A year ago, 100% employee-owned ATP Oil & Gas Corp., Houston, was preparing to sell 7.5 million shares in an initial public offering. A peer, New Orleans-based Energy Partners Ltd., had priced two months earlier and seen its stock tumble. Another independent, Denver-based Westport Resources Corp., had begun trading a couple of months earlier and its shares were performing fairly well. What to do? Founder, chairman, president and majority shareholder T. Paul Bulmahn proceeded. The offshore-oriented company sold 6 million shares at $14 each. With net proceeds of approximately $80 million, ATP was able to pay off some pricey mezzanine debt, zero its borrowings under its bank credit facility and make approximately $25 million in acquisitions. The total raised-less than the amount hoped for of as much as $135 million, gross-was not enough to keep its debt at zero, however. To fund all of its plans, the company borrowed $70 million in a new, $100-million credit facility with Union Bank of California and arranged a new $30-million deal with Aquila Energy Capital Corp. At press time, its shares (Nasdaq: ATPG) were trading at $2.56 each, for a market capitalization of about $52 million. The problem was long-term debt totaled approximately $100 million. Its reserves were worth some $300 million. Analysts are confident in the stock, however. Among those at Raymond James & Associates, RBC Dain Rauscher Wessels, CIBC World Markets and Lehman Brothers, three rate it a Strong Buy and one calls it a Buy. They expect ATP's losses this year to average 28 cents per share, and next year to decline to average 20 cents per share. RBC analyst Ray Deacon expects the stock to reach $19 per share. "By acquiring proved undeveloped Gulf of Mexico reserves and developing these assets, ATP has formulated and refined a unique strategy that has allowed it to maintain above-average production and reserve growth through the gamut of commodity prices," he says. "We can point to few legitimate competitors in this space." The company's reserves grew to 210 billion cubic feet equivalent (Bcfe) in the first nine months of 2001, compared with 125 Bcfe at year-end 2001. Production was 6.5 Bcfe in the third quarter of 2001, compared with 6.1 Bcfe in the same period in 2000. John J. Gerdes of Raymond James and Associates Inc. says, "Nothing operationally has gone wrong. Its production trend simply is less than the market expected." Bulmahn, who was shopping in December for debt capital, visited with Oil and Gas Investor from the road. He is optimistic about what is in store for shareholders-particularly from ATP's existing Gulf of Mexico program and from its recent strategic move into the U.K. North Sea, where production is expected to commence in 2003. Investor What has happened to the stock price, since the IPO? Bulmahn We pursued a debt instrument after the IPO to keep development drilling at the rate we've had, which has been an outstanding rate of growth since the company was founded in 1991. When we were pursuing that debt, we were behind some other entities who were pursuing the same type of instrument, and when they were not successful, we pulled our offering. Thus, we have been caught in the dilemma of not having enough capital to address the continued growth of our company. But because of our strategy of operating 100% of what we touch-in fact, of the 12 projects we have going right now, we operate all 12-we have been able to control our destiny. When some of these circumstances were turning adverse to us during the year, we ramped back our development activities. We do not do pure exploration. We're not a company that drills wildcats. We focus on projects that generate EBITDA of more than 60%. Investor The company's reserves have grown a great deal, through development. Bulmahn When I see what we have accomplished and what has happened to our stock, there is a disconnect somewhere. At December 31, 2000, after nine years of growth, we had 125 Bcfe of proved reserves. From then until now, we're producing at a record clip at about 2 Bcfe a month, so at the end of October, we produced approximately 21 Bcfe. If we'd have sat on our hands and done nothing, we would have 104 Bcfe of proved reserves. But instead, we acquired a number of proved-reserve properties, which we are developing, and at the end of August we had 210 Bcfe, almost doubling what we accomplished in nine years of growth-and we did it in roughly nine months this year. While the company was almost doubling its proved reserves, our stock price was falling. Investor Did the stock-price decline correspond with taking on new debt? Bulmahn I don't think it corresponds to that at all. It seems to correspond to what has happened in the energy sector in general. There are a number of strong companies that have also had a drop in their stock prices in the same period. Investor What took you to the North Sea? Bulmahn We began investigating the North Sea at the invitation of the British government, when they learned of what we've done as an operator in the Gulf of Mexico, where we are one of the premier development companies. They recruited us to look at the Southern Gas Basin. When I began investigating that at the end of 1999, we moved very rapidly. The British government has identified more than 300 projects that fall into our niche-properties drilled by exploration companies that have identified proved reserves but for whatever reason have not developed those reservoirs. With this many projects in our niche, it was an opportunity set we couldn't ignore. In one year, we have opened permanent offices in London, assembled a staff of top-notch technical people who are U.K. nationals, secured three properties with approximately 63 Bcfe of proved reserves in the Southern Gas Basin of the U.K. North Sea, are already developing these, and obtained a permit for limited operations. This underscores how quickly we can move. Investor How