| ATP OIL & GAS CORP Item 1A Risk Factors |
| You should carefully consider the following risk factors in addition to the other information included in this report |
| Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock or other securities |
| 12 ______________________________________________________________________ [49]Table of Contents [50]Index to Financial Statements Our actual development results are likely to differ from our estimates of our proved reserves |
| We may experience production that is less than estimated and development costs that are greater than estimated in our reserve reports |
| Such differences may be material |
| Estimates of our oil and natural gas reserves and the costs and timing associated with developing these reserves may not be accurate |
| Development of our reserves may not occur as scheduled and the actual results may not be as estimated |
| Development activity may result in downward adjustments in reserves or higher than estimated costs |
| Our estimates of our proved oil and natural gas reserves and the estimated future net revenues from such reserves are based upon various assumptions, including assumptions required by the SEC relating to oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds |
| This process requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir |
| Therefore, these estimates are inherently imprecise and the quality and reliability of this data can vary |
| Any significant variance could materially affect the estimated quantities and PV10 of reserves |
| Our properties may also be susceptible to hydrocarbon drainage from production by other operators on adjacent properties |
| In addition, we will likely adjust estimates of proved reserves to reflect production history, results of development, prevailing oil and natural gas prices and other factors, many of which are beyond our control |
| Actual production, revenues, taxes, development expenditures and operating expenses with respect to our reserves may vary materially from our estimates |
| Delays in the development of or production curtailment at our material properties may adversely affect our financial position and results of operations |
| The size of our operations and our capital expenditure budget limits the number of properties that we can develop in any given year |
| Complications in the development of any single material well may result in a material adverse affect on our financial condition and results of operations |
| For instance, during 2003, we experienced unforeseen production delays and increased development costs in connection with the development of our Helvellyn well in the North Sea |
| In late 2005, we experienced delays and increased development costs in developing our Gomez project in the Gulf of Mexico as a result of hurricanes Katrina and Rita |
| In addition, a relatively few number of wells contribute to a substantial portion of our production |
| If we were to experience operational problems resulting in the curtailment of production in any of these wells, our total production levels would be adversely affected, which would have a material adverse affect on our financial condition and results of operations |
| 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 |
| Shortages or an increase in cost of drilling rigs, equipment, supplies or personnel could delay or adversely affect our operations, which could have a material adverse effect on our business, financial condition and results of operations |
| In periods of increased drilling activity in the Gulf of Mexico and the North Sea, we 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 |
| These costs may increase further and necessary equipment and services may not be available to us at economical prices |
| If we are not able to generate sufficient funds from our operations and other financing sources, we may not be able to finance our planned development activity, acquisitions or service our debt |
| We have historically needed and will continue to need substantial amounts of cash to fund our capital expenditure and working capital requirements |
| Our ongoing capital requirements consist primarily of funding acquisition, development and abandonment of oil and gas reserves and to meet our debt service obligations |
| Cash paid for capital expenditures for oil and gas properties were approximately dlra420dtta5 million, dlra87dtta4 million and dlra83dtta8 million for the years ended December 31, 2005, 2004 and 2003, respectively |
| Because we have experienced a negative working capital position in past years, we have been dependent on debt and equity financing to meet our working capital requirements that were not funded from operations |
| 13 ______________________________________________________________________ [51]Table of Contents [52]Index to Financial Statements For 2006, we plan to finance anticipated expenses, debt service and acquisition and development requirements with available cash, funds generated from cash provided by operating activities and net cash proceeds from the potential sale of assets, issuance of debt or new equity offerings |
| Low commodity prices, production problems, disappointing drilling results and other factors beyond our control could reduce our funds from operations and may restrict our ability to obtain additional financing |
| Furthermore, we have incurred losses in the past that may affect our ability to obtain financing |
| In addition, financing may not be available to us in the future on acceptable terms or at all |
| In the event additional capital is not available, we may curtail our acquisition, drilling, development and other activities or be forced to sell some of our assets on an untimely or unfavorable basis |
| In addition, we may not be able to pay interest and principal on our debt obligations |
| Our debt instruments impose restrictions on us that may affect our ability to successfully operate our business |
| In March 2004, we entered into a term loan, which was subsequently amended in September 2004 and again in April 2005 (the “Term Loan”) |
| As amended, the Term Loan provides for an aggregate outstanding principal amount of dlra350dtta0 million |
