Category Archives: Side Effects
Christopher Helman, Forbes Staff
I’m based in Houston, Texas, energy capital of the world.
Paul Buhlman swears the president’s ban on deepwater drilling killed his oil company. The whole story is a bit more complex.
(This story will appear in the Sept. 11, 2012 issue of Forbes Magazine)
When I get Paul Bulmahn on the phone rumors are swirling that he’s just days from putting his company, ATP Oil & Gas, into Chapter 11. He can’t confirm it yet, but he wants to make one thing perfectly clear: If it does come to bankruptcy (which it did on August 17) it isn’t his fault. The founder and chairman of publicly traded ATP (Nasdaq:ATPG), Bulmahn wants the world to know that the Obama Administration—and its illegal ban on deepwater drilling in the wake of the BP disaster—is to blame for the implosion of his company. Not him.
“It is all directly attributable to what the government did to us,” he rails. “This Administration has gone out of its way to create problems for my company, the company that I formed from scratch.” He’s more than angry. Bulmahn, 68, has already brought suit against the U.S. government seeking damages ($68 million to start with) for the 2010 moratorium that shut down deepwater operations in the Gulf of Mexico for the better part of a year. In an earlier case brought by ATP and rig company Ensco, Federal District Judge Martin Feldman ruled in May 2011 that the feds “acted unlawfully by unreasonably delaying action” on drilling permit applications. Still, ATP has a long, winding road to any hope of recovering damages from the government (which says it’s protected from claims by sovereign immunity).
That’s proving disastrous for Bulmahn. While hundreds of companies with operations in the gulf were affected by the government’s decision, perhaps no other was as hard hit as ATP—or as vulnerable. In 2010 the company had completed work on its $800 million deepwater production platform Titan and floated it out to the deepwater Telemark field 160 miles south of New Orleans. Bulmahn planned for Titan to complete drilling the final feet of four wells, hook them up, and let the oil—and the cash—start rolling in.
On April 19, 2010 ATP refinanced and rolled up $1.5 billion in debt into a new bond issue “and celebrated with champagne.” He says that at the time ATP stood a good chance of doubling its oil and gas volumes to 50,000 barrels per day within a year.
But the Deepwater Horizon exploded April 20. “We didn’t foresee an impact. The Titan is 80 miles farther south, and the spill is going to drift to the north,” says Bulmahn. Underwriter JPMorgan agreed, and it closed on the bond offering.
Soon ATP was informed by regulators that it would not be allowed to complete those Telemark wells, even though Titan was already outfitted with all the safety redun- dancies subsequently required for deepwater work. “They closed our spigot on revenues, but didn’t stop our expenses” for interest payments, rig contracts and the like. Bulmahn scrambled to spin off Titan as a subsidiary and borrowed $350 million more against it. ATP posted a net loss of $349 million in 2010.
It hasn’t gotten much better since. Overleveraged, ATP was balanced on a knife edge. The final Telemark wells didn’t get hooked up until earlier this year. Meanwhile, ATP has been burning through cash on what appears to be an ill-advised exploratory drilling campaign off Israel. In the past year ATP has lost $250 million on $600 million in revenues and now heads into bankruptcy, crushed by $2.7 billion in long-term debt and obligations and $300 million in annual interest payments. Bulmahn’s shares used to be worth $400 million; now they’re worthless.
But, say those who know ATP, you can only blame the Obama Administration for so much of the drama. “The moratorium had an effect on a lot of companies, but this is the only one blaming the moratorium two years later,” says an oil executive with direct knowledge of ATP.
Ravi Kamath, high-yield analyst with Global Hunter Securities, has been bearish on ATP for years and had a sell rating on ATP debt since early 2011, when it was trading at 104 cents on the dollar. It’s fallen to 29 cents now. Kamath says ATP’s problems reach far beyond the moratorium. He keeps a spreadsheet with 105 instances from the past decade where he says ATP has overpromised and then underdelivered. “Bulmahn has said lots of stuff that never happened,” says Kamath. “They have 11 years of bad forecasts.”
The first Telemark well was hooked up to Titan before the BP blowout, “but the project was already a year behind schedule and over budget.” Multiyear delays were normal at other ATP fields, too. What’s more, in August 2011 ATP said the third Telemark well was going to deliver 7,000 barrels per day. One month later the well was doing only 3,500. “With their cost of capital it’s just crazy to invest hundreds of millions to build a platform from scratch,” says Kamath. “They live in fantasyland.”
