Deepwater GOM operator ATP will explore offshore Israel

PAUL BULMAHN: There are several…the people I have been able to attract to join me at ATP are truly outstanding, the technical and management teams account for an average experience level of over 25 years. Members of senior management have worked together since 1984 – insider ownership still encompasses 13% of the company. I have tried to creatively incentivize the talented individuals around me and retention has been high. There are still a lot of Volvos in the parking lot. [Note: this is from an incentive program several years ago in which employees received a paid vacation to Sweden and new Volvos.] I am proud that ATP has grown into a tenacious and resilient company which tackles and overcomes challenges. I never expected there would be so many monumental obstacles we would be forced to address. We expected to be challenged by deepwater technology issues, hurricanes, commodity price fluctuations, rig shortages, Sarbanes-Oxley requirements, and taxation. We did not envision facing a Wall Street credit market meltdown, Enron criminality and its wake, the BP Macondo explosion/oil spill, the government moratoriums, and the continuing permitorium, each of which impacted ATP adversely. ATP has demonstrated its character and strengths repeatedly in the face of each of the challenges.

It gives me a great deal of satisfaction that I was able to replicate the initial Gulf of Mexico niche strategy in the North Sea UK Sector, found it could be successfully employed also in the Dutch Sector, moved strategically into the deepwater Gulf of Mexico, and successfully deployed into the deepwater Mediterranean Sea. ATP developed its business plan to blossom and expand. Over our two decades, ATP has demonstrated the ability to grow reserves and production nearly every year in sizeable increments.

OGFJ: ATP ranks fourth overall, including super-majors, in deepwater Gulf of Mexico wellbores. Only Shell, BP, and Anadarko have more. How did ATP get to this point?

BULMAHN: ATP's strategy emphasizes critical elements of technology, safety, infrastructure assets, and the financing to make it happen. ATP has demonstrated deepwater operating expertise with our effective utilization of subsea technologies. Continued dedication to safety, from the design of facilities with safety redundancies exceeding regulations, to our constant scrutiny of operating details, has also set ATP apart. The HUB concept we espouse provides flexibility to effectively deploy our fleet of relocatable floating deepwater infrastructure assets. ATP has also employed creative financing mechanisms, coupled with a long-term bond to support our low-risk development portfolio.

OGFJ: How have you orchestrated ATP's evolution since 1991?

BULMAHN: After establishing a 98% success rate in converting low-risk, undeveloped offshore properties with existing reserves into commercial producers in the Gulf of Mexico, ATP expanded to the deep waters of the Gulf of Mexico and internationally into the UK North Sea in 2000, and into the Dutch sector in 2003. ATP's broadened global reach is accentuated with the strategic expansion into offshore Israel in 2011 and the addition of a huge upside exploration component to our mix in the Mediterranean Sea. ATP has accomplished geographical diversification and is now setting its sights on diversifying beyond development into exploration and development in the high impact Levant Basin of deepwater Israel.

At present, ATP is on target to deliver a sizeable production increase to 40,000 barrels of oil per day by end of 2011. Further, our production mix is 70% oil, and due to the production growth and exposure to favorable oil prices, the company's cash margins, approximately $14.13 per barrel in the 4th quarter 2010, are projected to increase to about $40.00 per barrel by end of 2011. We continue to lay the foundation for our future by achieving our domestic objectives and diversifying globally.

OGFJ: The BOEMRERE has begun to issue permits again. Leland, why do you think ATP is the only company to receive two of the first 11 deepwater permits since the moratorium was lifted?

LELAND TATE: ATP has earned a reputation for safety, environmental responsibility, skillful use of advanced technology, and a steadfast drive for quality. We strongly believe that we were early to receive permits due to our record as a safe operator. The ATP Titan in 2007, three years prior to the BP Macondo disaster, was designed and built with millions of dollars of redundant safety equipment. It surpassed all regulatory requirements and is the only platform in the GOM with surface blowout preventer (BOP) on the platform deck and a subsea shut in isolation device (SID) with blind shear rams which is controlled independently of the rig's surface BOP. ATP diligently directs and oversees its contractors to make certain every operation is sound, exceeding requirements and regulations to ensure proper functionality and to prevent ever having to utilize a BOP.

OGFJ: What is the biggest challenge in complying with the changing regulatory environment?

