ATP Reports Q2 Results, Ops Update
During ATP's second quarter of 2007, production increased 8% to 14.6 Bcfe (160.3 MMcfe per day) from the comparative period in 2006 while revenues from production increased 21% to $132.2 million during this same period.
Price realizations reflect an overall 12% increase in our average sales price per Mcfe from $8.05 for the second quarter 2006 to $9.05 for the second quarter 2007. For the first half of 2007 compared to the same period in 2006, production increased 57% to 30.5 Bcfe, revenue increased 79% to $276.6 million, and price realizations have risen 15% to $9.07 per Mcfe.
Lease operating expenses ("LOE") for the second quarter of 2007 decreased to $20.1 million ($1.38 per Mcfe) from $21.3 million ($1.57 per Mcfe) in the second quarter of 2006. The 2006 period included costs related to hurricane repairs performed on certain of our oil and gas properties in the Gulf of Mexico. The 2007 period included increased costs primarily attributable to the production gains noted above, higher insurance premiums and costs associated with our increased ownership in the Canyon Express Pipeline. For the first six months of 2007 compared to the same period in 2006, LOE per Mcfe has decreased from $1.64 to $1.35.
General and administrative expense ("G&A") decreased 11% to $6.6 million for the second quarter of 2007 compared to $7.4 million for the same period of 2006, primarily due to non-cash compensation, related charges and professional fees, partially offset by higher general office costs. Included in G&A is non-cash stock-based compensation expense of $1.7 million and $3.3 million for the three months ended June 30, 2007 and 2006, respectively.
ATP recorded a net tax benefit of $1.1 million during the quarter ended June 30, 2007 related to our foreign jurisdictions, based on the expected 2007 effective tax rate of each jurisdiction. The rates were determined based on the projected results of operations for the year, the valuation allowance released and permanent differences affecting the overall tax rate in each foreign jurisdiction. In the comparable quarter of 2006, we recorded a tax provision of $3.3 million related to our foreign jurisdictions. In the U.S., the tax provision recorded on our book income for both periods was offset by a partial release of the valuation allowance.
For the second quarter 2007, ATP reported net income available to common shareholders of $6.1 million, or $0.20 per basic and diluted share, as compared with a net income available to common shareholders of $6.4 million, or $0.21 per basic and diluted share for the second quarter 2006.
Second quarter net income available to common shareholders was impacted by a previously announced exploration expense of $10.6 million. In addition, ATP recorded impairment expense of $5.8 million. Research analysts typically exclude the nonrecurring impairment charge from their published estimates. Accordingly, after adjusting for impairment expense, ATP had net income available to common shareholders of $11.9 million or $0.40 and $0.39 per basic and diluted share. A reconciliation of non-GAAP net income for the quarter can be found near the end of this press release.
Operations and Development
Gulf of Mexico
Mississippi Canyon ("MC") 711 (Gomez - 100% Working Interest) - During the second quarter, we successfully drilled the MC 711 #8 well. The well encountered high quality sands in the 3750B and 3750C interval. The well flowed at the limit of the testing equipment, 28 MMcfe per day. We anticipate booking additional proved reserves at year end Gomez because of the results of this well.
ATP is currently upgrading processing and compression capacity on the ATP Innovator to approximately 200 MMcfe per day, gross. The capacity upgrade began at the end of May with a complete shut-down of the facility for 18 days. For the remainder of June and the beginning of July, the ATP Innovator handled production from Gomez at a reduced rate. A second complete shut-down of the facility began on July 18th and ended on August 5th when Gomez was placed back on production. In total the ATP Innovator was shut-down for 37 days, a period shorter than our expected shut-down of 45 days. During the third quarter of 2007, the MC 755 (Anduin) #2 and MC 711 #8 wells will be tied back and brought on production.
In the second half of 2008, the operator of MC 800 and MC 754 is planning to drill exploratory targets in these blocks. If successful, these exploratory targets will be brought on production through the ATP Innovator. ATP owns a 50% W.I. in MC 754 and a 25% W.I. in MC 800.
Ship Shoal ("SS") 351 (100% Working Interest) - ATP achieved successful drilling results in two wells at SS 351 and expanded its drilling program at this property from two wells to four wells. The first two wells at SS 351 are currently producing. The third well, SS 351 #A4, is expected to start producing in the third quarter, bringing net field production from approximately 10 MMcfe per day to approximately 17 MMcfe per day.
High Island ("HI") A-589 (100% Working Interest) - ATP is currently developing HI A-589 using a fixed production platform. The company completed construction of the jacket and deck in the second quarter 2007 and installation was completed in July of this year. ATP is planning to drill up to two wells at this location and we expect first production in the first quarter of 2008.
Telemark Hub - MC 941/942 and Atwater Valley ("AT") 63 (100 % Working Interest) - ATP commenced the construction of a MinDOC (Deep Draft Floating Platform) for use at MC 941/942 and AT 63. Drilling at MC 941/942 will occur via a platform rig to be located on the MinDOC. The AT 63 well is expected to be drilled from a floating drilling unit. The subsea well at AT 63 will be tied into the MinDOC and the MinDOC will serve as the primary production facility for MC 941/942 and AT 63. Construction of the hull is underway in Texas and construction of the topside is progressing in Louisiana. The MinDOC sail-out is currently scheduled for the summer of 2008 with first production late in the same year.
