Increasing volumes is ultimately what we want as shareholders, if we want to maximize our investments in the oil patch. Growth is the key to big increases in stock prices. So when an old supply that was lost to the oil market begins to come online again -- as is the case in the Gulf of Mexico -- we need to look at who will be best able to take advantage of that supply, and grow production. With global oil prices well above $110 a barrel for Brent, it is the growing E&P companies that are going to deliver better margins and ultimately better stock appreciation.
Dec. 14 will mark a fresh start, at least for the leasing of some prime real estate in the Gulf. It will be the first major sale of leases by the Department of the Interior since the Macondo blowout of 2010 caused a six-month shutdown of permitting for offshore drilling. Despite the increased regulation and equipment needed for offshore production after the BP (BP) spill, the GoM remains a prime source of developing new domestic crude and natural gas supply.
While BP and Chevron (CVX) continue their commitment to developing new wells in the GoM, smaller independents including Apache (APA) and Anadarko (APC) will yield relatively faster growth. These independent oil companies are already well known to regular readers; I've asserted time and again that they represent some of the best values in the oil patch. But I want to suggest one more, Gulf-of-Mexico-specific, admittedly very speculative name: ATP Oil and Gas (ATP).
ATP has a very big problem: Deep in debt from exploration costs and sidelined from its GoM projects since the BP spill, the company has seen its bonds downgraded on fears of a default and bankruptcy. ATP had the very bad fortune of floating its last bond offering a day before the BP spill and has been forced to renegotiate contract payments, delivering royalties on some projects instead of cash. The company's big four-well deepwater project in the GoM has had technical problems and has not yielded as quickly as hoped. Consequently, the stock has been crushed, down from $20 a share at the start of the year to $6.75 on Friday.
In order to beat the clock, ATP must mark enough time to increase production while still paying off debt obligations. If it can manage to do this -- which I think is likely -- shares of the company at today's prices could look awfully cheap 12 months from now.
If ATP can't walk the tightrope, however, shares will almost surely go to zero.
What makes this speculative play interesting to me is the company's pre-eminence in the Gulf as well as its continued interest in bidding on new leases come December. A company that truly believes it is on the verge of bankruptcy doesn't look for new projects to take on.
This is a very speculative play in a supply source that is just again beginning to open up. But whether you look at mega-caps, mid-caps or risky small-caps, there is a value to be found now in the deepwater drilling about to restart in the Gulf of Mexico. Have a look at some of these stocks and see if you can find one you like.