Powerful factors are aligning.
These forces clearly point to an increase in the price of oil.
Consider: Worldwide petroleum use is increasing. A slight pullback
caused by the recession notwithstanding, global demand for oil is
on the rise as China and other emerging-market countries have begun
to industrialize. Worldwide crude consumption rose from 65 million
barrels per day in 1980 to more than 85 million barrels per day in
2007. Consumption is anticipated to rise to more than 94 million
barrels per day by 2015.
All that oil has to come from somewhere, of course. And the supply
from which it comes is dwindling. New sources of oil are
increasingly difficult to find. Earth has 1.3 trillion barrels of
proven reserves -- only enough for 40 years at current rates, and
far less if the uptrend in the world's appetite continues.
The economics are simple: Increased demand and shrinking supply
inevitably put upward pressure on prices. History clearly bears
this out: Oil was $10 a barrel in 1998. The price rose for years
and peaked at $147 a decade later, in 2008. Prices have since
fallen, to about $73 per barrel, but the underlying economic
dynamics of this commodity undoubtedly point to a strong price
The second factor influencing the price of oil is the falling
dollar. Oil is priced in dollars. As many predict the dollar will
continue to decline in value as record deficits continue to
escalate with no end in sight, a weak dollar will necessarily push
the price of oil up even farther.
Third: The world's economies have begun to recover. Analysts expect
demand to resume its rise this year by a consensus average of 1.3
million barrels per day.
Goldman Sachs (
currently estimates oil will go to $90 per barrel in 2010 and $110
per barrel in 2011.
One of the best ways for income investors to play rising oil prices
BP Prudhoe Bay (
. BPT is a royalty trust set up in 1989 by oil giant
BP plc (
The Bank of New York Mellon Corporation (
to pay royalty interests for revenue from oil producing properties
on Alaska's North Slope.
BPT distributes royalties on 16.4% of the first 90,000 barrels of
the average actual daily net production (or the total daily
production, whichever is less) per quarter from BP's working
interest in the Prudhoe Bay Field, the largest oil-producing field
in North America.
The trust is set up to simply collect royalties on the oil sold.
Obviously, higher oil prices mean higher royalties and better
earnings and distributions. Like a master limited partnership (
), BPT is not taxed at the corporate level provided the trust pays
out the bulk of earnings in the form of distributions. However,
unlike most MLPs, which mostly earn fees for the storage and
transport of oil and gas, BPT's earnings are highly sensitive to
the price of oil.
As oil prices have plunged from record highs in 2008, this
sensitivity to oil prices has not been a good thing.
In the first three quarters of 2008, the trust sold oil at an
average price of $104.35 per barrel. That average price fell to
$53.66 in the same period in 2009. As a result, in the first nine
months of 2009, revenues plunged more than -50% to $92.8 million
and earnings also plunged by a similar percentage to $91.5 million
from the first nine months of 2008.
But how did the trust do during the past decade when oil prices
were mostly on the rise?
As of January 31, BPT has had a mind-boggling average annual total
return of more than +31% per year for the past 10 years -- during
which time the broader market's return has been negative. BPT
clearly is an investment that does well when oil prices rise. BPT
has also paid out a remarkable average dividend yield of 12.2%
during the past five years.
Distributions are paid quarterly and, while distributions totaled
$11.70 per unit in 2008, they fell to $6.00 in 2009. However, the
first distribution for 2010 was $3.61.
That's a yield near 9.5% -- after a reduction. Just imagine what
kind of cash this trust could throw off in the future.
That said, even a vast oil field like Prudhoe Bay has a limited
life, and as reserves in the oil properties diminish, the trust
will eventually expire. As of Dec. 31, 2008, the trust estimated
its proven reserves to be about 55 billion barrels. While BPT
estimates that it will be able to continue to generate royalties to
2020 and beyond, production should gradually diminish. However,
rising oil prices should be a huge benefit to unit holders during
the next several years.
Also, because of the aforementioned reasons as well as
environmental considerations, there is a strong push toward
alternative forms of energy including natural gas, nuclear as well
as wind and solar. But, while these energy alternatives should gain
in prominence and impact the demand for oil eventually, it probably
won't happen any time soon.
Falling oil prices in the recent recession have presented a window
of opportunity. While a recovery may be short lived and oil prices
could again pull back, the longer term trends are likely to win out
eventually. The beautiful thing about that is that you get paid to
wait. We've seen it happen with this same exact stock...
You see, if you're one of our veteran
subscribers you had the chance to make an +80.1% gain with BPT when
Carla Pasternak recommended owning it between October 2004 and
February 2007. What's incredible is that only +56.1% of the total
returns Carla and her readers recognized came from capital gains --
the rest came from a steady stream of hefty dividends.
So what's she recommending today? While Carla just profiled BPT in
the most recent issue of
, she didn't end up adding it to her portfolio this time around.
Why? Because she's found even more compelling high-yielders for
today's market -- some of which are paying out dividend yields of
10.0%... 11.8%... even 19.6%. If you're not putting your portfolio
to work for you and collecting huge dividend checks like Carla and
her subscribers are, you need to read this.
Disclosure: Tom Hutchinson does not own shares of any security
mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.