Computing MV Oil Trust's Q4 Distribution: Solid Returns

| About: MV Oil (MVO)

MV Oil Trust (NYSE:MVO) is a statutory trust that was created to acquire and hold a term net profits interest for the benefit of the Trust unit holders pursuant to a conveyance from MV Partners to the Trust. The term net profits interest represents the right to receive 80% of the net proceeds from production from the underlying properties. The net profits interest consists of MV Partners' net interests in all of its oil and natural gas properties located in the Mid-Continent region in the states of Kansas and Colorado. The underlying properties include approximately 1,000 producing oil and gas wells. (source: MVO 10q)

In order to compute MVO's future distribution, we must estimate the Volume, Price, and Costs attributable to the trust for the quarter. It is important to be conservative in our assumptions.

4 quarter average Volume (Barrels of Oil Equivalent) is 228,847 - let's be conservative and assume 225,000 BOE for the fourth quarter.

Proceeds - The price MVO sells its oil for is calculated by the market price of crude. Over the past four quarters, the price reported as proceeds per BOE has been between 91.4% and 92.4% the 90 day average price of crude for the period. The fourth quarter distribution will be calculated using the price of crude between September 1, 2012 and November 30, 2012. (Note that MVO received its proceed one month after production.) The average closing price of crude for this time period was $90.36. Using the low end of the price ratio (91.4%), we have a proceed price of $82.59.

Gross Proceeds given the above assumptions: $18,582,750

Costs: Costs have varied from $6M-$8.4M over the past four quarters. I am assuming costs for the fourth quarter to be $7,000,000.

Net Profit: $11,582,750

Percentage applicable to the trust (80%): $9,266,200

Provision for trust expenses: $216,200 (historically a number making the distribution even between $110,000 and $260,000)

Net cash proceeds for distribution: $9,050,000

Units outstanding: 11,400,000

Distribution per share: $.79

Note the previous four distributions announcements are available below:

Third Quarter

Second Quarter

First Quarter

Fourth Quarter 2011

Price Action - Since October 1st, MVO is down nearly 30% with oil being down roughly 4.5%. The big question is why the difference? MVO's future income stream is directly correlated to the price of oil. They should move in tandem. I believe the reason for the uncorrelated move is simply a misunderstanding of the future cash flows of this company. Quarterly distributions have dropped from $1.02 in Q1 to $.75 in Q3. Is Wall Street assuming there is a fundamental problem with the company and that the distributions will continue to fall? If so, they are wrong, as highlighted by the above computation of Q4's distribution. Volumes are steady; the price of oil is the component that has changed.

At oil's current price of $88.14, a distribution level of $.76 per quarter can be expected. If oil were to drop to $50 per barrel, the distribution level would be $.21 per quarter.

The 30% slide in the stock is an opportunity to buy shares in the trust cheap. With a stable oil price around $90, you can count on $3.00 per share in annual distributions for at least the next decade based on the most recent 10k showing future net cash inflows of $457,000,000 (note this number will be slightly lower given the slight decline in oil this year).

To put that in perspective… given a stable oil price, you will get roughly $40 in future cash flows for your $25.15 current investment. A 60% return over a decade is solid for an MLP given the low rate environment.

Disclosure: I am long MVO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.