Corporate Strategic Analysis and Recommendations

(Atp Oil And Gas Corporation)

By

Bright Asante-Appiah

A term paper submitted to Dr. William C. Minnis

School of Business

MBA

Eastern Illinois University

in partial fulfillment of the requirements for the class of

Administrative Policy

MBA 5890

on December 3, 2007
 Table of Contents
Executive summary……………………………………………………………………….2
Introduction……………………………………………………………………………….5
Methodology………………………………………………………………………………6
Findings…………………………………………………………………………………...7
ATP’s strengths – positive factors of ATP’s internal analysis……………………7
ATP’s weaknesses – negative factors of ATP’s internal analysis……………….10
External opportunities – positive factors of the external analysis……………….13
External threats – negative factors of the external analysis……………………...14
Strategic recommendations……………………………………………………………....17
Implementation…………………………………………………………………………..20
Short to medium term framework……………………………………………......20
Medium to long term framework………………………………………………...21
References……………………………………………………………………………….24
Appendixes………………………………………………………………………………25
Internal Analysis…………………………………………………………………25
Value chain analysis……………………………………………………..25
VRIO…………………………………………………………….26
Generic strategies………………………………………………..28
Price analysis…………………………………………………………….29
Board of directors and management……………………………………..31
Financial analysis (Trend)……………………………………………….44
Ansoff Matrix……………………………………………………………46
BCG Matrix……………………………………………………………...47
External Analysis……………………………………………………………......50
Porter’s five forces model………………………………………………50
PEST analysis…………………………………………………………..56
Competitor analysis…………………………………………………….60
Financial analysis (Inter-firm)………………………………………….61
Industry structure……………………………………………………....71

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 EXECUTIVE SUMMARY
Global energy crisis threatens the world security and oil and natural gas supplies
face long term decline. The reason is apparent: modern energy is responsible for
everything from transportation, manufacturing, heating and cooling, communications,
medical advancements, education, clean water/sewage treatment, etc. With growing
population versus projected energy supply imbalances, industrial superpowers will
compete with developing nations for access to energy resources. China, for example, is
expected to overtake the U.S in energy consumption soon after 2010. The picture is clear
– experts and forecasters have failed to forecast the impact of peak oil.
ATP Oil & Gas Corporation (ATP) is an upstream offshore oil and natural gas
development company operating in three primary areas: the Gulf of Mexico, the U.K.
North Sea and the Dutch North Sea. Founded in 1991, ATP’s mission is to acquire and
develop reserves that are already discovered, but are not strategic to major or exploration-
oriented oil and gas companies. Unlike many other oil and natural gas producing
companies, ATP is not exposed to political risk because the primary operating activities
are concentrated in relatively politically stable geographical regions.
The modules used in analyzing the internal strengths and weaknesses of ATP are
value chain analysis, porter’s generic strategies, price analysis, analysis of the
management team/board of directors, analysis of the financial health of the company, the
Ansoff matrix, and the Boston Consulting Group (BCG) matrix. Tools for the external
analysis are Portes’s five force model, PEST, competitor analysis, financial analysis, and
industry structure analysis. The primary source of information for this analysis is ATP’s
annual and quarterly reports, ATP corporate web site, and the annual and quarterly
reports of selected peers of ATP. Secondary sources include already conducted general
independent research, newspaper articles, and monitored news items in the media about
the past, present, and future state of the oil and natural gas industry, the various politics
and discussions about alternative sources of energy, the impact of the growing demand of
oil and natural gas especially in Asia driven by the galloping Chinese economy, the crisis
in the oil controlled nations in the Middle East and Africa, and the trend of oil and natural
gas prices worldwide and what is likely to influence the pricing of oil and natural gas in
the future.

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 ATP’s strengths lies in: its expertise in developing its resources and strong
development truck record; highly experienced, dedicated, well trained, and motivated
human resource coupled with strong management background who have vested stock-
based compensations; mission and strategy of acquiring and developing low-risk reserves
that are already discovered, but are not strategic to major or exploration-oriented oil and
gas companies; well respected expertise in innovation and technology; and low cost
structure. The above-mentioned strengths can be leveraged by the following
opportunities: pursue low risk growth strategy due to weak competitive rivalry that puts
no pressure to differentiate commodities and establish recognition; make higher profits
due to weak customer bargain power, weaker dollar, and rising prices of oil and natural
gas; and expand operations because of growing demand for oil and natural gas by
emerging economies led by China and India. Notwithstanding these positive factors, ATP
has the following weaknesses: small size that limits economies of scale; confined
operations in the Gulf of Mexico and the North Sea that increases operation, political, and
financial risks; excessive debt and numerous covenants that make the company
unattractive to prospective equity investors, coupled with one person who holds the
strategic positions of Chairman and CEO and also owns 24% of the only 5% equity
capital; ineffective financial derivative hedges that result in losses to the company; and
weak competitive ability in the wake of intense competition for property acquisition,
equipment, and labor required for operations. The company also faces the following
threats: substantial or extended decline in oil and natural gas prices may materially and
adversely affect future business, financial condition, results of operations, liquidity and
ability to finance planned capital expenditures due to the volatile nature of the oil and
natural gas prices; production of reserves from reservoirs in the Gulf of Mexico generally
declines more rapidly than production from reservoirs in many other producing regions of
the world; many uncertainties and operating risks in the oil and natural gas business that
can prevent ATP from realizing profits and can cause substantial losses; and terrorists
attacks and similar activities can create many economic and political uncertainties, some
of which may materially adversely impact.
Among the many strategic options available to ATP include building a strong
regional presence (focus strategy), pursuing aggressive low cost strategy, and building

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strategic alliances. ATP may consider exploration of new frontiers in its existing
geographical operations. For example, ATP will have to look at the potential for subsalt
exploration as a promising source of additional natural gas. This will provide superior
geoscientific and engineering information, higher per unit revenues, lower per unit
operating costs, greater rates of drilling success, higher returns from more easily
integrated acquisitions and higher returns on drilling investments. Prices of oil and
natural gas are volatile, and therefore the best way to be efficient in times of negative
price volatility is to strive for continuous improvements in operational process to reduce
cost. Strategic alliances should be developed to obtain shared technologies and explore
renewable energy sources.
The strategic options can be implemented from short term to medium and to long
horizon, and effective implementation will depend on superior management, ethical
leadership, and cutting-edge technology. Cost reduction strategy implementation should
focus on minimizing lease operating costs and general and administrative expense
through focused activities and increased scale, and delivering attractive financial returns
through all phases of the commodity price cycle. To achieve a significant low cost
structure will depend on management’s effective cost-control programs, a high-quality
asset base, and extensive and competitive services, gas and oil processing and
transportation infrastructures that exist in key operating areas. Medium to long term
corporate efficiencies can be realized by growing production and reserves through the
drillbit by using more horizontal wells at deeper drilling than the industry average will
also provide ATP a unique competitive edge in the long run. ATP should actively invest
in leasehold, 3-D seismic information and human capital to be able to take advantage of
the favorable drilling economics that exist today. ATP should form strategic alliances
with innovative petroleum industry service companies who will provide the Company
with the most current and advanced technological resources. Strategic partnership is also
necessary in order for ATP to explore alternative renewable energy sources.

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 INTRODUCTION
ATP Oil & Gas Corporation (“ATP”), incorporated in 1991, is a publicly traded
(NASDAQ: ATPG) company engaged in the acquisition, development and production of
natural gas and oil properties in the Gulf of Mexico and the North Sea. ATP acquires and
develops properties, many of which have proved undeveloped reserves (“PUD’s”) at the
time of acquisition that are economically attractive to ATP, but not strategic to
exploration-oriented oil and gas companies. Such strategy provides ATP with the assets
to develop and produce without the risk, cost and time involved in traditional exploration.
Since its inception in 1991, the company has had an exceptionally strong development
record, taking 39 out of 40 projects to production that were previously undeveloped and
non-producing. ATP is headquartered in Houston, Texas, with additional offices in
Guildford, Surrey (U.K.) and IJmuiden (Netherlands).
The purpose of this study is to develop a strategic profile of ATP in partial
fulfillment of the requirements of the class of Administrative Policy, Eastern Illinois
University MBA. This study is not intended to be used as a strategic framework for the
operations of ATP. The paper uses strategic management tools and models, including
financial analysis to assess the internal capabilities and the external factors of ATP’s
operations and the factors affecting the current and future of the oil and gas industry.
The general approach of this study and the procedures used to develop the
strategic profile is provided in this section. The methodology section of this paper
provides information about the data collection process and the methods used to analyze
the data. The outcome of the study is provided under the heading findings. The findings
describe the results of the internal analysis and the external analysis. To obtain an
understanding of the internal and external analysis, the findings section is divided into
positive factors of ATP’s environment and resource strength, and negative factors
affecting the current and future strategy of ATP. The negative factors are those factors
that show the weaknesses of ATP’s resources and the threats that it faces in pursuit of its
strategy. The positive factors on the other had reveals the resource capabilities of ATP
and the opportunities in the external environment that presents competitive advantage.
The paper makes recommendations out of the findings and assesses the actions needed to
be taken, the risks involved in taking those actions, and the expected outcome of

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implementing the strategic recommendations. The strategic options available to ATP are
also evaluated at this section.
The tools used to perform the internal analysis (which is basically an analysis of
strengths and weaknesses) are value chain analysis, porter’s generic strategies, price
analysis, analysis of the strengths and weaknesses of the management team/board of
directors, analysis of the financial health of the company, strengths and weakness in
growing the business using the Ansoff matrix, and the Boston Consulting Group (BCG)
matrix.
The external analysis consists of an assessment of both the macroenvironment and
the industry and competitive arena in which ATP operates. The assessment begins with
Portes’s five force model, and continuos with the analysis of the political, economic,
socio-cultural, and technological factors affecting the oil and gas business. Other modules
used are analysis of ATP’s competitors (peers), the financial performance of ATP in
comparison with its peers, and an analysis of the structure of the oil and gas industry. The
recommendations made on how ATP could strengthen its competitive position are based
on the analysis of the internal and external factors of ATP. The implementation section
consists of actions ATP need to take in the short to medium term and the actions that can
be implemented in the medium to long term.

METHODOLOGY
The primary source of data for this analysis is the information provided by annual
reports 2003, 2004, 2005, and 2006 and the 1st and 3rd quarter reports of 2005 and 2006 of
ATP. The analysis also made use of significant information from the annual reports of
ATP’s competitors (peers). The common size analysis which aided the internal trend
analysis and the calculated financial ratios for both the trend analysis portion of the
internal analysis and the financial analysis portion of the external analysis are based on
the figures obtained from the above mentioned annual and quarterly reports. The annual
reports of ATP’s competitors in the Gulf of Mexico were analyzed and used to calculate
financial ratios to perform a financial trend analysis in order to get a better picture of
ATP’s competitive position within the industry. This analysis is also based on 2006 and
2007 presentations of ATP at “OGIS Smallcap Investment Symposium” (Vcall, 2007).

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The Vcall presentations also helped in identifying the peers of ATP, and in making
strategic comparisons.
The report also uses information obtained from the corporate web site of ATP and
its peers, and the financial data obtained from yahoo finance. The information on yahoo
finance was very necessary because it provides up-to-date information about ATP and its
peers as well as significant industry statistics and performance. Additional information
used to make this strategic analysis consists of academic and scientific articles. These
articles helped to obtain and make interpretations of key industry information and general
relationships for certain variables.
This paper also makes use of already conducted general independent research,
newspaper articles, and monitored news items in the media about the past, present, and
future state of the oil and natural gas industry, the various politics and discussions about
alternative sources of energy, the impact of the growing demand of oil and natural gas
especially in Asia driven by the galloping Chinese economy, the crisis in the oil
controlled nations in the Middle East and Africa, and the trend of oil and natural gas
prices worldwide and what is likely to influence the pricing of oil and natural gas in the
future. In effect, this paper uses internal information provided by ATP, industry and
competitive information, and overall political, economic, and social information of oil
and natural gas business provided by researches, online sources, newspapers, and the
media. The information has been critically analyzed with the strategic management tools
described in the introduction section and conclusions drawn from the analysis.

FINDINGS
(A) INTERNAL ANALYSIS
(i) ATP’s Strengths – Positive factors
The internal analysis of ATP reveals much significant strength of things the
company is good at doing and that enhance its competitiveness in the marketplace. The
significant ones are discussed in the following paragraphs.
ATP has significant expertise in developing its resources. This is evidenced by the
company’s strong development success record. Since its inception in 1991, the company
has had an exceptionally strong development success record of 98% of taking projects to

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production that were previously undeveloped and non-producing. A demonstration of
ATP’s ability to exploit its resources is the fact that the company operates 94 (84%) of its
leasehold and other interests, including all of the subsea wells, and 86% of its offshore
platforms. ATP has a strong development track record and a low-risk, high-quality,
geographically diversified inventory of proved reserves to develop into producing
properties.Therefore it possesses significant advantage in terms of expertise in
developing its reserves.
ATP’s development expertise lies in its motivated and happy human resource and
directors. One of the key motivation factors for ATP’s employees is stock based
compensation which had a vested amount of $11,477million in 2006. As of February 28,
2007, the company’s executive officers and directors own approximately 30% of its
common stock. Workers are part owners of the company and they see themselves as
stockholders rather than mere employees. ATP has highly experienced academically
accomplished individuals who closely evaluate every project before the company invests.
The people are known for putting aside standard notions about how things should be done
and stepping “outside the box” to develop a unique implementation strategy for every
project. The company’s high level of creativity is a crucial advantage that often shortens
development time frames and increases rates of return. The management/board profile
shows that ATP has acquired with proven truck record in different fields of expertise both
within and outside the oil and gas industry. This is very important because quality human
resource is a strong competitive weapon in this modern challenging global environment.
Also, none of ATP’s employees is covered by a collective bargaining agreement.
ATP’s mission is to acquire and develop reserves that are already discovered, but
are not strategic to major or exploration-oriented oil and gas companies. The competition
and risks for these reserves is relatively low, and this provides ATP a unique advantage.
The company strives to achieve high rates of return by developing these low-risk projects
and efficiently operating them to maximize their production. Acquisitions provide
essential growth opportunities for ATP, and the company has a highly effective strategy
to acquire proved, undeveloped properties that meet its criteria. During 2006, ATP
increased its reserve base through selective acquisitions of known reservoirs, as well as
through reserve extensions at existing properties. ATP has an excellent track record for

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bringing previously undeveloped properties into production. During 2006, the company
marked a 100 percent drilling success rate, and achieved a 155 percent production
increase - a growth rate that underscores ATP’s increasing leadership among exploration
and production (E&P) companies worldwide.
ATP has strength in innovation and technology. For example, the company has
converted a semi-submersible drilling rig into an offshore production platform, installed a
new facility “ATP Innovator” in the deepwater Gulf of Mexico at Mississippi Canyon
block 711 where it connects to sub-sea transportation pipelines at water depths of more
than 3,000 feet. The Offshore Magazine named the project as one of the “Top Five
Projects” of 2006. ATP also won recognition at the Offshore Energy Achievement
Awards in 2006 for its Wenlock Project, which marked its third platform installation in
the North Sea in one year. Technology in the oil and gas industry is advancing in
quantum leaps. ATP’s engineers stay abreast of cutting-edge technologies and then
skillfully apply them to deliver value-added solutions. For example, they have identified
ways to predict the Bcfe potential of a specific well by drawing on their own wealth of
experience, improved seismic and logged interval data, and available development and
performance information relating to surrounding wells, thereby eliminating the need to
perform a costly well test. ATP’s ability to harness technology to accurately and cost-
efficiently forecast a well’s potential has helped the company build credibility in the
industry.
Production efficiency is one of the key factors that determine a company’s
position in the market place. Leading organizations in every industry strives fro
production systems that costs less and provide value to the customer. This is normally
achieved if a company can obtain significant cost reduction by improving quality and
service to customers. ATP has a leading cost structure among its peers operating in the
Gulf of Mexico and the North Sea. ATP employs an innovative hub strategy, which
allows the company to maximize resources by increasing economies of scale. Simply put,
this strategy helps to lower the cost of developing fields that may not be economical for
current operators to pursue, but are economically feasible for ATP due to their proximity
to ATP’s neighboring operations and infrastructure. ATP use equipment in innovative
and multi-faceted ways, helping to improve project economics and increase shareholder

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return. This is reflected in the significant drop in costs and operating expenses as a
percentage of total revenue (from 80.45% in 2005 to 74.93% in 2006) and (from 75.54%
in the 3rd quarter of 2006 to 69.62% in the 3rd quarter of 2007).

