OPEC is getting a little bit desperate. That's good news for US consumers, but bad news for us in the short term.
I don't think oil prices are going to skyrocket in the next year or two. Fortunately, that's not a problem for ROYT's long-term investors. I do think that with hundreds of billions in CAPEX off the table, oil prices will be going up in 3-4 years. That's great news for the futures market, the oil storage market, and a good reason to be long royalty trusts (who basically get free natural storage, regardless of what spot Brent or WTI is doing).
Thanks. I'm actually a bit pessimistic on this in the short term, but let's see.
Remember, while there's clearly some intrinsic value in ROYT, the real value is in the time value/option premium. I bought ROYT because I'm buying a Cessna 172 and I'm worried oil could go back up to $80/barrel. If oil goes to $0, your $2/unit at worst goes to $0. If oil goes to $80/barrel, you get paid back in less than two years. We take on some operational risk, but I honestly think ROYT is a better deal than buying long-term options on WTI Crude Oil.
To be fair, that would imply a pretty significant distribution- perhaps 10 cents/unit/month. Obviously we have to discount the future value of that, but we've got pretty low interest rates and pretty low market premiums right now. AFAIK, there's no provision in the royalty agreement for production cost escalations- our current distribution is really just based on cash costs.
Anyone buying today is *basically* paying $8/barrel for a long-term option on WTI with a strike price of about $40/barrel. It's a bit exotic because it's really a long-term cap rather than a set expiry- and there's a few knock-out features going on- but it's a whole lot easier than doing it on the NYMEX or through a PWM guy at Merrill Lynch.
Honestly, I think it's a pretty good deal when the futures market is saying a barrel of oil is worth $50or $60 a few years out. That's before we figure in the time value/ value from the volatility.
ROYT isn't for everyone, and I'll admit I'd feel better buying a royalty trust on a property in Texas, Alaska, or Montana than California but if you're buying a boat, buying an airplane, or an SUV, this is a pretty good way to hedge your exposure. You have a lot leverage to the upside on oil.
Nomad, for your sake, I hope there isn't a lot of volatility in WTI. ROYT's exposure basically acts like an option, and there's a clear positive vega oil exposure to being long/ negative vega oil exposure to being short.