Buy the Dips on ATPG and others

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dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Buy the Dips on ATPG and others

Post by dan_s »

I believe the selloff in ATPG, which is directly related to the BP oil spill in the GOM is way overdone. For one, ATPG is not currently drilling any high risk exploration wells in the GOM. Their business plan is to obtain properties where others have already proven the reserves and develop them.

Don't get me wrong, ATPG does have concentration risk. They get a high percentage of their revenues from a handful of projects so one Cat 5 hurricane in the wrong place can shut in a significant portion of their production. Note: The Telemark Hub is built to withstand a Cat 5 hurricane.

I was expecting ATPG to dip when their 1st quarter results came out. I now think the reverse is possible. Q1 results will not be much to sing about but their operations update on the large production increase at Telemark should give the share price a boost.

The Market is selling a sub-sector because of the GOM oil spill. Finding those sold off with the pack that have nothing to do with the reason for the selloff can be a successful strategy.

Dan

From The Motley Fool:

Five super falls -- one superball
So the Dow's still sitting north of 11,000, but even so, it's been an absolutely miserable few weeks for a lot of investors. First there was the Goldman Sachs PR nightmare. Then the return of the European Debt Meltdown, Part Deux. And finally, the Deepwater disaster.

Little wonder so many stocks have fallen so very far. Less wonder that all of them are in the oil drilling sector. Yet, surveying the damage on Friday, the Fool's resident oil expert, Toby Shute, declared many of these sell-offs "senseless." While it's true that lawsuits are already flying, and that Transocean, Halliburton, and BP for example are all targets, Toby points out in particular how companies like ATP Oil & Gas (Nasdaq: ATPG) and Dril-Quip had literally nothing to do with the Gulf Coast disaster. And yet, you may be surprised to see that the one stock on today's list with the absolute highest risk-reward estimate among CAPS investors is ... the very company that owns/owned the exploded Deepwater Horizon oil rig.

Can there truly be hope for Transocean shareholders? Some of the smartest investors on CAPS believe there is. Let's find out why.

The bull case for Transocean
CAPS All-Star blue2fire berates the "Ridiculous backlash on the companies involved in this fiasco," pointing out that "The amount lost in market cap and the money it will cost them in fines, lawsuits and cleanup charges have nothing in common."

Meanwhile, as far as the business goes, fdude71 concedes: "OK they recently lost a RIG in Louisiana but they have another 150 to leverage. The company is solid, has a nice balance sheet and is the technology and field leader ... I think the recent dip is just panic sale and I'm glad to catch Transocean at of PE of less than 9."

Last but not least, All-Star investor wjcoffman grits teeth and risks: "Catching a falling knife." While admitting that "This leak is huge and will be the worst environmental disaster of several generations," wjcoffman argues that "The investigation will determine that it is due to human error (regardless of whether that is the truth or not)." And no, "The world won't stop it's consumption of oil."

Buy the numbers
Ordinarily at this point in the column, in evaluating whether investors' enthusiasm is warranted, I'd take a close look at Transocean's balance sheet, its income statement, its cash flow statement. I'd crunch the numbers and tell you whether I think the shares are undervalued or overvalued. But not today.

Today, I'm going to end with a very simple analogy, hinging on wjcoffman's mention of how the Deepwater Horizon is going to become the "worst environmental disaster of several generations." Now, aside from the kindergartners in the class, I'm sure you all remember who was responsible for the last "worst environmental disaster in blah, blah, blah" -- ExxonMobil (NYSE: XOM).

On March 24, 1989, the Exxon Valdez oil tanker ran aground off the Alaskan coast, spilling some 10.8 million gallons of crude into the ocean. The disaster took years to clean up, tainted the local environment for decades, and cost Exxon an initial $5.3 billion in litigation awards (since reduced by a factor of 10). Yet for all this, can you guess how Exxon's stock has performed from March 24, 1989 through today's date?

It's up more than 10 times, versus just a 300% gain for the S&P 500. Simply put, one multi-generational disaster won't be enough to do in this stock.

Q.E.D.
Or so says me. Maybe you have a different take on the disaster? Maybe you believe that, unlike Exxon, this particular mess is just too sticky to swim away from unscathed. Share your take with the EPG.
Dan Steffens
Energy Prospectus Group
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