ATPG under the BP Oil Spill Cloud

[dan_s]

Article below is from Seeking Alpha article posted July 7. The MC 941 #3 well is very important to ATPG's near-term future. My guess now is that well will not be on-line until August. This well is not under the moritorium. If it comes on at 6,000 to 8,000 bopd as expected it should give ATPG the necessary cash flow to "weather the storm". Just be aware that this one has a lot of risk. - Dan

ATP Oil & Gas' (ATPG) stock price continues to languish despite a recent improvement in its financing structure that increased their available liquidity and removed all financial covenants on debt.

The second Telemark well will come on line some time in the next month (it is the completion of an already drilled well so wasn't impacted by the moratorium).

The Titan refinancing which would increase liquidity by another $350mil (and would give ATP more cash than they know what to do with) is also likely to be completed in the next month (ATP investor relations claims the deal is still on track).

And the moratorium revision is coming from Salazar that seems likely to be favorable for ATP in that Salazar has hinted that development wells (that is all ATP does) will be treated differently as they are known reservoirs and don't present the risk of an exploratory well.

So what is the problem? Well, it is the threat that the government is going to push up financial responsiblity requirements to at least $1.5bil which would mean that there is not enough insurance capacity in the industry to allow for companies to get the insurance they need to operate.

Now that is a threat to be sure, but my question is does it really matter to the value per share of ATP ?

Why do I ask this? Because based on what I have read it seems that such a change in regulation could not be applied to existing leases because it would be a clear breach of contract by the government. After all the government sold these leases to companies like ATP under the existing economic liability cap limits and the existing OPA of 1990 which limits financial responsibility requirements to $150mil.

Now I'm not telling you that the government can't do this. I'm asking because I'm not an expert in such things. The funny thing is that if it turns out that existing leases are grandfathered from such an increase in cap limits, the leases held by companies like ATP will actually be worth more than they were prior to this.

Here is some commentary on the subject that I found:

Government imposition of a new financial responsibility requirement on existing leases would likely be deemed a breach of contract under the Winstar principle, which has already been applied in the context of offshore leasing in a Mobil Oil case. The Government cannot induce investment in its property under one set of financial responsibility rules, then impair the value of the investment by unilaterally changing the rules. There are also constitutional problems with retroactive law that breaches contracts. But, even where Congress has constitutional power to impose new rules, it can be required to pay contract damages. The Government could argue here that the lessees assumed the risk of this kind of change. But that is not a defense that will succeed simply on the basis of a general agreement to comply with future law in the lease form. Though a DoJ witness suggested that the government would have defenses to a contract claim, he did not explain them or dispute the seriousness of the contract problem.

Congress may not want to believe or care about the liability problems it is creating, but the Executive does. While the Administration has supported the removal of the liability cap, the DoJ witness indicated that some kind of "transition" may be required. A simple solution is to make any new financial reponsibility rule prospective for new leases. Of course, Congress does not want to consider that while BP (BP) is on the table. The whole point of this effort was to remove the liability cap so that BP could not claim protection. But BP has not claimed the liability cap and it probably could not successfully do so if it wanted to (it is unavailable for gross negligence and violations of MMS rules).