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Rating Action:

Moody's lowers ATP Oil & Gas outlook to negative; affirms Caa2

04 Jun 2010

Approximately $1.5 billion of debt affected

New York, June 04, 2010 -- Moody's Investors Service lowered ATP Oil & Gas Corporation's rating outlook to negative from positive and affirmed its Caa2 Corporate Family Rating, Caa2 Probability of Default Rating, and Caa2 (LGD 4; 53%) rating on $1.5 billion of unregistered 144A senior second lien notes due 2015. We also reduced ATP's Speculative Grade Liquidity rating to SGL-4 from SGL-3. ATP is a small exploration and production company operating in the shallow and deep waters of the Gulf of Mexico (approximately two-thirds of reserves) and in the North Sea. At year-end 2009, ATP held 135.1 mmboe in proven reserves, of which a very small 13% was proven developed (PD) and a smaller proportion than that was proven developed and producing (PDP) reserves.

The move to a negative outlook reflects that the ratings and prior outlook were tied specifically to successfully drilling, completing and tying in three deepwater Gulf of Mexico (GOM) Telemark Field wells to first production this year, at roughly the projected production rates, and that by year-end 2010 ATP's 2011 drilling program would adequately capable of supporting the post-Telemark higher production base. Telemark is located in approximately 4,450 feet of water and most of ATP's other core prospects are located in GOM deep waters.

Accordingly, the negative outlook reflects the impact of the Department of the Interior's deepwater GOM drilling moratorium declared May 30 after the BP PLC Macondo well blow out. This will delay two of ATP's four Telemark wells at least for the cited six months or, in our opinion, longer. ATP reports that the moratorium does permit it to complete its already drilled second Telemark well (MC 941 #3), although ATP is still waiting for third party completion services and equipment that are delayed due to the sector's effort to shut the Macondo well down. As detailed in our April 14, 2010 analysis, in our view ATP's operating and financial profiles left little latitude in the ratings and outlook to absorb material delays in sequencing its deepwater GOM wells to first production.

Furthermore, given the unknown ultimate length of the moratorium, let alone the unknown regulatory conditions, cost and pace at which the sector will be able to recommence drilling after the moratorium is lifted, greatly diminish the visibility on timing and economics of ATP's Telemark, Canyon Express MC 305 #2, and Gomez Hub MC 711 #9 and MC711 #10 wells as well as its ATP's 2011 deepwater program. Telemark alone represents over 35% of ATP's reserves and forecasted Telemark production is more than double ATP's diminished fourth quarter 2009 production.

The ratings remain restrained by ATP's small production and cash flow base, its very short PD and PDP reserve lives, low drilling risk diversification, extremely high leverage, heavy capital spending in excess of cash flow, large net profits interest and overriding royalty obligations on current producing and future producing properties once they come on production, and other long-term obligations. While the timing, cost, and production response of the drilling program were too speculative to support a higher rating, the second quarter through fourth quarter 2010 visibilities of the three pending Telemark wells and other 2010 and 2011 prospects warranted a positive outlook.

The ratings could be stabilized once ATP is able to mount sustained production increases needed to substantially reduce its extreme leverage on units of production and cash flow. The company has promising prospects backed by prior well control data and seismic interpretation. But its massive debt burdens relative to current rates of production are a heavy burden to carry given its short PD reserve life and inability to significantly replace production decline during the drilling moratorium.

The ratings are supported by significant cash liquidity after the April bond offering, although outlays substantially exceed current cash flow. The ratings also benefit from ATP's decade long history of acquiring non-producing Gulf of Mexico and North Sea properties from other producers and subsequently funding, drilling, developing, completing, and bringing them to production. In first and second quarter 2010, ATP also began to significantly reverse several quarters of production decline. In the first quarter and second quarters of 2010, ATP's well completion at Mississippi Canyon Block 711 (part of its Gomez complex), the resumption and the addition of production at its Canyon Express Hub, and the completion of its first Telemark well in late March boosted daily production by more than 75% above depleted fourth quarter 2009 production. ATP's substantial oil and liquids production component also positively exposes it to oil prices that remain much stronger than natural gas prices.

In light of ATP's short PDP reserve life, reduced visibility on production rates and cash flow over the next four quarters, and its heavy capital outlays, the liquidity rating is downgraded to SGL-4 from SGL-3. While ATP still carries significant cash balances, it is committed to paying fixed rig day rates, the drilling moratorium could consume substantial cash, and seriously erode bank covenant coverage. To raise additional liquidity, the company may be still attempting to partly or fully monetize its ATP Titan floating production platform, the core production infrastructure asset for its Telemark Hub operation.

ATP had completed its pivotal Telemark Hub production infrastructure and the first Telemark well (AV 63 #4) was brought on production just before the note offering. The company believes it will be able to complete its already drilled MC 941 #3 and MC 754 #1 wells by year end 2010. However, given the nature of reservoir pressure, the risk of undetected permeability barriers, and risk of premature water encroachment and production decline, identifying even the completed Telemark well's reservoir drive mechanism, and estimating its decline curve, are tenuous after only two months of production.

ATP carries high operating and capital risk concentrations due to its strategy of holding 100% working interests in offshore projects and in buying or constructing its own floating production platforms. Its business model involves purchasing, at comparatively low cost, and then drilling and developing other producers' non-strategic PUD and non-proven properties in the GOM and North Sea. It therefore carries large up-front capital spending outlays, long project lead times, delay and cost overrun risks (particularly of its floating production platform construction program), fast production decline curves, and the challenges of sequencing new projects to come on line faster than older projects are declining.

ATP carries especially high leverage on daily production rates and year-end 2009 PD reserves, even pro-forma for its original production forecast. Its 2010 capital spending budget exceeds pre-Telemark cash flow and capital spending will continue at high levels for several years.

The Caa2 ratings and positive outlook were assigned on April 14, 2010. The principal methodology used in rating ATP was the Independent Exploration and Production (E&P) Industry rating methodology which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory.

ATP Oil & Gas Corporation is an independent oil and gas company headquartered in Houston, Texas.

New York
Steven Wood
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andrew Oram
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's lowers ATP Oil & Gas outlook to negative; affirms Caa2
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