BP Prudhoe Bay Royalty Trust (BPT)

Great dividends, and a great deal, but we must consider the risks.

BPT is a royalty trust with its dividends ultimately based on a percentage cut of oil revenues from Prudhoe Bay, Alaska operations.

Shareholders of BPT collect a quarterly share of the royalties based on a percentage of the revenue for some number of barrels extracted. To my inexpert eye, the deal appears to encourage rapid exploitation of PB, which is not helping investors feel warm and fuzzy.

Last quarter the dividend came to $3.05/share, and very near term it looks likely to stay at about that level (or maybe higher) based on recent oil prices and trends.

If there were few or no risks to the income stream at PB or the price of oil, and the dividend of $3.05/share flowed predictably, the price for this stock would logically(?) be set at the price of money for the three months that it takes to get paid your dividend.

Subtract transaction costs, and you might drop that price a bit, maybe adjust a bit for tax implications(?), and as you are coming in toward the latter part of the quarter, you might calculate your return on a pro rated basis, which also limits the exposure risk that the oil might dry up really, really soon, even further.

So, according to my calculations, if this issue were a bond paying a generous 6%, and the coupon income came to a coincidential $3.05 dividend over 3 months, the stock should be priced at around $230/share at the begining of the quarter, and actually go up in price as we approach dividend time, until the end of the quarter when folk cash out (or decide to weather the risk and stick around).

10% returns makes this stock "worth" $120, and of course, the current price of $89 gives us the current 13.67% yield.

So, BPT yields 13.67% annualized for a three month window of risk, which if you consider what the SP500 is doing right now (or likely to do in our lifetime), ain't too shabby! (I don't know if world war three will break out in three months!)

Lately, Prudhoe was moving in less-than-sideways fashion, and now seems to be bumping upwardly, which would be predicted on a time value of money/risk basis. The theory would predict this stock to continue to move upwardly as dividend time approaches.

If you bought BPT last week, you might concieveably sell your shares before payout, because the updraft in stock price would give you that annualized yield with even less risk, assuming you have a better place to invest in the near future.

With this theoretic in hand, this appears to be a stock that would be kind to traders who buy shares on any significant downward blip in stock price, or on even a temporary blip upward in oil prices which will be reflected in less than 3 months in the way of dividends. Absent the upward pressures on this stock, the folk who are in it for the dividend long term are the winners, especially if they buy on downdrafts.

Unless there is something catastrophic before the dividend that drops the value of the stock to zero, this stock looks like something a lot of folk would benefit from tapping into, but currently aren't. Given the lack of interest, this makes this stock one that rewards getting in and out with channel investing.
It is very predictably going to run within a channel when the cycle begins right after the dividend.

Regardless of the trading potential phenomenon, this stock looks to me to be very underpriced. One reason for the low price might be that there are worries related to how long the reserves will last in PB, and there are doubts about whether oil prices will stay high enough to preserve a decent dividend.

Bad news for oil or about PB reserves would catastrophically affect expectations about the future income stream, and the price could reset to a new, even very, very low value, based on expected future dividends.

Given the doubts, this should be a question straight from rationality 101.

First, the price for the stock is obviously already discounted for the possibility of future price drops in oil, or the possibility the reserves dry up in the near future (because you can get out over the longer run), or some other dividend killing factor. So the yield and stock price might conceivably go to zero (something most other companies are less prone to), but more likely will come down by only some fraction because the fear is often worse than the threat.

This CAPS pick reflects that I'm willing to gamble that the anticipation of bad news is worse than the reality of the bad news, that this stock is on an inexorable updraft based on rock solid dividends (less any catastrophic loses due to a hypothetical collapse of the stock price) and I conclude absent a 100% chance of collapse, this is a seriously undervalued stock. Add to that we are in a very tricky market, the solid income stream at a much higher than market rate is not nothing.