|ATP OIL & GAS CORP. (ATPG) |
We will be riding the Natural Gas CrisisWave in many ways over the next 12 to 18 months. One of the best ways right now is in a small gas exploration company that is just plain 50%-80% undervalued versus normal valuations. This mispricing happens many times in the microcap world and ATP Oil and Gas Corp. (ATPG) is my current favorite.
ATPG looks to develop already-discovered offshore petroleum reserves not strategic to major or exploration-oriented oil and gas companies. Essentially, ATPG takes on projects from the major energy companies that are big for ATP, but way too small to make a difference in a major company. My great contact in the gas patch led me to ATPG as a great example of this type of company that is publicly traded.
The following is great example of how it all works from a Wall Street Transcript interview with Philip J. McPherson of C. K. Cooper: “Say Exxon Mobil is out in the Gulf of Mexico looking for a 100 Bcf natural gas target and they only find a 25 Bcf target. To them that amount of gas will not make a major impact to their bottom line, and there are still liabilities. A company like ATP goes to Exxon and says, ‘We want to take over your platform for this project, and we’ll assume the plugging and abandonment liabilities associated with drilling, and we'll offer an overriding interest in what we produce.’ This means that Exxon can get 10% of the revenues until a project dries up.”
One important aspect to look at when evaluating a company like ATPG--other than its current projects and reserves--is the company’s cash flow. The reason for this is that cash flow ultimately affects what ATPG will spend on the next year’s projects. They can’t very well go exploring for new reserves if they don’t have the resources to spend on the search. And being a smaller company, it isn’t able to borrow a lot so it must depend on its cash flow.
Where’s all this going? Well, according to Mr. McPherson, similar companies to ATPG sell historically for 3 to 4 times cash flow. This year, my estimates have the company coming in with cash flow in the $70 million range, or about $3.50 per share in cash flow. With ATPG closing today at $5.33, the stock now trades at about 1.5 times cash flow. So, as you can see, APTG is an extremely undervalued stock.
This company should literally be valued closer to $20 than $5.33. If they have the success I think they will have this year and gas prices go to $7 this summer and $15 in the REAL gas crisis this winter, as I believe they will, the company could generate $100 million of cash flow. That makes it a $350 million to $400 million-market cap company--today it’s a $108 million company.
We’ll put a buy under of $7 on ATPG and will look to hold the stock for a year or more, where you’ll only have to pay 15% capital gains on the 200%-300% profits we anticipate.
From Changewave newsletter dated today.