BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
Derynos, The return of capital calculation is contained in the annual tax booklet issued by the Trustee, The Bank of New York Mellon. The 2012 booklet was issued in late February and has depletion deduction of almost 6% of your tax basis for someone who held the units the entire year.
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
Serge, Adjusted Chargeable Cost is a completely artificial number; it's calculation is based upon pre-set numbers adjusted for inflation as described in the company's financial statements. My prior article goes into detail describing it. To the extent that technological improvements decrease the cost of extracting oil, the benefit all goes to BP Alaska, not BP Prudhoe Bay unit holders.
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
I have a suggestion for all you bulls out there. Interactive Brokers only charges 1-2% interest on margin accounts. Set up an account there, (trades are only a buck, by the way), Buy a bunch of BPT on margin, collect your 11% "dividend", use the first 1-2% to pay interest on the loan and reinvest the remaining "dividends" in more shares. Cash out in 2027, when I think everything will be worthless, but you know it will be worth a fortune due to increasing oil prices, discovery of new reserves at Prudhoe Bay, new technology etc. You can then retire to your yacht in the Caribbean and tell all your new yacht owning friends about the idiot that made you rich.
Seriously, I never said this thing was a terrible investment; all I have been trying to point out is that your return until termination will most likely be around 5-6%, much better than a CD, but it's clearly not the 11% coupon. If oil prices do increase rapidly, you will get a nice return from this, but you'd most likely get a much better return from a portfolio of E & P companies. I wrote the second article because my first article was clearly not understood by some readers. I thought that by presenting my information in a different, somewhat simplistic way, it would help investors who are not fluent enough in accounting to interpret the 10 K (or haven't bothered to read it) to understand what they are buying, I also purposely tied my discussion to the 10K about to come out because I thought this would be a good way for readers to be able to determine shortly whether I have any idea what I'm talking about. I've clearly not been successful at getting this point across, however.
Since I believe the units are already somewhat overvalued, I should have done a "pump and dump" scheme to push them even higher before I quietly shorted them. Then all the longs here would have been happy with me, rather than wanting to have me drawn and quartered.
It's also clear that there is a lack of understanding of how shorting a stock via options works. As I write this, BPT trades at about 79, and the June 80 call options trade at about 2.50. This means that someone who goes short via options would collect $2.50 from the bullish option purchaser. If the stock is below $82.50 on the option expiration date, the short would make money. Let's assume the trust units are at $82 in mid June when the options expire. Investors in BPT would be happy because the units would be up by about $3, plus they would have collected another distribution in the meantime, presumably around $2.50. (hopefully , no one is going to accuse me of making assumptions again) Unit holders total return would be about $5.50 in four months, or over 20% annualized, so they'd be happy while the call seller would be happy because he could buy it back at $2, making a 50c profit. Bulls should be happy to see a lot of shorts who are selling call options, rather than hating them. If there were more sellers, the premium on the calls would drop, and a bull might be able to buy one for $1.50, for example, rather than $2.50, so a bull's breakeven would be an $81.50 stock price rather than an $82.50 stock price.
I am not arrogant enough to think I can unduly influence a good stock and cause the price to drop despite positive fundamentals and good valuation. Put your emotions aside, and read my article critically based upon the facts and analysis in it. BPT may trade well for years based upon the coupon, but at some point, the distributions will invariably drop and the unit price will tank. The efficient market hypothesis says the market should anticipate this and cause the price to drop at a steady rate based upon future decreases in distributions. The academics are clearly wrong on this, however, creating opportunities for people like me.
My conclusion is open your mind, review all info. critically and make your own decision. If you think I'm wrong, and I've unduly driven down the price of the stock (not at all obvious from its price action), take advantage of the situation and buy more.
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
All the drilling technology in the world won't save this entity. Once the Adjusted Chargeable Cost per barrel reaches the revenue per barrel, this thing is toast. BP Alaska will then have an unencumbered interest in any remaining reserves. Debasing the currency won't have a big impact, as long as the CPI increases at a similar rate to oil prices, since CPI increases cause the Adj. Chargeable Cost to increase more rapidly.
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
Yes, and honestly disclosed. I fully expect readers to read my article understanding what my potential motives are. I would also hope that they read the article critically, but judging it on its merits, and I am open to anyone pointing out any fallacies in my facts or analysis. So far, this hasn't happened, other than getting Mr. Poulis' first name wrong in a comment I made, for which I profusely apologize.
