ATP Oil & Gas Corporation

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1 1 ATP Oil & Gas Corporation DCohen / September Trade:Buy2ndLien117/8 2015Notes/BuyATPOTMPuts I have been buyingsecond lien debt at low to mid 70 s with YTM of 21%and spending approximately 0.08X of its long dollar exposure in OTM PUT premiums with maturities extending up to March In my bullish scenario the secured notes will trade back to par as soon as the drilling moratorium is lifted and ATP is granted the drilling permits necessary for its new developments in Gomez and Telemark ( between 1st and 2nd quarters of 2011). That s the exact same level the notes were trading prior to the Macondo blowout. Inthisscenariothegrossreturnwouldbeof41.3%producinganIRRof+100%(periodof6months). Under my estimates the hedge will cover losses of as much as 30 points on the long exposure (notes priced at USD 40 cents and equity wipedout).inthatsense,myworstcasescenariorendersarecoveryofusd48tousd52centstothesecurednotes. My analysis, described along the report, focused specifically in determining and pricing a reasonable worst case scenario. ATP has approximately 74% of its reserve valuation associated with the GOM Deepwater(page.2). Thanks to GOM s reservoir characteristics we do believe that the ATP business model is dependent on its ability to recurrently develop new reserves(page.3). In that sense, the drilling moratorium and the coming regulatory uncertainty represent a significant threaten. Based on conversations with industry insiders I concluded that the worst case scenario doesn t include the current moratorium extension or unlimited third party liabilities(page.7). However, it is reasonable to expect that a tighter regulation and the MMS/BOEM unwillingness to grant new drilling permits can end up bringing very negative effects. In that scenario ATP wouldn t stay as an independent producer. An obvious issue is to determine whether ATP reserves and infrastructure have any residual value. By definition ATP acquires reserves that the big E&P players don t consider strategic (page.3). I held conversations with professionals involved in the GOM and learned that for certain price levels there would be interested buyers(page.8). To value ATP s infrastructure assets can be tricky. Production platforms have specific characteristics that would require a buyer to spend capital in re-modeling and my rig-broker advisor believes that valuations are sensibly lower than the company estimates(page.12). An additional issue has to do with timing. I believe that buyers will need another year to start acquiring assets in the GOM (page.8). Based on ATP s current sources of liquidity (page.5), its light covenants package (pag.5) and the coming Titan monetization I assume that the company has the ability to withstand another non drilling year. I am working with recoveries varies from $52.3 to $48.5 depending on ATP capacity to monetize the Titan platform.

2 2 Company Assets: NAV dependent on GOM assets. 82% of the reserves valuation coming from GOM

3 3 Why ATP s business model can t deal with a prolonged drilling moratorium? ACQUISITION ATP is engaged in the acquisition, development and production of natural gas properties in the Gulf of Mexico and the UK and Dutch sector of the North Sea. ATP acquires proved undeveloped reserves (PUD) that are economically attractive to the company but are not strategic to major or large exploration oriented oil and gas companies. ATP targets above-salt reservoirs that are largely delineated by existing well penetrations and seismic data assuming significantly less geological risk than do many traditional upstream operators Hub concept # 1: ATP s ties multiple reservoirs to a central system lowering the operating costs per boe. DEVELOPMENT After acquiring reserves ATP must obtain permits to develop the wells (includes drilling). The permits are obtained from the MMS / BOEM. ATP hires specialized contractors such as Diamond Offshore to perform development services (prepare the discovery to production). ATP has a technical team of 22 professionals including engineers, geologists,geophysicists that oversees the development process. At the conclusion of the development phase ATP ties the developed well to a production platform. PRODUCTION ATP s strategy is unique in that small E&Ps typically do not build their own deepwater platforms or floating infrastructure in the Gulf of Mexico Company s fleet of long lived reusable floating infrastructure can be moved from project to project By using its own platforms ATP: 1) has quick availability of producing rigs. 2) has tailor made producing capacity. 3) pays lower LOEs Production of reserves from reservoirs in the GOM generally declines more rapidly than production from reservoirs in other producing regions of the world. In order to increase its reserves, ATP must replace with newly acquired properties MONETIZATION ATP has been focusing in cleaning up its balance sheet through the sale of some (or all) of its working interests in multiple assets 2008 Monetizations Transfered 80% of ATP's UK interest in the Tors (68% working interest) and Wenlock (80% working interest) fields to EDF for $ 365 million Monetizations $ million of capital from the formation of ATP-IP + $ 74.5 million from Gomez pipeline transaction and $ 14.5 million from a limited overriding transaction Monetizations $ 140 million in overrides over Gomez hub properties + $ 49.5 million in NPIs + expected Titan monetization. Affected by drilling moratorium and new regulations

