As poorly as BPT has performed in the last few months, it has overperformed the price of crude by a large margin. Now that WTI has closed in the $50’s, it is only a matter of time before BPT catches up.
As a long-term investment, a good entry point would be the sum of the future distributions, discounted for the time value of money. Using today’s futures curve, you can calculate the future distributions quite easily, which will total $25/unit before terminating at the end of 2020. A good entry point would then be around $20/unit.
However, 6 months ago, many “investors” were willing to pay $100 for $35 in future distributions. As such, $70/unit for $20 in future distributions might make sense as a short-term play as long as there is a greater fool willing to buy it at a higher price.
Thanks for the link. It makes sense that the declines in production would increase the per barrel transportation costs. My model has been tweaked, and now indicates that with WTI in the mid to upper $60’s during 2015, the ANNUAL distribution to BPT will be between $5.50 and $6.00/unit.
Sentiment: Strong Sell
The SB21 (MAPA) that survived repeal in August has significantly decreased the tax rate owed by the trust. For modeling distributions in 2015, I am using the following formula to calculate the tax: ((WTI - $25 transportation cost) * 35% tax rate) - $8 tax credit. If you have knowledge of the tax, please provide input into whether this formula is correct, and specifically how the transportation cost could be accurately determined.
Past performance is no guarantee of future results. If oil stays in the mid $60’s during the 1st Quarter of 2015, the royalty payment in April will be around $1.25. In addition, the more astute long-term holders will begin selling in anticipation of the rising chargeable costs in 2018. These factors will cause the unit price to continue its fall, and it should not rebound as it has in past cycles. I project $50 - $55 unit price by June 2015, and have adjusted my option strategy to take advantage of this mispriced security.
If the $80 puts expire worthless, the gains from the $90’s will more than offset the losses. Since the next quarter dividend will be around $2.15, the probability that the trust sees $90 again is waning. If oil prices are to defy economics and rise in 2015, BPT might eclipse $90, which would be a really good exit point considering the escalation in chargeable costs in 2018.
Agreed, the primary issue is the increase in fixed costs in 2018. With $80/bbl WTI in 2018, you will receive a $5/unit ANNUAL dividend. The dividend will steadily decrease until trust termination in 2021. Be prepared!
The deduction for depletion of reserves is not a “tax break”, but a tax deferral. When utilizing the depletion deduction, it decreases the basis in your units, resulting in a larger capital gain when you sell.
The depletion deduction is meant to spread out the cost of buying the asset over the useful life of the reserves; you should pay income tax on the income from the property, not on the value of the property itself. The only “tax break” occurs if by using percentage depletion, you expense more than the value of your investment (which could be the case for some long-term BPT holders). Tax reform could potentially take away percentage depletion, but should not affect reserve depletion.
The momentum on BPT is certainly heading in the wrong direction. The 50 day and 200 day are on a collision course that should happen early next week. Look for technical traders to bring this stock down over the next few weeks based on the negative momentum.
This "trader" is not a trader, but a tax CPA who admittedly knows little about the oil business. I am short BPT, so it is correct to assume I have an agenda. However, I am certain that no one will sell their stock based on an anonymous poster’s sentiments; instead, my expectation is that long holders will do their own due diligence in figuring out a reasonable value for this trust that is not based on past performance or hope in future oil prices. If they model out future dividends, I am convinced that they will come to a similar realization, and avoid substantial future losses.
Any rational investor knows that the value of this trust is the sum of the future dividends you will receive. Using generous assumptions of a constant WTI of $90/bbl, a 0% depletion rate, a CPI increase rate of 2.23%, you can expect annual dividends of $8.87, $8.68, $8.49, $7.20, $5.45, $4.06, $2.61, $1.10, and $0 in 2023 -- $46.46 over the life of the trust ($36 under more moderate assumptions). Who would pay $85+ for an annuity that will pay out $46 over the next seven years? According to the stock price, there is strong demand for just this kind of annuity.
The trust does not own or sell physical oil. It merely has a claim to 16.4246% of the royalty production at the spot rate (Cushing WTI). From that number is subtracted Chargeable costs, Taxes, and other miscellany to derive the royalty received, which is then passed on to unitholders.
Nacn, I appreciate your concern for my shorts. In actuality, the volatility is quite beneficial to put options. When the dead cat bounce is over next week, and the trust resumes its 9.8 m/sec^2 drop, the out of money put options will be worth more than if the stock had never bounced. Hopefully you sold into the bounce.
The dividend calculation is really quite simple: WTI price – (Chargeable costs + Taxes) = profit/bbl; Profit/bbl * barrels produced = Annual distribution. In 2022, Chargeable costs = $70 and Taxes = $15. At that point, the remaining reserves are irrelevant if WTI is equal to $85/bbl. I hope you all will run the numbers yourself for all relevant years to see the true value of this investment.
As an investor, you should be aware that the trust has no claim to the oil in the ground (see 10-K section regarding Trust Property). When the distributions cease, the expenses to close the trust will exceed the assets ($1,000,000 in cash) in the trust, and the residual value will be zero. In 2022, chargeable costs will be $71/bbl, and taxes roughly $14/bbl; if WTI is
When the trust pays out its last dividend in 2021 the units will be worth zero. If you reinvest the dividends for the next 7 years, you will have lost the principal and any income generated from it. If you invest the dividends elsewhere, at least you will recover $40 of your $80 investment. Please read the 10-K to see how chargeable costs of $63/bbl in 2021 will result in a worthless investment.
Sentiment: Strong Sell
Feel free to publish a counter position on Seeking Alpha. I personally would like to see a model that substantiates BPT’s value at these prices. If WTI were to hit $180 for the next ten years, my model would show BPT as a buy at $83/share.
The significant difference between stocks and a royalty trust is the growth rate. A growing company invests its capital for higher future returns. A royalty trust has reserves that are constantly declining. What makes this specific trust a uniquely awful investment are the chargeable costs that will double from 2015 – 2021 to $64/bbl. Please read the 10K to better understand how your investment will be worth $0 in 2021.
Foolish to think the dividend will last. If you value this trust based on its undiscounted cash flows using today’s WTI futures, the intrinsic value of the trust is less than $40/share. If you add a discount factor to account for risk, then the value is significantly less. The reasons it trades at its current valuation are 1) ignorance, and 2) hoping a greater fool will buy it at a higher price.