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BP Prudhoe Bay Royalty Trust Message Board

  • mhicks_98 mhicks_98 May 21, 1998 9:04 AM Flag

    Where Is John Galt?

    From looking through all your previous posts I
    assumed you would be quick to respond, especially if it
    meant the possibility of increasing the extent of
    negative information on BPT.

    Please respond.
    Intrinsic value?

    Good Luck,

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    • MESSAGE 145. Also see 143, 128
      Subj: Pre-Tax Valuation?
      By: Inefficient_Market
      Date: 05/27/98 11:17 pm EDT

      Just because different investors have different marginal
      tax rates is not a reason to ignore the government's take.
      The analysis should assume the marginal rate of the
      marginal investor. With the number of shares traded
      daily in BPT, I think it is safe to assume the marginal
      retail investor is at 36% or 39.6%. The issue of
      incorporating the value of the capital loss is fallacious.
      The value investor is not trading on the
      daily/weekly/monthly volatility in prices, but is searching
      for an intrinsically undervalued asset. I would plan on
      holding an undervalued asset (which we agree BPT is
      not) until the market recognized that value. Though this
      may potentially take years, the investor isn't planning on
      a loss. I find your explanation of option value opaque, at
      best. What I briefly described in message 128 was the
      sources of data to apply a Black-Scholes commodity
      model to generate the value of each quarterly
      distribution. This approach provides the present value of
      each future distribution, including the oil price option
      value. I'd appreciate it if you could be more specific on
      how you've incorporated interest rate risk. Again, you
      lack clarity. The 10K states that BP can't close the Trust
      (without the unlikely Unitholders support) until two
      successive years commencing after 12/31/2010 have
      generated less than $1 million per year in revenue (or
      about $0.05/Unit). Thus BP can't unilaterally close the
      Trust until 1/1/2013. Oil will be produced well beyond
      2012, it just is unlikely to have value for the Unitholder
      due to the high chargeable costs. Though we agree that
      BPT is over valued, our difference is more than one of
      degree. Upon closer examination, your analysis appears
      very incomplete.

    • Thanx for the tip on BBZ. I did some research and
      this is what I came up with.
      BBZ is a closed end
      Mutual Fund that invests in International Investment
      grade Corporate and Govertment Bonds. The price has
      recently been pushed down due to a rights offering where
      holders of rights were entitled to buy additional shares
      at only $6.15.
      Naturally many bought shares at
      that low price, not to mention those who tried to do
      some arbritrage. Many of those who bought at $6.15 are
      dumping shares for cheap now. When all of these short
      term players are out the stock should easily be at
      least $7 / share. It is paying .07 per moth dividend
      even at $7 this is a 12% return. Before the rights
      offering this stock was trading in the $8 range. Because
      the rights offering did dilute the stock I don't thnk
      we will see $8 again. However, $7.50 is not
      unreasonable to expect. The recent price has been 6 3/8 - 6
      You even get a 12% + dividend while you wait for the
      stock to recover.
      Whether you buy this for the
      dividend, or just waiting till the price recovers from the
      rights offering, good luck investing.

    • I the depletion benefit a tax shield on 15% of
      the dividends. I do not understand what you or
      ineffecient mean by "revenues". If the depletion benefit is a
      tax shield on 15% of dividends, the its value is
      equal to roughly 4.5% of the dividend stream's present
      value, which is insignificant.

      I ignored the
      depletion benefit in calculating value because it did not
      seem material. I also used a very low discount rate
      because of the short duration and low correlation with
      the overall market. Value appears to be under
      $5/share, but I would recommend covering shorts at a higher
      level because the next big oil price move is more
      likely to be up than down and regardless of the merits,
      bpt will move upward if the oil price moves higher.

    • I believe you di right!
      FAX is an Australian fund which invests in grad A+ securities and bonds!