(ii) APT’s Weaknesses – Negative factors

The size of ATP’s operations and its capital expenditure budget limits the number
of properties that the company can develop in any given year. Complications in the
development of any single material well may result in a material adverse effect on the
company’s financial condition and results of operations. For instance, during 2006, ATP
experienced production delays and increased development costs in connection with the
development of its Tors wells in the North Sea. In late 2005, the company experienced
delays and increased development costs in developing its Gomez project in the Gulf of
Mexico as a result of hurricanes Katrina and Rita. Due to ATP’s size of operation, delays
in the development of or production curtailment at any material properties may adversely
affect its financial position and results of operations. This will be a significant blow to
stockholders and investors. In addition, a relatively few number of wells contribute to a
substantial portion of ATP’s production. If the company experience operational problems
resulting in the curtailment of production in any of these wells, the total production levels
would be adversely affected, which would have a material adverse effect on its financial
condition and results of operations.
ATP’s operations and risks are not diversified enough, and are confined to the
Gulf of Mexico and the North Sea. Shortages or an increase in cost of drilling rigs,
equipment, supplies or personnel in these operating geographical areas could delay or
adversely affect the company’s operations, which could have a material adverse effect on
the company’s business, financial condition and results of operations. In periods of
increased drilling activity in the Gulf of Mexico and the North Sea, ATP may experience
increases in associated costs, including those related to drilling rigs, equipment, supplies
and personnel and the services and products of other vendors to the industry. Increased
drilling activity in the Gulf of Mexico and the North Sea also decreases the availability of
offshore rigs and associated equipment, and this puts ATP at a significant disadvantage.
The critical issue is that unforeseen crisis such as terrorist attacks, hurricanes,

10
unavailability or increased cost of drilling rigs, equipment, supplies, personnel and
oilfield services could adversely affect ATP’s ability to execute on a timely basis its
development plans within budget.
Strategy for financing capital projects and developing overall firm capital
structure can provide a unique competitive advantage; however, where a firm fails to
obtain the appropriate mix of debt and equity capital, financing strategy can present
challenges to a company and turn its operations into risky and uncompetitive. As at 30th
September 2007, ATP had a capital structure of approximately 95% debt capital and
approximately 5% equity capital. The argument on what constitute an ideal mix of capital
structure is not the emphasis of this paper. However, if the company is not able to
generate sufficient funds from its operations, it may not be able to service its debt. The
debt capital also has various covenants which, although ATP is currently in compliant
with all the covenants, can significantly affect its future operations. ATP has historically
needed and will continue to need substantial amounts of cash to fund its capital
expenditure and working capital requirements. Ongoing capital requirements consist
primarily of funding acquisition, and development and abandonment of oil and gas
reserves. Additional debt capital may be difficult to obtain in future in an event that ATP
is not able to comply with the loan covenants. Current and prospective equity holders
may also feel that it is risky to provide equity finance to approximately 95% debt capital
structured firm.
Members of APT’s management team own a significant amount of common
stock, giving them influence or control in corporate transactions and other matters, and
the interests of these individuals could differ from those of other shareholders. Members
of the management team beneficially own approximately 30% of ATP’s outstanding
shares of common stock as of February 20, 2007. As a result, these shareholders are in a
position to significantly influence or control the outcome of matters requiring a
shareholder vote, including the election of directors, the adoption of an amendment to the
company’s articles of incorporation or bylaws and the approval of mergers and other
significant corporate transactions. Their control of ATP may delay or prevent a change of
control of ATP and may adversely affect the voting and other rights of other
shareholders. Therefore, prospective investors may not find ATP attractive. The problem

11
is compounded by the fact that the Chairman, who doubles as the CEO, owns 24% of
ATP’s stock.
ATP’s price risk management decisions may reduce the company’s potential
gains from increases in commodity prices and may result in losses. As required by the
company’s lenders, ATP periodically utilize financial derivative instruments and fixed
price forward sales contracts with respect to a portion of expected production, generally
not less than 40% or more than 80% of such production. These instruments expose ATP
to risk of financial loss if: production is less than expected for forward sales contracts; the
counterparty to the derivative instrument defaults on its contract obligations; or there is
an adverse change in the expected differential between the underlying price in the
financial derivative instrument and the fixed price forward sales contract and actual
prices received. Results of operations may be negatively impacted in the future by
financial derivative instruments and fixed price forward sales contracts. ATP’s fixed
forward sales are designated as normal sales under derivative accounting rules, and these
instruments may limit any benefit the company would receive from increases in the
prices for oil and natural gas. Example, for the year ended December 31, 2006, the
company realized a loss on settled financial derivatives of $3.2 million. Unrealized losses
on cash flow hedges amounted to $8.1million for the 3 quarters of 2007.
Although competition for market share arguably does not exist, ATP compete
with major and independent oil and natural gas companies for property acquisitions. The
company also competes for the equipment and labor required to operate and to develop
its properties. Some of ATP’s competitors have substantially greater financial and other
resources and may be able to sustain wide fluctuations in the economics of the industry
more easily than ATP can. They may be able to absorb the burden of any changes in
federal, state and local laws and regulations more easily than ATP can. ATP’s ability to
acquire and develop additional properties in the future will depend upon the company’s
ability to conduct operations, to evaluate and select suitable properties, to secure adequate
financing and to consummate transactions in this highly competitive environment.

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 (B) EXTERNAL ANALYSIS
(i) Opportunities – Positive Factors
Competition in the oil and gas industry is very low and all players, regardless of
size, can compete and make profit. This is largely due to demand and supply imbalances
for oil and natural gas commodities. Demand for oil and natural gas continues to rise at a
rate faster than the supply base. Therefore, competitors do not compete directly for
market share with each other because there is the market for oil and gas and the market
keeps growing, and new discoveries are limited. Products, oil and gas are not also subject
to product differentiation strategies; therefore competition for brand recognition does not
apparently exist. This is evidenced by the almost zero spend on marketing and
advertising, except that companies engaged in oil marketing in the supply chain spends
some money for public relation purposes and also to promote their brand. High capital
requirements and what has become an “acceptable norm” in the Middle East, coupled
with instability in oil producing countries in Africa has created huge entry barriers for
new companies to enter and stimulate competition.
Increasingly, customer bargain power is becoming weaker and. Since demand for
oil and natural gas exceed supply, and prices of oil and natural gas are market
determined, the prices of the two commodities continue to rise in the world market. This
presents unique opportunities for companies in the industry to provide attractive returns
to their investors. Crude Oil prices ranged between $2.50 and $3.00 from 1948 through
the end of the 1960s (William 2007). Today, analysts predict that crude oil will reach
$100 per barrel in 2007. Major factors contributing to the current level of prices include a
weak dollar and the continued rapid growth in Asian economies and their petroleum
consumption.
There is increasing demand for oil and natural gas, and the trend is expected to
continue for a long time for various reasons. For example, while the production of natural
gas is expected to be 20.5 trillion cubic feet in 2030, consumption (demand) is expected
to reach 26.1 trillion cubic feet in 2030 (source: Energy information administration,
annual energy outlook 2007 reference case, 2005-2030). Americans have paid $420
billion more in natural gas costs than 2000 EIA forecast, and dependence on foreign oil
has risen to 65% (Source: EIA Annual Energy Outlook 2000; Monthly Energy Review,

13
December 2006). The demand for oil and natural gas continue to rise in emerging
economies led by China. Asia has 56% of the world population, but only 12% of the oil
and natural gas deposit. China and India have 70% of global energy growth in the past 2
years (Source: International Energy Agency World Energy Outlook November 2007 and
related comments).
OPEC Oil Production 1973-2007

Crude Oil Prices 1970-2007

14
 (ii) Threats – Negative factors
Oil and natural gas prices are volatile, and low prices have had in the past and
could have in the future a material adverse impact on ATP’s business. Revenues,
profitability and future growth and the carrying value of ATP’s properties depend
substantially on the prices for oil and natural gas production. Realized prices also affect
the amount of cash flow available for capital expenditures and ability to borrow and raise
additional capital. Historically, the markets for oil and natural gas have been volatile, and
they are likely to continue to be volatile in the future. For example, oil and natural gas
prices increased significantly in late 2000 and early 2001 and then steadily declined in
2001, only to climb again in recent years to near all-time highs in 2007. Among the
factors that can cause this volatility are: worldwide or regional demand for energy, which
is affected by economic conditions; the domestic and foreign supply of oil and natural
gas; weather conditions; domestic and foreign governmental regulations; political
conditions in natural gas or oil producing regions; the ability of members of the
Organization of Petroleum Exporting Countries (OPEC) to agree upon and maintain oil
prices and production levels; and price and availability of alternative fuels. It is
impossible to predict oil and natural gas price movements with certainty. Lower oil and
natural gas prices may not only decrease ATP’s revenues on a per-unit basis but also may
reduce the amount of oil and natural gas that ATP can produce economically. A
substantial or extended decline in oil and natural gas prices may materially and adversely
affect future business, financial condition, results of operations, liquidity and ability to
finance planned capital expenditures. Further, oil prices and natural gas prices do not
necessarily move together.
Production of reserves from reservoirs in the Gulf of Mexico generally declines
more rapidly than production from reservoirs in many other producing regions of the
world. While this results in recovery of a relatively higher percentage of reserves from
properties in the Gulf of Mexico during the initial years of production, companies
producing in this region must incur significant capital expenditures to replace declining
production. ATP may not be able to identify or complete the acquisition of properties
with sufficient reserves or reservoirs to implement it business strategy. The availability of

15
properties for acquisition depends largely on the divesting practices of other oil and
natural gas companies, commodity prices, general economic conditions and other factors
that ATP cannot control or influence. A substantial decrease in the availability of proved
oil and gas properties that meet the company’s mission and criteria in the areas of
operation, or a substantial increase in the cost to acquire these properties, would
adversely affect ATP’s ability to replace its reserves.
The oil and natural gas business involves many uncertainties and operating risks
that can prevent ATP from realizing profits and can cause substantial losses. ATP’s
development activities may be unsuccessful for many reasons, including cost overruns,
equipment shortages and mechanical difficulties. Moreover, the successful drilling of a
natural gas or oil well does not ensure a profit on investment. A variety of factors, both
technical and market-related, can cause a well to become uneconomical or only
marginally economic. In addition to their cost, unsuccessful wells can hurt efforts to
replace reserves. The oil and natural gas business involves a variety of operating risks,
including fires, explosions, casing collapses, hurricanes and other natural disasters, and
uncontrollable flows of natural gas, oil and formation water. If ATP experiences any of
these problems, it could affect well bores, platforms, gathering systems and processing
facilities, which could adversely affect its ability to conduct operations. Offshore
operations are also subject to a variety of operating risks peculiar to the marine
environment, such as capsizing, collisions and damage or loss from hurricanes or other
adverse weather conditions. These conditions can cause substantial damage to facilities
and interrupt production.
The terrorist attacks that took place in the United States on September 11, 2001
were unprecedented events that have created many economic and political uncertainties,
some of which may materially adversely impact ATP’s business. Uncertainty
surrounding military strikes or a sustained military campaign may affect ATP’s
operations in unpredictable ways, including disruptions of fuel supplies and markets,
particularly oil, and the possibility that infrastructure facilities, including pipelines,
production facilities, processing plants and refineries, could be direct targets of, or
indirect casualties of, an act of terror or war. The continuation of these developments may
subject operations to increased risks and, depending on their ultimate magnitude, could

16
have a material adverse effect our business, results of operations, financial condition and
prospects.
Development, production and sale of oil and natural gas in the Gulf of Mexico
and in the North Sea are subject to extensive laws and regulations, including
environmental laws and regulations. ATP may be required to make large expenditures to
comply with environmental and other governmental regulations. Matters subject to
regulation include: discharge permits for drilling operations; bonds for ownership,
development and production of oil and gas properties; reports concerning operations; and
taxation. Under these laws and regulations, ATP could be liable for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and clean-up
costs and other environmental damages. Failure to comply with these laws and
regulations also may result in the suspension or termination of ATP’s operations and
subject the company to administrative, civil and criminal penalties. Moreover, these laws
and regulations could change in ways that substantially increase costs. Accordingly, any
of these liabilities, penalties, suspensions, terminations or regulatory changes could
materially adversely affect ATP’s financial condition and results of operations.

STRATEGIC RECOMMENDATIONS
The strategic recommendations below are based on the findings of the internal
and external analysis. It is assumed that ATP will be able to leverage its strengths with
the opportunities it have, and turn its internal weaknesses and external threats into growth
breakthroughs. This section assess discusses the strategic options available to ATP, and
how the company can prepare itself to be a competitive weapon in the oil and natural gas
business.
One of the major weaknesses of ATP is its size relative to the competition. The
market capitalization of ATP is $1.35billion compared to $485.44billion of Exxon
Mobile (Source: finance.yahoo.com/q?s=XOM and finance.yahoo.com/q?s=ATPG
12/3/2007). Size matters in today’s competitive business environment; therefore, ATP
can compete favorably by pursuing aggressive growth strategy. The strategic growth
options available to APT are in three folds, and each option, if carefully pursued, can
significantly turn ATP’s weaknesses and threats into strengths and opportunities: by

17
concentrating on its core business of E&R and expanding operations to other
geographical regions such as the Middle East and Africa (horizontal diversification); by
changing its structure from an upstream producer to a fully integrated company (vertical
diversification); and by focusing and growing its existing operations. These are obviously
the strategy of all the leading companies in the industry; namely BP Plc, Chevron Corp.,
Exxon Mobil Corp., etc). Each of the above mentioned strategies are discussed below.
Africa, for example, has one of the largest undiscovered oil deposits. For
example, in June 2007 UK’s Tullow Oil Company discovered 600 million barrels of oil
in Ghana – one of the biggest finds in Africa in recent times (observers believe the figure
is hugely under estimated to decrease potential competition for oil reserves in Ghana).
Tullow’s stock price increased by 10% on announcement of the discovery (Source:
http://news.bbc.co.uk/2/hi/business/6764549.stm). ATP will spread its operating risks by
expanding to other geographical regions. Already, ATP’s has low acquisition cost
structure, and has unique business strategy of acquiring properties that contain oil and
natural gas in commercial quantities in areas that have significant undeveloped reserves
or reservoirs and a relatively stable regulatory environment for offshore oil and natural
gas development and production. The company’s existing expertise in acquisitions and
development will reduce the risk of entry into these new markets. ATP will diversify its
political and financial risks and reduce its dependence on the Gulf of Mexico and the
North Sea.
ATP can also grow through vertical integration. With this option ATP will
produce oil and natural gas, process the production to the final product required by the
final consumer. For example, ATP will own gas stations, and take care of the entire
supply chain. This strategy will require huge capital investment and the necessary
internal expertise in all aspects of the supply chain. This strategy will exceed ATP’s
financial capabilities and the success may largely depend on the willingness of providers
of finance to support ATP.
An alternative to the above growth strategies will be for ATP to build a strong
regional scale (focus strategy). Many believe that one of the keys to success in the oil and
natural gas E&P industry is to build significant operating scale in a limited number of
operating areas that share many similar geological and operational characteristics.