Yet instead of slashing costs and circling wagons, Bulmahn in late 2010 chose to take ATP on an international adventure. “I felt the need to find a way to keep our technically expert people occupied,” he says. That meant forging a deal with Isramco to drill an exploratory well offshore of Israel, near an area that has seen some massive natural gas discoveries. One well was finished in June; drilled to a depth of 14,000 feet it tapped as much as 800 billion cubic feet of gas. Sounds good, but it will be years before the infrastructure can be put in place to harvest it. Meanwhile ATP has $40 million in costs sunk off the coast of Israel.
Bulmahn says he’d like to retire; he owns a horse farm in Florida and has cashed out $100 million in ATP stock over the years (though, he insists, he’s eschewed $7 million in bonuses granted him since 2009). Earlier in 2012 he hired Matt McCarroll as ATP’s new CEO. McCarroll had expanded deepwater operator Dynamic Offshore Resources and sold it to SandRidge Energy for $1.3 billion. Yet after a week at ATP McCarroll left and rescinded his agreement to buy 1 million shares. The belief is that McCarroll was scared off by Bulmahn’s unwillingness to back a complete overhaul of ATP. Trying to salvage the status quo wasn’t an option. “He wasn’t the right fit,” says Bulmahn. McCarroll declined comment.
So what happens to ATP from here? They have already secured $600 million in debtor-in-possession financing, but after first-lien holders like Michael Dell’s MSD Capital are paid off, that won’t get it very far. Analysts say investors holding common shares, preferreds, convertible bonds and unsecured debt will get wiped out. Buyout bids are welcome.
So at this point, legal claims might be the most valuable asset ATP has left. In addition to the case pending against the U.S. government, ATP is pursuing claims against deep-pocketed BP. Who knows? With luck and lawyers, Bulmahn could still strike something.
More from the archives:
- ATP Oil And Gas Files For Bankruptcy, CEO Blames Obama (zerohedge.com)
- Drilling Moratorium Leads ATP to Chapter 11 (gcaptain.com)
ATP Oil & Gas, a Gulf of Mexico focused operator, on Friday, August 17, filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas.
ATP has taken this action in order to undertake a comprehensive financial restructuring.
“ATP expects its oil and gas operations to continue in the ordinary course throughout the reorganization process and sees the reorganization as a helpful step towards deleveraging the company to position it for future development of its assets. ATP believes that the rights and protections afforded it by a court-supervised reorganization process, including the ability to access new financing, will provide ATP with the time and flexibility it needs to fully address its financial challenges and position ATP for long-term viability,” wrote ATP in a press release.
The company said that the the primary reason for the reorganization began with the Macondo well blowout in April 2010 and the imposition beginning in May 2010 of the moratoria on drilling and related activities in the Gulf of Mexico.
“These events prevented ATP from bringing to production in 2010 and in early 2011 six development wells that would have added significant production to ATP. As of the date of this filing, three of these wells are yet to be drilled. Had ATP been allowed to drill and complete these wells, ATP believes it would have provided a material production change in 2010 continuing to today. This projected increase in production should have substantially increased cash flows, shareholder value and allowed the company the ability to withstand normal operational issues experienced by owners of oil and gas properties in the Gulf of Mexico. In addition, these incremental cash flows would have mitigated or prevented the need to enter into many of the financings ATP has closed since the imposition of the moratoria—financings that require relatively high rates of return and monthly payments” said the company in a statement.
The fiasco that is playing out in the natural gas industry doesn’t happen often in a free market, and when it does happen, it’s usually short—and brutal for all involved: namely, prices that are way below production costs. In most industries, hedging strategies might get market participants through the period, while unhedged production, a money-losing activity, gets slashed. If it lasts long enough, it causes a shakeout where less efficient or poorly capitalized producers, and their investors, get wiped out. It’s all part of the capitalist system that weeds out weaker elements through occasional sweeps of creative destruction.
As shortages crop up on the horizon, prices return to sustainable levels, and occasionally spike to once again unsustainable levels. For the survivors, or for lucky new entrants, the next step in the cycle has begun.
