Friday, August 24, 2012

Worthless Stock Inefficiency: ATP Oil & Gas Equity ($ATPG)

ATP Oil & Gas equity ($ATPG) is actually up 63 percent since Monday, which was the first day of trading after the bankruptcy filing.

"What about option value of the common shares?," the efficient market theorists cry! Today, the company's secured (second lien) notes hit a new low of 26 cents - a market value of $400 million for $1.5 billion face value of debt.

The company's preferred stock traded at 1.7 cents. They will make over 50x if the equity is worth anything.

ATPG March 2013 $0.50 puts are offered at 34 cents. Assume they will be worth 45 cents after deducting for transaction costs. That is a very high return (~33% for ~6 months) with high expected value.  That is 75 percent annualized.

There shouldn't be 75 percent returns available for things that are pretty certain, like ATPG equity being canceled as part of its restructuring.

Maybe you think the stock won't be cancelled by March 2013. The January 2014 puts are only a few cents more. Those get you a 22 percent return.

What does the Kelly formula say? It says you should have your entire net worth long the ATPG puts, possibly hedged with the preferred or bonds.

Something else cool that you can do is use the expected profits on the put trade to fund purchases of the company's bonds, which seem cheap at 26. It is entirely reasonable to think that they could get 50 cents of value after all is said and done.


jHurt said...
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jHurt said...

Love the idea, went short long term calls a few weeks back...but would emphasize that the very complex capital structure here means it will take longer than March '13 for the stock to get cancelled (even though they are assuredly have no value).

And I would wait on the new reserve report (due in a few weeks) before touching the bonds, even at 26. These bonds have made a lot of people look very foolish.

CP said...


You are right about the bonds. I have not owned any. This will be a huge lesson in how to think about PV10 values.

Which calls are you short? That's a good idea too.

Even if the stock isn't actually cancelled by Mar 13 it should be trending towards zero by then.

I would expect tax loss selling into de minimis bids at the end of the year.

jHurt said...

I went short $.50 calls all over the place before they filed (to add more to your thesis certain earlier-dated calls had the same or higher premiums than longer dated ones at the same strike).

Have you looked at eastman kodak for a similar trade? Appears to be 2 sets of options at each strike which I don't understand...$3bn in liabilities subject to compromise from the June 10-Q.

CP said...
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CP said...

The Jan 13 calls are probably a good sell even now.

Is it possible to buy EK puts now, or are they closing trades only now that it's delisted?

jHurt said...
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CP said...

You know what I realized?

There's not much attractive in the market right now because there's too much fervor/liquidity/fed put expectations.

E.g. high yield is insanely expensive, long/short equity isn't that interesting.

But in-bankruptcy equities are pumped up because of all the stupid money! So, short them!

We can probably find a basket of these that will make double digit returns over the next year.

david said...

What are the mechanics of put options in the case of cancelled stock? You can't exercise them, so you have to trade before the cancellation date, I assume. I'm thinking why would anyone (market-maker) buy them from you though, to realize the 45c value?

CP said...

You can exercise them before the cancellation date.