discount of 65% to the cash flow in 2016. The
reason being the company has been increasing its cashflow by admitting new debt and
monetizing its asset. I feel this means of funding might not be sustainable in the future. As such,
I took conservative estimate of cash flow for perpetuity.
In addition to all these, I have made certain simplifying assumptions such as, all production are sold
(which is in line with the actual practice), revenue to be net of hedge, no effect of foreign exchange gain
or loss on account of translation etc., no effect of deferred tax given in the projected period, (considered
the total of current and deferred tax and calculated it as a percentage of PBT and considered the ratio as
effective tax rate, for the explicit projection period). No explicit treatment of hedging (be it fair value or
cash flow hedge) has been done.
Recommendation & Valuation
We recommend ‘Hold’ on the stock despite the valuation arrived at using fundamental parameters
indicate an upside of 85%. We feel that the value arrived at considering EBITDAX parameter is indicating
high target price because we expect 2012 revenue and earnings for the company is going to be robust
on the back of high realization of oil prices and increase in production. However, we are of the belief
that such high oil prices are not going to be sustainable in the long run and a significant correction to the
oil prices is going to have severe impact on the company’s cash flows. Especially if we consider the high
debt to equity ratio that the company has and the significant quantum of cash outflow that the
company would have to bear because of debt servicing. As we feel that the earnings of the company is
going to peak in 2012 and taper between 2013 to 2015, the upside to the company’s stock can be
capped at 15-20% from the current level. Moreover, the company is currently trading at EV/EBITDAX
multiple of 6.13 based on 2011 earnings, as compared to the average EV/EBITDA (based on TTM
earnings) of 5.23 of the five companies that we have taken as our sample space, it looks comparatively
expensive.
Rating
Sell – return expectation is less than 5%
Hold – return expectation is between 5%-20%
Buy - return expectation is above 20%
Methodology
This report has been prepared primarily depending on data and information available from secondary sources,
such as Company Annual Reports and analyst presentations, Nasdaq and Yahoo Finance website, etc. Information
relating to the exploration and production industry has mainly been collected from E&Y reports that are available
in the organization’s website. In addition to these, I have referred to various articles that appeared in news paper
and business magazine relating to the industry in question. Most of the latest information relating to ATPG has
been obtained from the press releases that are posted in the company’s website. Additionally, I have also collected
information relating to the company from the webcast of the post 4th
quarter earning conference call, hosted by
the company management and available in ATP’s website.
Industry related data and 2012 industry forecast have been obtained from reports published by Lumsden &
McCormick, LLP and The Economist Intelligence Unit’ Survey Report.
Oil & Gas Exploration & Production Industry seems to be very unique in terms of accounting principles. To get better insight into the accounting and valuation aspect of ATPG, I have frequently referred to the book ‘Petroleum Accounting: Principles, Procedures & Issues’ 5th Edition, by Dennis R. Jennings, Joseph B. Feiten and Horace R. Brock. I have also referred to an article by Alex W. Howard titled ‘Oil and Gas Company Valuations’.
