Wednesday, November 10, 2010

ATPG - Caught the longs with their pants down?

We'll I just received an interesting link to a board over at the motley fool website. (If you posted the link at my blog please send me a quick email, I would like to talk to you.)

To begin I would like to address a few of the statements in ValuePEG's initial post.

ValuePEG states, "In Kevin's opening paragraph he states "I have never read any analyst reports nor have I read any comments by CanadianValue (a blogger was mentioned in the comment by Jason)". This was a bold face lie as he posted the following on his blog on Oct 23rd"

Please read the comment in context. I have never read any analyst's reports on ATPG and I have never read any of CanadianValue's comments on ATPG.

Continuing

1) ATPG hasn't earned a dime in profits as a corporation.

Bold face lie, not only has ATPG earned a profit based on GAAP rules in the past, more importantly they have been cashflow positive the last 9 months on a operating basis, as most investors look for in stocks in the E&P business


Dear ValuePEG, please learn how to read a balance sheet. As of the end of 2009 they had negative cumulative earnings. I'm sure if I looked at the latest quarterly it would be even worse. Secondly, No matter angle you look at the income statement a profit is a profit and a loss is a loss. Go ahead a use Cash Flow if you like but that is what they did with internet stocks back in 1999. Lastly, speak for yourself, but please don't speak on behalf of other investors.

And finally, "To toot my own horn the writer has 22 followers as of this writing here at SA, while I have 31 at MF CAPS"

Congratulations you are my hero, do you pat your own back regularly?

Then we have another commenter named Justmee1 ask Swizzled (Devin Shire aka CanadianValue) the following question.

"Swizzled,

And Morgus will move additional P UD reserves to developed reserves, raising asset values again 1H 2011? How exactly is the asset value calculated? (I presume that developed reserves are higher value, but how much higher?)"


And then we catch Devin with his pants down.

"I don't know enough about the calculation to offer an opinion."

Well finally some honesty out of Devin Shire (CanadianValue). He knows nothing about reserves, how they are valued and walks around telling everyone he's an expert in oil and gas.

And then we catch ValuePEG with his pants down.

"As far as how exactly it is calculated i couldn't state but it is obvious that PDP counts at a much higher rate then P.D.P." (I believe he meant PUD's)

Thanks for attempts to lecture me on ATPG. I am embarrassed I wasted my time discussing the stock with these guys. You both call yourselves value investors, yet you haven't determined what assets the company owns and tried to value them. It appears that these guys are attemping to determine how to calculate a net asset value over at the motley fool boards.

You can follow their ongoing discussion here:

http://boards.fool.com/re-sa-article-quotwhy-id-avoid-atp-oil-and-g-28879719.aspx?sort=whole

Have a great Remembrance/Veterans Day Holiday!


Best Regards,
Kevin

11 comments:

  1. Kevin,

    I have to agree with ValuePEG.

    "ATPG hasn't earned a dime in profits since inception"

    Please review ye '07 where they had reported net income attributed to common shareholders of $49 mil, $1.55/ fully diluted shr and ye '08 where they had net income attributed to common shareholders of $122 mil, $3.39/fully diluted shr.

    In case you don't believe Morningstar reporting of financials, here are the links to their SEC filed annual reports:

    services.corporate-ir....=

    services.corporate-ir....=

    If you were trying to communicate that accumulated earnings were negative, that is different than what you wrote "ATPG hasn't earned a dime in profits since inception".

    There is a huge difference.

    ReplyDelete
  2. Hi George,

    What is the difference? If your company earns $50 million this year and loses $50 million the next, you have not earned a profit. Feel free to believe otherwise.

    Here is a simple test. Take five steps forward and then take five steps backwards. Are you any further ahead than when you started? No, you have just wasted your time.

    Now this is a serious problem with companies that report one time charges to earnings. Some investors pretend they don't exist. When they happen every second or third year, they do matter... who are you kidding?

    ATPG has not earned a dime in profits as a corporation. Period. The company would be futher ahead if they had never existed.


    Regards,
    Kevin

    PS. How about your portfolio? Do you only count the years when you have gains and not losses. Do you calculate your investment returns by taking the arithmetic average of your yearly results?

    Go ahead agree with ValuePEG, He's still working on how to calculate a net asset value?

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  3. Kevin,

    Really now. I've read this debate from a neutral's perspective. This is a sector I follow relatively closely, although ATPG's leverage is something I've never seen before - big roll of the dice.

    That said, your comments about "profits" are a bit strange. Most plays I invest in don't have them - or so low as to be virtually meaningless. The name of the game for early stage plays (juniors) is to reinvest cash flow back into operations and grow production - then comes profits, although they typically like to sell out at that point and repeat the cycle. The TSX Venture is full of guys making millions doing the same thing over and over.

    ATPG has elevated the game to a new high by taking on developments that are usually the exclusive realm of mid caps or majors. As such, not surprising many would dismiss such a company, simply because of the risks involved. That said, ATPG looks very likely to beat the odds. They survived the worst case scenario - collapse in energy prices and credit markets just as they had max capex spend. Then, just as they were pulling out, the Macondo blowout happens. That they are still kicking, let alone prospering, deserves kudos, not scorn and ridicule as you seem fond of doing.