TATE: The biggest challenge in the new environment is the lack of understanding of the criticality and cost of the permitting timing issues. Whether it is crew on the platform or a drilling rig standby, the costs can be exorbitant for preparedness once the permit is approved. The other costs are escalating administrative overhead as the process is lengthened and permits are submitted, rejected, resubmitted, and revised. The first ATP permit since the Macondo blowout totaled over 3,654 pages. We now have had three permits granted.

OGFJ: How are investors reacting to the regulatory environment?

TATE: As you can imagine this creates uncertainty and makes projections subject to revisions. As more permits are approved, we believe investors are becoming more comfortable, especially since ATP has been at the forefront of companies issued permits. ATP is doing everything possible to expedite the permit process from increasing the size of our staff to address the application process, to dispatching senior management representatives to communicate with and educate congressmen, congressional staffs, and the regulators. However, the most important action ATP is taking to facilitate the permitting process is to continue to operate in a safe, high quality and responsible manner.

OGFJ: Al, in April 2010, ATP issued a $1.5 billion high yield bond. What was behind that decision and how has it worked for you?

REESE: Since 2004 ATP had been a strong participant in the term loan market. Term loans offered us flexibility when needed, but could have unnecessary covenants and constraints. In early 2010 we installed the ATP Titan at our Telemark property, and in March 2010 we placed Telemark on production. Telemark was scheduled to have three additional wells on production by the end of 2010 with production nearing 25,000 barrels per day just from the Telemark Hub. Coupled with our other developments in 2010 and our existing production, ATP was projecting 40,000 barrels of production by year end 2010. The timing was right to move from the term loan market into the corporate bond market. The new bond offered us a longer-term maturity matched with significantly fewer covenants and constraints. On April 19, 2010 we priced our bond. On April 20, the BP Macondo disaster occurred. By early May the government began its series of moratoriums, and the drilling plans for 2010 were essentially put on an indefinite hold for not only ATP, but for the entire industry. Needless to say, we could not hit our production goals for 2010.

In the middle of 2011, things are looking better. We have placed on production another well at Telemark. We have two other permits pending for drilling in the Gulf (one at Telemark and one at Clipper) and expect the needed permits for our other 2011 and 2012 drilling program. When we issued our bond, it was issued in anticipation of ATP achieving these production goals. The production target of 40,000 barrels per day looks achievable by the end of 2011 and going into 2012.

OGFJ: In June, 2011 you issued a Series B convertible preferred. What drove that decision?

REESE: Two primary reasons. The first was strengthening near-term liquidity. While we are extremely confident of the production growth at Telemark from the well that we are currently completing, the recent success at Gomez and production growth at other locations, there is still a lot of uncertainty in the industry. While Washington and the BOEMRE appear to be moving forward, they have not shown an ability to issue permits on a regular basis. Hurricane season is approaching, which is always a concern for anyone in the Gulf. While oil prices have recently exceeded $100 per barrel, there has been some weakness. The decision was made to add extra liquidity at this time. We would always rather have an extra $100+ million on the books and not need it, than have to go into the markets at a difficult time when we must have a deal.

The second reason was longer term. We do believe that Washington and BOEMRE will have a more regular stream of permits as we get into late 2011 and early 2012. There are a few projects, Entrada in particular, that are scheduled in 2013 - 2014. As we become more confident in the permitting process, we will consider advancing a project or two from our 2013 – 2014 programs forward into 2012.

OGFJ: The Series B preferred had a call spread with it. Why that decision?

REESE: We are not pleased with our stock price. The call spread allows ATP to effectively increase the conversion price from the stated $22.20 to $27.50. In addition, we expanded the call spread to cover not only the shares that are convertible in the Series B issue, but also those shares that are part of the original September 2009 issue. With this call spread we can now prevent any dilution to our common shareholders up to a price of $27.50 for all shares that are convertible by our preferred stock. If the stock price is above $27.50, there will be a slight dilution, but significantly less than without the call spread. This was an extremely bullish investment by ATP to protect current shareholders.

OGFJ: Your recent initiative in offshore Israel caught many by surprise. What prompted the move into Israel?

BULMAHN: In May of 2010, our government made a political determination to prevent companies that had always drilled safely and environmentally soundly from drilling in deepwater Gulf of Mexico. That decision to issue a moratorium, despite numerous indications that Macondo was the result of negligence – perhaps even gross negligence, as BP's joint interest partner Anadarko publicly advanced – injected uncertainty into our business. I immediately launched an effort to begin the evaluation process globally to find the right opportunity where the deepwater technical expertise of the ATP bright, talented people could be gainfully employed. Israel is a country highly motivated and focused on securing energy independence. A company like ATP with deepwater operating and infrastructure expertise without entanglements in disparate countries is a perfect fit.