Once the 10 K comes out, you will be able to determine whether I'm on target or "blowing smoke". I would also welcome one of the analytical "bulls" on the stock providing their analysis of the 2012 10K. In particular, Mr. Weiss has provided an excellent analysis of the company in the past; with the main difference being he believes the most likely scenario is that oil prices will increase considerably faster than the CPI, and I believe the most likely scenario is that both will increase at the same rate. One of his articles contains a great spreadsheet showing projections into the future. I encourage readers to look at his spreadsheet, note how even in his analysis, adjusted chargeable costs increase rapidly starting in 2018 and ultimately cause the Trust to terminate. Readers might want to even pull out a piece of graph paper and plot the numbers he shows for oil prices and adjusted chargeable costs, and compare it to my chart, above, of the most likely scenario to see that at least his and my understanding of the nature of this instrument is basically the same. Although he and I disagree as to whether there will be a final termination payment, (he has shown $20 in 2040), he has given it only $2 of value on a present value basis, so it is an insignificant difference between us. I also don't want to put words in his mouth, but I strongly suspect he would agree that a portion of each payment needs to be considered a return of capital, although I would expect that we have a modest difference of opinion as to what the allocation of each distribution between interest and return of capital should be due to his more optimistic assumptions..
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
Seaside49: No, I'm confident I'm right, and I have provided a benchmark the doubters can judge me by in a few weeks, rather than having to wait for 7-10 years to see what actually happens with the cash flows. .
Mr. Poulis: I apologize for getting your first name wrong, and if you sell in 2015, I now suspect you will get out just fine, mainly for the reason Zeus 2012.provides.
I also agree that historically the price of BPT has moved in tandem with the price of oil and have never said anything to the contrary. My point is that as 2018 approaches, circumstances are changing and there will begin to be a significant divergence in this relationship as the increasing adjusted chargeable cost calculation becomes the most significant factor governing the value of this instrument rather than the price of oil going forward.
With respect to diversification, the debate is whether 10 stocks are enough or whether you need 30 or more. Doing an internet search will bring up many articles on the subject. A quote from an excellent Globe and Mail article is as follows: "In his influential 1949 book The Intelligent Investor, legendary value investor Benjamin Graham argued that a portfolio of just 10 to 30 stocks provides adequate diversification. Increasing the number beyond that may reduce volatility marginally, but at the expense of higher transaction costs and more time required to monitor the portfolio."
Investors, even some of those who read articles like mine, still seem to think the entire distribution is income rather than cash flow (which includes some principal return), and they are investing for this reason.. If it were all income, the IRS would tax the entire amount rather than only part of it. .
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
Marihelen1: I'm simply trying to provide an analysis and explanation of the facts, and we'll know in a few weeks whether I have it right or wrong. If I'm substantially off, I'll write a mea culpa. Also, if I simply wanted to talk down the price of the stock, I would have ended my discussion when I came up with a projected discounted cash flow figure of $60, rather than providing an explanation as to why I feel this understates the value of the company. I could have used it to irresponsibly conclude that the stock was 33% overvalued. Instead, I provided what I feel was a reasoned analysis of the numbers.
I would encourage people to look at bullish articles as well, in particular, the ones written by Andrew Poulis. He has no facts to back up his bullish opinion and thinks he's getting dividends, as opposed to distributions. He is actually reinvesting his "dividends" and states that he has sold all his "stocks" except this and three others, violating the first rule of diversification. People love his articles, though, because he has validated their decision to invest in BPT. I encourage investors to read both his articles and mine with a critical eye and make up their own decisions, and if you find anything factually wrong in mine, I welcome criticism. Additionally, anyone who is a long tem investor for the anticipated cash flows of the Trust shouldn't be bothered by any short term price fluctuations. If you think my articles are unduly negative and are unjustifiably pushing down the price of BPT, I'm providing a great buying opportunity for any bulls out there.
Basic Materials And Energy Dogs: Top 10 Net 43.75% Gains By February 2014 [View article]
No, I'm am absolutely not accusing the Royalty Trusts of being Ponzi schemes. They have clearly indicated in multiple ways that part of the cash distributions are returns of capital, basically reflecting depletion of the underlying asset. It's reported in the financial statements that show changes (usually decreases) in future cash flows, as well as tax reporting packages provided at ye, which report depletion or at least how to calculate it for tax purposes.. It is clear to me that many investors either don't look at this info., or don't understand its implications. They assume cash payments are income, and your article implies that this is in fact the case, by describing them as "dividends'. I used a very simplistic analogy to help investors understand that these payments are partly return of their original investment.
Although I stated I my previous comment that the article was misleading, I did not mean to insinuate that you are purposely trying to mislead anyone. You were just perpetuating a common misconception that equates the distribution with income. I'm trying to make sure investors don't overpay based upon a misconception. After all, they're actually putting in the effort to look at this site in an attempt to make a good decision.
