ATLS at Attractive Entry Point

SCOTT HANOLD, RBC Capital Markets (05/10/2010)
"Recurring EPS/CFPS of $0.17/$0.64 beat our $0.09/$0.48 and the consensus of $0.16/$0.62. Production of 100 MMcfe/d was 5% below our 105 MMcfe/d estimate and down 3% sequentially. Cash operating costs of $1.35/Mcfe were much better than our $1.89/Mcfe expectation.

Our 2010 production forecast of 39.4 Bcfe is 10% below our prior estimate. ATLS issued new guidance of 39–41 Bcfe, down from its prior expectation of 45–50 Bcfe.

The lower production outlook reflects capacity constraints and is not indicative of well performance. While ATLS's midstream access in SW Pennsylvania provides some advantages, it does not make the company immune to constraints in the Marcellus basin. We expect most if not all Marcellus players to have growing pains, which we have seen already, as infrastructure plays catch up to growth. The company and its partners have ~70 projects in the works to improve its capacity. However, we would like to see more visibility on key milestones and other details.

Short-term growing pains provide attractive entry point. At the current stock price, ATLS shares reflect just $3,000 per Marcellus acre (402k net acres), a sharp discount to its recent record JV price and a discount to its Marcellus peers. Importantly, ATLS' wells are performing ahead of our expectation of 3.75 Bcfe EURs. Most wells in the area look more like 4–5 Bcfe."

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