much of the company's production do you foresee eventually coming from the North Sea? Bulmahn We don't expect first production until 2003, but because the reservoir size is larger in the Southern Gas Basin than in the Gulf of Mexico, the production figures should be substantial. Investor Are market dynamics more volatile in northern Europe? Bulmahn Prices are strong. They're roughly equivalent to prices in the U.S., perhaps without the peaks and valleys we're seeing here. Expenses are greater but can be spread out by a larger reservoir size. Also infrastructure already exists. A small independent like ATP has a good opportunity to tie-in its production readily, without building infrastructure. And an existing Bacton, England-to-Belgium pipeline allows production to move both ways, having the effect of stabilizing prices. As for demand, environmental lobbies are very strong in that part of the world, so gas is rapidly becoming the fuel of choice. The most attractive aspect-and the reason why I'm baffled by what has happened to our stock-is that the production or revenue, when it hits our bottom line, is going to be a substantial boost to the company. So on the equity side, those are some strong reasons for investors to look at our company. Investor Are you running into other U.S. independents in the U.K. North Sea? Bulmahn There are a number of companies of which I am aware that have expressed an interest in trying to duplicate what ATP has done. We have a competitive advantage for having moved so quickly and so effectively and I hope to preserve that advantage. Investor Are you looking at getting into other areas right now? Bulmahn If we move in the North Sea during the next three years as effectively as I believe we will, we will be able to build the company very effectively there and in the Gulf of Mexico, which remains the breadbasket of the company. Investor What's new in the Gulf for you? Bulmahn We commenced production of 8,000 barrels of oil and 8 million cubic feet of gas per day in September from two wells in Garden Banks 409 (Ladybug), where we're a 50% partner with Unocal and we're the operator. The development underscored the technological abilities of the company to move into the shallow-deep Gulf with utilization of subsea technology. There are many more projects in that depth where hydrocarbons have been identified, but exploration companies are scratching their heads to figure out how to make those projects commercially feasible. ATP has solutions to some of those questions. Investor Why did you form ATP? You were a lawyer. Bulmahn I was president of an independent, Harbert Oil & Gas, prior to incorporating ATP and was with Tenneco as its Washington, D.C., counsel prior to that. I saw an opportunity for niche development. The majors were beginning to leave the Gulf to pursue international prospects, to get higher rates of return. The independents in the Gulf were upgrading their prospects to take what the majors were leaving behind, and I believed there were opportunities there for an aggressive independent. So I set out to talk to every individual I knew-high-net-worth or not-to join me in a limited partnership. Ten individuals joined and from there we built the company with project financing. That's probably the most brutal way to build a company-one project at a time, making each project pay for itself. Investor When you formed ATP, you were officing in an airport hangar. Bulmahn After moving out of my living room, for one year I utilized an office in a hangar at Hobby airport where there were business machines. Investor Who started it with you? Are they still with you? Bulmahn The first three ATP employees are still with me, as are most of the ATP employees who have joined me over time. There has been almost no turnover of the talented technical people we have been able to attract. Investor What is your exit plan? Bulmahn I'm not considering an exit yet. It's still a lot of fun to have the satisfaction of building a company and putting the pieces together into something with substantial potential, such as the way we've grown the company in the Gulf. As you know, we've won accolades for our growth. We've been on Inc. magazine's list of the 500 the fastest-growing companies in America several times. You need five-year revenue to be considered. We jumped on the list at No. 21. The second year we moved to No. 5. Probably the most significant difference about ATP is many people throw a lot of money at growth for growth's sake and we're not that kind of company. While we have been growing at these extraordinary rates, we have also maintained an EBITDA margin (earnings before interest, taxes, depreciation and amortization, divided by revenues) of greater than 60% every year since 1996. We've had solid, stable growth and we've been able to implement our business plan. Investor What else? Bulmahn I should note that ATP has been able to use subsea technology effectively and has been recognized as a technology leader in the industry. We now operate 12 subsea wells, including those producing or under development. Ladybug is the longest subsea oil tieback in the Gulf-91,865 feet (about 19 miles). For a small independent to hold that record in deep water underscores the ability to utilize technology effectively in the Gulf. We also took a unique pigging approach-we are pigging through our trees. By using that innovative control system, installation and operation are simplified. We are also using a dual-diameter pig design that is a technology advance that has not been employed extensively yet in the Gulf. We've already been through a pigging loop and it worked flawlessly. When we went public, 100% of the company was owned by the employees and management. We did it entirely with project financing up to the point of the IPO. Management and employees still own 71% of the company, and we are obviously dedicated to optimizing shareholder value.