I'd also like to clarify that BPT is not a marketing entity. It is simply a financial instrument with no employees and is represented by a bank trustee.
Basic Materials And Energy Dogs: Top 10 Net 43.75% Gains By February 2014 [View article]
It's actually a misleading article, since many of the high "dividend payers" are the Royalty Trusts; they actually pay distributions, which frequently include a return of capital, rather than pay dividends. Using this logic, a bank CD could be structured to be a top "dividend payer;" simply collect your 1% interest and withdraw 10% of your principal, and voila!, you have an 11% "dividend." Articles like this cause uniformed investors to overpay for Royalty Trusts. Rajprasad is absolutely correct with respect to WHX, and I have previously written an article on this subject regarding BPT.
Petroleum And Resources Corp: An Attractive Alternative To BP Prudhoe Bay [View article]
Vinofilo, You are right about there being an extra discount in Adams Express (ADX) , which is an affiliate of PEO. I was actually thinking about writing an article highlighting that discount, although I'm not sure if the discount has as much impact as you seem to be implying. I am also long ADX.
For those who are not familiar with Adams Express, it is a diversified closed end fund with its two biggest holdings being Apple and PEO, at roughly 4.5% each, and it trades at a slightly larger discount to NAV of about 13.9% My understanding is that the NAV discount is calculated using PEO's market price rather than PEO's NAV. If you used the NAV, the discount would be about 14.5% by my calculation. It's another great fund, also with a 6%+ distribution policy, if you are looking for a general equity fund as opposed to an industry specific one. I picked PEO for this article because I wanted to compare BPT to another company in the same industry.
Petroleum And Resources Corp: An Attractive Alternative To BP Prudhoe Bay [View article]
You are correct with respect to XLE, which per Morningstar, had an average annual total return for the last 10 years of 14.29%, compared to PEO's average of 11.44% (as of 9/30/12). However, the SPY has only had an average total return of 7% over this period. I suspect you may just be comparing stock prices, rather than taking into account distributions. The most recent distribution yield for these two ETF's is around 2%, whereas PEO is now guaranteeing a minimum of 6% and has paid over 11% at least one year in the past 10. I could readily endorse either of these two alternatives if they fit the investors goals, and in fact there is a huge overlap in portfolios between the XLF and PEO; the top four holdings are identical. I chose PEO to contrast with BPT because of its high distributions, since most BPT investors seem to be searching for income.
You very well could be correct that BPT's return has been better during this period, although Morningstar doesn't publish any figures for BPT. It has been a pure play on the WTI price, which has tripled since January of 2003, when it was a little over $30/ bl. I have a little trouble imagining it will triple again in the next 10 years, but if it does, this will be a great investment. There is also the Adjusted Chargeable Cost Calculation I keep harping on, which will be a drag on BPT's earnings going forward, so I think PEO or any of the alternatives you suggested will perform much better. I feel that an important aspect of successful investing is to recognize when circumstances have changed. ( "Past results are no guarantee of future performance.")
BP Prudhoe Bay: A Derivative Security In Disguise [View article]
No, I think the likelihood of finding the Loch Ness monster is about equal to the likelihood of receiving a significant residual payment at the termination of this Trust.
I'm glad to see some cooler heads have now responded to my article.
BP Prudhoe Bay: A Derivative Security In Disguise [View article]
It appears to me that some investors may be assuming that the property of the Trust is 16.4245% of the Prudhoe Bay oil field reserves. It is not; it is simply the cash flows the Trust is entitled to as defined by The Royalty Interest. This is the reason I do not expect there to be any significant residual payment upon termination of the Trust, even if a significant amount of proved reserves remain in the field at the time of termination.
BP Prudhoe Bay: A Derivative Security In Disguise [View article]
Marihelen1: When the Trust payments decrease to $1,000,000 or less per year, the payments would be only a nickel per unit, so any residual value BP would pay would be nominal. As I indicated earlier, it appears that the only reason WTU holders received a significant payment was because the documents indicated the Trust would terminate on a certain date, March 1, 2010. BP Prudhoe Bay does not have this provision. Furthermore, the $5610 payment per acre you refer to above basically represents a kind of debt encumbrance on the trust acreage, rather than a market value for the acres themselves, which could have been higher or lower. This is the reason I used a dramatic headline in my article, to get people to view this entity from the correct perspective, as basically a form of debt instrument, (the first clue being it has no employees and a Trustee, just like a bond would have.), although it appears I am not being very successful in that regard.