18
Therefore ATP may also consider exploration of new frontiers in its existing
geographical operations. For example, ATP will have to look at the potential for subsalt
exploration as a promising source of additional natural gas. Achieving such scale
provides many benefits, the most important of which are superior geoscientific and
engineering information, higher per unit revenues, lower per unit operating costs, greater
rates of drilling success, higher returns from more easily integrated acquisitions and
higher returns on drilling investments. For example, Chesapeak Energy first began
pursuing this focused strategy in the Mid-Continent region ten years ago and is now the
largest natural gas producer, the most active driller and the most active acquirer of
leasehold and producing properties in the Mid-Continent (Source:
http://www.chkenergy.com/p/396/Default.aspx)
Already, ATP has a superior cost structure relative to the competition. However,
opportunities exist for the company to build a superior cost structure. As indicated, prices
of oil and natural gas are volatile, and therefore the best way to be efficient in times of
negative price volatility is to strive for continuous improvements in operational process to
reduce cost. This will protect ATP against unexpected drop in prices of oil and natural
gas at the world market.
Finally, the debt capital of ATP is significantly higher and has several covenants
that may restrict the company’s future operations and impair its ability to meet its
obligations. Investors are willing to buy stock and have much confidence in oil and
natural gas companies because of rising prices of the commodities. Investors expect that
this trend will continue and that oil and gas producing companies will offer attractive
returns to the investments. ATP has an option to raise equity finance at a relatively
cheaper cost and retire some of the term debts. This is the right time because the current
situation that is driving investor confidence in the oil and natural gas business may not
exist forever.
The United States House of Representatives passed an Energy Bill in August
2007 requiring utility companies to produce 15 per cent of their electricity from
renewable sources such as wind and solar power by 2020. This is just the beginning of
various efforts to address the growing concern for alternative forms of energy. There is
also increasing environmental awareness and growing pressure on companies to offer

19
environmentally-friendly products and services to people. The issue remains a big threat
to companies in the oil and natural gas industry. Former US vice president Al Gore is a
joint recipient of the 2007 Nobel Peace Prize for his wide-reaching efforts to draw the
world’s attention to the dangers of global warming. Therefore alternative and renewable
energy sources like solar energy and wind power is likely to receive greater attention in
the coming years. Oportunity exist for companies like ATP to integrate and invest in
research and development in alternative energy sources.
Global demand along with the growth of emerging markets is creating enormous
challenges for oil and gas companies. Companies must gain access to existing reserves
and find new ways to increase production levels. Information technology (IT) can be an
enabler of business success that can help companies resolve these issues. Global oil and
gas organizations need a robust, secure and flexible IT capability to help them capture,
analyze, communicate and apply the information needed for effective decision making.
Infrastructure outsourcing is on the rise in the oil and gas marketplace and can be a great
way to help companies overcome current challenges and meet their bottom-line goals.
Some of the specific outsourcing patterns that ATP might take advantage are: IT
outsourcing of infrastructure related components; alternative outsourcing, or best-shoring,
of applications related to corporate systems; and human resource outsourcing.

IMPLEMENTATION
Implementing the recommendations above would require that ATP reinvent its
business model to fit the strategic options. The most important drivers that will shape the
implementation of ATP’s strategic options are the nature of the oil and gas industry and
ATP’s own competitive capabilities. Some of the strategic options can be implemented in
the short to medium term, and other can also be implemented with medium to long term
objectives.
Short term to medium term
In the short to medium term, ATP should re-arrange its capital structure, pursue
superior low cost strategy, and outsource some of its activities. ATP should take
advantage of the growing investor confidence in the oil and natural gas business to raise
public equity finance. To remove investor fears of possible dictatorship and make the

20
public offering of stock more attractive to prospective investors, ATP should separate the
positions of Chairman and CEO. The chairman should also reduce its equity holdings and
increase stockholder participation in decision making. Already, ATP has established
communications office headed by chief communications officer who reports to the
president. This office can help improve investor relations and improve ATP’s brand
recognition. The risk is the dilution of ownership and control, but equity capital will
carries less risk and is subject to less restrictive covenants.
ATP should pursue a more aggressive cost reduction by minimizing lease
operating costs and general and administrative expense through focused activities and
increased scale, and delivering attractive financial returns through all phases of the
commodity price cycle. To achieve a significant low cost structure will depend on
management’s effective cost-control programs, a high-quality asset base, and extensive
and competitive services, gas and oil processing and transportation infrastructures that
exist in key operating areas.  In addition, to control cost and service quality, ATP should
make significant investments in its drilling-rig and trucking service operations and in the
midstream gathering and compression operations. The risk is that cost efficiency may be
pursued at the expense of quality including cuts in employee remuneration and benefits.
However, cost leadership will make ATP profitable even in periods of negative volatility
in oil and natural gas prices.
In addition to IT outsourcing, applications outsourcing is a cost cutting imperative
for companies competing on a global scale. The ability to run applications from a single
network, versus multiple networks in numerous locations, improves costs and enables
standardization and streamlining of processes and methodologies. Also, ATP must focus
on its core begin to investigate the benefits of human resources outsourcing. While
important to the overall business strategy, areas like compensation, benefits management,
recruitment and employee retention can be better managed by companies with expertise
in that area. The success, of course, depends on superior management, ethical leadership,
and cutting-edge technology. Outsourcing non-core activities will mean that ATP no
longer controls such activities. However, this risk can be mitigated through the out-source
contract. Outsourcing the above functions will enable ATP concentrate on core activities
of acquisition, development, and exploration of oil and natural gas.

21
 Medium to long term
Medium to long term strategic options include acquisitions, corporate efficiencies,
cutting-edge technology, and strategic alliances. A company needs a strategy predicated
on growing faster than the market average so it can boost its market share and improve its
competitive standing vis-à-vis rivals. ATP should achieve asset, revenue and cash flow
growth as a result of the acquisition and further development of producing oil and natural
gas properties. Acquisition program should focus on acquisitions of oil and natural gas
properties that offer high-quality, long-lived production and significant development and
higher potential horizontal and deep drilling opportunities. These acquisitions should
either increase the company’s ownership in existing wells or fields or add additional
drilling locations in other geographical areas. In the long term, ATP should review
potential acquisitions in other regions if they represent a significant concentration of
energy-related assets. Acquisition has many potential risks including the challenges of
finding a strategic fit for the combined company as well as the risk that the expected
synergy may eventually not be realized. However, acquisition is inline with ATP’s
mission and will provide the fastest growth that ATP needs.
Medium to long term corporate efficiencies can be realized by growing
production and reserves through the drillbit by using more horizontal wells at deeper
drilling than the industry average will also provide ATP a unique competitive edge in the
long run. ATP should actively invest in leasehold, 3-D seismic information and human
capital to be able to take advantage of the favorable drilling economics that exist today. It
is believe that one of the key elements of the success of drilling programs is new
horizontal drilling and completion techniques that would enable development of
previously uneconomical natural gas resources and various tight sand and shale
formations that could be geologically recognized as potentially prolific natural gas
reservoirs rather than just sources of natural gas. To pursue this, the company should
proactively hire new employees and build seismic inventories - the building blocks of a
successful large scale drilling program and the foundation of value creation in the natural
gas exploration and production (E&P) industry. The risk in implementing this strategy is
the huge financial commitment required, as well as fears that the company may not

22
generate enough returns for the investments required. This strategy will however make
ATP very efficient in the long run, increase its realized price, reduce its operating costs,
and increase its overall profitability and liquidity.
Medium to long term technology implementation should be realized by focusing
on established geological trends where ATP can employ geological, geophysical and
engineering expertise. ATP should consider the application of 3-D seismic and advanced
drilling and completion technologies (i.e., horizontal drilling, CO2 fracture stimulation,
specialty sidetrack drilling). Of course, such technology comes with higher costs and
higher risks. This will eventually pay off because ATP will be able to increase production
and hence generate adequate revenue in the long run.
ATP should form strategic alliances with innovative petroleum industry service
companies who will provide the Company with the most current and advanced
technological resources, e.g. 3D seismic proprietary evaluation and interpretation
processes; state-of-the-art horizontal drilling, completion, and production techniques; the
most compatible reservoir stimulation procedures and high tech engineering management
methods. The company should also associate itself with oil and gas industry leaders who
possess fully generated, "ready to go" exploration and development drilling programs.
The Company will capitalize on the opportunity to participate in these extraordinary
prospects that have already completed the economic process of land acquisition, geology,
seismic data, and other prospect generation expenses. Strategic partnership is also
necessary in order for ATP to explore alternative renewable energy sources. This will
help ATP share the risk and costs involved with the partners. Strategic alliances can be
very risky if the individual interests of strategic partners are not managed properly.
However, this risk can be mitigated through proper alliance contract that specifies what
the alliance is about, the role of each partner, commitments required from each partner,
how benefits and risks will be distributed, and means of settling disputes. Strategic
partnership will help ATP obtain the needed technologies and programs that it cannot
individually obtain and also provide an opportunity to share the benefits and costs of
researching and developing alternative energy sources.

23
 REFERENCES

Annual Energy Outlook. Energy Information Administration, Office of Energy Markets

and End Use, U.S. Department of Energy. Washington, D.C.: Supt. of Docs., U.S.
G.P.O., [distributor], 1983 - present. Annual. 2005 and 2006 editions

ATP Oil and Gas Corporation – 3rd Quarter Report 2007

ATP Oil and Gas Corporation – Annual Report 2006

ATP Oil and Gas Corporation – Annual Report 2006

APT Oil and Gas Corporation (ATPG), August 22, 2007. EnerCom's The 12th Oil & Gas
Conference

Chevron Corporation: Annual report 2006

Energy Information Administration. Annual Energy Outlook 2007 Reference Case, 2005-
2030

EIA Annual Energy Outlook 2000; Monthly Energy Review, December 2006

International Energy Agency World Energy Outlook November 2007 and related
comments

NetMBA.com

OCS Study (2002). “Effect of the Oil and Gas Industry on Commuting and Migration
Patterns in Louisiana: 1960-1990”.; MMS 2002-072

Petterson UTI Energy Inc., August 23, 2007. EnerCom's The 12th Oil & Gas Conference.

Stone Energy CP (SGY). Annual Report 2006

Thompson A. A., Strickland A. J., Gamble J. E. (2007). Crafting and executing strategy:
The quest for competitive advantage. USA McGraw-Hill

World Energy Magazine; Vol. 5, No. 3

W&T Offshore Inc. (WTI). Annual Report 2006

www.worldbank.org/html/opr/pmi/oil00004.html - 6k

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www.deloitte.com/dtt/cda/doc/content/sk_regime_change_june2006.pdf

http://www.atpog.com/home.html)

http://biz.yahoo.com/bw/071105/20071105005278.html

http://news.bbc.co.uk/2/hi/business/6764549.stm

http://www.chkenergy.com/p/396/Default.aspx

Williams., J. L. (2007). Oil Price History and Analysis. Energy Economist Newsletter.
2007

Yahoo! Finance. (2007). Retrieved September 232 at http://finance.yahoo.com/q/cf?

s=ATPG&annual

APPENDIXES

(A) INTERNAL ANALYSIS

(1) Value Chain Analysis

The oil and natural gas "value" or "supply" chain consists of three highly linked,
interdependent segments - exploration and production (or E&P); refining and shipping -
from the point of production to the final destination; and receiving, storage and retailing
at the final destination. I use the term "value" because at each stage investments are made
to take oil or natural gas from an unusable state to one in which optimal use of natural
gas/oil as a critical energy fuel and feedstock for materials can be achieved. ATP Oil &
Gas Corporation (ATP) is engaged in the development and production of oil and natural
gas (source: http://www.atpog.com/home.html), and can be classified under the E&P
segment. ATP activities range from the development of ideas about where oil and natural
gas resources might occur (prospect generation), to the mobilization of financial capital
to support drilling and field development, to ultimate production. ATP activities
incorporates geologic risk - the chance that natural gas resources in a "play" (an area of
interest) either do not exist or exist in quantities or subsurface conditions that do not
favor commercially successful exploitation. Being an upstream(E&P) company, ATP
execute a focused, consistent and low-risk strategy of acquiring and developing oil and

25
gas properties with proved undeveloped reserves, and operating them efficiently; acquire
undeveloped properties that are economically attractive and expand its hub areas; develop
these properties; and produce from these properties.

(a) Resource analysis using VRIO

VRIO is a resource/capability analysis tool that uses the question of Value, Rarity,
Imitiability, and Organization to analyze an organization’s resource strengths and
weaknesses.
Value: Is the firm able to exploit an opportunity or neutralize an external threat with the
resource/capability?
Rarity: Is control of the resource/capability in the hands of a relative few?
Imitability: Is it difficult to imitate, and will there be significant cost disadvantage to a
firm trying to obtain, develop, or duplicate the resource/capability?
Organization: Is the firm organized, ready, and able to exploit the resource/capability?

ATP resource: Oil and Natural Gas

Value
ATP had 636,873 (MMcfe) total proved reserves as at 31 December, 2006
(Annual Report 2006). The figure consists of 329,226 millions of cubic feet equivalent of
natural gas reserves and 51,275 million barrels of oil reserves. At December 31, 2006 the
standardized measure of discounted future net cash flows was $1.015 billion. The present
value of future net cash flows attributable to estimated net proved reserves, discounted at
10% per annum, (“PV-10”) is a computation of the standardized measure of discounted
future net cash flows on a pretax basis. PV-10 may be considered a non-GAAP financial
measure under the SEC’s regulations but the company believes PV-10 to be an important
measure for evaluating the relative significance of its natural gas and oil properties. PV-
10 is computed on the same basis as the standardized measure of discounted future net
cash flows but without deducting income taxes. In January 2007 the company acquired
interest in other reserves totaling $7million.
Rarity

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 Oil and natural gas are fossil fuels. Some fossils are rare -- one (or few)-of-a-
kind. Other fossils are widespread. However rarity does not always play a role in the
value. The dollar value is assigned like everything else -- by the market -- how much
someone is willing to pay for it. However, looking at the increasing demand pressure of
both commodities, one can argue that rarity for both oil and natural gas will increase over
the years.
Imitability
Do firms without a resource or capability face a cost disadvantage in obtaining it
compared to firms that already possess it? I believe that firms without the resources and
capabilities of ATP face a cost disadvantage in obtaining them. Competitors will need to
invest in research and development and/or reverse engineering in order to gain the
technical competence that ATP has already achieved. Also, so far there is no equivalent
substitute for oil and natural gas. Companies researching for substitutes may have to
depend on federal subsidies, and unless competitors benefit from the same federal
subsidies of $60 per barrel of oil as existing companies does, they will face serious cost
disadvantages. Although both commodities are not unique to a particular company the
resource cannot be imitated.
Organization
Considering the innovative practices taken on by the firm in terms of research and
constantly discovering new ways of exploring and producing oil and gas from
unorthodox methods, I believe that the firm's organization must be one that encourages
innovation. I assume that ATP is organized in a manner that encourages new ideas and
concepts, and surely must fund research and development in order to continue on the
innovative path that the firm is on.

Summary of VRIO
The realized value of ATP’s oil and natural gas properties continue to rise. For
example Natural gas, oil and condensate price realizations per Mcfe increased 19% from
$7.62 for the first quarter 2007 to $9.11 (Source: 1st Quarter 2007 Results). The trend is
expected to continue for a long time. Since its inception in 1991, the company has had an
exceptionally strong development success record of 98% of taking projects to production

27
that were previously undeveloped and non-producing. Therefore it possesses significant
advantage in terms of expertise in developing its reserves. Although oil and gas
properties are not controlled by one entity, serious cost disadvantages for new entrants
and scarcity of oil and natural gas fields makes it very difficult to imitate or obtain,
develop, or duplicate the resource capabilities of firms engaged in this area of business.
ATP is a well organized firm that is ready and able to exploit the resources at its disposal.
A demonstration of ATP’s ability to exploit its resources is that fact that within 15 years
of operations ATP own leasehold and other interests in 72 offshore blocks, 44 platforms
and 112 wells, including 14 subsea wells, in the Gulf of Mexico. Out of this the company
operates 94 (84%), including all of the subsea wells, and 86% of its offshore platforms.
ATP also has interests in 11 blocks and 2 company-operated subsea wells in the North
Sea. ATP’s average working interest in its properties at December 31, 2006 was
approximately 81%. The company continues to invest in research to make its activities
very efficient and cost effective.

(b) Generic Strategy

Summary
Oil and gas are homogenous goods and a pure differentiation strategy might not make
much sense in terms of offering a different product. However, uniqueness can take many
forms such as brand image, technology, functionality, customer service, networks and
many others. Prices of oil and natural gas are market determined, and no single producer
has control over it. However, in the oil and natural gas business a significant cost
advantage can be obtained by an enterprise that has the ability to control its operating
costs so well that it is able to streamline its processes efficiently and produce at a lower
cost and generate high profit margins, thus having a significant competitive edge. APT’s
peer analysis indicates that the company has a leading cost structure among offshore
E&P’s. APT’s Full cycle cost is $4.83/Mcfe compared to industry average of around
$5.52/Mcfe (source: ATP Oil & Gas Corporation: Enercom’s The 12th Oil and Gas
Conference). Full cycle cash cost represents all of the operating cash costs associated
with the production and marketing of historical and future reserves production. A low
cost strategy is expected to lead to high profit margins if the. ATP’s operation is focused

28
mainly in the Gulf of Mexico, the U.K. North Sea and the Dutch North Sea. However,
ATP does not have a strategy of serving a particular target of the oil and gas market in
such an exceptional manner that others cannot compete. Although the company sells
about 90% of its final product to few major customers it is not designed to address a
focused segment of the marketplace.