4 4 ATP Management Paul Bulmahn Chairman and CEO T. Paul Bulmahn has served as Chairman and Chief Executive Officer of ATP since May 2008 and before that as Chairman and President since he founded the company in He holds 12% of ATP shares outstanding. From 1988 to 1991, Mr. Bulmahn served as President and Director of Harbert Oil & Gas Corporation. From 1984 to 1988, he served as Vice President, General Counsel of Plumb Oil Company. Consequences Equity financing is the last resource. Strong benefits in leveraging whatever can be leveraged. it is difficult to understand what they own and what not. Clint Wetmore Post Oak Partners Focus in NAV creation, analysts price the equity based on NAV. NAV 3-4 times current share price / ATP presentation Sep 15, 2010 In general references were OK. Good guys with interests aligned to stock holders Have been around for a long time and know what they are doing. Leland Tate President Leland E. Tate has served as President of ATP since May From 2003 to 2008, he served as Chief Operating Officer and, from August 2000 to December 2003, he served as Sr. Vice President, Operations. Prior to joining ATP, Mr. Tate worked for over 30 years with Atlantic Richfield Company ( ARCO ). Albert Reese CFO Albert L. Reese Jr. has served as Chief Financial Officer of ATP since March 1999 and, in a consulting capacity, as ATP s director of finance from 1991 until March From 1986 to 1991, Mr. Reese was employed with the Harbert Corporation. Mr. Reese owns 0.5% of shares outstanding. George Morris COO George R. Morris has served as Chief Operating Officer of ATP since May He served as Vice President, Acquisitions, from 2002 until From 2004 until 2007, Mr. Morris was Chief Operating Officer at Chroma Exploration & Production.

5 5 Sources of Liquidity Financing Cash Flow Breakdown for the 6 months ending in June 2010 In April 2010 (a few days ahead of the Macondo spill) ATP was able to refinance all its outstanding term loans that carried financial maintenance covenants including: net debt to ebitda, interest coverage, P1 PV-10 to Net Debt and P2 PV-10 to Net Debt ratios. The new $ 1.5 billion high yield notes and the $150 million first lien term loan financing eliminated all financial maintenance covenants and raised $ 303 million in additional liquidity. Additionally, it extended the maturities schedule at a cost marginally higher than the prevailing one. In June 2010 ATP entered into a first lien credit agreement that replaced the Original Credit Facility (dated as of April 2010). The new credit facility allows the Company to incur up to $350 million in additional indebtedness as the Consolidated Net Tangible Assets increases.

6 6 Capital Structure confidential Capital Structure as of June 2010 Subsidiaries Map

7 7 The worst case scenario : insider s view Included below part of out industry checks (btw July and Sep 2010) Summarizing iii. i. drilling moratorium won t be extended. ii. liability gap will be sensibly increased, but won t be unlimited. chances that ATP Oil gets the permits for Telemark and Gomez during the 1H 2011 are limited. iv. GOM deepwater E&P will continue to exist, but won t be for everyone.

