ATP calls asset coverage 'substantial,' touts recent convertibles deal

By Paul Deckelman

New York, July 19 - ATP Oil & Gas Corp. is back in business in the Gulf of Mexico, having received two of the first 11 deepwater permits the federal government issued for renewed drilling there in the post-BP drilling-rig accident era, and is also moving forward with its drilling activities in the North Sea and, most recently, in the Mediterranean Sea off the coast of Israel.

The Houston-based energy production company also remains active on the financial front. It recently did a convertibles deal, among other liquidity-raising steps.

And despite carrying a fair amount of debt on its books for a company of its size, the company has "substantial" asset coverage that "more than adequately" covers the debt that it has, ATP's chief financial officer, Albert L. Reese, Jr., declared to investors attending a Global Hunter Securities LLC conference in San Francisco on Tuesday.

"ATP gets a hit, I will admit, for our debt component as it relates to our overall capital structure," Reese acknowledged. "But in doing so, we're using the capital for development. We're not using it for exploration," which is a considerably more risky venture than development of already proved or provable reserves of oil and natural gas - an area in which ATP claims a 98% success rate.

Reserves exceed net debt

According to information provided by the company as part of Reese's presentation, as of the end of the first quarter on March 31, ATP had total debt of $1.98 billion. This consisted of $206.2 million of first-lien term loans, slightly more than $1.49 billion of 11 7/8% second-lien senior secured notes due 2015 issued in April of 2010 - which priced just the day before the disastrous BP oil rig accident and subsequent well blowout in the Gulf of Mexico that so badly affected companies like ATP, even if they had no role in the debacle - and $279 million of outstanding term loan debt on a facility the company entered into last fall, which is secured by its big new ATP Titan deepwater drilling rig. With unrestricted cash and equivalents at the quarter's end of $182.1 million, ATP had a net debt level of about $1.8 billion.

According to the company's 10-K annual report for 2010, ATP's assets - its drilling rigs and other infrastructure, 126.4 million barrels of oil equivalent of proved energy reserves and 84.9 million barrels of probable reserves - had a value of about $5.85 billion given where energy prices were at that time: $79.43 per barrel of crude oil and $4.38 per million BTU of natural gas on the New York Mercantile Exchange and $6.58 per million BTU for North Sea gas for the British market. That converts to about 3.3 times the net debt. Using energy prices in effect as of June 1, including oil prices at $103.79 per barrel and higher natural gas prices as well, the assets had a total value of about $8.68 billion, or 4.8 times net debt.

"All of the proved reserves we have here more than adequately cover any debt that we have, with all of the upside, everything above the net debt line [on the graph he showed the audience] available for the equity shareholders," Reese asserted.

Convertibles boost liquidity

The CFO noted that during the second quarter, ATP did an offering of 8% convertible perpetual preferred securities as a liquidity-increasing measure. The company priced the $150 million offering, plus a $22.5 million greenshoe exercised by the underwriters, on June 15 at a price of 90 and a conversion price of $22.20. Proceeds, after the pricing discount, fees and the $26.5 million purchase of a capped call spread derivative contract, were $123.6 million. They were expected to be used for capital expenditures and for general corporate purposes.

Reese said that doing the capped call - which covers about 13 million common shares and will prevent dilution of the company's outstanding stock up to a share price of $27.50 - was "the key" to this particular transaction. The June transaction, if fully converted, would amount to 6 million or 7 million shares, and the company did a similar deal in September 2009, so it had about 14 million potential shares into which the securities from the two deals could be converted, potentially badly diluting the 51 million of outstanding shares.

"As long as the stock remains below $27.50 - not that we want to keep it there - we have the ability to basically protect all the shareholders against any dilution at $27.50. It's an extremely bullish item for the company," he said.

Royalty deals raise cash

Reese further noted that ATP also did a couple of overriding royalty interest transactions producing total proceeds for the company of $70.3 million. He said that some might question those moves on the grounds that ATP had given no indication that it might need the additional liquidity.

Reese said that while he "fully expect[s]" to have the permits for Gulf of Mexico deepwater drilling and fully expects a planned third well to go into operation at Telemark Hub, one of ATP's Gulf of Mexico sites, and fully expects this to be "a light hurricane season" - all of which would be arguments against any further need to capital-raise - Reese added, "I'm 62 years old. I've been in this business for a long, long time ... and things can happen.

"This literally does nothing more than improve our liquidity. It protects us in the event there are any issues in the Gulf of Mexico this year. In the longer term, as we begin to see more and more permitting become available, that gives us the ability to move forward with other operations."

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