(2) Price Analysis

% Change % Change
Year Ended December 31, from 2005 from 2004
2006 2005 2004 to 2006 to 2005

Average realized sales price per unit:

Natural gas (per Mcf)............................... $ 7.50 $ 7.46 $ 5.12 – 46%
Effects of cash flow hedges (per Mcf)........ 0.07 - (0.07) 100% 100%
Average realized price (per Mcf) ................$ 7.57 $ 7.46 $ 5.05 1% 48%

Oil and condensate (per Bbl) .....................$ 55.21 $ 41.90 $ 33.93 32% 24%
Effects of cash flow hedges (per Bbl)........ (0.96) - - (100%) -
Average realized price (per Bbl) ...............$ 54.25 $ 41.90 $ 33.93 29% 24%

Natural gas, oil and condensate (per Mcfe) $ 8.15 $ 7.35 $ 5.23 11% 41%
Effects of cash flow hedges (per Mcfe)....... (0.01) - (0.05) (100%) 100%
Average realized price (per Mcfe) ..............$ 8.14 $ 7.35 $ 5.18 11% 42%
(Source: Annual report 2006)
% Change
Nine Months Ended September 30, in 2007

2007 2006 from 2006

Average realized sales price per unit:
Natural gas (per Mcf)............................... $ 8.25 $ 7.18 15%
Effects of cash flow hedges (per Mcf)........ 0.03 0.11 (73)%
Average realized price (per Mcf) ................ 8.28 $ 7.29 14%

Oil and condensate (per Bbl) ..................... $ 60.60 $ 57.66 5%

29
Effects of cash flow hedges (per Bbl)........ (0.45) (0.92) 51%
Average realized price (per Bbl) ............... $ 60.15 $ 56.74 6%

Natural gas, oil and condensate (per Mcfe) $ 8.99 $ 8.08 11%
Effects of cash flow hedges (per Mcfe)....... (0.01) 0.01 (200)%
Average realized price (per Mcfe) .............. $ 8.98 $ 8.09 11%
(Source: 3rd quarter report 2007)

Summary
Approximately 67%, 61% and 47% of ATP’s oil production is sold under fixed
price delivery contracts for the years ended December 31, 2006, 2005 and 2004,
respectively. Approximately 19%, 54% and 46% of ATP’s natural gas production was
sold under these contracts for the comparable periods. For the period ending 30 th
September 2007 and 2006, approximately 31% and 22% respectively of the company’s
natural gas production was sold under these contracts. Approximately 35% and 63%,
respectively, of our oil production was sold under these contracts during the comparable
periods. The realized prices above may differ from the market prices in effect during the
periods depending on when the fixed price delivery contract was executed. Although the
prices of oil and natural gas are market determine, the fixed price delivery contract can be
an advantage for a small company like ATP. The reason is that predatory pricing strategy
can be available for the larger companies. The fixed price also provides some form of
predictability for ATP. Oil and gas revenue increased 183% in 2006 compared to 2005
primarily as a result of increased production volumes and a stronger oil price. Revenues
from production increased 37% in the nine months ended September 30, 2007 compared
to the same period in 2006 primarily due to greater production in the Gulf of Mexico, and
new production at the Canyon Express Hub and West Cameron. The comparable
revenues were impacted favorably by an overall 11% increase in our average sales price
per Mcfe. In 2006, natural gas volumes increased 100% and oil and condensate volumes
increased more than three-fold. ATP’s realized sales price per Mcfe in 2006 was 11%
higher as compared to 2005. Oil and gas revenue increased 26% in 2005 compared to

30
2004 primarily as a result of increased commodity prices. ATP’s realized sales price per
Mcfe in 2005 was 41% higher as compared to 2004. The increase was partially offset by
an 11% decrease in production. The rising realized price is expected to continue

(3) Board of Directors and Management

Name Age Position
T. Paul Bulmahn .............................................63 Chairman and President
Gerald W. Schlief ...........................................59 Senior Vice President
Albert L. Reese, Jr. ........................................ 57 Chief Financial Officer
Leland E. Tate.................................................59 Chief Operations Officer
John E. Tschirhart ...........................................56 Senior Vice President, International
Isabel M. Plume ..............................................46 Chief Communications Officer
Keith R. Godwin .............................................39 Chief Accounting Officer

T. Paul Bulmahn has served as ATP’s Chairman and President since he founded
the company in 1991. From 1988 to 1991, Mr. Bulmahn served as President and Director
of Harbert Oil & Gas Corporation. From 1984 to 1988, Mr. Bulmahn served as Vice
President, General Counsel of Plumb Oil Company. From 1978 to 1984, Mr. Bulmahn
served as counsel for Tenneco's interstate gas pipelines and as regulatory counsel in
Washington, D.C. From 1973 to 1978, he served the Railroad Commission of Texas, the
Public Utility Commission and the Interstate Commerce Commission as an
administrative law judge.
Gerald W. Schlief has served as ATP’s Senior Vice President since 1993 and is
primarily responsible for acquisitions. Between 1990 and 1993, Mr. Schlief acted as a
consultant for the onshore and offshore independent oil and gas industry. From 1984 to
1990, Mr. Schlief served as Vice President, Offshore Land for Plumb Oil Company, and
its successor Harbert Energy Corporation, where he managed the acquisition of interests
in over 35 offshore properties. From 1983 to 1984, Mr. Schlief served as Offshore Land
Consultant for Huffco Petroleum Corporation. He served as Treasurer and Landman for
Huthnance Energy Corporation from 1981 to 1983. In addition, from 1974 to 1978, Mr.

31
Schlief conducted audits of oil and gas companies for Arthur Andersen & Co., and from
1978 to 1981, he conducted audits of oil and gas companies for Spicer & Oppenheim.
Albert L. Reese, Jr. has served as the company’s Chief Financial Officer since
March 1999 and, in a consulting capacity, as our director of finance from 1991 until
March 1999. From 1986 to 1991, Mr. Reese was employed with the Harbert Corporation
where he established a registered investment bank for the company to conduct project
and corporate financings for energy, co-generation, and small power activities. From
1979 to 1986, Mr. Reese served as chief financial officer of Plumb Oil Company and its
successor, Harbert Energy Corporation. Prior to 1979, Mr. Reese served in various
capacities with Capital Bank in Houston, the independent accounting firm of Peat,
Marwick & Mitchell, and as a partner in Arnold, Reese & Swenson, a Houston-based
accounting firm specializing in energy clients.
Leland E. Tate has served as ATP’s Chief Operations Officer since August 2000.
Prior to joining ATP, Mr. Tate worked for over 30 years with Atlantic Richfield
Company (“ARCO”). From 1998 until July 2000, Mr. Tate served as the President of
ARCO North Africa. He also was Director General of Joint Ventures at ARCO from
1996 to 1998. From 1994 to 1996, Mr. Tate served as ARCO's Vice President Operations
& Engineering, where he led technical negotiations in field development. Prior to 1994,
Mr. Tate's positions with ARCO included Director of Operations, ARCO British Ltd.;
Vice President of Engineering, ARCO International; Senior Vice President Marketing
and Operations, ARCO Indonesia; and for three years was Vice President and District
Manager in Lafayette, Louisiana.
John E. Tschirhart joined ATP in November 1997 and has served as our General
Counsel since March 1998. Mr. Tschirhart was named Senior Vice President
International in July 2001 and served as Managing Director of ATP Oil & Gas (UK)
Limited from May 2000 to May 2001. He has served on the board of directors of ATP Oil
& Gas (UK) Limited and ATP Oil & Gas (Netherlands) B.V. since the formation of those
corporations and currently serves as the Managing Director of ATP Oil & Gas
(Netherlands) B.V. From 1993 to November 1997, Mr. Tschirhart worked as a partner at
the law firm of Tschirhart and Daines, a partnership in Houston, Texas. From 1985 to

32
1993 Mr. Tschirhart was in private practice handling civil litigation matters and from
1974 to 1979 he was with Shell Oil Company.
Isabel M. Plume joined ATP in 2023 as Chief Communications Officer and
Corporate Secretary. Ms. Plume currently serves on the board of directors of ATP Oil &
Gas (UK) Limited. From 1996 to 1998, she was employed by Oasis Pipe Line Company,
a midstream transporter of natural gas, responsible for implementing accounting and
reporting systems. From 1982 to 1995 Ms. Plume served in a financial reporting capacity
for Dow Hydrocarbons & Resources, Inc. and the Dow Chemical Company.

Summary
APT has a strong management team with great deal of expertise in all functional
areas. Its management team has engineering, geological, geophysical, technical and
operational expertise in successfully developing and operating properties in both its
current and planned areas of operation. For example, Bulmahn was selected Entrepreneur
Of The Year in Energy by Ernst & Young in 2000 and also accepted the Inc./Cisco 2000
Growing with Technology Award on behalf of ATP. Paul Bulmahn is the Chairman and
President and owns approximately 24% of shares. This is not healthy for corporate
governance purposes. Good practice in corporate governance requires that no single
person occupies the positions of chairman and president. The aging management team is
also a source of worry. Most of the key members are reaching their retirement age, and
the company require immediate succession plan to be able to maintain focus. For
example, Mr Gerald W. Schlief (Senior Vice President) will retire from ATP in
December 2007 (source: http://biz.yahoo.com/bw/071105/20071105005278.html?).
According to the president, Gerald made a substantial impact to ATP as he led skillful
and creative negotiations to acquire development properties and close financial
transactions. “His efforts helped move this company forward from a small private
company to an international public company with multi-billion dollar assets”. On October
22, 2007 the SEC reported that Mr. Schlief sold 219,000 of his common stock for
$11,935,500.00 in open market purchase and sales. The company’s shares are closely
held, and such open market sale of shares may lead to dilution of ownership and control

33
in the future. However, the president reports that Mr. Schlief has agreed to continue to
serve ATP on a consulting basis into the future.

4. Financial analysis
a) Financial statements
ATP OIL & GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Per Share Amounts)
9 Months Ended Year Ended
September September December December
2007 2006 2006 2005
Current assets:
Cash and cash equivalents.................. $ 152,981.00 61,263.00 182,592.00 65,566.00
Restricted cash ...................... 14,413.00 26,298.00 27,497.00 12,209.00
Accounts receivable (net) ......... 66,438.00 148,714.00 105,030.00 83,571.00
Deferred tax asset ............................... 1,418.00 4,633.00 1,113.00 -
Derivative asset.............................. 1,044.00 1,272.00 1,170.00 -
Other current assets............................ 16,213.00 12,464.00 9,931.00 4,454.00
Total current assets ................................ 252,507.00 254,644.00 327,333.00 165,800.00
Oil and gas properties
Proved properties................................ 2,109,119.00 1,348,746.00 1,483,163.00 890,402.00
Unproved properties ............................. 112,381.00 33,936.00 56,189.00 8,882.00
2,221,500.00 1,382,682.00 1,539,352.00 899,284.00
Less: Accumulated depletion,
impairment and amortization (617,420.00) (400,646.00) (443,707.00) (271,863.00)
Oil and gas properties, net ................... 1,604,080.00 982,036.00 1,095,645.00 627,421.00
Furniture and fixtures (net ) 969.00 1,136.00 1,079.00 1,175.00
Deferred tax asset......................... 591.00 1,342.00 - 4,025.00
Derivative asset............................... 3,019.00 177.00 - -
Deferred financing costs, net .................... 22,064.00 24,337.00 13,272.00 17,922.00
Other assets, net ................................. 6,462.00 11,549.00 9,729.00 7,420.00
Total assets......................................... $ 1,889,692.00 1,275,221.00 1,447,058.00 823,763.00
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accruals................$ 163,460.00 208,987.00 195,846.00 144,675.00
Current maturities of long-term debt......... 12,737.00 5,250.00 8,987.00 3,500.00
Current maturities of long-term capital lease - 22,962.00 23,699.00 8,679.00
Asset retirement obligation................. 15,832.00 13,201.00 21,297 7,097
Derivative liability...................... 168.00 - - 1,282.00
Other current liabilities............... 24,265.00 - - -
Total current liabilities.................. 216,462.00 250,400.00 249,829.00 165,233.00
Long-term debt ..................... 1,449,207.00 513,301.00 1,062,454.00 337,489.00
Asset retirement obligation....................... 113,822.00 87,967.00 87,092.00 60,267.00
Deferred tax liability........................ 14,391.00 5,738.00 11,765.00 -
Derivative liability ............................. 6,185.00 - - -
Other long-term liabilities - - - 8,826.00
Total liabilities ........................... 1,800,067.00 857,406.00 1,411,140.00 606,252.00

34
Shareholders’ equity:
Preferred stock - 364,198.00 - 184,858.00
Common stock 30.00 30.00 30.00 29.00
Additional paid-in capital ............... 158,567.00 148,125.00 151,467.00 149,267.00
Accumulated deficit.................... (104,801.00) (103,649.00) (140,681.00) (101,333.00)
Accumulated other comprehensive income 36,740.00 10,022.00 26,013.00 (4,693.00)
Uneraned compensation - - - (9,706.00)
Treasury stock....................... (911.00) (911.00) (911.00) (911.00)
Total shareholders’ equity............... 89,625.00 417,815.00 35,918.00 217,511.00
Total liabilities and shareholders’ equity..$ 1,889,692.00 1,275,221.00 1,447,058.00 823,763.00

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)
9 Months Ended Year Ended
September 30, September30, December 31, December31,
2007 2006 2006 2005
Revenues:
Oil and gas production....................................... $ 393,640.00 286,952.00 414,182.00 146,674.00
Other revenues ................................................... 1,598.00 - 5,639.00 -
Total 395,238.00 286,952.00 419,821.00 146,674.00

Costs, operating expenses and other:

Lease operating .................................................. 62,326.00 54,800.00 72,446.00 23,629.00
Exploration......................................................... 13,135.00 2,168.00 2,231.00 6,208.00
General and administrative ................................ 22,950.00 23,163.00 21,499.00 24,274.00
Stock-based compensation - - 11,477.00 57.00
Depreciation, depletion and amortization.......... 159,629.00 115,545.00 169,704.00 64,069.00
Impairment of oil and gas properties................. 9,798.00 11,760.00 19,520.00 -
Accretion of asset retirement obligation............ 9,019.00 5,473.00 8,076 3,238
Gain/ (Loss) on
abandonment ........................................ 379.00 3,855.00 9,603.00 (732.00)
Gain on disposition of properties - - - (2,743.00)
Other, net............................................................ (2,069.00) – - -
275,167.00 216,764.00 314,556.00 118,000.00
Income from operations ..................................... 120,071.00 70,188.00 105,265.00 28,674.00
Other income (expense):
Interest income................................................... 5,947.00 3,157.00 4,532.00 4,064.00
Interest expense.................................................. (87,541.00) (38,049.00) (58,018.00) (35,720.00)
Loss on extinguishment of debt - - (28,115.00) -
Other income - - 7.00 419.00
(81,594.00) (34,892.00) (81,594.00) (31,237.00)
Income (loss) before income taxes ................... 38,477.00 35,296.00 23,671.00 (2,563.00)
Income tax (expense) benefit:
Current................................................................ 1,532.00 (4,036.00) (2,528.00) -
Deferred.............................................................. (4,129.00) (4,236.00) (14,266.00) (153.00)
(2,597.00) (8,272.00) (16,794.00) (153.00)
Net income ......................................................... 35,880.00 27,024.00 6,877.00 (2,716.00)
Preferred stock dividends.................................... – (29,340.00) (46,225.00) (9,858.00)
Net income (loss) available to common

35
shareholders......................................................$ 35,880.00 (2,316.00) (39,348.00) (12,574.00)
Net income (loss) per common share:
Basic ...............................................................$ 1.19 (0.08) (1.33) (0.43)
Diluted................................................................ 1.17 (0.08) (1.33) (0.43)
Weighted average number of common shares:
Basic................................................................... 30,060.00 29,643.00 29,693.00 29,080.00
Diluted................................................................ 30,669.00 29,643.00 29,693.00 29,080.00

