Atlas Energy Resources (ATN)

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Andrew Lewis

Atlas Energy Resources is an gas exploration and production company with 896.7 Bcfe (Billion cubic feet equivalent) of natural gas in proved reserves. Atlas Energy is based onshore and extracts natural gas from its two main fields in Appalachia and in Michigan. The Appalachia region consists of reserves in New York, Pennsylvania, West Virginia, Tennessee, and Kentucky. The company is mostly exposed to natural gas, 99% of its proved reserves, and has little oil reserves, 1% of its reserves.^[1] Rising gas and oil prices have increased the profit margins and the value of the territories Atlas Energy owns. The growing demand for energy from China, India, and other emerging markets have further elevated the price.^[2]

Natural gas is often viewed as cleaner and more environmentally friendly then coal, and 3 large investment banks have announced that they will be unlikely to finance a coal powered electicity plant.^[3][4] Atlas encounters almost uniquely natural gas, and this switch in dependence will only further elevate the prices of the hydrocarbon. Atlas Energy has also been able to defy the trend of falling levels of North American onshore oil reserves.^[5]

Business Overview

Atlas Energy Resource was created to manage the oil and energy assets of [[Atlas America (ATLS)]. It has no actual employees, instead, it uses Atlas America's support staff and contracts out work. It participates in oil and gas exploration, production and investment.^[6]

Atlas Energy has only 68% proved developed lands. This means that it still has a large portion of its lands which have yet to be put into development.^[7] The company also has a histroy of acquiring new territories. For example, in June 2007, Atlas Energy acquired DTE Energy Company (DTE) for $1.3B. The acquisition gave Atlas Energy access to natural gas wells in Antrim Shale. This purchase was financed by a private offering of approximately 24 million Class B and D shares which raised $597.5 million. The large percentage of undeveloped lands plus the acquisition of new lands gives Atlas Energy the possibility to continue to grow in output per day and in the duration of output.^[8]

Because of the nature of the oil and gas industry, the majority of the costs are incurred in the exploration and initial production phases. The company must spend large sums of money to discover oil reserves and then purchase the necessary lands. In addition, there is a high cost to set up the infrastructure such as oil wells, oil rigs, pipelines etc.^[9] Because Atlas Energy has already accomplished the exploration aspect and the majority of the establishment of the infrastructure, it is likely that its costs will fall over time while its output rises.

Business & Financial Metrics^[10]

In 2009, ATN incurred a net loss of $90.7 million on revenues of $707.6 million. This represents a serious turnaround from 2008, when the company earned $142.8 million on $788.7 million in revenue.

Business Segments^[11]

The company owns two main sites:

• Appalachia (42.6% of production in 2009): has 7,722 oil wells working on 229.9 Bcfe (Barrels of Cubic feet equivalent) of proved natural gas.^[12] Appalachia operates an average of 29.7 Mmcfe per day (Million cubic feet equivalent)^[13] Atlas Energy owns approximately 1,600 miles of gathering systems and pipelines across eastern Ohio and Western Pennsylvania. This elaborate system allows Atlas Energy to move its own gas without incurring costs from third parties.^[14]

• Michigan/Indiana (57.4% of production in 2009): has 2,292 oil wells working on 666.8 Bcfe of proved natural gas reserves. Michigan operates on an average of 59.8 Mmcfe per day.^[1] Atlas Energy owns 61 CPFs (compression and dehydration facilities) which separate and dispose of water mixed in with natural gas. The natural gas wells produce a mix of natural gas and water for the first 3 to 12 months of production, and then they produce solely gas.^[15]

Trends and Forces

The rise in gas and oil prices positively benefits Atlas Energy

The increase in prices of gas and oil have expanded the demand to find gas and oil reserves and to further drill the existing ones. The higher prices also allow companies to further explore for new deposits. The rise in demand for energy from China, Indian and other emerging markets have pushed prices higher. This price increase also raises the utilization and rental rate of rigs. ^[16] Rising oil prices increase the profitability of drilling and raise the value of Atlas Energy's existing oil and gas reserves.

