Sapna Maheshwari and Joe Carroll, ©2011 Bloomberg News
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Nov. 16 (Bloomberg) -- Bondholders are losing patience with ATP Oil & Gas Corp., erasing almost $310 million of value in a week, after its failure to deliver on output targets stirred concern the driller may struggle to meet interest payments.
The company's $1.5 billion of 11.875 percent notes due May 2015 have plunged 20.6 cents to 64.3 cents on the dollar since Nov. 8, when ATP revealed it pumped the average daily equivalent of 24,200 barrels of crude in the third quarter, down from 31,000 in late August. That pushed the yield to 28.9 percent, almost equaling the high on Oct. 4. It declined after ATP's chief financial officer said the Houston-based firm would start 2012 with 40,000 barrels of daily output.
ATP, the third driller permitted to resume work in the Gulf of Mexico after the Deepwater Horizon disaster, said last week it won't reach its year-end target after facing mechanical problems in offshore wells. The jump suggests ATP may struggle to come up with the money to make an $89 million interest payment in May.
"ATP is burning through a lot of cash, so unless they come up with some creative financing, they should run out of cash before the May coupon payment is due," said Ravi Kamath, a Houston-based debt analyst at Global Hunter Securities LLC, an investment bank that focuses on the energy, mining and health- care sectors, said in a telephone interview.
Isabel Plume, communications chief for ATP, didn't return a telephone message left at her office seeking comment.
Capital Deficit
The company projects $70 million to $120 million in capital expenditures for the remainder of 2012, and has a working capital deficit of $260 million as of Sept. 30, according to its most recent quarterly filing. It had $172 million of cash and cash equivalents.
Long-term debt, which includes term loans as well as the bonds, totaled $1.98 billion at the end of the quarter, according to the filing.
After Moody's Investors Service, which rates ATP Caa2 with a "negative" outlook, said in September that the company shows a "high likelihood" of having to restructure its finances because cash flow is insufficient to cover the bonds, Chief Financial Officer Albert L. Reese disputed the rating company's assumptions.
"They are evaluating a company that's producing about 25,000 barrels of oil a day and if you project that out over four years, there's not enough cash to service the bonds," he said from Houston on Oct. 3. "But we should enter 2012 with production around 40,000 barrels a day."
ATP's third-quarter average production was down from a peak of 31,000 reported in late August, President Leland Tate said last week.
Bond Yields
ATP's bonds were trading as high as 87.5 cents on the dollar with a yield of 16.7 percent as recently as Oct. 27, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds were sold in April 2010 at 99.53 cents on the dollar to yield 12 percent.
Yields on the company's bonds, graded CCC+ by Standard & Poor's, are more than double the average 14.2 percent yesterday on debt rated CCC and lower, according to Bank of America Merrill Lynch index data. High-yield, high-risk energy company debt yields an average 7.42 percent, the data show.
"People are pricing in that the company might not be able to make it over the next hurdle," Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. "They're walking on this tightrope and any sort of trip-up could make them fall."
'Lack of Confidence'
ATP's shares have plummeted 60 percent this year, reaching a low of $5.78 on Nov. 14, the least since July 2009. The company's first profit after five straight quarters of losses was overshadowed by the problems restricting output at ATP's Mirage field in the Gulf, part of its Telemark project.
"There's just a lack of confidence in management," said Dwayne Moyers, chief investment officer at Fort Worth, Texas- based SMH Capital Advisors Inc., which oversees $1.45 billion, including about $80 million of ATP bonds.
Moyers said he's not worried about the company's ability to make interest payments and that ATP bonds are a "buying opportunity."
"If their production does not come online and management continues to not hit their targets, then it does set this company up to be a prime takeover candidate," he said. "If they cannot realize the value that's inherently in their reserves, I'd like for somebody else to be able to do that."
Disappointing Wells
All four of the wells drilled at Telemark have been disappointments, Global Hunter's Kamath said. In addition, two new wells at the company's Gomez field won't begin output until 2013, rather than the second half of 2012, as originally planned, said Kamath, who cut his full-year 2012 production forecast 17 percent to the equivalent of 31,473 barrels a day.
Executives' failure to tell investors how much cash they had at the time of a conference call to discuss third-quarter earnings on Nov. 9 also spooked bondholders, Lurie said.
After an analyst queried the company's current cash balance, Reese said "we never reveal cash balances between quarters" because "if it was extremely higher or extremely low it could be taken negatively or positively."
ATP probably will end 2011 with about $55 million in cash and generate about $350 million in cash flow next year, Biju Perincheril, an equity analyst at Jefferies & Co. in New York, said yesterday in a note to clients. That will leave the driller about $260 million short of its 2012 needs, according to the note.
"The company will need additional external financing to carry out its 2012 program but sources are difficult to identify," said Perincheril, who lowered his price target for ATP shares yesterday to $5 from $12 and has a "hold" rating on the stock.
A sharp decline in oil prices or additional project delays that forestall production increases could "decrease equity value to almost $0," he wrote.
"Even if ATP figures out a way to make the May coupon, by the time the November coupon comes due, things will have deteriorated even more and most avenues of financing will be shut out," Kamath said.
--Editors: Mitchell Martin, Alan Goldstein
To contact the reporters on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net; Joe Carroll in Chicago at jcarroll8@bloomberg.net
To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Susan Warren at susanwarren@bloomberg.net.
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