Who cares if ATP fails?
There have been quite a few positive developments in ATP since I wrote about them last. Perhaps I will address them in a later post. However, elsewhere you see a lot of hand wringing over whether ATP will execute their plans for the next few quarters. Make no mistake, if they do execute them (and I see no reason why they won’t) it will be a transforming event for them - huge free cash flows, all debt paid off, etc.
However, for any company I own I try to “break it”. Figure out what can go wrong in a perfect storm, and get a feel for the results.
The PV-10 value of ATP’s reserves is $5.3B. The infrastructure value, almost all of it new construction with a 25-40 year life span, is $1B. That value is based on what it cost ATP to build it, not the present value of cash flows they will generate (which of course will have a greater value). This number is backed up by the deal made with GE, where GE paid the estimated value for the Innovator platform.
Total liabilities, including long term debt, income tax, accounts payable, etc., is just under $2B. That gives us an enterprise value of $4B, vs a current market cap of under $500MM. A pretty huge disconnect.
Why is the stock price so low? Everyone is hand wringing over the debt covenants. When ATP renegotiated their debt, it came along with a bunch of provisions, most of which I talked about before. They had to sell assets, devote 75% of the proceeds to debt reduction, they had to earn revenues at some multiple of the debt, etc.
Of their covenants, the requirement that debt be less than 3x EBIDAX gets the most attention. Right now the plan is to make the majority of that money via asset sales. They were helped along with a sweetheart deal with a driller, whereby the driller pays for the cost of development and gets paid with profits. Still, ATP has to execute some sales to meet the covenant.
But, is this a big deal? Sure, we don’t want them to blow the covenant. But suppose they do? They won’t go bankrupt over it, but pretend they did. ATP would be put up on the block, and over $6B of assets would be sold to generate $2 worth of money to pay off debtors.
While we would all be extremely disappointed by the demise of a company with such a great future, under any reasonable scenerio there would be more than enough money to pay off shareholders. Would we end up with $70/share? Probably not, trying to sell that many assets at once in this environment probably means we’d end up selling some things for less than they are worth.
So, while I’d hate for them to end up bankrupt (let’s very clear here, I don’t consider that a real risk), it’d hardly be a disaster. I’d fully expect to make money from the deal.
Realistically, blowing a debt covenant means sitting down with your debtor and renegoiating terms. Sure, they could demand repayment in full immediately, forcing some kind of bankrupcy proceedings. But is that likely? Given that ATP recently coveyed 3 limited-term NPIs for the development of Telemark (meaning the devlopers pay for the development, and get paid from future profits) we can conclude that there is future value in ATP. Debtors are unlikely to walk away from such cash flows. Instead, they’ll turn the screws a bit and get more favorable terms. Nothing is guaranteed - a debtor that needs cash can always demand repayment, but it is unlikely. If it does happen, stockholder still win, though much less than they could have.
So, what is the fear that makes ATP trade so low? I don’t know, I’ve never seen anything reasonable articulated.
edit: I haven’t bothered looking at all the little terms in the debt - with that we could get a more realistic assessment of what happens if a debt covenant fails. My position is: who cares? If I win even if the company breaks I don’t need to know much more.
Tags: ATPG