Bloomberg News

ATP Diverts Default in Iran-Fueled Oil Rally: Corporate Finance

March 29, 2012

ATP Oil & Gas Corp. (ATPG:US) bonds are generating the biggest returns this month among junk-rated U.S. energy companies as the driller takes advantage of higher oil prices and a recovering credit market to stave off default.

ATP’s debentures have gained 12.9 percent through yesterday, even as speculative-grade debt from energy companies posted a 0.3 percent loss, according to a Bank of America Merrill Lynch index of 276 securities with a market value of about $129 billion. Energy suppliers that derive most of their revenue from natural gas production have lagged behind after prices for the commodity plunged to a 10-year low.

The driller is benefiting (ATPG:US) as a threat by Iran to shut the transit route for about 20 percent of the world’s oil supplies contributed to a 37 percent rise in crude prices. The revenue boost and rebound from last year’s credit-market strains helped the Houston-based company raise an expected $350 million from asset sales, commodity hedges and an expanded loan this year, according to a March 15 statement.

“The company’s recent earnings were a lot more favorable than anyone expected,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “Investors have definitely become yield- seeking over the past couple of months. That’s flowed into their desire to own ATP debt.”

Par by Year-End

The company’s $1.5 billion of 11.875 percent bonds due in May 2015 have risen 12.75 cents to 72.75 cents on the dollar since the start of February, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

“Our expectation is that by the end of the year you’ll see over par value for the bonds,” said Dwayne Moyers, chief investment officer at Fort Worth, Texas-based SMH Capital Advisors Inc., which owns ATP bonds with a face value of almost $100 million. “Their cash flows are up significantly this year and will continue to grow substantially over the years.”

ATP, the third driller permitted to resume work in the Gulf of Mexico after the Deepwater Horizon disaster in 2010, is winning back some of the investor confidence lost in 2011.

The notes dropped to as low as 60 cents on the dollar on Nov. 15 a week after ATP said it wouldn’t reach its year-end target after facing mechanical problems in offshore wells, Trace data show.

The debt sunk to as low as 59 cents on Feb. 1 as investors lost faith that the driller would be able to make an $89 million interest payment in May.

Negative Outlook

Moody’s Investors Service, which has its fourth-lowest rating (ATPG:US) of Caa2 on the company with a “negative” outlook, said in September that the ATP showed a “high likelihood” of having to restructure its finances because cash flow was insufficient to cover the bonds.

Isabel Plume, communications chief for ATP, didn’t return a telephone message seeking comment.

The company had $2.01 billion of long-term debt at the end of 2011, compared with $1.88 billion a year earlier, according to a March 15 filing (ATPG:US) with the Securities and Exchange Commission. It reported cash and cash equivalents of $65.68 million in December, down 58 percent from 2010, the filing said.

“Their operating performance has been poor,” said Ravi Kamath, a Houston-based debt analyst at Global Hunter Securities LLC, an investment bank that focuses on energy, mining and health-care sectors.

The analyst has a target price of 50 cents on the dollar for the bonds and recommends investors sell.

“There’s somewhat of a chance that they have to file in November,” when a $90 million coupon payment comes due, he said. “They’ve been able to do these liquidity enhancing transactions, which has kept them out of bankruptcy.”

Oil Surge

ATP sold oil at an average price of $105.07 per barrel last year, a 35 percent increase from 2010, according to a March 16 filing with the SEC. During the same time, natural gas prices dropped 15 percent, to $4.12 per modified energy factor, according to the filing.

Oil in New York surged 8.7 percent last month on concern European Union and U.S. sanctions aimed at Iran’s nuclear program will disrupt oil shipments. The Persian Gulf nation has threatened to shut the Strait of Hormuz in response to an embargo.

Prices on ATP’s notes reached as high as 78.25 cents on March 15 as ATP solidified plans to sell a percentage of the revenues and profits tied to its Gomez and Clipper drilling projects in the Gulf of Mexico to raise $280 million. It completed an expansion of its first-lien loan this month, to $155 million from $140 million, according to a March 9 statement.

Natural Gas Companies

At the same time, bonds of speculative-grade companies that rely more on natural gas for their revenue have dropped. Rockies Express Pipeline LLC bonds a 3.3 percent decline in and a 2.3 percent loss for Energy Transfer Equity LP notes.

ATP has lost money every year since 2008, with its interest expenses rising to $326.4 million last year from $100.7 million three years earlier, according to data (ATPG:US) compiled by Bloomberg. Its revenue grew to $674.6 million last year from $435.3 million in 2010, the data show.

The company’s bonds declined to 72.75 cents on the dollar as of 10:49 a.m. as a gas leak from Total SA’s Elgin platform in the U.K. North Sea entered its fifth day and as its shares retreated 4.6 percent to $7.45 as of 12:55 p.m. in New York.

Kenneth Duffel, an analyst at KDP Investment Advisors Inc., changed his recommendation on ATP’s 11.875 percent bonds to “buy” from ”hold” in a March 16 note, citing the company’s “enhanced liquidity” and higher oil prices.

‘Never in Danger’

ATP may produce 48.3 billion cubic feet of oil this year, up from 36.7 billion last year, according to Duffel’s estimates. About 70 percent of the driller’s production will be in the form of oil rather than natural gas this year, his estimates show. Most of the company’s debt comes due (ATPG:US) in 2015, according to Bloomberg data.

“This company was never in danger of bankruptcy,” Moyers said. “They can hedge off future production at very healthy levels. They can lock in their cash flow for a two-, three-year time.”

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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