As coal power falls from grace, natural gas rises

Growing fears of climate change have negatively impacted the coal industry. Coal is viewed as 'dirty' as it releases nearly twice as much carbon dioxide and more than 5 times as much carbon monoxide as natural gas for the same amount of energy output. Natural gas also releases less sulfur dioxides and nitrogen oxides then coal.^[17] In early 2008, Citigroup (C), J P Morgan Chase (JPM), and Morgan Stanley (MS) all said they will be wary before investing in coal burning factories. However, in order to keep up with the 2% growth in demand for electricity utility executives have announced the construction of more natural gas generators. Low levels in American natural gas reserves combined with a rise in demand will result in future elevated prices.^[4]

The growth of U.S. Environmental Legislation have also had a negative impact

Within the US, the Energy Independence and Security Act has established a 35mpg average by 2020 for automakers and sets a Renewable Fuel Standard of 36 billion gallons of biofuels by 2022.^[18] Because Atlas Energy is operating partly on US government lands, the National Environmental Policy Act require a more detailed Environmental Impact Statement.^[19] Atlas Energy must also comply to regulation on waste management, air pollution, the Kyoto Protocol and others.^[20] Renewable Energy and alternative sources of energy such as nuclear, solar, wind, biofuels, and ethanol, on the other hand, have grown extensively. Concerns about environmental issues such as global climate change have also resulted in a decreased demand for oil and gas.^[21]

Competition

Atlas Energy is a solely land based oil and land based company. Because it has substantial reserves on land, it is able to extract the fossil fuels at a lower cost than the deepwater and the the ultra-deepwater oil and gas drilling and exploration. Offshore drilling rigs are also more susceptible to poor weather. Hurricanes Rita and Katrina caused damage to 113 oil rigs in the Gulf of Mexico alone.^[22] The downside of staying on land however, is the price of the physical drilling grounds tends to be much more expensive. On top of that, U.S. onshore drilling as been on the decline in recent years.

Atlas Energy faces competition from many different oil and gas exploration companies, however the companies described below are most closely in competition with Atlas Energy:

• Arena Resources (ARD): which is also uniquely based on onshore drilling. Atlas Energy however, is focused more heavily on Natural Gas, while Arena Resources is encounters more crude oil.^[23]
• Eastern American Natural Gas Trust (NGT): only has natural gas producing wells. The company is also based in the Appalachia like Atlas Energy, however the company only has 13.837 billion cubic feet of equivalents in reserves, approximately 64 times less than Atlas Energy.^[24]
• Petroleum Development (PETD): is an independent energy company which operates in the Rocky Mountain, Appalachian, and Michigan Basins. Like Atlas Energy, it encounters mostly natural gas, and it has 686 billion cubic feet equivalent in reserves. As a whole, it is very similar to Atlas Energy, and it has also been able to increase its reserves in recent years despite the industry trend.^[25]
• BreitBurn Energy Partners, L.P. (BBEP): is an onshore based drilling company with the majority of the reserves in Michigan. BreitBurn encounters slightly more natural gas than oil and has approximately 142.2 million barrels of oil equivalents in its reserves. This makes it smaller than Atlas Energy in terms of net reserves.

References

1. ↑ ^{1.0 1.1}
2. ↑ Time "China's Quest for Oil"
3. ↑ Green Car Congress "Comparing Civics: Hybrid, Diesel, CNG, Gasoline"
4. ↑ ^{4.0 4.1} New York Times: Business "Utilities Turn From Coal to Gas, Raising Risk of Price Increase"
5. ↑
6. ↑ ATN 10-K 2008 Item 7 "Overview" p.43
7. ↑ ATN 10-K 2008 Item 1 "Business" p.4
8. ↑ ATN 10-K 2008 Item 7 "Overview" p.44
9. ↑ Oil & Gas Jobs: "Oil Pipelines Job Overview"
10. ↑ ATN 2009 10-K pg. 37  
11. ↑ ATN 2009 10-K pg. 23  
12. ↑ The Free Dictionary "BCFE"
13. ↑ The Free Dictionary "MMCFE"
14. ↑ ATN 10-K 2008 Item 1 "Natural Gas Gathering" p.10-11
15. ↑ ATN 10-K 2008 Item 1 "Michigan" p.12
16. ↑ Rigzone: Day Rates
17. ↑ Natural Gas and the Environment: "Fossil Fuel Emission Levels"
18. ↑ WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
19. ↑ ATN 10-K 2008 Item 1 "National Environmental Policy Act" p.16
20. ↑ ATN 10-K 2008 Item 1 "Environmental Matters and Regulation" p.16-18
21. ↑ New York Times: Science "Solar Energy"
22. ↑ Tech IMO: "Offshore Drilling: Fact Vs. Fiction"
23. ↑ ARD 10-K 2008 Item 1 "General" p.4
24. ↑ Reuters Business and Finance: Eastern American Natural Gas Trust
25. ↑ Google Finance: Petroleum Development Corporation (PDC)