ATP OIL & GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands, Except Per Share Amounts)
9 Months Ended Year Ended
September September December December
2007 2006 2006 2005
Cash flows from operating activities
Net income............................................. $ 35,880.00 27,024.00 6,877.00 (2,716.00)
Adjustments to reconcile net income to net
cash provided by operating activities –
Depreciation, depletion and amortization 159,629.00 115,545.00 169,704.00 64,069.00
Impairment of oil and gas properties 9,798.00 11,760.00 19,520.00 -
Accretion of asset retirement obligation 9,019.00 5,473.00 8,076.00 3,238.00
Deferred income taxes 4,129.00 4,236.00 14,266.00 (3,949.00)
Dry hole costs 10,251.00 - - 5,341.00
Gain on disposition of properties - - - 2,743.00
Loss on extinguishment of debt - - 28,115.00 -
Noncash interest and credit facility
expenses - - 3,054.00 1,742.00
Amortization of deferred financing costs 5,212.00 4,387.00 5,985.00 4,173.00
Stock-based compensation 5,095.00 8,686.00 11,477.00 57.00
Ineffectiveness of cash flow hedges (74.00) 45.00 (110.00) (189.00)
Other noncash items 1,742.00 4,424.00 (643.00) (1,075.00)
Changes in assets and liabilities –
Accounts receivable and other current
assets 31,339.00 (81,935.00) (24,904.00) (43,095.00)
Accounts payable and accruals (31,879.00) 6,847.00 20,419.00 23,212.00
Other long-term liabilities and deferred
obligations - - - (696.00)
Other assets (2,390.00) (1,146.00) (3,322.00) (3,781.00)
Net cash provided by operating activities 237,751.00 105,366.00 258,514.00 43,588.00
Cash flows from investing activities
Additions and acquisitions of oil and gas
properties (636,597.00) (390,916.00) (577,012.00) (420,516.00)
Proceeds from disposition of oil and gas
properties - - - 19,820.00
Additions to furniture and fixtures (296.00) (331.00) (381.00) (900.00)
(Increase) decrease in restricted cash 14,096.00 (13,296.00) (13,290.00) (12,476.00)
Net cash used in investing activities (622,797.00) (404,543.00) (590,683.00) (414,072.00)
Cash flows from financing activities

36
Proceeds from long-term debt 574,500.00 178,500.00 728,500.00 132,113.00
Payments of long-term debt (184,552.00) (2,188.00) (4,435.00) (3,175.00)
Deferred financing costs (13,449.00) (11,116.00) (24,551.00) (10,416.00)
Issuance of preferred stock, net of issuance
costs - 145,463.00 145,463.00 169,437.00
Redemption of preferred stock - - (381,083.00) -
Payments of capital lease - - (20,869.00) (1,658.00)
Payments of capital lease (23,950.00) (20,869.00) - 44,774.00
Other - (68.00)
Exercise of stock options 2,004.00 4,416.00 4,966.00 4,507.00
Net cash provided by financing activities 354,553.00 294,206.00 447,991.00 335,514.00
Effect of exchange rate changes on
cash and cash equivalents 882.00 688.00 1,204.00 (2,238.00)
Increase/(Decrease) in cash and cash
equivalents (29,611.00) (4,303.00) 117,026.00 (37,208.00)
Cash and cash equivalents, beginning of
period 182,592.00 65,566.00 65,566.00 102,774.00
Cash and cash equivalents, end of period 152,981.00 61,263.00 182,592.00 65,566.00

b) Common size statements

Balance sheet 9 Months Ended Year Ended
September September December December
2007 2006 2006 2005
Current assets:
Cash and cash equivalents.................. $ 38.71% 21.35% 43.49% 44.70%
Restricted cash ...................... 3.65% 9.16% 6.55% 8.32%
Accounts receivable (net) ......... 16.81% 51.83% 25.02% 56.98%
Deferred tax asset ............................... 0.36% 1.61% 0.27% 0.00%
Derivative asset.............................. 0.26% 0.44% 0.28% 0.00%
Other current assets............................ 4.10% 4.34% 2.37% 3.04%
Total current assets ................................ 63.89% 88.74% 77.97% 113.04%
Oil and gas properties 0.00% 0.00% 0.00% 0.00%
Proved properties................................ 533.63% 470.02% 353.28% 607.06%
Unproved properties ............................. 28.43% 11.83% 13.38% 6.06%

Less: Accumulated depletion,

impairment and amortization -156.21% -139.62% -105.69% -185.35%
Oil and gas properties, net ................... 405.85% 342.23% 260.98% 427.77%
Furniture and fixtures (net ) 0.25% 0.40% 0.26% 0.80%
Deferred tax asset......................... 0.15% 0.47% 0.00% 2.74%
Derivative asset............................... 0.76% 0.06% 0.00% 0.00%
Deferred financing costs, net .................... 5.58% 8.48% 3.16% 12.22%
Other assets, net ................................. 1.63% 4.02% 2.32% 5.06%
Total assets......................................... $ 478.11% 444.40% 344.68% 561.63%
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accruals................$ 41.36% 72.83% 46.65% 98.64%
Current maturities of long-term debt......... 3.22% 1.83% 2.14% 2.39%

37
Current maturities of long-term capital lease 0.00% 8.00% 5.65% 5.92%
Asset retirement obligation................. 4.01% 4.60% 5.07% 4.84%
Derivative liability...................... 0.04% 0.00% 0.00% 0.87%
Other current liabilities............... 6.14% 0.00% 0.00% 0.00%
Total current liabilities.................. 54.77% 87.26% 59.51% 112.65%
Long-term debt ..................... 366.67% 178.88% 253.07% 230.09%
Asset retirement obligation....................... 28.80% 30.66% 20.75% 41.09%
Deferred tax liability........................ 3.64% 2.00% 2.80% 0.00%
Derivative liability ............................. 1.56% 0.00% 0.00% 0.00%
Other long-term liabilities 0.00% 0.00% 0.00% 6.02%
Total liabilities ........................... 455.44% 298.80% 336.13% 413.33%
Shareholders’ equity:
Preferred stock 0.00% 126.92% 0.00% 126.03%
Common stock 0.01% 0.01% 0.01% 0.02%
Additional paid-in capital ............... 40.12% 51.62% 36.08% 101.77%
Accumulated deficit.................... -26.52% -36.12% -33.51% -69.09%
Accumulated other comprehensive income 9.30% 3.49% 6.20% -3.20%
Uneraned compensation 0.00% 0.00% 0.00% -6.62%
Treasury stock....................... -0.23% -0.32% -0.22% -0.62%
Total shareholders’ equity............... 22.68% 145.60% 8.56% 148.30%
Total liabilities and shareholders’ equity..$ 478.11% 444.40% 344.68% 561.63%

9 Months 9 Months
Income statement Ended Ended Year Ended Year Ended
September September December December
2007 2006 2006 2005
Revenues:
Oil and gas production....................................... $ 99.60% 100.00% 98.66% 100.00%
Other revenues ................................................... 0.40% 0.00% 1.34% 0.00%
Total 100.00% 100.00% 100.00% 100.00%

Costs, operating expenses and other:

Lease operating .................................................. 15.77% 19.10% 17.26% 16.11%
Exploration......................................................... 3.32% 0.76% 0.53% 4.23%
General and administrative ................................ 5.81% 8.07% 5.12% 16.55%
Stock-based compensation 0.00% 0.00% 2.73% 0.04%
Depreciation, depletion and amortization.......... 40.39% 40.27% 40.42% 43.68%
Impairment of oil and gas properties................. 2.48% 4.10% 4.65% 0.00%
Accretion of asset retirement obligation............ 2.28% 1.91% 1.92% 2.21%
Gain/ (Loss) on
abandonment ........................................ 0.10% 1.34% 2.29% -0.50%
Gain on disposition of properties 0.00% 0.00% 0.00% -1.87%
Other, net............................................................ -0.52% 0.00% 0.00% 0.00%
69.62% 75.54% 74.93% 80.45%
Income from operations ..................................... 30.38% 24.46% 25.07% 19.55%
Other income (expense): 0.00% 0.00% 0.00% 0.00%
Interest income................................................... 1.50% 1.10% 1.08% 2.77%
Interest expense.................................................. -22.15% -13.26% -13.82% -24.35%
Loss on extinguishment of debt 0.00% 0.00% -6.70% 0.00%

38
Other income 0.00% 0.00% 0.00% 0.29%
-20.64% -12.16% -19.44% -21.30%
Income (loss) before income taxes ................... 9.74% 12.30% 5.64% -1.75%
Income tax (expense) benefit: 0.00% 0.00% 0.00% 0.00%
Current................................................................ 0.39% -1.41% -0.60% 0.00%
Deferred.............................................................. -1.04% -1.48% -3.40% -0.10%
-0.66% -2.88% -4.00% -0.10%
Net income ......................................................... 9.08% 9.42% 1.64% -1.85%
Preferred stock dividends.................................... 0.00% -10.22% -11.01% -6.72%
Net income (loss) available to common 0.00% 0.00% 0.00% 0.00%
shareholders......................................................$ 9.08% -0.81% -9.37% -8.57%

9 Months 9 Months
Cash flow Ended Ended Year Ended Year Ended
December December
2006 2005
Cash flows from operating activities
Net income............................................. $ 9.08% 9.42% 1.64% -1.85%
Adjustments to reconcile net income to net
cash provided by operating activities –
Depreciation, depletion and amortization 40.39% 40.27% 40.42% 43.68%
Impairment of oil and gas properties 2.48% 4.10% 4.65% 0.00%
Accretion of asset retirement obligation 2.28% 1.91% 1.92% 2.21%
Deferred income taxes 1.04% 1.48% 3.40% -2.69%
Dry hole costs 2.59% 0.00% 0.00% 3.64%
Gain on disposition of properties 0.00% 0.00% 0.00% 1.87%
Loss on extinguishment of debt 0.00% 0.00% 6.70% 0.00%
Noncash interest and credit facility expenses 0.00% 0.00% 0.73% 1.19%
Amortization of deferred financing costs 1.32% 1.53% 1.43% 2.85%
Stock-based compensation 1.29% 3.03% 2.73% 0.04%
Ineffectiveness of cash flow hedges -0.02% 0.02% -0.03% -0.13%
Other noncash items 0.44% 1.54% -0.15% -0.73%
Changes in assets and liabilities – 0.00% 0.00% 0.00% 0.00%
Accounts receivable and other current assets 7.93% -28.55% -5.93% -29.38%
Accounts payable and accruals -8.07% 2.39% 4.86% 15.83%
Other long-term liabilities and deferred
obligations 0.00% 0.00% 0.00% -0.47%
Other assets -0.60% -0.40% -0.79% -2.58%
Net cash provided by operating activities 60.15% 36.72% 61.58% 29.72%
Cash flows from investing activities
Additions and acquisitions of oil and gas
properties -161.07% -136.23% -137.44% -286.70%
Proceeds from disposition of oil and gas
properties 0.00% 0.00% 0.00% 13.51%
Additions to furniture and fixtures -0.07% -0.12% -0.09% -0.61%
(Increase) decrease in restricted cash 3.57% -4.63% -3.17% -8.51%
Net cash used in investing activities -157.58% -140.98% -140.70% -282.31%
Cash flows from financing activities
Proceeds from long-term debt 145.36% 62.21% 173.53% 90.07%

39
Payments of long-term debt -46.69% -0.76% -1.06% -2.16%
Deferred financing costs -3.40% -3.87% -5.85% -7.10%
Issuance of preferred stock, net of issuance
costs 0.00% 50.69% 34.65% 115.52%
Redemption of preferred stock 0.00% 0.00% -90.77% 0.00%
Payments of capital lease 0.00% 0.00% -4.97% -1.13%
Payments of capital lease -6.06% -7.27% 0.00% 30.53%
Other 0.00% 0.00% 0.00% -0.05%
Exercise of stock options 0.51% 1.54% 1.18% 3.07%
Net cash provided by financing activities 89.71% 102.53% 106.71% 228.75%
Effect of exchange rate changes on 0.00% 0.00% 0.00% 0.00%
cash and cash equivalents 0.22% 0.24% 0.29% -1.53%
Increase/(Decrease) in cash and cash
equivalents -7.49% -1.50% 27.88% -25.37%
Cash and cash equivalents, beginning of period 46.20% 22.85% 15.62% 70.07%
Cash and cash equivalents, end of period 38.71% 21.35% 43.49% 44.70%

c) Financial ratios
September September December December
2007 2006 2006 2005
Ratio Calculation
Profitability (Dupont)
Return on sales Net income/Total revenue 9.08% 9.42% 1.64% -1.85%
Asset turnover Total revenue/Total assets 0.21 0.23 0.29 0.18
Assets to equity Total assets/stockholders' equity 21.08 3.05 40.29 3.79

Return on Assets Net income/Total assets 1.90% 2.12% 0.48% -0.33%

Return on Equity Net income/stockholders' equity 40.03% 6.47% 19.15% -1.25%
Operating Margin Operating income/Total revenue 30.38% 24.46% 25.07% 19.55%

Liquidity Ratios
Current Ratio (mrq): Current assets/current liabilities 1.17 1.02 1.31 1.00

Leverage
Debt ratio Total liabilities/total assets 0.95 0.67 0.98 0.74
Total liabilities/Stockholders'
Total Debt/Equity equity 20.08 2.05 39.29 2.79
Interest cover ratio EBIT/interest expense 1.44 1.93 1.89 0.92

Summary
Operating and profitability analysis
For the years ended December 31, 2006 and 2005, ATP reported net loss
available to common shareholders of $1.33 and $0.43 per share, respectively. For the
nine months ended September 30, 2007, ATP reported net income available to common

40
shareholders of $1.19 per basic share and $1.17 per diluted share on total revenue of
$395.2 million as compared with a net loss available to common shareholders of $0.08
per share, on total revenue of $287.0 million for the nine months ended September 30,
2006. ATP’s ability to turn revenue into profit for shareholders is getting better in 2007
due to increase sales volume, decreased general administrative expenditure, reduction in
lease operating cost as a percentage of revenue, and reduction in impairment cost as
percentage of revenue. Operating margin increased from 24.46% in 2006 to 30.38% in
2007. Similarly, ATP recorded dramatic increase in return on equity from 6.47% in 2006
to 40.03% in 2007.
The 207% increase in lease operating cost in 2006 compared to 2005 was
primarily attributable to costs incurred in the Gulf of Mexico due to the increased
production levels in 2006 compared to 2005. The 19% increase in such costs on a per unit
basis reflects the price spikes the company experienced for materials and labor in the
Gulf of Mexico after the 2005 hurricanes. Lease operating expenses for the nine months
ended September 30, 2007 increased to $62.3 million ($1.42 per Mcfe) from $54.8
million ($1.55 per Mcfe) in the first nine months of 2006. The increase was primarily
attributable to the production increases, and, as noted above, the 2007 figure is favorable
when compared with revenue. ATP recorded an impairment of oil and gas properties for
2006 totaling $19.5 million related to certain producing properties acquired during 2005
and a few smaller end-of-life properties and one unproved property in the Gulf of
Mexico. This amount represents the excess carrying costs over the discounted present
values of the estimated future production from those properties. These impairments were
the result of reductions in estimates of recoverable reserves. Restoration of a previously
recognized impairment loss is prohibited.
Interest expense increased $22.3 million, to $58.0 million for 2006 from $35.7
million for 2005 as a result of an increase in outstanding borrowings under the Term
Loans, partially offset by a lower average effective floating interest rate on such
borrowings. Interest expense increased to $87.5 million for the nine months ended
September 30, 2007 compared to $38.0 million for the same period of 2006 primarily due
to the increase in borrowings and to the issuance of $210.0 million face value
subordinated notes in September 2007. Interest cover ratio continues to deteriorate (1.4

41
times in 2007) due to excessive borrowing, and this should be a source of worry to ATP.
The company’s credit agreement covenants specify a minimum liquidity ratio. Although
ATP is currently in compliance with all of its credit agreement covenants, the future
looks uncertain. The company will be better of by issuing common stock to raise capital
to retire some of the term loans, finance its operations, and re-arrange its capital structure.

Liquidity analysis
At December 31, 2006, ATP had working capital of approximately $77.5 million,
an increase of approximately $76.9 million from December 31, 2005. This increase is
primarily attributable to the increase in the company’s cash flows from operations
coupled with the success of its financing programs during 2006, partially offset by higher
amounts spent on capital projects and the redemption of preferred stock. During 2006,
ATP completed several major projects which were financed by a private placement of
preferred stock for net proceeds of $145.5 million, an additional loan of $704 million.
ATP had working capital of approximately $36.0 million, a decrease of approximately
$41.5 million from December 31, 2006. Current ratio as at September 2007 is better than
September 2006 (1.17 compared to 1.02).

Financing strategy
In the fourth quarter of 2006, ATP redeemed all of its outstanding preferred
shares by expanding its first lien term loan by $375.0 million, adding a new revolving
credit facility for up to $50.0 million and adding a new second lien facility of $175.0
million. The new financing added $155.5 million in additional liquidity and reduced the
overall cost of capital (preferred dividends plus interest) by approximately 200 basis
points.