      Another stock to look at is BBZ which pays 12 1/3%

    • BPT dripped again today. It traded as low as

      I expect it to keep falling. The dividend
      in Q2 will be around $0.10 per unit. That gives BPT
      an annualized yield of 3.9%. The retail holders will
      once again surprise themselves with their own
      stupidity when that tiny dividend comes out. Another good
      wave of selling could drive BPT to $8.00 by July

      No signs of higher oil prices to increase the
      dividend, either.

      NSQU-- You are on the wrong
      board. BPT is no longer a yield play...the yield is
      miniscule. The best yield play today is CCA. Go to that
      message board to check it out-- I may even leave you a
      message there.

    • I recently bought 1000 shrs @6 7/8 of FAX closed end bond fund. Rate of return approx 10.5 % Your opinion please. Any suggestions of other income investments.

    • Inefficient, you miss the forest for the trees.
      I'll try to explain (with clarity) in terms that you
      can understand. I'm going to have to shut you down
      like a three piece chicken dinner.

      I do not deny that there is a tax benefit from
      depletion. My point is that this-- why do you care about it?
      Let's say you just bought BPT at $11.00 per unit
      yesterday. Now fast-forward to 2008. If the forward curve is
      right, oil is at $20.20 per barrel. We know that in
      2008, that the dividend would be $0.00 if oil is at
      $20.20. There would be no projected dividend in any year
      going forward. Does it matter when the trust legally
      dissolves if there are no more dividends? No-- it is still
      worthless. If I were a unitholder at that time, I would want
      the lawyers to shut it down officially so I could
      have a chance to get paid for the sale of the royalty
      interest ASAP. Anyway, the value of BPT in 2008 will be
      $0.00 dollars per share. The investor that bought at
      $11.00 per unit will receive less than $3.50 in
      dividends during that ten year period. If I were that
      investor, I would be more focused on that huge capital loss
      than on any tax beneit from depletion. If you are in
      the 28% tax bracket with an $11.00 per unit loss,
      your effective tax shelter is $3.08 per unit --
      actually a bigger benefit than your coveted depletion
      benefit. Why focus on taxes when you are paying $11.00 to
      receive less than $3.50 in dividends?
      Further, this
      is a yield play. Yield attracts old/retired
      investors. They may not have any income to offset with the
      depletion benefit.

      On option value:
      Here's the
      structure of the options that you need to recreate the oil
      price exposure for BPT. To recreate exposure to a
      10,000 share position, you need an option to buy 500
      barrels of oil per quarter at a strike price equivalent
      to the breakeven oil price for BPT. You need the
      option to be "asian" - meaning that the oil price is
      determined over the average for the quarter, not on a
      certain day. For example, for the second quater, BPT will
      not pay a dividend if the price of oil is $13.00 or
      less. You need to have an option to buy 500 barrels of
      oil at $13.00 per barrel. If the oil price averages
      $16.00 for the second quarter, you will get a dividend
      of $0.15 per unit or $1,500 if you own 10,000 shares
      of BPT. Likewise, if you bought the option, under
      the same scenario, you would receive $1,500
      (($16.00-$13.00)*500). If you had options for every quarter until the
      trust dissolves, you would have synthetically recreated
      BPT. The question is-- how much do the options cost if
      you were to recreate it? That is the real value of
      BPT. I paid Merrill Lynch the equivalent of $3.95 per
      unit to create this structure. I figured that my
      dividend exposure was $2.99 per unit. My effective cost to
      hedge (the additional cost of the options over the
      dividend exposure) is $0.96 per unit. So $0.96 is the
      undiscounted value of the oil price option. No theory--actual

      As you can see, the above structure is the perfect
      hedge if you are short BPT.

      On interest rate
      Figure it out yourself. What you think the investors
      would want in terms on yield on BPT if the risk free
      rate went to 10%? What would the unit price of BPT
      have to be to get a yield that high?

      closer examination, educating amateur day now over.

    • I'm sorry that I was slow to respond, I was out
      for a couple of days.

