BP Prudhoe Bay Royalty Trust: A Likely Buy In 2023 (NYSE:BPT)

During times of high volatility and bearish market conditions, investors tend to run to safety. Cash, gold, and dividend/distribution producing stocks are all considered potential safe havens. Like MLPs, royalty trusts enjoy big tax breaks and pass on big distributions to investors.

Is BP Prudhoe Bay Royalty Trust (NYSE:BPT), which drills from the largest oil field in North America and had a massive distribution of 32.34% over the last twelve months, a good buy? How much future distributions can an investor expect? And do the distributions justify the stock price?

Is it a good buy?

As shown in the graph below, when superimposing the distribution history and the WTI graph from Trading Economics over the stock’s price graph, BP Prudhoe Bay Royalty Trust’s stock price did follow the WTI fairly well from 1996 to 2016. After 2016, WTI increased and decreased much more than the stock. But the stock’s short-term moves seem to still follow WTI. The distribution history also followed WTI, but to a lesser extent than the stock price.

Thus, the stock will probably rise in the short term, since WTI is expected to rise. President Biden probably created a floor for WTI when he said in October that the he plans to purchase oil to refill the Strategic Oil Reserve at $67 to $72/barrel. Purchases and deliveries are expected to start early in 2023. Economists estimate Saudi Arabia needs oil to be at least $75 to $80/barrel to balance its budget. Speculation is that Russia is planning to send another flood of troops into Ukraine in January and February of 2023 and try again to take the capital. This could cause another oil spike. Plus, oil has a tendency to rise as summer driving season approaches.

Using their global macro models, Trading Economics’ analysts estimate that WTI will be at $94.09 by January of 2024 . The U.S. Energy Information Agency (U.S. EIA) predicts Brent crude oil will average at $92/barrel in 2023. Brent crude oil is currently at $85.91/barrel, while WTI is currently at $80.26/barrel. Assuming Brent is about $5/barrel more than WTI, the U.S. EIA is predicting an average WTI price of $87/barrel in 2023. Goldman Sachs predicts Brent will average $90/barrel in the first quarter of 2023 and $95/barrel in the second quarter of 2023. Using the same assumption as above, Goldman is predicting WTI to average $85 and $90/barrel in the first and second quarters of 2023, respectively. Predicting the long-term price of oil is almost impossible. But using the mathematical and statistical models from the Economy Forecast Agency, WTI is predicted to average $82/barrel in 2024, $106/barrel in 2025, and $100/barrel in 2026.

While it looks like the stock will rise by the end of the quarter and the end of the year, BP Prudhoe Bay Royalty Trust stock will probably fall to about $10.51/share over the next week based on the stock’s lower Bollinger Band as shown in the stock’s technical graph below. Support is also about $10.51/share, and resistance is about $14.43/share. The MACD looks like it could form a bearish downward cross soon. The W%R does look like the stock is quickly approaching oversold. However, all five times when the RSI, W%R, and MACD were at similar levels, as shown by the orange lines, the stock fell.

How much distributions can an investor expect?

The table below is compiled from the company’s 10-K and 10-Q SEC documents. It shows how distributions are calculated. Distributions are based on the royalty revenue received from the previous quarter’s royalty production. If the average per barrel royalty becomes zero or negative (highlighted in red), the cash distribution will be zero.

The royalty percentage stays fixed at 16.4246%. The average per barrel royalty is equal to the average WTI price minus the adjusted chargeable cost and the average production taxes. Thus, there are four variables that determine the royalty production, which is directly correlated with the cash distribution. Three of those four variables move in nearly a straight line as shown in the graph below.

Combining the adjusted chargeable costs with the average production taxes gives a total cost of $76.28/barrel at the end of the third quarter (9/30/2022). Using the above equations, the total cost in the fourth quarter of 2023 is estimated to be $76.26/barrel. The total cost is estimated to increase slowly to $101.85/barrel by the end of 2025. Using the average WTI price of $87/barrel in 2023, $82/barrel in 2024, $106/barrel in 2025, and $100/barrel in 2026 as mentioned earlier, distributions are estimated to become zero starting in the first quarter of 2026. By then, distributions are estimated to total about $2.68/share, or 22.93% of Friday’s closing price of $11.68/share.

Do the distributions justify the stock price?

A future distribution total of only a little more than the stock value does not seem enough to justify the stock price when the Trust could be terminated in 2028. As stated in the 10-Ks, if the Trust has zero or negative royalty production for two successive years, the Trust will be terminated. But what if those distributions were reinvested? In his 2014 article, fellow Seeking Alpha author A Prudent Investor recommended to also reinvest those future cash distributions to get the fair value. Unfortunately, reinvesting the distributions back into the stock will only raise the total distributions to $2.97/share, or 25.44% of Friday’s closing price of $11.68/share. It is very likely that the stock could revisit its 2020 lows of just above $1/share in 2026 unless WTI increases to a price greater than $105/barrel by the beginning of 2026. Thus, it probably is not wise to hold the stock till 2026.

Conclusion

BP Prudhoe Bay Royalty Trust will likely see its stock rise in the near term, as WTI is expected to rise. However, future distributions would likely be much small than last year’s distributions unless WTI spikes. And it is not recommended to hold the stock till 2026. Additional risks include WTI falling, pushing the stock and its distributions down further and causing the trust to terminate earlier than 2028. On the flip side, a spike in WTI could prolong the life of the BP Prudhoe Bay Royalty Trust.