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Is the Drop in Prudhoe Bay Shares Justified?

the BullMaket.com Staff

BullMarket.com regularly answers subscriber questions, here is one recent example.

Q) You were certainly right in your last assessment of Prudhoe Bay Royalty Trust (BPT), as it has dropped like a rock in the past few trading sessions and now trades in the range you consider justified. Two questions: Did the bears overdo the selling? Since BPT offers protection against increasing oil prices, is that "baked in" to the estimate or might it justify a higher price?

A) As a refresher, owning shares in Prudhoe is like owning a stake in an oil field, or in this case, 150,000 acres in the Prudhoe Bay oil field located on the North Slope in Alaska. The trust was created in 1989 and it is entitled to receive a 16.4246% overriding royalty interest in cash received from up to 90,000 barrels per day of net crude oil and condensate produced from the working interest of BP Alaska in the Prudhoe Bay oil field. Payment of the overriding royalty cannot effectively exceed production of 90,000 barrels per day, but it can potentially drop below this level.

At the end of 2011, the trust was estimated to hold reserves of 82.3 million barrels of oil and condensate, including 73.5 million barrels of proved developed reserves and 8.8 million barrels of proved undeveloped reserves. Estimated future net revenues to the trust at the end of 2009 were $2.46 billion, with a discounted value of $1.43 million.

Meanwhile, at the end of 2011, under current conditions, royalty payments were estimated to be zero after 2027.

The stock has been hammered the last few days after The Wall Street Journal ran an article on Friday noting that its future discounted cash flows and that of other trusts were lower than the current market cap of the trusts.

"Unfortunately, most people who buy [royalty trusts] don't realize that they tend to be depleting assets," Tyson Halsey of Income Growth Advisors told the newspaper. "They end up being bad for retired people who think they are getting a fixed-income alternative."

BMR Take: When we pegged a fair value of around $85 on Prudhoe Bay, that was towards the end of 2010 and using data based on its 2009 annual report. Trusts, meanwhile, are declining assets, and thus that target would seemingly come down. Notably, though, the reserve, future cash flow estimates, and when the trust goes to zero are all higher than they were in 2009, largely because the price of oil is a lot higher as well. The yield on the 10-Year is also a lot lower. ...

For BMR's full analysis and current fair value of Prudhoe Bay Royalty Trust, please visit BullMarket.com.

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