Alas, thanks to the Fed’s zero-interest-rate policy and the trillions it has handed over to its cronies since late 2008, the sweeps of creative destruction have broken down. Instead, boundless sums of money have been searching for a place to go, and they’re chasing yield when there is none, and so they’re taking risks, any kind of risks, in their vain battle to come out ahead. The result is a stunning misallocation of capital to the tune of tens of billions of dollars to an economic activity—drilling for dry natural gas—that has been highly unprofitable for years. It’s where money has gone to die. What’s left is debt, and wells that will never produce enough to make their investors whole. For that whole debacle, read…. Capital Destruction in Natural Gas.
But the money has dried up. And drilling for natural gas is collapsing. Last week, there were only 562 rigs drilling for dry natural gas—the lowest number since September 1999. A dizzying downward trajectory:
Producers, if at all possible, are switching to drilling for oil and natural gas liquids (priced like oil), still a profitable activity. Thus, capital is now being channeled to where it can make money. Drilling for dry natural gas will continue to decline as the long delayed sweep of creative destruction is scouring the industry.
The largest producer, ExxonMobil, given its monumental size and worldwide focus on oil, will weather the fallout just fine. But the second largest producer, Chesapeake Energy, is struggling. It’s trying to dump assets to raise cash to deal with its mountain of decomposing debt. Other producers that haven’t diversified away from dry natural gas are in a similar quandary. And at current prices, it’s going to be bloody.
At $2.53 per million Btu at the Henry Hub, the price of natural gas is up 33% from the April low of $1.90 per million Btu—a number not seen in a decade. But even if it doubled, it would still be below the cost of production. And if it tripled, it might still be below the cost of production for most producers. That’s how mispriced the commodity has become.
Misallocation of capital, and the resulting overproduction, is only part of the problem. The other part of the problem is horizontal fracking itself—a drilling method that extracts gas from shale formations. With nasty economics. It’s an expensive method. And once drilled, the well suffers from steep decline rates; after a year or a year-and-a-half, only 10% of the original production might still come to the surface.
The breakeven price for natural gas under these conditions—and it differs from well to well—is still partially theoretical since horizontally fracked wells have not yet gone through their entire lifecycle. Here is a detailed discussion and pricing model. The short answer: over $8 per million Btu. Even if that number is off, at the current price of $2.53 per million Btu, the industry is still near its point of maximum pain.
There are consequences. Power generators, having switched massively from coal to natural gas, are driving up demand. And production has finally seen a bend, a small one, in the curve that had set new highs month after month. Now, it’s declining. There is a lag between dropping rig count and production. The rig count estimates how many new wells are being drilled. Even if it dropped to zero next week, production would not immediately be impacted because the current wells would continue to produce. Production would then taper off as a function of decline rates per well—and in fracked wells, that lag is expressed in months, not years.
While the US doesn’t yet have LNG terminals to liquefy and export natural gas—in the global markets, LNG fetches mouthwatering prices between $10 and $15 per million Btu—it does have a pipeline to Mexico. According to BENTEK Energy (via the EIA), pipeline exports to Mexico hit 1,867 million cubic feet per day, a record in the seven plus years that BENTEK has been tracking it (by comparison, Chesapeake Energy produces about 2,575 MMcf/day).
Rising demand and exports are slamming into declining production. What was a record amount of natural gas in storage is coming down rapidly. Fears that storage would reach capacity towards the end of the injection period in the fall, and that natural gas would have to be flared, thus reducing its price to zero, seem ridiculous now. But prices, if they stay in the current ballpark, will continue to demolish producers, drive them away from dry natural gas, and cause financial bloodshed.
Until shortages appear on the horizon. But then, production can’t be ramped up quickly, regardless of what the price might be. Expect a spike and more mayhem, but this time in the other direction.
And oil, which has experienced a phenomenal boom in drilling? In North America, the range of oil qualities and a raft of infrastructure nightmares are wreaking havoc with record price differentials, writes energy expert Marin Katusa in his excellent…. Oil Price Differentials: Caught between the Sands and the Pipelines.
- Will Natural Gas Ever Catch On as an Important Transportation Fuel? (wallstreetpit.com)
- A clear look at Natural Gas (webjunkie09.wordpress.com)
- EIA: Horizontal Drilling Boosts Gas Production in Pennsylvania, USA (mb50.wordpress.com)
- No relief for natural gas producers as Apache’s Kitimat plant delayed (business.financialpost.com)
- A tough break for fracturing companies (fuelfix.com)
- Sad news for peak oil disciples (business.financialpost.com)
- Using Natural Gas (wallstreetpit.com)