8 8 The worst case scenario : ATP has to function as a going concern until the end of 2011 In the case ATP is not among the survivors, is there any value for its GOM deepwater reserves? Obs: ATP buys reserves that are not strategic to the big Oil & Gas companies and it is reasonable to question whether there would be any buyers for its assets. Production Asset Manager in a multi-billion Oil & Gas company. There is still a market in the GOM, Chinese are trying to get involved. Even reserves with production capacity of 20,000 BOE/ day can be potentially attractive. Senior Partner in a Investment Bank focused in Oil & Gas. There will be people willing to buy these assets, you can think about a liquidation value of USD 10 / Boe for the proved reserves. The proxy multiple in the sector has been around USD 20 / Boe. This is more or less in line with couple of buyers we advised they were offering half of comparable metrics for assets in the shelf. Ended up not buying anything. Partner in a North America Private Equity fund focused in Oil & Gas. Nothing is trading now, as soon as the OIL SPILL started couple of companies tried to sell their GOM assets in a fire-sale. No, we can't get you out", that s what their bankers answered. Our take As soon as the moratorium is lifted, the new sector regulations are approved and new permits start being awarded ( we assume end of 2011) there could be companies willing to buy bargains.

9 9 The worst case scenario : Can ATP function as a going concern until the end of 2011? As soon as the moratorium is lifted, the new sector regulations are approved and new permits start being awarded ( we assume end of 2011) there could be companies willing to buy bargains. Consequences to ATP business if new development drilling permits are now awarded 50% of 2011 planned Capex of $ 400 million is committed to GOM drilling. ATP has permits to complete the development work on the wells 941#3 and 754#2 at the Telemark and Gomez hub respectively. Reserves are mainly composed by liquids and can add 11,500 boe in daily production. We estimate that ATP has currently 1.6 years of Production to PDP (proved developed producing reserves). We expect it to be increased by at least half a year by the end of It provides the company with some short term production cushion. Overrides, NPIs and Pipeline Obligations have a variable amortization schedule driven exclusively by production. In the worst case scenario, would ATP need to raise in additional financing until the end of 2011? DCohen Sources of Cash ATP Titan monetization ( total investment of $ 684 million). The company will most probably delay any equity like monetization and use ATP Titan as a collateral to leverage a subsidiary. Brian Nelson (ATPs VP of Finance) believes that such a structure could raise btw $ 300 and $ 400 million in capital (theoretical asset coverage > 2x).

10 10 Moratorium Scenarios As soon as the moratorium is lifted, the new sector regulations are approved and new permits start being awarded ( we assume end of 2011) there could be companies willing to buy bargains. ATP OIL & GAS ATP NAV VALUATION REALITY CHECK GOM DEEPWATER: PV-10 implies $ 17/boe. Our banker believes that ATP wouldn t get more than $ 10 / boe. We applied a 50% discount to his conservative view. GOM SHELF: M&A, April 2010 / Devon acquisition by Apache priced reserves at $ 16.7 / boe. Since April, 5 new drilling permits were awarded in the shelf. NORTH SEA: M&A, July 2010 / PC UK Assets acquisition by Dana Petroleum priced reserves at $15.8/boe. We apply a 50% discount to PV-10 proxy of $8.46/boe. Broker at Bassoe Brokers US Production rigs, as opposite to standard drilling rigs, are tailor made and therefore the market is not as liquid. The DNA of a production rig includes: i. Total throughput ii. Oil to gas ratio can be all dry gas or all oil or a combination of the two iii. API of crude or the lightness or heaviness of the oil needs submersible pumps or heating? iv. Pressure of the reservoir v. Water or gas reinjection required vi. Rules and regulations to be complied with vii. Environmental design criteria. In that sense, a seller can either find a buyer who owns reserves with the exact same characteristics or sell it at a relevant discount that would allow for remodeling works

11 11 Asset Valuation / Proved Reserves GOM DEEPWATER: PV-10 implies $ 17/boe. Our banker believes that ATP wouldn t get more than $10 / boe. We applied a 50% discount to his conservative view. GOM SHELF: M&A, April 2010 / Devon acquisition by Apache priced reserves at $16.7 / boe. Since April, 5 new drilling permits were awarded in the shelf. NORTH SEA: M&A, July 2010 / PC UK Assets acquisition by Dana Petroleum priced reserves at $15.8/boe. We apply a 50% discount to PV-10 proxy of $8.46/boe.

12 Asset Valuation / Platforms 12

13 Worst Case Scenario 2nd Lien Valuation, Dec 2011 Monetization 13

14 Worst Case Scenario 2nd Lien Valuation, Dec 2011 No Monetization 14

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