Cash flow analysis

1. Operating activities
In 2006, cash flow from operations increased primarily due to a 155% increase in
equivalent production volumes and an overall 11% increase in average realized prices per
Mcfe. Gas sales, including the effects of hedging, increased by $120.0 million, or 103%,

42
due mainly to 100% higher production volumes. Oil sales, including the effects of
hedging, increased by $147.5 million, or 491%, due to a 356% increase in production
volumes and a 29% increase in the average price realized for oil. In 2007, cash flow from
operations increased due to higher oil and gas production revenues during the nine
months ended September 30, 2007 compared to the first nine months of 2006. The
increase in sales revenue was attributable to higher oil and gas production and higher
average oil and gas prices during the nine months ended September 30, 2007.

2. Investing activities
Cash used in investing activities in 2006 and 2005 was $591.0 million and
$414.1million, respectively, and included increases in restricted cash of $13.3 million and
$12.5 million, respectively. Cash paid for acquisition, development and exploration
expenditures of oil and natural gas properties in the Gulf of Mexico and North Sea totaled
approximately $356.0 million and $221.0 million, respectively, in 2006. Such
expenditures in the Gulf of Mexico and North Sea were approximately $296.1 million
and $124.4 million, respectively, in 2005, offset by the receipt of $19.8 million in
proceeds for the sale of properties. Cash used in investing activities was $622.8 million
and $404.5 million during the nine months ended September 30, 2007 and 2006,
respectively. Cash expended in the Gulf of Mexico and North Sea was approximately
$470.4 million and $166.2 million in the nine months ended September 30, 2007. Cash
expended in the Gulf of Mexico and North Sea was approximately $257.9 million and
$133.0 million, respectively, in the first nine months of 2006.

Financing activities
Cash provided by financing activities in 2006 consisted primarily of net proceeds
of $703.9 million related to Term Loans, and net proceeds of $145.5 million from the
issuance of preferred stock, partially offset by $381.1 million paid to redeem preferred
stock. Cash provided by financing activities in 2005 consisted primarily of net proceeds
of $121.7 million Term Loan, after and $169.4 million from the issuance of preferred
stock. As noted above, ATP continues to finance most of its activities in 2007 through
term loans

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 (5) Ansoff Matrix

Summary
Ansoff matrix is a marketing tool that allows a company to consider ways of growing the
business via existing and/or new products, in existing and/or new markets.

Market penetration (existing markets, existing products): Market penetration occurs when
a company enters/penetrates a market with current products. The growth strategy of ATP
is primarily through its existing products (i.e. oil and gas) and its existing market (i.e.
consumers world wide). The best way to achieve this is by gaining competitors'
customers (part of their market share), attracting non-users of your product, and
convincing current clients to use more of your product/service, with advertising or other
promotions. However, competition for market share is not intense in the oil and gas
market (due to excess demand over supply), therefore, ATP’s market penetration
strategy, like other oil and gas companies, is less risky.

Product development (existing markets, new products): A firm with a market for its
current products might embark on a strategy of developing other products catering to the
same market. This is currently not a strategy of ATP. Due to massive support for

44
alternative forms of energy, product development could become a possible strategy for
ATP. Frequently, when a firm creates new products, it can gain new customers for these
products. Hence, new product development can be a crucial business development
strategy for ATP to stay competitive.

Market development (new markets, existing products): An established product in the

marketplace can be tweaked or targeted to a different customer segment, as a strategy to
earn more revenue for the firm. For example, ATP could market its existing products (oil
and gas) consumers. But ATP has no incentive to do so, unless production increases to a
level over and above the capacity of its existing buyers (especially when ATP sells a
larger percentage of its oil and gas under fixed term contracts). The reason is that, as
noted earlier, demand for oil and gas commodities far exceed supply, and this trend is
expected to continue for the coming years. Therefore, the issue is not on expanding the
market for oil and gas, but on increasing production of oil and gas to meet demand.

Diversification (new markets, new products): this involves the creation of new products
into new markets to leverage existing products and markets. This results in a company
entering new markets where it has no presence. ATP can diversify in a number of ways:
by undertaking exploration and development activities in other geographical regions, by
pursuing forward integration (i.e. becoming an oil marketing company), and by entering
into the market of other energy sources.

6. BCG Matrix
a) Calculation of relative market share:
ATP oil and natural gas production for 2006:
Natural gas (MMcf) ................................................................. 31,224
Oil and condensate (MBbls) .................................................... 3,273
Total (MMcfe)...................................................................... 50,860
(Source: ATP annual report 2007)
Average daily production (assuming 365 days a year) = 139.34
Largest competitor: Chevron Corporation

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Chevron oil and natural production for 2006
Average daily production of oil (barrels) 102,000
Average daily production of natural gas (MMcf) 661
Total average production (MMcf) 661.612
(Source: Chevron annual report 2006)
Conversion factor: 6 MMcfe/barrel
Relative market share: oil production = 3273/ (102000*365/1000) = 9%
Relative market share: gas production = 31,224/ (661*365) = 13%
b) Calculation of growth rate
Sales growth in 2003 - 2006
2006 2005 2004
Natural gas ($ millions) 236,514 116,444 90,053
Oil and condensate ($ millions) 177,558 30,041 25,970
Average growth: natural gas (103.1% +29.3%)/2 = 66.2%
Average growth: oil and condensate (491% + 15.7%)/2 = 253.3%

c) Graphical presentation

Summary
Dogs: are units with low market share in a mature, slow-growing industry. These units
typically "break even", generating barely enough cash to maintain the business's market

46
share. None of ATP’s products can be designated as a dog because the oil and gas market
is growing rapidly. Besides, the calculations of relative market shares for both products
have done with Chevron corporation which is a large multinational company operating in
many geographical regions and also diversified than ATP.
Question marks are growing rapidly and thus consume large amounts of cash, but
because they have low market shares they do not generate much cash. ATP’s oil
production has a little characteristic of a question mark product. Although average
growth rate is 253.3%, it has a market share of only 9% relative to Chevron.
Cash cows are units with high market share in a slow-growing industry. These units
typically generate cash in excess of the amount of cash needed to maintain the business.
As noted earlier, the oil and gas market is a fast growing market; therefore ATP’s
products cannot be positioned is this quadrant. However both products have some
characteristics of cash cow, considering the amount of cash both oil and natural gas
generates. Revenues from the two products more than doubled in 2006, and continues to
rise in 2007.
Stars are units with a high market share in a fast-growing industry. The hope is that stars
become the next cash cows. Arguably, ATPs products (oil and natural gas) are better
positioned in this quadrant. The growth rate of both commodities are very high (253.3%
and 66.2%). Although relative market share is low compared to Chevron, ATP’s market
share is high compared to its peers.
The above analysis indicate that ATP’s oil and gas commodities are likely to fall in the
intersection of cash cow, question mark, and star.

EXTERNAL ANALYSIS

(A) Porter’s Five Forces Model

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Rating used: Very weak – weak – moderate – moderate-strong – strong
The bargaining power of buyers
The power of buyers is the impact that customers have on a producing industry. In
general, when buyer power is strong, the relationship to the producing industry is near to
what economists’ terms as monopsony – a market in which there are many suppliers and
one buyer. Under such market condition the buyer sets the price. The ability of customers
to put a firm under pressure in a particular industry largely depends on buyer
concentration to firm concentration ratio, bargaining leverage, buyer volume, buyer
switching costs relative to firm switching costs, buyer information availability, ability to
backward integrate, availability of existing substitute products, buyer price sensitivity,
and price of total purchase. In reality customers in the gas and oil industry do not wild
any power in determining the price of the produce. ATP, like other companies in the oil
and natural gas industry, sells its oil and natural gas production under price sensitive or
market price contracts. Its revenues, profitability and future growth depend substantially
on prevailing prices for oil and natural gas. The price received by the company for its oil
and natural gas production can fluctuate widely. Changes in the prices of oil and natural
gas will affect the carrying value of the company’s proved reserves as well as its
revenues, profitability and cash flow. ATP sells a portion of its oil and natural gas to end
users through various non-affiliated gas marketing companies. Historically, the company
has sold its oil and natural gas to a relatively few number of purchasers. For example,
revenues of oil and gas production from two purchasers accounted for 43% and 32%
respectively in 2006, revenues from three purchasers accounted for 48%, 14% and 12%
respectively in 2005, and revenues from four purchasers accounted for 35%, 21%, 17%

48
and 15% respectively in 2004. Although these individual buyers volume is very high, and
switching cost in the oil and gas industry is relatively low, ATP management believes
that the company is not dependent upon, or confined to, any one purchaser or small group
of purchasers. “Due to the nature of oil and natural gas markets and because oil and
natural gas are commodities and there are numerous purchasers in the areas in which the
company sell production, the loss of a single purchaser, or a few purchasers, would not
materially affect the company’s ability to sell its production” (Annual report 2006). In
addition, oil and gas exploration is very expensive, and requires huge capital investment
which creates barrier for customers to integrate backward.
Rating: Very weak – weak

Bargaining power of suppliers

A producing industry requires raw materials - labor, components, and other
suppliers. This requirement leads to buyer-supplier relationships between the industry
and the firm that provide it the raw materials used to create the product. Suppliers, if
powerful, can exert pressure on the producing industry, such as selling raw materials at a
high price to capture some of the industry’s profits. Supplier power depends on supplier
switching costs relative to firm switching costs, degree of differentiation of inputs,
presence of substitute inputs, supplier concentration to firm concentration ratio, threat of
forward integration by suppliers relative to the threat of backward integration by firms,
cost of inputs relative to selling price of the product. As oil and gas producer, APT
currently occupies the top ladder of the chain of distribution (an upstream producer), and
does supply its produce to other companies and end users in the supply chain. However,
the oil and gas industry require materials to operate. These include oil and gas fields
(properties), machinery and equipment for exploration, and labor. The cost of these
materials is very substantial, and land fields can be subject to long term litigations and
environmental liabilities. “The unavailability or increased cost of drilling rigs, equipment,
supplies, personnel and oilfield services could adversely affect our ability to execute on a
timely basis our development plans within our budget” (Annual report 2006). However, it
is a practice in the oil and gas industry to committing the suppliers into long-term

49
contracts to forestall supplier power. For this reason supplier power is not excessively
significant.
Rating: Weak - moderate

Rivalry among existing competitors

Economists measure rivalry by indicators of industry concentration. If only a few firms
hold a large market share the industry is concentrated and the competitive landscape is
less concentrated. On the other hand, if an industry is characterized by many rivals, none
of which has a significant market share, there is low concentration and there is
competition. According to Thompson et al (2007, page 56) “Competitive jockeying
among rival firms is ever changing, as rivals initiate fresh and defensive moves and
emphasize first one mix of competitive weapons and then another in efforts to improve
their market share”. Oil and natural gas prices are volatile, and low prices have had in the
past and could have in the future a material adverse impact on companies in the industry.
However, there is increase world demand for oil and natural gas marked by excess
capacity decline in OPEC. The US natural gas consumption has increased over the years
and, despite a significant price increase, supply has remained relatively constant for last
12 years (source: Petterson UTI Energy Inc., August 23, 2007 Vcall conference).

Source: Energy Information Administration/Rich Clabaugh – Staff

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This means that “cheap” gas and oil is unlikely to return, and the high long-term demand
trends are likely to persist. Therefore, a company like ATP can afford to sell all its
produce without significant challenges from competitors. Again, no single producer
determines the oil or gas price, as prices for both commodities are determined by the
world market. This implies that companies in this industry do not compete on price.
Many oil and gas producing companies do not spend money on advertisement, except a
little spending on public relations. The industry is growing due to high demand for oil
and gas in China and Far East, and other industrialized nations. Although competitors in
the industry may compete for resources such as exploration fields and properties, ATP
has adopted a strategy of acquiring and developing low-risk properties with proved
undeveloped reserves (“PUD”) that are economically attractive to the company but are
not strategic to major or large exploration-oriented independent oil and gas companies.
(Source: annual report 2006).
Rating: Very weak - weak

Threat of new entrants

Threat of new entrants refers to the possibility that new firms may enter industry
to compete for profit. In theory any firm should be able to enter and exit a market, and if
free entry and exits exists, then profits always should be nominal. In reality however,
industries always possess characteristics that protects the high profit levels of firms in the
market and inhibit additional rivals from entering the market. The ability of new firms to
enter and compete for industry’s profit largely depends on the barriers of entry - the
unique characteristics that defines the industry. Factors that create barriers are economies
of product differences, switching costs or sunk costs, capital requirements, access to
distribution, absolute cost advantages, learning curve advantages, expected retaliation by
incumbents, and government policies. Profitable markets that yield high returns will
draw firms, and this seems to be the case in the oil and gas industry today. Again, there is
high demand for oil and gas, and customers do not incur substantial switching cost. This
means that there will be no difficulties for new firms to build a net work of distributors or

51
to obtain oil marketing companies and end users. However, issues like environmental
laws, production licenses, huge capital requirement, and the long timing associated with
the development of reserves provide adequate barriers of entry. Traditionally, countries in
the Middle East rent oil and natural gas fields to existing oil and gas producing
companies than to new companies. This practice help heighten the barriers of entry for
the companies operating in the Middle East. One can argue that ATP has most of its
properties at the Gulf of Mexico and at the North Sea which is not subject to the norm in
the Middle East, and therefore new entrants may target this geographical area and may
increase competition for properties. However, APT has a significant learning experience
in these regions and has already acquired substantial properties. At December 31, 2006,
the company owned leasehold and other interests in 72 offshore blocks, 44 platforms and
112 wells, including 14 subsea wells, in the Gulf of Mexico. The company operate 94
(84%) of these wells, including all of the subsea wells, and 86% of its offshore platforms.
ATP also had interests in 11 blocks and 2 company-operated subsea wells in the North
Sea. The company’s average working interest in its properties at December 31, 2006 was
approximately 81%. As of December 31, 2006, ATP had leasehold interests located in the
Gulf of Mexico and North Sea covering approximately 456,331 gross and 380,743 net
acres, of which 257,102 gross acres were developed and 187,428 net acres were
developed (source: Annual report 2006).
Rating: Moderate – moderate-strong

Threat of substitutes
Increasing traditional oil and gas prices has become a major concern to the society
today. The existence of close substitute products increases the propensity of customers to
switch to alternatives in response to price increases. Threat of substitudes depends on
buyer propensity to substitute relative price performance of substitutes, buyer switching
costs, and perceived level of product differentiation. Prospects are brightening for a big
change at the oil and gas industry. Oil and has resources has been found to be limited,
and many countries, companies, and research institutions are busily searching for
alternative forms of energy. Although the demand for natural oil and gas is high the trend
might not continue in the near future. Instead of just regular, plus, and premium, gas

52
stations in a few years may well be offering fuel made from corn, soybeans, and plant
fiber. And new cars would be engineered to run on them. For example, following
President Bush's call in January 2007 for a 20 percent cut in gasoline consumption,
Democrats and Republicans in Congress have unveiled legislation that would require
automakers to build "flex-fuel" cars that could burn the various alternative fuels, and the
new legislation has powerful backers. The push for alternative fuels is coming from
several forces. In November 2006, the chief executives of the Big Three automakers met
with Mr. Bush in a White House chat to talk about the challenges facing their industry.
One idea that surfaced: by 2012, half of all their new vehicles could be flex-fuel models.
These cars and trucks could burn a range of alternatives to gasoline – from ethanol made
from corn to methanol made from coal. That kind of push could help meet Mr. Bush's
goal of reducing US gasoline consumption by 20 percent over the next 10 years. Various
countries, including poor African states, are researching into alternative forms of oil and
gas.
Rating: Moderate-strong - strong

Summary
The analysis above indicate that although bigger companies exist in the industry, all
members can compete and make profit since there is very-weak to week rivalry among
existing firms. Besides, customer power is weak in oil and gas industry today because
demand for these two commodities far exceed supply, and prices are determined by
market forces of the world economy. Suppliers of oil and gas fields and equipment do
have moderate power, but as long as prices for oil and natural gas keeps rising producers
can meet their cost and make profits by simply passing the cost to the helpless consumer.
High capital requirements and what has become an “acceptable norm” in the Middle East,
coupled with instability in oil producing countries in Africa has created huge entry
barriers for new companies to enter and stimulate competition. However the oil and gas
industry face unprecedented challenges to improve efficiency and maintain profitability
in an industry experiencing tougher environmental and safety regulations, increasing
complexity and cost of operations, and growing challenge of alternative forms of energy.