| The Term Loan matures in March 2010 and is secured by substantially all of our oil and gas assets in the Gulf of Mexico and the UK Sector – North Sea and is guaranteed by our wholly owned subsidiaries ATP Energy and ATP Oil & Gas (UK) Limited |
| As of December 31, 2005, we had dlra347dtta4 million principal amount outstanding under the Term Loan |
| The Term Loan contains customary restrictions, including covenants limiting our ability to incur additional debt, grant liens, make investments, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions and enter into transactions with affiliates |
| We also are required to maintain specified financial requirements under the terms of our Term Loan including the following, as defined in the Term Loan: • Current Ratio of 1dtta0/1dtta0; • Total Net Debt to Consolidated EBITDAX coverage ratio of not greater than 3dtta0/1dtta0 at the end of each quarter; • Consolidated EBITDAX to Consolidated Interest Expense of not less than 2dtta5/1dtta0 for any four consecutive fiscal quarters; • Pre-tax PV-10 of our Total Proved Developed Producing Oil and Gas Reserves to Net Debt of at least 0dtta5/1dtta0 at June 30 and December 31 of any fiscal year; • Pre-tax PV-10 of our Total Proved Oil and Gas Reserves to Net Debt of at least 2dtta5/1dtta0 at June 30 and December 31 of any fiscal year; • the requirement to maintain Commodity Hedging Agreements on no less than 40prca nor more than 80prca of the next twelve months of forecasted production attributable to our proved producing reserves; • the requirement to maintain a Maximum Leverage Ratio of no more than 3dtta0/1dtta0 at the end of any fiscal quarter; • the requirement to maintain a Debt to Reserve Amount of no greater than dlra2dtta50 through maturity; provided, however, that if such amount is exceeded at the end of the fiscal year ending on December 31, 2005, the covenant shall be retested at June 30, 2006, and • limit Permitted Business Investments, as defined, to dlra75dtta0 million during any fiscal year |
| These restrictions may make it difficult for us to successfully execute our business strategy or to compete in our industry with companies not similarly restricted |
| While we were in compliance with all of the financial covenants in our Term Loan at December 31, 2005 and 2004, during 2003 and in February 2004, we were required to obtain waivers for certain of our financial covenants in our prior credit facility |
| If we are unable to meet the requirements of our Term Loan or any new financial transaction that we may enter into, we may be required to seek waivers from our lenders and there is no assurance that such waivers would be granted |
| 14 ______________________________________________________________________ [53]Table of Contents [54]Index to Financial Statements We have debt, trade payables, preferred stock and related interest and dividend payment requirements that may restrict our future operations and impair our ability to meet our obligations |
| Our debt, trade payables, preferred stock and related interest and dividend payment requirements may have important consequences |
| For instance, they could: • make it more difficult or render us unable to satisfy these or our other financial obligations; • require us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which will reduce funds available for other business purposes; • increase our vulnerability to general adverse economic and industry conditions; • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • place us at a competitive disadvantage compared to some of our competitors that have less financial leverage; and • limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes |
| Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control |
| We cannot provide assurance that our business will generate sufficient cash flow or that future financings will be available to provide sufficient proceeds to meet these obligations |
| The successful execution of our business strategy and the maintenance of our economic viability are also contingent upon our ability to meet our financial obligations |
| Our Gulf of Mexico properties are subject to rapid production declines |
| Therefore, we are required to replace our reserves at a faster rate than companies whose onshore reserves have longer production periods |
| We may not be able to identify or complete the acquisition of properties with sufficient proved reserves to implement our business strategy |
| 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, we must incur significant capital expenditures to replace declining production |
| We may not be able to identify or complete the acquisition of properties with sufficient reserves or reservoirs to implement our business strategy |
| As we produce our existing reserves, we must identify, acquire and develop properties through new acquisitions or our level of production and cash flows will be adversely affected |
| The availability of 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 we cannot control or influence |
| A substantial decrease in the availability of proved oil and gas properties that meet our criteria in our areas of operation, or a substantial increase in the cost to acquire these properties, would adversely affect our ability to replace our reserves |
| 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 our business |
| 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 |
| Because approximately 67prca of our estimated proved reserves as of December 31, 2005 were natural gas reserves, our financial results are more sensitive to movements in natural gas prices |
| Our realized prices also affect the amount of cash flow available for capital expenditures and our 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 |
| Among the factors that can cause this volatility are: • worldwide or regional demand for energy, which is affected by economic conditions; 15 ______________________________________________________________________ [55]Table of Contents [56]Index to Financial Statements • 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 to agree upon and maintain oil prices and production levels; and • the 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 our revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically |
| A substantial or extended decline in oil and natural gas prices may materially and adversely affect our 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 |
| Our price risk management decisions may reduce our potential gains from increases in commodity prices and may result in losses |
| As required by our lenders, we periodically utilize financial derivative instruments and fixed price forward sales contracts with respect to a portion of our expected production, generally not less than 40prca or more than 80prca of such production |
| These instruments expose us 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 |
| Our results of operations may be negatively impacted in the future by our financial derivative instruments and fixed price forward sales contracts — our fixed forward sales are designated as normal sales under derivative accounting rules — and these instruments may limit any benefit we would receive from increases in the prices for oil and natural gas |
| For the years ended December 31, 2005, 2004 and 2003, we realized a loss on settled financial derivatives of dlra0, dlra1dtta2 million and dlra16dtta6 million, respectively |
| We may incur substantial impairment write-downs |
| If management’s estimates of the recoverable reserves on a property are revised downward, if development costs exceed previous estimates or if oil and natural gas prices decline, we may be required to record additional non-cash impairment write-downs in the future, which would result in a negative impact to our financial position |
| We review our proved oil and gas properties for impairment on a depletable unit basis when circumstances suggest there is a need for such a review |
| To determine if a depletable unit is impaired, we compare the carrying value of the depletable unit to the undiscounted future net cash flows by applying management’s estimates of future oil and gas prices to the estimated future production of oil and gas reserves over the economic life of the property |
| Future net cash flows are based upon our independent reservoir engineers’ estimates of proved reserves |
| In addition, other factors such as probable and possible reserves are taken into consideration when justified by economic conditions |
| For each property determined to be impaired, we recognize an impairment loss equal to the difference between the estimated fair value and the carrying value of the property on a depletable unit basis |
| Fair value is estimated to be the present value of the aforementioned expected future net cash flows |
| Any impairment charge incurred is recorded in accumulated depreciation, depletion, impairment and amortization to reduce our recorded basis in the asset |
| Each part of this calculation is subject to a large degree of judgment, including the determination of the depletable units’ estimated reserves, future cash flows and fair value |
| We recorded no impairments in 2005 and 2004 and an impairment of dlra11dtta7 million for the year ended December 31, 2003 |
| Management’s assumptions used in calculating oil and gas reserves or regarding the future cash flows or fair value of our properties are subject to change in the future |
| Any change could cause impairment expense to be recorded, impacting our net income or loss and our basis in the related asset |
| Any change in reserves directly impacts our estimate of future cash flows from the property, as well as the property’s fair value |
| Additionally, as management’s views related to future prices change, the change will affect the estimate of future net cash flows and the fair value estimates |
| Changes in either of these amounts will directly impact the calculation of impairment |
| 16 ______________________________________________________________________ [57]Table of Contents [58]Index to Financial Statements The oil and natural gas business involves many uncertainties and operating risks that can prevent us from realizing profits and can cause substantial losses |
| Our 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 our efforts to replace reserves |
| The oil and natural gas business involves a variety of operating risks, including: • fires; • explosions; • blow-outs and surface cratering; • uncontrollable flows of natural gas, oil and formation water; • pipe, cement, subsea well or pipeline failures; • casing collapses; • embedded oil field drilling and service tools; • abnormally pressured formations; • environmental accidents or hazards, such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases; and • hurricanes and other natural disasters |
| If we experience any of these problems, it could affect well bores, platforms, gathering systems and processing facilities, which could adversely affect our ability to conduct operations |
| We could also incur substantial losses in excess of our insurance coverage as a result of: • injury or loss of life; • severe damage to and destruction of property, natural resources and equipment; • pollution and other environmental damage; • clean-up responsibilities; • regulatory investigation and penalties; • suspension of our operations; and • repairs to resume 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 |
| As a result, we could incur substantial liabilities that could reduce or eliminate the funds available for development or leasehold acquisitions, or result in loss of equipment and properties |
| Terrorist attacks or similar hostilities may adversely impact our results of operations |
| 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 our business |
| Uncertainty surrounding military strikes or a sustained military campaign may affect our 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 our operations to increased risks and, depending on their ultimate magnitude, could have a material adverse effect on our business, results of operations, financial condition and prospects |
| Our insurance coverage may not be sufficient to cover some liabilities or losses that we may incur |
| The occurrence of a significant accident or other event not fully covered by our insurance could have a material adverse effect on our operations and financial condition |
| Our insurance does not protect us against all 17 ______________________________________________________________________ [59]Table of Contents [60]Index to Financial Statements operational risks |