Tors - Kilmar & Garrow (85% Working Interest) - ATP produces from three wells at Tors, the most recent of which (G1) was placed on production in February of 2007. ATP is currently drilling a fourth well (K3) at Tors. The K3 well is expected to be completed and on production in the fourth quarter 2007 and is expected to initially expand production at the Tors field to 60-80 MMcfe per day, net. Production at the Tors field was voluntarily curtailed during the second quarter due to seasonally low natural gas prices in the U.K. As favorable prices return during the third and fourth quarters, Tors production should increase to 60-80 MMcfe per day, net.
Wenlock (100% Working Interest) - ATP successfully completed and tested the W1 well in July 2007 with a company record 3,900' horizontal completion. The W1 well encountered additional sands in an exploratory target across a fault and tested at the limit of the test equipment with a flow rate of 58 MMcf per day. In the coming months, ATP will dewater, hydrostatically test and tie-in the 27-kilometer pipeline to bring the field onto production. First production is scheduled for the fourth quarter of 2007 at a rate of approximately 60 MMcfe per day, net. Beyond the existing well, further upside is expected from two additional drilling opportunities, which are currently under evaluation in the vicinity of Wenlock.
Helvellyn (50% Working Interest) - Helvellyn was returned to production at 9 MMcfe per day, net, in July following its planned summer shut-in and should remain on production through next winter.
Production for the second quarter averaged approximately 160 MMcfe per day, a rate higher than had been expected. In spite of the complete shut-down for 18 days of Gomez during the quarter due to the ATP Innovator expansion, Gulf of Mexico oil production from the first quarter 2007 to the second quarter 2007 increased from 11.1 MBbls per day to 11.3 MBbls per day. ATP previously forecasted production of approximately 10 MMcf per day in the North Sea due to voluntary curtailments. Natural gas volumes produced during the quarter exceeded volumes hedged at the end of the first quarter, rising to 16.5 MMcf per day. Production was increased to take advantage of new hedges in the North Sea and a higher-than-forecast natural gas price. Based on the company's current production capacity, including the ATP Innovator capacity upgrade and the new wells scheduled to commence production during the second half 2007, estimated production for the third and fourth quarters of 2007 is expected to exceed production for each of the previous quarters in 2007. ATP is on target to exit 2007 at a production rate in excess of 300 MMcfe per day, net.
Since the beginning of 2007, ATP has closed transactions covering 8 blocks in the Gulf of Mexico. In July 2007, ATP acquired the remaining 22% interest in South Timbalier 77 and the remaining 44% interest in High Island 74, both producing properties operated by ATP. ATP also acquired a 100% interest in Ship Shoal 350 adjacent to the previously discussed Ship Shoal 351. Future development plans for each of these properties are currently being finalized. Additionally, ATP is in discussions with parties regarding potential acquisitions and divestitures of other properties, including the sell down of a portion of ATP's working interest in certain properties, in both the Gulf of Mexico and the North Sea. ATP expects to continue to pursue opportunities that meet its acquisition and divestiture strategy. Coupled with extension well discoveries at existing locations, ATP estimates these acquisitions have added approximately 80 Bcfe of recoverable hydrocarbons to its portfolio of properties in 2007. Proved and probable reserves associated with these acquisitions and extension well discoveries are being evaluated by ATP's independent reserve engineers and will be reported in conjunction with the annual 2007 year-end reserve report.
In total for the second half of 2007, and for 2008 and 2009, ATP has 103 Bcfe hedged at an average price of $9.09 per Mcfe, representing potential future revenue of $938 million. Since its first quarter earnings press release dated May 10, 2007, ATP has hedged an additional 8.8 Bcfe for 2007 and 2008. Included in these hedges are 548 thousand barrels of crude oil fixed forward sales at prices ranging from $73.00 per Bbl to $73.45 per Bbl and 5.5 Bcf of U.K. natural gas swaps at prices ranging from $6.12 to $10.20 per Mcf. A detailed listing of all of our hedges is provided near the end of this press release.
ATP entered into its first currency hedge on July 26, 2007. The currency swap locks in a $2.049 USD/GBP exchange rate for GBP 33 million, protecting $67.6 million in projected cash flow from our U.K. subsidiary. A complete listing of the company's currency hedge positions can be found near the end of this press release.
Capital Resources and Liquidity
Cash flow from operating activities was $177.5 million during the first six months of 2007, compared to $46.6 million in cash flow from operating activities for the same 2006 period. Cash flow from operating activities prior to changes in assets and liabilities, a non-GAAP measure frequently used by research analysts, was $175.1 million for the first six months of 2007, compared to $91.1 million for the same 2006 period. A reconciliation of non-GAAP cash flow from operating activities prior to changes in assets and liabilities can be found near the end of this press release.
ATP had $132.6 million in cash and cash equivalents on hand at June 30, 2007, compared to $182.6 million at December 31, 2006. Cash paid for acquisition and development activities for the six months ended June 30, 2007 was $390.0 million, compared to $203.4 million for the same period in 2006. At June 30, 2007, ATP had a GAAP working capital deficit of $24.9 million, compared to working capital of $77.5 million at December 31, 2006. At June 30, 2007, ATP had positive working capital per its credit agreement of $49.6 million, which includes ATP's $50 million fully available and un-drawn revolver.
ATP previously announced that it was evaluating an MLP or similar partnership structure for certain of its platform and pipeline assets. ATP completed its preliminary evaluation in June and determined that this initiative may be achievable and, if successful, might provide advantages for the Company. ATP continues to work to identify both the assets and a structure that may be appropriate.
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