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Notwithstanding, the oil and gas industry is very attractive and highly profitable, with
weak industry competition.

(B) Pest Analysis

Political and regulatory factors
Oil & gas companies withstand extreme regulatory compliance pressures. The
industry, already heavily regulated, can expect an increased focus on regulatory
compliance based on legislation such as the Sarbanes-Oxley Act. They will also shape
Oil & Gas IT expenditures and risk assessment. Of course, political factors will continue
to shape the hierarchy of the world’s oil companies. “We are subject to complex laws and
regulations, including environmental regulations that can adversely affect the cost,
manner or feasibility of doing business” (Annual report 2006). Development, production
and sale of oil and natural gas in the Gulf of Mexico and in the North Sea are subject to
extensive laws and regulations, including environmental laws and regulations. ATP may
be required to make large expenditures to comply with environmental and other
governmental regulations. Matters subject to regulation include: discharge permits for
drilling operations; bonds for ownership, development and production of oil and gas
properties; reports concerning operations; and taxation. Under these laws and regulations,
the company could be liable for personal injuries, property damage, oil spills, discharge
of hazardous materials, remediation and clean-up costs and other environmental damages.
Failure to comply with these laws and regulations also may result in the suspension or
termination of ATP’s operations and may be subject to administrative, civil and criminal
penalties. Moreover, these laws and regulations could change in ways that substantially
increase the company’s costs. Accordingly, any of these liabilities, penalties,
suspensions, terminations or regulatory changes could materially adversely affect the
company’s financial condition and results of operations. Oil and gas business is globally
political, and source of conflict in many countries. For example, in Africa, political
instability or lack of well-established and reliable legal systems in oil and gas producing
countries is the major source of many conflicts. Erik and Alexander in their book “power,
personality, and political risks: inside Russia’s oil and gas industry” remarked that
“following Putin's re-election and comprehensive restructuring of the government,

54
investors in Russia's oil and gas industry are at risk if they do not understand new
political appointments”. Terrorist attacks or similar hostilities may also adversely impact
on results of operations.

Economic factors
The oil and gas business is fundamentally a commodity business. This means the
operations and earnings of ATP may be significantly affected by changes in oil and gas
prices and by changes in margins on gasoline and other refined products. Oil and gas
product prices and margins in turn depend on local, regional and global events or
conditions that affect supply and demand for the relevant commodity. These events or
conditions are generally not predictable and include, among other things: general
economic growth rates and the occurrence of economic recessions; the development of
new supply sources; adherence by countries to OPEC quotas; weather, including seasonal
patterns that affect regional energy demand (such as the demand for heating oil or gas in
winter) as well as severe weather events (such as hurricanes) that can disrupt supplies or
interrupt the operation of ATP facilities. “Our revenues, profitability and future growth
and the carrying value of our properties depend substantially on the prices we realize for
our oil and natural gas production. Our realized prices also affect the amount of cash flow
available for capital expenditures and our ability to borrow and raise additional capital”
(Source: Annual report 2006). Historically, the markets for oil and natural gas have been
volatile, and they are likely to continue to be volatile in the future. For example, oil and
natural gas prices increased significantly in late 2000 and early 2001 and then steadily
declined in 2001, only to climb again in recent years to near all-time highs before
declining again in late 2006. It is impossible to predict oil and natural gas price
movements with certainty. Lower oil and natural gas prices may not only decrease ATP’s
revenues on a per-unit basis but also may reduce the amount of oil and natural gas that
the company can produce economically.

Socio-cultural factors
Changes in demographics, including population growth rates and consumer
preferences may also have effect on the demand and supply of oil and gas. For example, a

55
larger percentage of American population perceive vehicles and other products related to
it as necessities, therefore it is unlikely that cultural aspects will have negative effect on
the demand of oil and gas. However, environmental fears have already led to restrictions
to explore in places such as Alaska and other parts of the world. Harry J. Longwell,
Director and Executive Vice President of Exxon Mobile Corporation is quoted in the
world energy journal as saying “Concerns over potential climate change have led to
demands for greater control of energy use and could well impede on ATP’s ability to
produce adequate amounts of energy” (Source: World Energy Magazine; Vol. 5, No. 3).
However the oil and gas industry has created many jobs for various people. For example,
a study conducted by the Coastal Marine Institute on Effect of the Oil and Gas Industry
on Commuting and Migration Patterns in Louisiana: 1960-1990” showed that oil and
natural gas industry has been an important source of revenue and employment in
Louisiana throughout these periods. The industry contributes a significant proportion in
State revenue through the severance tax which, in turn, is used to finance various social
and economic activities throughout Louisiana. A significant part of the severance tax
(sometimes up to 90 percent) has been used to finance the public school system, with the
remaining proportion given back to the parishes. The strong impact of the industry on
Louisiana's labor force is reflected in employment changes in the extractive industry that
mirror the fluctuation of oil and gas production.

Technological factors
Technological advances, including advances in exploration, production, refining
and petrochemical manufacturing technology and advances in technology relating to
energy usage in very crucial in the energy industry. Technology in the oil and gas
industry is advancing in quantum leaps. ATP’s engineers stay abreast of cutting-edge
technologies and then skillfully apply them to deliver value-added solutions (Source:
Annual report 2006). For example, they the engineers identified ways to predict the
BCFE potential of a specific well by drawing on their own wealth of experience,
improved seismic and logged interval data, and available development and performance
information relating to surrounding wells, thereby eliminating the need to perform a
costly well test. ATP’s ability to harness technology to accurately and cost-efficiently

56
forecast a well’s potential has helped the company to build credibility in the industry.
Industry players will increasingly rely on technological advances for improved recovery
and optimization, cost reduction, rate acceleration, discovery of new frontiers, and
environmental footprint. This is expected to have significant cost implications on ATP’s
operations.

Summary
APT operates only at the Gulf of Mexico and the North Sea (UK and Netherlands)
areas, which are both politically stable. However, the areas are heavily regulated, and the
regulatory environment is highly unpredictable. This can significantly affect ATP’s
operations. The company will equally need to pay attention to the economic factors since
the discovery of and legislation to push alternative forms of energy could reduce
customer demand for gas and oil and therefore bring prices down. The industry also faces
technological challenges to reduce cost and be efficient, and this pressure can lead to
competing technologies among firms in the industry and put pressure on profit.

C. Competitors analysis (positioning)

Offshore peer analysis with peers as WTI Offshore (WTI), Stone Energy (SGY),
Mariner Energy (ME), and Energy Partners (EPL) indicates that ATP yields superior cash
on cash margins (i.e. 47% for ATP as compared to 39% of WTI, 35% of SGY, 33% of
ME, and 30% of EPL). Similarly APT is a leading cost structure among Offshore E&P’s,
coupled with best in class price realizations (Source: ATP Oil and Gas Corporation: The
12th oil gas conference, August 22, 2007). ATP’s market capitalization is $1.42 billion,
compared to some of its major competitors. For example ENI SPA ADR has market
capitalization of $53.67 billion (Source: yahoo finance).ATP competes with major and
independent oil and natural gas companies for property acquisitions. The company also
competes for the equipment and labor required to operate and to develop these properties.
Some of the company’s competitors have substantially greater financial and other
resources than ATP. In addition, larger competitors may be able to absorb the burden of
any changes in federal, state and local laws and regulations more easily than APT, which

57
would adversely affect its competitive position. These competitors may be able to pay
more for oil and natural gas properties and may be able to define, evaluate, bid for and
acquire a greater number of properties than APT. The company’s ability to acquire
additional properties and develop new and existing properties in the future will depend on
its ability to conduct operations, to evaluate and select suitable properties and to
consummate transactions. In addition, some of ATP’s competitors have been operating in
the Gulf of Mexico and in the North Sea for a much longer time than ATP have and have
demonstrated the ability to operate through industry cycles.

Summary
As already indicated companies in the oil and natural gas industry do not compete
on price. They also do not compete directly for market share with each other because
there is the market for oil and gas keeps growing, and new discoveries are limited.
Products, oil and gas are not also subject to product differentiation strategies; therefore
competition for brand recognition does not apparently exist. However they compete for
resources. The peer analysis puts APT a little ahead of its competitors, but obviously
behind the industry’s major players.

(D) Financial analysis (ATP with peers in the industry)

CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 2006
FOR THE YEAR ENDED DECEMBER 31, 2006
(In Thousands, Except Share Amounts)
Assets ATPG WTI SGY
Cash and cash equivalents 182,592.00 39,235.00 58,862.00
Restricted cash 27,497.00 10,680.00 -
Accounts receivable (net of allowance) 105,030.00 239,899.00 241,829.00
Deferred tax asset 1,113.00 - -
Derivative asset 1,170.00 - 11,017.00
Other current assets 9,931.00 49,559.00 965.00
Total current assets 327,333.00 339,373.00 312,673.00
Proved and unproved properties 1,539,352.00 3,297,153.00 3,424,787.00
Less: Accumulated depletion, impairment and
amortization (443,707.00) (1,042,315.00) (1,640,362.00)
Furniture and fixtures (net of accumulated
depreciation) 1,079.00 10,948.00 14,113.00
Deferred tax asset (4,025.00) - -
Deferred financing costs, net 13,272.00 - -
Other assets, net 9,729.00 4,526.00 17,260.00

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Total assets 1,447,058.00 2,609,685.00 2,128,471.00
Liabilities and Shareholders’ Equity
Accounts payable and accruals 195,846.00 247,324.00 120,532.00
Current maturities of long-term debt 8,987.00 271,380.00
Current maturities of long-term capital lease 23,699.00 -
Asset retirement obligation 21,297.00 41,718.00 130,341.00
Accrued liabilities - 28,825.00
Deferred income taxes—current portion - 7,896.00
Undistributed oil and gas proceeds - 46,933.00 39,540.00
Derivative liability (1,282.00) -
Other current liabilities - - 20,415.00
Total current liabilities 249,829.00 644,076.00 310,828.00
Long-term debt 1,062,454.00 413,617.00 797,000.00
Long-term capital lease (34,437.00) - -
Asset retirement obligation 87,092.00 272,350.00 210,035.00
Deferred tax liability 11,765.00 232,835.00 94,560.00
Other long-term liabilities and deferred obligations 8,826.00 3,890.00 4,408.00
1,411,140.0
Total liabilities 0 922,692.00 1,416,831.00
Shareholders’ equity:
Preferred stock: - -
Common stock: 30.00 1.00 276.00
Additional paid-in capital 151,467.00 361,855.00 502,747.00
Accumulated (deficit)/Retained earnings (140,681.00) 681,634.00 200,929.00
Accumulated other comprehensive income (loss) 26,013.00 (573.00) 8,849.00
Treasury stock (911.00) - (1,161.00)
Total shareholders’ equity 35,918.00 1,042,917.00 711,640.00
Total liabilities and shareholders’ equity 1,447,058.00 2,609,685.00 2,128,471.00

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2006
(In Thousands, Except Share Amounts)
Revenues: ATPG WTI SGY
Oil and gas production 414,182.00 800,348.00 686,300.00
Other revenues 5,639.00 118.00 2,688.00
Total Revenue 419,821.00 800,466.00 688,988.00
Costs and operating expenses:
Lease operating 72,446.00 109,652.00 159,043.00
Exploration 2,231.00 - -
General and administrative 21,499.00 42,119.00 34,266.00
Stock-based compensation 11,477.00 - 4,356.00
Production taxes - 1,556.00 13,472.00
Depreciation, depletion and amortization 169,704.00 325,131.00 320,696.00
Impairment of oil and gas properties 19,520.00 16,141.00 510,013.00
Accretion 8,076.00 12,496.00 12,391.00
(Gain) loss on abandonment 9,603.00 - -
Commodity derivative gain - (24,244.00) -
Total costs and expenses 314,556.00 482,851.00 1,054,237.00
Income from operations 105,265.00 317,615.00 (365,249.00)
Other income (expense):

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Interest income 4,532.00 - 35,931.00
Interest expense (58,018.00) (30,418.00) -
Merger expense reimbursement - - (51,500.00)
Merger expense - - 50,034.00
Loss on extinguishment of debt (28,115.00) - -
Interest expense capitalized - 13,238.00
Other income 7,419.00 5,919.00 (7,186.00)
Income (loss) before income taxes 23,671.00 306,354.00 (392,528.00)
Income tax expense:

Current (2,528.00) 107,250.00 227.00

Deferred (14,266.00) (138,533.00)

Net income (loss) 6,877.00 199,104.00 (254,222.00)

Preferred stock dividends (46,225.00) — -

Net income (loss) available to common
shareholders (39,348.00) 199,104.00 (254,222.00)
Earnings/(loss) per common share: – basic and
diluted (1.33) 2.84 (9.29)
Weighted average number of common shares:

Basic 29,693.00

Diluted 29,693.00
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2006
(In Thousands, Except Share Amounts)
Cash flows from operating activities ATPG WTI SGY

Net income (loss) 6,877.00 199,104.00 (254,222.00)

Adjustments to reconcile net income (loss) to net
cash
provided by operating activities –

Depreciation, depletion and amortization 169,704.00 337,627.00 320,696.00

Impairment of oil and gas properties 19,520.00 - 510,013.00

Accretion 8,076.00 6,765.00 12,391.00
Unrealized commodity derivative gain - (13,476.00) (377.00)

Deferred income taxes 14,266.00 106,645.00 (138,533.00)

Dry hole costs (5,341.00) - -

Amortization of deferred financing costs 5,985.00 1,417.00 -
Loss on extinguishment of debt - -

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 28,115.00

Stock-based compensation 11,477.00 2,544.00 4,358.00

Ineffectiveness of cash flow hedges (110.00) - -

Noncash interest and credit facility expenses 3,054.00 - -

Other noncash items (643.00) - (2,066.00)

Accounts receivable and other current assets (24,904.00) (54,470.00) (30,145.00)

Joint interest and other receivables - (17,584.00) 1,780.00

Asset retirement obligations - (24,492.00) (18,545.00)

Insurance receivables - (61,301.00) -
Prepaid expenses and other assets - (27,168.00) (11,682.00)
Income taxes - (47,313.00) -
Accounts payable and accruals 20,419.00 162,274.00 1,300.00
Other assets (3,322.00) 511.00 (65.00)
Other long-term liabilities and deferred obligations - 506.00 -
Net cash provided by operating activities 258,514.00 571,589.00 399,035.00
Cash flows from investing activities
Additions and acquisitions of oil and gas
properties (577,012.00) (588,978.00) (657,878.00)
Acquisition of subsidiary - (1,061,769.00)
Sale of proved properties - - (38.00)
Increase in restricted cash (13,290.00) - -
Additions to furniture and fixtures (381.00) (4,825.00) (2,540.00)
Other - (331.00) -
Net cash used in investing activities (590,683.00) (1,655,903.00) (660,456.00)
Cash flows from financing activities
Proceeds from long-term debt 728,500.00 1,123,732.00 85,000.00
Payments of long-term debt (4,435.00) (485,500.00) (76,000.00)
Deferred financing costs (24,551.00) (1,135.00) (3,283.00)
Issuance of preferred stock, net of issuance costs 145,463.00 306,979.00 -
Redemption of preferred stock (381,083.00) - -
Dividends to shareholders - (8,225.00) -
Payments of capital lease (20,869.00) - -
Proceeds from issuance of notes - - 225,000.00
Exercise of stock options 4,966.00 - 9,858.00
Net cash provided by financing activities 447,991.00 935,851.00 240,575.00
Effect of exchange rate changes on cash 1,204.00 - -
Increase (decrease) in cash and cash equivalents 117,026.00 (148,463.00) (20,846.00)
Cash and cash equivalents, beginning of period 65,566.00 187,698.00 79,708.00
Cash and cash equivalents, end of period 182,592.00 39,235.00 58,862.00
Source: ATPG, WTI, and SGY 2006 annual reports

