It has been said, practically since the dawn of time, that one
of the greatest enemies investors face is their own emotions.
Adopting affection or disdain for a stock as it is real person
that can return those feelings usually ends poorly for investors.
BP Prudhoe Bay Royalty Trust's (NYSE:
BPT
) is starting to prove as much.
For those that have not actively followed BP Prudhoe Bay
Royalty Trust, here is a brief rundown of what has been happening
since late August. For starters, some royalty trust basics are
needed. BPT and scores of other royalty trusts are prized by
income investors for high yields, strong payouts and tax
advantages that are not found with ownership of common
shares.
Along those lines, it is vital to note that while an
energy-based royalty trust may be able to extract oil from a
certain location for years upon years, the legal structure of
U.S. trusts forbids the acquisition of new assets, meaning that
at some point, royalty trusts are sitting on top of depleting
assets. Granted, full depletion for many trusts, BPT included, is
well into the future.
So this is what has been happening with BPT, the most
recognizable brand name among royalty trusts, since late August.
On August 24, the Wall Street Journal publish an article
questioning BPT's market value
while highlighting recent distribution cuts from other royalty
trusts. The Journal piece was
followed by this one on August 29
that highlighted some of the dangers income investors need to be
aware of with royalty trusts.
What ensued was a firestorm of controversy. Between the
Journal piece and the other article published on Seeking Alpha,
nearly 60 comments were left on the two web sites, few of which
were flattering. Acknowledging the obvious difficulty in
summarizing almost 60 comments from dozens of different people,
the crux of the criticisms of both articles was that since BPT
had fallen from $120 on August 17 to below $77 on August 29, the
sell-off combined with the seductive payout meant a buying
opportunity.
Additionally, many BPT bulls all but acknowledged that oil
production in Alaska is waning, but said the income offered by
BPT is too compelling to ignore. Here is a harsh reality about
Alaskan oil production. Peak production was reached in the
1988-1990 time frame. Alaska has been usurped by North Dakota as
the No. 2 oil-producing state behind Texas. Alaska's 2010 oil
output was the
lowest since 1977
.
Simply put, Alaska produced almost 2.1 million barrels per day
in 1988. In 2011,
that number plunged to 608,000
.
Falling Knife
Those audacious enough to ignore all those facts and get involved
with BPT in high $70s or low $80s, at a time when the units
looked like a falling knife, could have done quite well for
themselves. That is if they traded BPT, which is often used as a
long-term instrument, as a trade.
An unfortunate reality of investing is that few investors are
able to buy at a stock's absolute bottom and sell right at its
peak. In other words, it is unlikely a lot of retail investors
caught BPT at $76 and some change on August 29. More than likely,
those investors were lured in by the yield sometime over the next
few days in the $87-$89.
That made for a decent trade, assuming those folks dumped BPT
on one of the multiple occasions the units hit $94 later in
September. Chances are that did not happen because the primary
reason investors own royalty trusts in the first place is the
dividends. BPT's ex-dividend date was October 11 and the record
date was four days later
.
By the time payout arrived on October, investors that got
involved in the $87-$88 area were out of the money by a couple of
bucks, but the dividend would have them close to breakeven. That
is not terrible, but now BPT is within spitting distance of its
August low. BPT's almost 14 percent loss in the past month is
nearly seven times as the SPDR S&P 500's (NYSE:
SPY
).
Flawed Reasoning
To be sure, some BPT bulls have made strong arguments. Read a few
of them and it is clear this stock has some intelligent, savvy
supporters. Unfortunately, a lot of those arguments revolve
around the assumption that BPT will be able to pump 90,000
barrels of oil per day for as much as another 15 years.
Alaska's declining production numbers do not bode well for any
company operating there being able to say with any modicum of
certainty that it will be able to produce a static number of
barrels for 15 months let alone 15 years. BPT proves as much.
Third-quarter output
was less than 66,000 barrels per day
. That is down from
less than 86,000 bpd
in the second quarter and over
94,000 bpd in the first quarter
.
Bottom line: It can be inferred from reading the comments of
BPT supporters that these investors either believe Alaska's
faltering crude output does not pertain to BPT or that BPT units
and the dividend can at least remain stable in the face of that
declining output.
The Dividend
Then there is the matter of the dividend. Since the payout from
many trusts is based on production levels, dividends from trusts
fluctuate. Said another way, assuming no increases, investors no
that next year, Exxon Mobil (NYSE:
XOM
) will pay $2.28 a share in dividends. BPT's dividend is anything
but static. That is not necessarily a bad thing, but dividend
cuts have hit royalty trusts in force this year.
Hugoton Royalty Trust (NYSE:
HGT
) has seen seven consecutive months of lower dividends. Three of
the past four payouts from Permian Basin Royalty Trust (NYSE:
PBT
) have been lower than the previous months. Same goes for San
Juan Basis Royalty Trust (NYSE:
SJT
).
And like the dividend, BPT's proved reserves fluctuate,
another factor investors have a hard time acknowledging. It might
be an oversimplification, but
the trust's proved reserves total moves in tandem
with oil prices
.
At the end of the day, there are some irrefutable truths about
BPT. Investors are emotional about this stock. It has a seductive
yield and payout. Oil production in Alaska is declining. Those
that bought the stock in early to mid-September are now sitting
on loser of a trade, the percentage loss of which cannot be
covered by the most recent dividend. If another $4 or $5 comes
off the units, BPT will be trading at its lowest levels in over
three years. None of this sounds attractive, does it?
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.