    And yes, ATPG has large debt - but that debt was put in place to develop reserves and get cash flow/profits flowing in the door. With multi-billion dollar investment upfront, is it really any surprise that profits have yet to arrive before they've even finished development? Of course not. To suggest otherwise (or even mention the lack of profitability) is beyond silly.

    ATPG will be a significant success story if they continue to bring on production as promised. That said, my concerns about their ability to meet those time lines after the Macondo blowout and the hysterical regulatory response is what keeps me away - I have too many other juniors to invest in with similiar upside potential, but with lower external risk factors.

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  4. Hi OracleofMumbia,

    Thanks for the comments. I feel your comments regarding profits to be quite interesting. I would really suggest you start your own company and learn the importance of profits.

    I understand ATPG has some large upfront capex but they have really got themselves into a pickle with the whole BP thing. Their feet are to the flames with interest cost of $80 million per day or $30/boe. The walk a fine line and one hiccup in the GOM will take ATPG into insolvency.

    Regards,
    Kevin

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  5. Kevin,

    You suggested that OracleofMumbia "start your own company and learn the importance of profits." I pretty sure that he does, but he also understands how the industry and profits within it works. This is a skill that you seem to be lacking. Please reread his last post and try and learn something for a change!

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  6. Hi Anonymous,

    Your right I don't understand profits.

    Let's keep it simple.

    Price - Cost = Profit

    If price and cost are the same thing you have not earned a profit.

    Their is no such thing as a free lunch. All losses have to be paid for, either out of equity or increasing debt. You cannot defy economic gravity.

    Listen, I understand early startups do not earn a profit as overheads can be large, but you have to overcome that eventually (sooner than later). ATPG has been around for a while now, overpromising and underdelivering. Perhaps management will deliver this time and perhaps it won't.

    The only ones making millions on the TSX venture are the promoters and financial engineers who know how to exploit the individual investor.


    Good Luck,

    Kevin

    PS. my previous comment was incorrect. Interest expense is not $80 million per day it is $600k per day. Regardless interest expense was 68% of revenue in the third quarter. Incredible!

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  7. It's not that you don't grasp the definition or importance of "Profit." You almost nailed it. The only correction is Profit = Revenue - Cost. Of course, Revenue = Price * Quantity, but you were close - good job!

    In all candor, I am about to tell you something that I suspect you already know. Profit for ATPG should not be measured in quarters or even the next year or two. ATPG's projects take several years to develop and even longer to demonstrate thier economic potential. Telemark is a good example. To develop this project, ATPG levered up and invested a ton of capex and overhead to make Telemark a reality. Imagine if ATPG would have stopped with Gomez, which has been a home run, and scaled back capex and delevered while in the process generating outrageous profits. Would that have made ATPG a better investment than it is today? I think not!

    You also casually threw out there that ATPG over promises and under delivers. I personally can make this statement about 90% of the company's I follow. It depends on how picky I want to be. To ATPG's credit, it's a deepwater company that is in the black (actually very black) on 100% of its deepwater projects that have preceded Telemark. And Telemark came on production this year. We will know in a couple of years if Telemark continues the 100% track record, and then it will make more sense to discuss the topic of ATPG's "Profits."

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  8. Hi Bmenhorn,

    You are correct, I know exactly what you are saying regarding ATPG. My only question is when is this company going to start generating any return? When will they earn a profit? Lay it out their for all to see. If anyone can get me the raw data for their reserves I could work some magic also.

    Here is the problem with the company and most investors don't even realize it. Their reserves, discounted at 10%, are worth $2 billion before tax. The company borrows money at 12.3% so using a discount rate of 10% isn't nearly high enough as the cost of debt is much higher. What are the reserves worth with a 20% discount rate? Secondly, when you net out the debt of 1.8 billion where is the value?

    Lastly, the company still has close to 2 billion in capex require to bring all those pud reserves online. Where is that capital going to come from? The company doesn't have the cash flow to float the current interest (68% of revenue last quarter) let alone an agressive capital program on top of that. If you read the risks associated with the reserve value located in the 10-k you will begin to appreciate what I am talking about.

    Why not buy a company that generates high returns on capital today? I can name a number of companies that generate high ROE that trade at or around book value. That is value in plain sight, not some pie in the sky.

    I have a funny feeling your Devin in disguise. Regardless, you are more than welcome here and I hope you are learning about oil and gas. And yes, determining a net asset value is a good starting point.

    Regards,
    Kevin

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  9. Kevin,

    I will do my best to help you out and respond to your points.

    “You are correct, I know exactly what you are saying regarding ATPG. My only question is when is this company going to start generating any return? When will they earn a profit? Lay it out their for all to see. If anyone can get me the raw data for their reserves I could work some magic also.“

    Unless I missed something, I believe we have covered this topic.

