Just did a future dividend analysis on this trust, and based on today’s WTI futures, this trust will provide $35. in undiscounted future dividends. If you are thinking of buying this trust at $100/share, please take the prospectus and an Excel spreadsheet, and find out for yourself that you will never recoup your investment.
The driving force behind the early termination of the trust is the chargeable costs, which in 2021 will be $29.25/bbl times an index factor of roughly 2.2, for a total cost of $64/bbl. Add in taxes of roughly $22/bbl and the income to the trust ($85.77/bbl per COMEX futures) is less than the projected cost of a barrel. If the WTI futures are correct, the trust will terminate in 2020.
This model assumes a 2% decline rate in production, but even if there were an increase in production, the effect on future dividends would be marginalized by the decreasing margins per barrel.
The only way the trust could return your $100 investment, would be for the WTI price to rise 30% by the end of 2014 and to stay there for the next 10 years. The EIA, IEA, and COMEX futures all show oil prices falling dramatically in the next few years. Do your own due diligence, and sell/short this trust before everyone else does.
Disclosure: Opportunistically short.
Sentiment: Strong Sell
I think you're wrong. Many energy analyst predict $150 oil a probability if the middle east continue to explode. Already we're filling the pinch from import loses of Iraq and if you believe internet and newspaper articles on BPt, like The Wall Street Daily, they clearly state NEW wells are being drilled in the trust fields. It's not the # of wells but the amount of oil that the trust draws its royalty from. Therefore the reserves are underestimated. You can keep on knockin' the stock and I'll just keep on drawing the dividends.
I am willing to concede that the trust could be a good investment depending on your assumptions. If WTI increases to $150/bbl for the next ten years, the SB21 tax is not repealed, and production increases to 90,000 bbls per day, the trust should return $148 in dividends over the next ten years before trust termination in 2026. This will provide you a 4% annualized return on your $100/share investment. However, if oil futures follow EIA projections, the SB21 tax is repealed, and production decreases at 2% per year, then you will receive $35 in future dividends, and the trust will stop paying dividends in 2020.
Not sure about your math (I expect the trust will pay more than that), however the chargeable costs issue is real and known by anyone who bothers to look at the trust document. Of course, most here prefer to invest blind and would rather buy without knowing what they are buying than to spend an hour doing research. I have pointed out the costs escalation (written into the trust terms) for several years now. Yes, starting in 2017-18 timeframe there will be a sharp drop in distributions with that drop extending each year. Depending on oil prices in that timeframe, trust distributions could indeed go to zero decades before the trust terminates. Of course that will make the trust units almost worthless as units in a declining trust that doesn't pay distributions are inherently of no value.
Again, I'm not sure on your math. I haven't constructed a model but I would guesstimate remaining distributions more like in the $50 range (could even pay the $35 before the escalation in costs kicks in) which is still half the current unit price, so I am not disputing your overall conclusion.
Respectfully, I must disagree with something you said. "Depending on oil prices in that timeframe, trust distributions could indeed go to zero decades before the trust terminates."
I believe the 10-K clearly states that the trust will terminate if the net reveues from the Royalty Interest for two successive years are less than $1,000,000 per year (unless the net revenues during the two-year period have been materially and adversely affected by certain extraordinary events).
Under what scenario could the trust continue for decades after distributions go to zero?
Thanks lizahuang, appreciate your insight. The $35 value is based on EIA projections of oil futures declining 15-20% by 2017. The argument can be made that oil futures are undervalued, but no reasonable argument can be made that this trust is fairly valued.
The way things are going in the Middle East the price of oil could be above 30% by the end of the year. And if not this year, then next year. Do not underestimate the price of oil. To go along with it, Obama has a global warming agenda. The higher the price of oil, the more people will buy electric cars and other green machines. IMO, that is part of the reason he is doing nothing about what is going on in Iraq. Middle East chaos means high oil prices.
You are correct that Middle East pressures could bring oil to $130. But your next point about electric cars shows that there is a substitute for oil; that will keep long-term demand for oil down. With all the new supply coming in the next five years, and with oil prices capped by alternative sources of energy, it is not prudent to predict that oil prices will remain at $130+ for the next several years. (Check out the steo reports for global oil on the EIA website for a more comprehensive analysis.)