ATP Loss Widens in 2Q
ATP announced second quarter 2010 results and an update on ATP's developments.
The second quarter of 2010 and the early part of the third quarter has been one of the more challenging periods in the company's history, including the following events:
- Production increased 29% from the first quarter of 2010;
- In the North Sea, ATP was awarded Blythe in the U.K. 25th Oil & Gas Licensing Round, which is expected to add proved and probable reserves to its year-end 2010 report. ATP's drilling program continued at Tors and will add production in both 2010 and 2011. The construction of the Octabuoy Hull, which will be initially deployed at Cheviot, ATP's largest development in terms of proved and probable reserves in the North Sea, remains on schedule for delivery of the hull and topsides in late 2012;
- ATP completed a $1.5 billion high yield and $150.0 million first lien term loan offering that refinanced its prior term loan facility, eliminated all financial maintenance covenants, and raised $303.3 million in additional liquidity. As a result, ATP expensed $78.2 million in costs related to previous financings;
- As a result of the BP oil spill and regulatory fallout, the Bureau of Ocean Energy Management ordered ATP on June 8, 2010 to stop drilling at its Canyon Express Hub. This action resulted in ATP recording an $8.7 million expense. ATP will pursue full recovery for this expense;
- The above items contributed to a quarterly loss of $82.9 million; and
- ATP sold its interest in the deep exploratory rights in Mississippi Canyon ("MC 348"), which is adjacent to the third party Appomattox discovery announced earlier this year, for an initial 10.005% ORRI and other consideration.
Results of Operations
ATP recorded a net loss attributable to common shareholders of $82.9 million or $1.63 per basic and diluted share for the second quarter of 2010 compared to a net loss of $4.4 million or $0.12 per basic and diluted share for the second quarter of 2009.
Production for the second quarter 2010 averaged 21.3 MBbls/day, an increase of 24% from the comparable quarter in 2009 and a 29% increase from the first quarter of 2010. The increase was driven primarily from the first well at ATP's Telemark Hub which was placed on production on March 28, 2010 and new wells in the company's Canyon Express Hub placed on production in March 2010. Revenues from oil and gas production were $101.1 million for the second quarter of 2010 compared to $80.9 million for the second quarter of 2009. Oil continued to represent a majority of revenues, accounting for 70% of revenues in the second quarter 2010 and 77% in the comparable 2009 period.
Lease operating expense for the second quarter of 2010 was $32.3 million, compared to $17.4 million for the second quarter of 2009. Lease operating expense for the second quarter of 2010 included non-recurring workover expenses of $6.6 million. The increase in recurring operating expense was primarily due to the new production from the Telemark and Canyon Express Hubs. ATP began recording lease operating expenses at its Telemark Hub in the second quarter 2010 with the commencement of production from the Atwater Valley 63 #4 well.
General and administrative expense increased $1.0 million from the second quarter of 2009 to $8.1 million, including $1.7 million of noncash stock-based compensation. The increase was primarily due to the 2009 reversal of approximately $1.0 million of accrued compensation associated with a terminated employee bonus plan.
Other expenses incurred in 2010 that were not incurred in the comparable period in 2009 were $8.7 million associated with the termination of a contract as a direct result of the recently announced moratorium on drilling in the Gulf of Mexico and $78.2 million associated with a complete refinancing of ATP's bank and term debt. The latter two items are discussed below.
With the completion of the installation of the ATP Titan at the Telemark Hub and the commencement of production at this location on March 28, 2010, ATP's Telemark Hub no longer qualifies for interest capitalization. Interest expense for the second quarter 2010 was $64.6 million compared with $10.2 million in the second quarter of 2009 when $22.9 million of interest expense was capitalized. Additional interest expense is recorded for other liabilities.
Acquisitions and Divestitures
In July, ATP's wholly-owned subsidiary ATP Oil & Gas (UK) Limited received an award in the U.K. 25th Oil & Gas Licensing Round from the Department of Energy and Climate Change.
ATP UK will receive a 50% working and net revenue interest, and serve as operator of Blythe located in Blocks 48/22b and 48/23a with the other 50% assigned to Ebor Energy Ltd. Blythe contains an undeveloped gas opportunity which was discovered in 1966 in 76 feet water depth. This gas discovery is in a Rotliegend sandstone interval at 7,200 feet water depth. ATP expects to record both proved and probable reserves at Blythe in its year-end 2010 reserve report.