OGFJ: How does it fit ATP's overall growth strategy or portfolio?

TATE: Moving forward in this new area is a natural follow-on for ATP because it will allow us to maximize our expertise in exploration and development which may lead to other deepwater discoveries and we expect to be able to acquire other opportunities. There is another element in this move. ATP has been a development company, versus one focused on exploration. Our move into Israel offers us the significant exposure to exploration returns. Yes, there is added risk with exploration, but we believe the potential returns are there and have mitigated risk with appropriate 30% to 50% working interest ownership.

OGFJ: How does your deepwater operating experience create an advantage?

TATE: A deepwater play is where ATP's expertise shines. There are only a few operators that can safely handle such operations and whose operations are not in conflict with Israel. We are among the few. There are a limited number of experienced operators in Israel. We will be the second. ATP has always performed extensive evaluation of developmental projects and has had a focus on geosciences.

OGFJ: What are the opportunities there? What is the potential upside?

TATE: The opportunities are in exploration and follow-on development. The USGS has stated that it has a potential resource base of up to 122 tcf. With only two wells, 25 tcf has quite recently been discovered. This is an astounding discovery rate.

OGFJ: Can Israel become a supplier of gas to Europe?

TATE: With a projected gas supply of 20 to 25 years for its own domestic use, Israel is ready to export. To that end, we have introduced to the Israeli government a Floating LNG concept that we believe will be very beneficial for many reasons: 1) It is cost competitive, 2) It does not require precious land for facilities, 3) It can be operated totally in the deepwater offshore, and 4) It only requires 1.5 to 2.0 tcf of reserves, which makes it economically feasible.

OGFJ: What are the challenges?

TATE: The challenges are the normal requirements in a new basin. It does not have extensive infrastructure, so much of the infrastructure will have to be developed as the basin grows. On the plus side, Israel does have an emerging regulatory environment where the Ministry looks to the operator to demonstrate its operational expertise and safe practices.

OGFJ: Is the new taxation reasonable?

TATE: Taxation has been a very hot topic since we began business dealings in Israel. Israel had not updated its tax regime since its initial establishment in 1948, so it was due for review. The most difficult issue that needed to be addressed was that there were companies who had invested under the old regime and had taken substantial risk. To change the tax regime on those previous licenses was harsh, in my opinion. However, for those companies that had not expended risk dollars on licenses, each then had to decide if the new tax levels were reasonable. Looking forward, ATP felt they were reasonable.

OGFJ: What are the plans for exploration and development?

TATE: We have been awarded interests in three licenses and are awaiting the approval of two more. This year, we will be focused on seismic work and planning our first well in the second and third quarter of 2012. Development will follow a discovery.

OGFJ: How do you intend to finance your Israel investment?

REESE: In Israel, our scheduled commitment is $3 million to $5 million in 2011 with a well commitment in 2012. We will operate that well and our share of the cost is estimated at $24 million to $29 million. This level of commitment can easily be financed out of cash flow.

OGFJ: That seems like a relatively small investment. What is the potential return on that type of investment?

REESE: The potential is huge. That is why we are so excited about the opportunity in Israel. There have been three major discoveries in the deepwater in Israel – Leviathan is an announced 16 tcf development, Tamar an 8 tcf, and Dalit a 1 tcf. With an initial 40% working interest in our licenses, any discovery can be dramatic for ATP. At year-end 2010, ATP had proved and probable reserves of 211 MMboe. While we are predominately an oil company today, on a BTU conversion basis the 211 MMboe equates to 1.266 tcfe. With an initial 40% working interest, every 1 tcf discovered adds 0.4 tcf to our reserves. A discovery of 3 to 5 tcf could double the size of ATP. Time and drilling success will tell the ultimate potential of our commitment to Israel, but we believe that it could be huge.

OGFJ: Is there anything else you would like to add that we haven't covered?

BULMAHN: In 2011, ATP is accomplishing the work which will result in major oil-levered production growth, which is beginning to yield substantially increasing cash margins per barrel. We are on schedule to deliver from our inventory of projects future production growth from existing proved undeveloped reserves. Our recent expansion into deepwater Israel provides additional upside potential. We are excited about where ATP is headed.

OGFJ: Thank you all for your time.

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