COMMON SIZE ANALYSIS

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Revenues: ATPG WTI SGY
Oil and gas production 98.66% 99.99% 99.61%
Other revenues 1.34% 0.01% 0.39%
Total Revenue 100.00% 100.00% 100.00%
Costs and operating expenses:
Lease operating 17.26% 13.70% 23.08%
Exploration 0.53% 0.00% 0.00%
General and administrative 5.12% 5.26% 4.97%
Stock-based compensation 2.73% 0.00% 0.63%
Production taxes 0.00% 0.19% 1.96%
Depreciation, depletion and amortization 40.42% 40.62% 46.55%
Impairment of oil and gas properties 4.65% 2.02% 74.02%
Accretion 1.92% 1.56% 1.80%
(Gain) loss on abandonment 2.29% 0.00% 0.00%
Commodity derivative gain 0.00% -3.03% 0.00%
Total costs and expenses 74.93% 60.32% 153.01%
0.00% 0.00% 0.00%
Income from operations 25.07% 39.68% -53.01%
Other income (expense): 0.00% 0.00% 0.00%
Interest income 1.08% 0.00% 5.22%
Interest expense -13.82% -3.80% 0.00%
Merger expense reimbursement 0.00% 0.00% -7.47%
Merger expense 0.00% 0.00% 7.26%
Loss on extinguishment of debt -6.70% 0.00% 0.00%
Interest expense capitalized 0.00% 1.65% 0.00%
Other income 1.77% 0.74% -1.04%
0.00% 0.00% 0.00%
Income (loss) before income taxes 5.64% 38.27% -56.97%
Income tax expense: 0.00% 0.00% 0.00%
Current -0.60% 13.40% 0.03%
Deferred -3.40% 0.00% -20.11%
0.00% 0.00% 0.00%
Net income (loss) 1.64% 24.87% -36.90%
Preferred stock dividends -11.01% 0.00% 0.00%
Net income (loss) available to common
shareholders -9.37% 24.87% -36.90%
Assets
Cash and cash equivalents 43.49% 4.90% 8.54%
Restricted cash 6.55% 1.33% 0.00%
Accounts receivable (net of allowance) 25.02% 29.97% 35.10%
Deferred tax asset 0.27% 0.00% 0.00%
Derivative asset 0.28% 0.00% 1.60%
Other current assets 2.37% 6.19% 0.14%
Total current assets 77.97% 42.40% 45.38%
Proved and unproved properties 366.67% 411.90% 497.07%
Less: Accumulated depletion, impairment and
amortization -105.69% -130.21% -238.08%
Furniture and fixtures (net of accumulated
depreciation) 0.26% 1.37% 2.05%

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Deferred tax asset -0.96% 0.00% 0.00%
Deferred financing costs, net 3.16% 0.00% 0.00%
Other assets, net 2.32% 0.57% 2.51%
Total assets 344.68% 326.02% 308.93%
Liabilities and Shareholders’ Equity 0.00% 0.00% 0.00%
Accounts payable and accruals 46.65% 30.90% 17.49%
Current maturities of long-term debt 2.14% 33.90% 0.00%
Current maturities of long-term capital lease 5.65% 0.00% 0.00%
Asset retirement obligation 5.07% 5.21% 18.92%
Accrued liabilities 0.00% 3.60% 0.00%
Deferred income taxes—current portion 0.00% 0.99% 0.00%
Undistributed oil and gas proceeds 0.00% 5.86% 5.74%
Derivative liability -0.31% 0.00% 0.00%
Other current liabilities 0.00% 0.00% 2.96%
Total current liabilities 59.51% 80.46% 45.11%
Long-term debt 253.07% 51.67% 115.68%
Long-term capital lease -8.20% 0.00% 0.00%
Asset retirement obligation 20.75% 34.02% 30.48%
Deferred tax liability 2.80% 29.09% 13.72%
Other long-term liabilities and deferred obligations 2.10% 0.49% 0.64%
Total liabilities 336.13% 115.27% 205.64%
Shareholders’ equity: 0.00% 0.00% 0.00%
Preferred stock: 0.00% 0.00% 0.00%
Common stock: 0.01% 0.00% 0.04%
Additional paid-in capital 36.08% 45.21% 72.97%
Accumulated (deficit)/Retained earnings -33.51% 85.15% 29.16%
Accumulated other comprehensive income (loss) 6.20% -0.07% 1.28%
Treasury stock -0.22% 0.00% -0.17%
Total shareholders’ equity 8.56% 130.29% 103.29%
Total liabilities and shareholders’ equity 344.68% 326.02% 308.93%

Cash flows from operating activities

Net income (loss) 1.64% 24.87% -36.90%
Adjustments to reconcile net income (loss) to net
cash 0.00% 0.00% 0.00%
provided by operating activities – 0.00% 0.00% 0.00%
Depreciation, depletion and amortization 40.42% 42.18% 46.55%
Impairment of oil and gas properties 4.65% 0.00% 74.02%
Accretion 1.92% 0.85% 1.80%
Unrealized commodity derivative gain 0.00% -1.68% -0.05%
Deferred income taxes 3.40% 13.32% -20.11%
Dry hole costs -1.27% 0.00% 0.00%
Amortization of deferred financing costs 1.43% 0.18% 0.00%
Loss on extinguishment of debt 6.70% 0.00% 0.00%
Stock-based compensation 2.73% 0.32% 0.63%
Ineffectiveness of cash flow hedges -0.03% 0.00% 0.00%
Noncash interest and credit facility expenses 0.73% 0.00% 0.00%
Other noncash items -0.15% 0.00% -0.30%
Accounts receivable and other current assets -5.93% -6.80% -4.38%
Joint interest and other receivables 0.00% -2.20% 0.26%

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Asset retirement obligations 0.00% -3.06% -2.69%
Insurance receivables 0.00% -7.66% 0.00%
Prepaid expenses and other assets 0.00% -3.39% -1.70%
Income taxes 0.00% -5.91% 0.00%
Accounts payable and accruals 4.86% 20.27% 0.19%
Other assets -0.79% 0.06% -0.01%
Other long-term liabilities and deferred obligations 0.00% 0.06% 0.00%
Net cash provided by operating activities 61.58% 71.41% 57.92%
Cash flows from investing activities 0.00% 0.00% 0.00%
Additions and acquisitions of oil and gas
properties -137.44% -73.58% -95.48%
Acquisition of subsidiary 0.00% -132.64% 0.00%
Sale of proved properties 0.00% 0.00% -0.01%
Increase in restricted cash -3.17% 0.00% 0.00%
Additions to furniture and fixtures -0.09% -0.60% -0.37%
Other 0.00% -0.04% 0.00%
Net cash used in investing activities -140.70% -206.87% -95.86%
Cash flows from financing activities 0.00% 0.00% 0.00%
Proceeds from long-term debt 173.53% 140.38% 12.34%
Payments of long-term debt -1.06% -60.65% -11.03%
Deferred financing costs -5.85% -0.14% -0.48%
Issuance of preferred stock, net of issuance costs 34.65% 38.35% 0.00%
Redemption of preferred stock -90.77% 0.00% 0.00%
Dividends to shareholders 0.00% -1.03% 0.00%
Payments of capital lease -4.97% 0.00% 0.00%
Proceeds from issuance of notes 0.00% 0.00% 32.66%
Exercise of stock options 1.18% 0.00% 1.43%
Net cash provided by financing activities 106.71% 116.91% 34.92%
Effect of exchange rate changes on cash 0.29% 0.00% 0.00%
Increase (decrease) in cash and cash equivalents 27.88% -18.55% -3.03%
Cash and cash equivalents, beginning of period 15.62% 23.45% 11.57%
Cash and cash equivalents, end of period 43.49% 4.90% 8.54%

Ratio Analysis
Ratio Calculation ATPG WTI SGY
Profitability (Dupont)
Return on sales Net income/Total revenue 4.87% 16.39% -26.48%
Asset turnover Total revenue/Total assets 29.01204 30.6729 32.37009
Assets to equity Total assets/stockholders' equity 40.28782 2.502294 2.990938
Other profitability
Return on Assets Net income/Total assets 6.46% 9.63% -9.86%
Return on Equity Net income/stockholders' equity 10.92% 18.81% -21.87%
Operating Margin Operating income/Total revenue 28.27% 28.78% -49.52%
Qtrly Revenue Growth
(yoy) 21.40% 16.4 19.6

Liquidity Ratios
Current Ratio (mrq): Current assets/current liabilities 0.909 1.165 1.72

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Levered Free Cash Flow
(ttm): -384.77M 85.87M -94.59
Leverage
Debt ratio Total liabilities/total assets
Total liabilities/Stockholders'
Total Debt/Equity (mrq): equity 15.262 0.595 0.786
Earnings before interest and
Times interest earned taxes/interest expense 1.81 10.44 0.00

Stock market (Source:

yahoo finance)
Revenue Per Share Total revenue/Total # of stock 17.946 13.277 26.666
Book Value Per Share
(mrq): 2.732 14.451 28.376
Price/Sales 2.79 1.86 1.58
Price/Book 18.06 1.68 1.46
Diluted EPS (ttm): -0.08 2.17 -7.06
Forward P/E (fye 31-Dec-
08) 10.36 10.86 11.47
Net Income Avl to
Common -2.3 163.36M -194.32
Market Cap 1.49B 1.85B 1.14B

Summary
The financial analysis compares the performance of ATP with WTI and SGY. Of
the three companies WTI is the most profitable for a variety of reasons. The company has
a lesser cost to revenue ratio, coupled with low interest expense. It also has a
substantially lower lease operating cost than both ATP and SGY. The net benefit per unit
of ATP’s operations is hugely affected by substantially higher lease operating cost, loss
on extinguishment of debt, and higher interest expense. This implies that ATP is largely
financed by debt capital, as opposed to equity. ATP’s times interest earned stands at 1.81
times compared to 10.44 times of WTI, and virtually no debt capital structure of SGY;
the company’s ability to raise additional debt capital is very suspect. Debt capital
investors will require additional premium from ATP than from WTI and SGY for the
risky nature of its capital structure, and the increasing trend of interest expense will
continue if ATP continues to borrow. SGY seems unprofitable. This is however in the
short term. In 2006, the company lost 74% of its annual revenue on impairment of oil and
gas properties. This is not a movement of cash, and does not affect its liquidity position.

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This means that the company will be able to turn things round better than ATP in 2007.
Again, SGY does not have debt in its existing capital structure, and has a better asset
turnover ratio than both ATP and WTI. The liquidity position of SGY is the best among
the three companies, and thus supports the above profitability analysis. Although SGY
made substantial loss, this did not affect its liquidity position at all and the company
stands a better chance to pay its debts as and when they fall due. ATP will have to
manage its cash expenditure very well. The company has the weakest liquidity ratio,
largely due to the excessive amount paid to redeem preferred stock in 2006, payment of
capital leases, deferred financing cost (due to restructuring of debt and interest
payments), and cash needed to pursue its growth strategy (i.e. payments for additions and
acquisitions of oil and gas properties). The major issue is the financing strategy as
indicated above. Debt to equity ratio stands at 15.262% compared to 0.595% of WTI, and
0.786% of SGY. The financing mix and an idle capital structure for this industry is quit
debatable, considering the various arguments for and against excessive debt capital as
opposed to equity financing. Both WTI and SGY are financed largely by equity, but ATP
is financed largely by debt capital. With the looming interest expenditure, coupled with
acquisition strategy, ATP might have to alter its capital structure to increase equity
holdings. Not withstanding the poor book value share, ATP can raise equity capital for
variety of reasons. A critical analysis reveals that ATP has a leading cost structure among
its peers in the exploration and production chain of the oil and gas industry. For example,
full cycle cash costs associated with the production and marketing of historical and future
reserve production of ATP is $4.83, compared with $4.87(WTI), and $5.71 of SGY. This
is coupled with ATP’s best in class price realizations (ATP $9.07; WTI $8.20; SGY
$8.57). ATP also yields superior cash on cash margins (ATP 47%; WTI 39%, SGY 35%).

E. Industry Structure
The structure of the oil and gas industry has evolved over many decades and is
related to the following business characteristics: • Element of geologic risk; • High capital
intensity; • Long project gestation; • Lag time between investment and effects; •
International market pricing for oil; • No international market pricing for gas; • Physical
(sometimes extreme) separation of producing and consuming countries; • Potentially

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significant environmental impact. (Source: www.worldbank.org/html/opr/pmi/oil00004.html -
6k). Consequently the industry structure has many segments in the value chain, some
participants are integrated through all of them, and others present in only one or a few.
There are three segments of the oil and gas value chain - retail, refining, and exploration
and production. ATP Oil & Gas Corporation engages in the acquisition, development,
and production of oil and natural gas properties in the Gulf of Mexico, the North Sea, and
the United Kingdom. APTG is typically engaged in the exploration and production and
can be categorized as an upstream producer. Those engaged in the retail and refining are
the downstream companies. In each of the three segments mentioned “forces are at work
that threatens disruption, a specific kind of innovation that has historically spelled the end
of even the most powerful incumbent organizations” (source:
http://www.deloitte.com/dtt/cda/doc/content/sk_regime_change_june2006.pdf). The source continues
that “The nature of the disruptive threat is clearest in retail, while disruption in refining
requires more subtle analysis, and the shifting sands in the E&P sector are the most
difficult – yet perhaps the most critical – to interpret”. In recent years the most important
problems to be solved by upstream companies (exploration and production) like ATPG
has shifted from what the source describes as a phase of “overshoot (more than good
enough)” to a phase of “undershoot (less than good enough).” The bad news is that
competing in each phase requires very different capabilities, and the major players may
have the special competitive capabilities than ATPG. By the 1970s, access to oil reserves
and their extraction capabilities had increased to the point where they were able to drive
and support rapid market growth through plentiful supplies of cheap oil and gas. By the
late 1990s, however, opportunities for worthwhile exploration in traditional oil basins
still open to the international companies were becoming scarce. Companies needed to
replace their depleting reserves and were forced to do so through acquisition and
increasingly “frontier” drilling. According to the Deloitte research this situation led to an
explosion of new technologies and a surge of new opportunity for the oilfield services
sector as companies innovated in search of new growth and profits. The research asserts
that throughout this shift, the integrated oil companies have maintained their laser-like
focus on managing costs downward, reducing risk, and maximizing returns. They have
chosen to reduce their internal spending on “risky” capex projects and on specialized,

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unproven skills. In what many researchers see as a related development, the high level of
commercial risk in the industry has discouraged many state enterprises and led to
significant private sector participation. The industry is characterized by international
linkages, capital intensity, and long duration of projects. This requires participants to be
free to conduct their business in an efficient manner. On the other hand, the importance
of this sector to economic prosperity and the complexity of it require that governments
put into place proper legislative and policy instruments to facilitate investment. This
business environment is driven by uncontrollable factors (international crude oil price)
and by controllable ones (presence of adequate petroleum legislation). Since its inception
in the late 1800s, the oil and gas industry has undergone multiple structural changes that
have altered its global competitive landscape (source:
http://www.deloitte.com/dtt/cda/doc/content/sk_regime_change_june2006.pdf). But for all the seeming
turmoil that has characterized its history, the industry’s fundamental competitive
dynamics have remained essentially stable for decades: the major international players
have sought access to plentiful and cheap reserves to serve predominantly developed
world markets, global scale to maximize utilization of assets, and ownership of a
vertically integrated value chain to promote quality and drive customer loyalty via
widely-recognized brand names.
Natural gas is the fastest growing energy source according to industry experts,
and the consumption of natural gas is projected to rise by almost 70 percent by 2025 from
92 trillion cubic feet to 156 trillion cubic feet. Industrial consumption of natural gas is
also projected to rise over the next 10 to 15 years from 8 trillion cubic feet in 2003 to
10.3 trillion cubic feet in 2025 according to OECD reports. The largest increases in
natural gas consumption from 2003 to 2025 are anticipated in petroleum refining, metal
durables, bulk chemicals and food industries. By 2025 natural gas consumption is
projected to grow by 63 percent. Emerging economies in Asia are expected to almost
triple its current consumption rate in 2025. In comparison, the industrialized or 'mature
economies' production in natural gas is projected to decline in 2025, making up only 29
percent while accounting for nearly 45 percent of world consumption. The emerging
economies natural gas production is predicted to increase by 4.1 percent by 2025. As
industrialized economies natural gas consumption grows and production rates slow down,

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while emerging economies production increases, the industrialized economies will
increasingly be dependent upon imports of natural gas from the emerging economies.
(Source: annual energy outlook)

Summary
The oil and natural gas industry is expected to grow over the years due to increasing
demand from emerging economies. However the growth is not without challenges at each
of the major three industry levels. To counter these trends, and solve the most important
problem for downstream customers as described above, companies like ATPG would
need to respond by redeveloping their own in-house know-how and technology. In other
words, they would need to reintegrate or “insource” this knowledge. This, of course,
would have the effect of increasing these companies’ risk profiles in the short term – not
only due to the inherent risks of owning resources, but also due to the difficulty of
reintegration. But if these firms are to be successful in the longer term, they may well
find that such risks are worth taking.

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