In April, the then Minerals Management Service ("MMS") accepted ATP's bid of $0.2 million for Garden Banks Block 782, also known as Entrada. ATP made the bid at the Central Gulf of Mexico Offshore Lease Sale 213 held in March 2010. Previous exploration drilling on Garden Banks 782 found logged hydrocarbons and Entrada is in the vicinity of existing infrastructure owned by others. ATP will serve as operator with a 100% working interest in Entrada, which is located in 4,531 feet of water.
In July 2010, ATP sold its interest in the deep rights in MC 348. The deep rights at MC 348 are unexplored but adjacent to the third party Appomattox discovery announced earlier this year. In addition to the cash proceeds, ATP retained a 10.005% overriding royalty interest that decreases to 1.6675% following the conclusion of deepwater royalty relief.
Gulf of Mexico Oil Spill and Drilling Moratorium Update
On Tuesday, April 20, 2010, a semi-submersible drilling rig operated by BP p.l.c. in the deepwater Gulf of Mexico exploded, burned for two days, and sank, ultimately resulting in an oil spill. In response to this crisis, the U.S. Secretary of the Interior, on May 6, 2010, announced a moratorium on U.S. offshore drilling permits issued after April 20, 2010 until May 28, 2010 when a report on the accident was expected to be completed. Effective May 30, 2010, the Minerals Management Service issued a Notice to Lessees (NTL No. 2010-N04) ordering a second moratorium, originally scheduled to last for six months, that essentially halted all drilling in water depths greater than 500 feet in the Gulf of Mexico. On June 7, 2010, a lawsuit was filed by a supplier of services to Gulf of Mexico exploration and production companies challenging the legality of the six-month moratorium. This challenge was successful and on June 22, 2010 a Federal District Court issued a preliminary injunction preventing the moratorium from taking effect. The Fifth Circuit Court of Appeals is scheduled to hear the injunction case in late August. On July 12, in response to the court's actions, the U.S. Department of Interior issued a Decision Memorandum establishing a third moratorium and essentially canceling all permits for drilling at locations using a floating drilling rig or platform. Although lawsuits have been filed challenging the moratorium, there is no resolution to the challenge as of the date of this release.
The moratorium forced ATP to cancel on June 9 an ongoing drilling operation at its MC 305 location, which had begun based on a permit for the operation issued on May 12, 2010. The termination of the drilling contract cost ATP an additional $8.7 million. ATP is seeking reimbursement of this, and other moratorium related expenses, from BP p.l.c. The third moratorium has caused ATP to delay the third and fourth Telemark Hub wells and a drilling operation at its Gomez Hub.
Liquidity and Capital Resources
In April 2010, ATP issued 11.875% senior second lien notes in an aggregate principal amount of $1.5 billion, due May 1, 2015. Proceeds from the second lien notes were used to repay the entire amount outstanding under ATP's prior credit facility and for general corporate purposes. In conjunction with the senior second lien notes, ATP entered into a first lien revolving credit facility with an initial borrowing base of $100.0 million. In June 2010, ATP replaced the first lien revolving credit facility with a $150.0 million first lien Term Loan agreement that has an 11% interest and matures May 15, 2014. The senior second lien notes and the first lien Term Loan do not contain financial maintenance covenants that had been part of the prior credit facility.
Cash and cash equivalents were $205.9 million and $109.0 million as of June 30, 2010 and December 31, 2009, respectively. ATP had a working capital deficit of approximately $39.7 million and $26.4 million as of June 30, 2010 and December 31, 2009, respectively.
2010 Revised Guidance for Production and CAPEX
The impact from the BP oil spill and the resulting moratorium discussed above have caused significant adjustments to ATP's previously announced production estimates and CAPEX program. ATP incurred CAPEX costs of $513.3 million during the first six months of 2010. Of this amount $46.2 million was capitalized interest and $107.6 million was financed by suppliers. For the second half of 2010, ATP recommends the preliminary guidance provided in the schedule below. The guidance is based on completing the second well at Telemark which is scheduled to begin production before the end of the third quarter and bringing to production the well at MC 754 in ATP's Gomez Hub late in 2010. All additional drilling and well operations in the Gulf of Mexico are deferred until 2011. In the UK North Sea, ATP anticipates bringing to production the new Garrow G2 well at Tors before the end of the year and continuing the development program of the Octabuoy, the floating drilling and production facility destined for Cheviot.
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