      In response to your
      question about value, I'll update and repost a message
      that I wrote a few months ago. (check out messages 41
      and 33 as well) Also my comment about BPT selling at
      twice its intrinsic value is incorrect, it is trading
      at more than 4 times its value. Here's

      The value of BPT is solely related to the dividend
      payment stream. The
      dividend is important because as a
      shareholder, that is all you get. (Beacause BPT is a royalty
      trust, not a company, there is no
      chance that there
      will any upside from a big oil discovery, an
      acquisition, or anything else.) Because all you get is
      the value of the shares should be the sum of the
      expected dividends discounted back to the present value.
      If you could know
      the average WTI price per
      quarter for the next ten years, you could know the
      aggregate amount of the dividends that BPT will pay
      its shareholders. Thus you could know the value of
      BPT. Sound complicated? (If it does, then you don't
      understand BPT enough
      to have a cent of your money
      invested in it.) The problem in figuring the dividend is
      that you can't guess the price of oil for
      the next
      ten years. The good news is that you don't have to
      guess the price of oil because the futures and forward
      markets do
      this for us. Here is the market for WTI as
      of May 21. (meaning-you can enter a contract to buy
      WTI at these prices per barrel
      for the following
      years) From today's WSJ page C14:

      1998 - $15.80

      1999 - $17.12
      2000 - $17.65
      2001 - $17.75

      2002 - $17.81
      2003 - $17.87
      2004 - $17.93

      If these WTI prices turn out to be the actual
      average prices, the resulting annual dividends will be as

      1998Q2 - $0.09
      1998Q3 -
      1998Q4 - $0.17
      1999 - $0.68
      2000 - $0.73

      2001 - $0.51
      2002 - $0.36
      2003 - $0.21

      2004 - $0.14
      2005 - $0.10 (assumes a 3% increase
      in the price of oil)
      2006 - $0.06 (assumes a 3%
      increase in the price of oil)
      2007 - $0.02
      For any
      year, if the price of WTI averages $1.00 dollar higher
      or lower, the resulting change in the dividend will
      be approximately $0.21 higher or lower respectively.
      So, the undiscounted value of BPT(the aggregate sum
      of the dividends) is $3.18 per share. Of course you
      should discount those dividends to their present value
      at 10% you get a value of $2.40 per share.

      In BPT's 10-K, the third party reserve analysts
      performed the same analysis as above (page 15)and estimated
      the value of BPT at $108 million ($5.05 per unit)
      aggregate and $78 million ($3.64 per unit) present value.
      The reason that they came up with a number that is
      slightly higher than mine is that they were using December
      31, 1997 estimates on the price of oil, which were a
      few dollars higher than today. BPT estimates that the
      trust should dissolve in the year 2009.

      • 1 Reply to John_Galt_NY
      • There is no nice way to say it. Based on today's
        oil price curve, BPT is wildly, unbelievably
        overvalued. If you own it, you
        should feel compelled to
        sell it. The only reason to own BPT is that if you
        believe that the price of oil will jump up to $25
        barrel over the next few years and then climb from
        there. You have a marginal chance of getting your money
        back if oil did that. If
        you believe oil will do
        that, I can recommend hundreds of other oil stocks that
        will benefit more than BPT if that were to
        The argument that oil prices are going up, so BPT
        should go higher would be true if BPT were already
        trading at its net present value. We have a long way to
        go down before that happens.

        Anyway, since
        BPT is mostly owned by retail folks that don't have a
        clue as to what drives the dividend, I don't expect
        to get smart and sell until they see their tiny
        dividend checks. The $0.14 dividend in the first quarter
        is responsible for BPT falling from around $16.00 to
        below $11.00. The second quarter dividend is on track
        to be below $0.10, so expect further declines in the
        price in June.
        The price where the selling will stop
        should be below $10 if the indicated yield is to be
        above 7%. (
        It has averaged 10% so it could and
        should go lower.)

        Your logic that BPT could be a
        buy because it is near its low is flawed. That sort
        of technical analysis has no merit. You should only
        consider that current price versus the current value. "New
        Low" has nothing to do with value. Remember that BPT
        will eventually go to $0, according to the company
        that will happen in 2009.


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