As those familiar with my articles know, I forecast the future distributions of oil and gas trusts using an engineering-style accounting model. Two trusts, BP Prudhoe Bay Trust (NYSE:BPT) and MV Oil Trust (NYSE:MVO), are expected to announce their next quarterly distributions in early October. This article presents the model's best estimate for what these trusts are about to announce.
The Model and Key Assumptions
The model that I have developed estimates the distributions for oil and gas trusts using forecasts each revenue and cost component of a trust's distributable income statement. Each trust is treated differently based on its unique characteristics, but the approach is the same:
- Production forecasts are based on historical well depletion rates.
- Sales prices are an average of daily Henry Hub (HH) gas and West Texas Intermediate (WTI) oil, adjusted for historical spreads.
- Costs are forecast individually for each line item reported by the trust based on prior costs, revenues, production, and inflation.
- Share subordination and unique passive income streams are explicitly considered.
If you have any questions about the assumptions or the input values for either trust, please ask. And for more on the model and the other trusts that I follow, check out my recent valuations for a suite of trusts across the sector.
This article is about the next distribution for MVO and BPT, so let's get to it. The table below shows the last two actual distributions and the model's forecast for the next distribution for these trusts. Also shown on the left half of the table are the change in distribution from the prior quarter, a conservative estimate of the announcement date, and a note about my personal level of confidence in the forecast. The right side of the table provides a recent market price, spot yield at that price, and prices that would result on four alternate spot yields that are often typical of the sector.
Fig. 1: Forecast distribution and spot yields for BPT and MVO. Source: author's analysis.
The key indicators that I look for in this table are:
- What is the % change in distribution?
- What is the spot yield for the current market price?
- Which prices would result in a spot yield at the high end of the range (17.5%) and the low end (10%)?
A trust with a low spot yield and a decreasing distribution may be a short candidate, while a high spot yield and an increasing distribution may be a long candidate.
BPT's distribution is forecast to be $0.548/share, a decline of 20% from the prior quarter. At current prices, this would represent a spot yield of 12.7%. Confidence in the forecast is about average - production for BPT varies more than most trusts that I follow, but its production costs are set according to a schedule and have relatively less uncertainty.
As for how to play it, I see mixed indicators. The declining distribution, which may be a surprise to some investors and general overvaluation of BPT, suggest that sellers may outnumber buyers after the distribution is announced. However, the spot yield is in the middle of the range, which (based on my experience) indicates that sell-side pressure could be weak. So I'd call it a buy at $14.62, a sell at $17.54, and a pass on everything in between. I prefer more certainty in my trades and expect to sit this one out.
MVO's distribution is forecast to be $0.135/share, an increase of 23% from the prior quarter. At current prices, this would represent a spot yield of 10.2%. Confidence in the forecast is a little lower than most trusts. Production declines are fairly steady, but costs have been all over the map. I suspect that costs may be less than the model estimate and would not be surprised if the model is off by 5-8 cents this quarter.
The trading strategy indicators are mixed, as well. The increasing distribution, combined with what I believe could be an upside surprise on the model estimate, suggest that buyers may outnumber sellers once the distribution is announced. However, the spot yield is awful, which suggests that sellers could use the volume generated by distribution announcements to get out. The recent price movements for MVO on low volume are curious and also signal caution to me. I might take a flyer under $5, but am otherwise unenthusiastic.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
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