    “Here is the problem with the company and most investors don't even realize it. Their reserves, discounted at 10%, are worth $2 billion before tax. The company borrows money at 12.3% so using a discount rate of 10% isn't nearly high enough as the cost of debt is much higher. What are the reserves worth with a 20% discount rate? Secondly, when you net out the debt of 1.8 billion where is the value?”

    I assume you are referring to the PV 10 before tax at the end of last year. What was the oil price used for that PV? Oh it was about $60/bbl. What is the current strip price? ~90/bbl? Hmmm what does that do the PV 10? My guess is an increase to about $3.5 billion.

    Oh and should I mention that the $2 billion value from last year is based on only proved reserves? Based on ATPG’s track record of delivering more than proved reserves on 100% of its deepwater fields, I would say that is an unusually conservative way of looking at the company’s value. But maybe that’s just me.

    “Lastly, the company still has close to 2 billion in capex require to bring all those pud reserves online. Where is that capital going to come from? The company doesn't have the cash flow to float the current interest (68% of revenue last quarter) let alone an agressive capital program on top of that. If you read the risks associated with the reserve value located in the 10-k you will begin to appreciate what I am talking about.”

    $2 billion in capex? From the 10K the capex is $1.5 billion for proved. I believe the $2 billion is for proved and probable. Funny how you forgot to mention the value of the probables above.

    Please explain how the company does not have the cf to float the current interest. Current production per the last presentation is 28,000 barrels per day. What is that about $1.8 million a day in revenue or about $650 million per year? What do you think the revenue will be when ATPG has two more wells at Telemark and two more wells at Gomez online next year? I think it is going to be pretty sweet don’t you?

    “Why not buy a company that generates high returns on capital today? I can name a number of companies that generate high ROE that trade at or around book value. That is value in plain sight, not some pie in the sky."

    “In plain sight?” Please shed some light on it for me. After all I am new to oil and gas.


    “I have a funny feeling your Devin in disguise. Regardless, you are more than welcome here and I hope you are learning about oil and gas. And yes, determining a net asset value is a good starting point.”

    Don’t flatter yourself. Devin would not waste time on your analysis of ATPG. I am only here to have a bit of fun.

    ReplyDelete
  10. Hi Bmenhorn,

    You comment hardly deserves a response.

    Feel free to use whatever oil price you like. Why not answer my objection to using 10 percent as a discount rate when their debt costs them 12.3%? What does that do to the reserve value?

    Secondly pal, one thing I can do is read. From the 10-k and I quote,

    “Estimated future development costs relating to the development of PUDs are projected to be approximately $503 million in 2010, $461 million in 2011, $494 million in 2012, and $694 million in years 2013 to 2015.”

    Do the math, it’s $2.1 billion. That is for PUDs only, no probables. Where did they get the capital for this year’s capex? It wasn’t CF but Debt, and it’s ballooning and it doesn’t seem to bother you.

    Lastly, “the production growth will be sweet.” Are you ten years old?

    Regards,
    Kevin

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  11. Hello Kevin,

    Thanks for the response. I have tried to respond to your points below. I think we are making progress.

    “Feel free to use whatever oil price you like. Why not answer my objection to using 10 percent as a discount rate when their debt costs them 12.3%? What does that do to the reserve value?”

    I am not using 10% as a discount rate. That would make about as sense as using only proved in my valuation when the fact is ATPG has delivered substantially more than proved on 100% of its deepwater developments that have preceded Telemark.

    “Secondly pal, one thing I can do is read. From the 10-k and I quote,

    “Estimated future development costs relating to the development of PUDs are projected to be approximately $503 million in 2010, $461 million in 2011, $494 million in 2012, and $694 million in years 2013 to 2015.”

    “Do the math, it’s $2.1 billion. That is for PUDs only, no probables. Where did they get the capital for this year’s capex? It wasn’t CF but Debt, and it’s ballooning and it doesn’t seem to bother you.”

    I am glad to know we are pals. I feel the same way.

    While we are on the subject of quoting ATPG’s public disclosures, let’s use data that is a more recent than the 2009 10K you keep referring to. In the Aug 25th presentation, ATPG’s proved and probable PV10 was $5.6 billion. With infrastructure it was $6.6 billion.

    Because we are pals and we agree it does not make sense to value a deepwater company with a 10% discount rate, let’s use a 25% discount rate. My math shows the $6.6 billion would be about $3.0 billion, which means the equity after debt would be worth about $25 per share. If we give ATPG credit for this years acquisitions, additional reserve appreciation, and the reusability of its infrastructure, the implied value is much higher.

    We can also look at cash flow. The same presentation shows exit rate production at the end of next year at 45 – 55 Mboe/d. What does that translate into? $600 to $700 million in cash flow? Assuming a modest multiple, that implies about a $2 billion market cap and $40 per share.

    “Lastly, “the production growth will be sweet.” Are you ten years old?”

    What’s wrong with the word sweet? Life is sweet, my kids are sweet, and making money is sweet. Take some advice from your pal, loosen up a bit and don’t be too quick to criticize.

    ReplyDelete