| We do not carry business interruption insurance at levels that would provide enough funds for us to continue operating without access to other funds |
| For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented |
| Because third party contractors and other service providers are used in our offshore operations, we may not realize the full benefit of workmen’s compensation laws in dealing with their employees |
| In addition, pollution and environmental risks generally are not fully insurable |
| We may be unable to identify liabilities associated with the properties that we acquire or obtain protection from sellers against them |
| The acquisition of properties requires us to assess a number of factors, including recoverable reserves, development and operating costs and potential environmental and other liabilities |
| Such assessments are inexact and inherently uncertain |
| In connection with the assessments, we perform a review of the subject properties, but such a review will not reveal all existing or potential problems |
| We cannot necessarily observe structural and environmental problems, such as pipeline corrosion, when an inspection is made |
| We may not be able to obtain contractual indemnities from the seller for liabilities that it created |
| We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations |
| Competition in our industry is intense, and we are smaller and have a more limited operating history than some of our competitors in the Gulf of Mexico and in the North Sea |
| We compete with major and independent oil and natural gas companies for property acquisitions |
| We also compete for the equipment and labor required to operate and to develop these properties |
| Some of our competitors have substantially greater financial and other resources than us |
| 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 we can, which would adversely affect our 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 we can |
| Our ability to acquire additional properties and develop new and existing properties in the future will depend on our ability to conduct operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment |
| In addition, some of our competitors have been operating in the Gulf of Mexico and in the North Sea for a much longer time than we have and have demonstrated the ability to operate through industry cycles |
| We may suffer losses as a result of foreign currency fluctuations |
| The net assets, net earnings and cash flows from our wholly owned subsidiaries in the UK and the Netherlands are based on the US dollar equivalent of such amounts measured in the applicable functional currency |
| These foreign operations have the potential to impact our financial position due to fluctuations in the local currency arising from the process of re-measuring the local functional currency in the US dollar |
| Any increase in the value of the US dollar in relation to the value of the local currency will adversely affect our revenues from our foreign operations when translated into US dollars |
| Similarly, any decrease in the value of the US dollar in relation to the value of the local currency will increase our development costs in our foreign operations, to the extent such costs are payable in foreign currency, when translated into US dollars |
| We have not utilized derivatives or other financial instruments to hedge the risk associated with the movement in foreign currencies |
| Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations |
| Our success will depend on our ability to retain and attract experienced geoscientists and other professional staff |
| As of December 31, 2005, we had 21 engineers, geologist/geophysicists and other technical personnel in our Houston office, two engineers, geologist/geophysicists and other technical personnel in our London location and one engineer in our Netherlands office |
| We depend to a large extent on the efforts, technical expertise and continued employment of these personnel and members of our management team |
| If a significant number of them resign or become unable to continue in their present role and if they are not adequately replaced, our business operations could be adversely affected |
| 18 ______________________________________________________________________ [61]Table of Contents [62]Index to Financial Statements Rapid growth may place significant demands on our resources |
| We have experienced rapid growth in our operations and expect that significant expansion of our operations will continue |
| Our rapid growth has placed, and our anticipated future growth will continue to place, a significant demand on our managerial, operational and financial resources due to: • the need to manage relationships with various strategic partners and other third parties; • difficulties in hiring and retaining skilled personnel necessary to support our business; • the need to train and manage a growing employee base; and • pressures for the continued development of our financial and information management systems |
| If we have not made adequate allowances for the costs and risks associated with this expansion or if our systems, procedures or controls are not adequate to support our operations, our business could be adversely impacted |
| We are subject to complex laws and regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business |
| 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 |
| We 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, we 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 our operations and subject us to administrative, civil and criminal penalties |
| Moreover, these laws and regulations could change in ways that substantially increase our costs |
| Accordingly, any of these liabilities, penalties, suspensions, terminations or regulatory changes could materially adversely affect our financial condition and results of operations |
| Members of our 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 our management team beneficially own approximately 35prca of our outstanding shares of common stock as of March 9, 2006 |
| 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 our 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 |