The family royalty interests you are referring to, which I assume are not publicly traded instruments, most likely fit my traditional understanding of a royalty trust, where you are sharing in the true economics of the wells, and if additional reserves are discovered that can be retrieved economically, you share in the benefit. BP Prudhoe Bay does not operate this way, although I assumed it did when I first invested. Once the Adjusted Chargeable Cost surpasses the WTI price per barrel, trust holders share none of the benefit of any additional reserves discovered and eventually extracted, no matter how large and no matter how cheaply they can be extracted.
Brazil Oil Shutdown Threat Looms For Rio De Janeiro Producers [View article]
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
Seriously, I never said this thing was a terrible investment; all I have been trying to point out is that your return until termination will most likely be around 5-6%, much better than a CD, but it's clearly not the 11% coupon. If oil prices do increase rapidly, you will get a nice return from this, but you'd most likely get a much better return from a portfolio of E & P companies. I wrote the second article because my first article was clearly not understood by some readers. I thought that by presenting my information in a different, somewhat simplistic way, it would help investors who are not fluent enough in accounting to interpret the 10 K (or haven't bothered to read it) to understand what they are buying, I also purposely tied my discussion to the 10K about to come out because I thought this would be a good way for readers to be able to determine shortly whether I have any idea what I'm talking about. I've clearly not been successful at getting this point across, however.
Since I believe the units are already somewhat overvalued, I should have done a "pump and dump" scheme to push them even higher before I quietly shorted them. Then all the longs here would have been happy with me, rather than wanting to have me drawn and quartered.
It's also clear that there is a lack of understanding of how shorting a stock via options works. As I write this, BPT trades at about 79, and the June 80 call options trade at about 2.50. This means that someone who goes short via options would collect $2.50 from the bullish option purchaser. If the stock is below $82.50 on the option expiration date, the short would make money. Let's assume the trust units are at $82 in mid June when the options expire. Investors in BPT would be happy because the units would be up by about $3, plus they would have collected another distribution in the meantime, presumably around $2.50. (hopefully , no one is going to accuse me of making assumptions again) Unit holders total return would be about $5.50 in four months, or over 20% annualized, so they'd be happy while the call seller would be happy because he could buy it back at $2, making a 50c profit. Bulls should be happy to see a lot of shorts who are selling call options, rather than hating them. If there were more sellers, the premium on the calls would drop, and a bull might be able to buy one for $1.50, for example, rather than $2.50, so a bull's breakeven would be an $81.50 stock price rather than an $82.50 stock price.
I am not arrogant enough to think I can unduly influence a good stock and cause the price to drop despite positive fundamentals and good valuation. Put your emotions aside, and read my article critically based upon the facts and analysis in it. BPT may trade well for years based upon the coupon, but at some point, the distributions will invariably drop and the unit price will tank. The efficient market hypothesis says the market should anticipate this and cause the price to drop at a steady rate based upon future decreases in distributions. The academics are clearly wrong on this, however, creating opportunities for people like me.
My conclusion is open your mind, review all info. critically and make your own decision. If you think I'm wrong, and I've unduly driven down the price of the stock (not at all obvious from its price action), take advantage of the situation and buy more.
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
Once the 10 K comes out, you will be able to determine whether I'm on target or "blowing smoke". I would also welcome one of the analytical "bulls" on the stock providing their analysis of the 2012 10K. In particular, Mr. Weiss has provided an excellent analysis of the company in the past; with the main difference being he believes the most likely scenario is that oil prices will increase considerably faster than the CPI, and I believe the most likely scenario is that both will increase at the same rate. One of his articles contains a great spreadsheet showing projections into the future. I encourage readers to look at his spreadsheet, note how even in his analysis, adjusted chargeable costs increase rapidly starting in 2018 and ultimately cause the Trust to terminate. Readers might want to even pull out a piece of graph paper and plot the numbers he shows for oil prices and adjusted chargeable costs, and compare it to my chart, above, of the most likely scenario to see that at least his and my understanding of the nature of this instrument is basically the same. Although he and I disagree as to whether there will be a final termination payment, (he has shown $20 in 2040), he has given it only $2 of value on a present value basis, so it is an insignificant difference between us. I also don't want to put words in his mouth, but I strongly suspect he would agree that a portion of each payment needs to be considered a return of capital, although I would expect that we have a modest difference of opinion as to what the allocation of each distribution between interest and return of capital should be due to his more optimistic assumptions..
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
Mr. Poulis: I apologize for getting your first name wrong, and if you sell in 2015, I now suspect you will get out just fine, mainly for the reason Zeus 2012.provides.
I also agree that historically the price of BPT has moved in tandem with the price of oil and have never said anything to the contrary. My point is that as 2018 approaches, circumstances are changing and there will begin to be a significant divergence in this relationship as the increasing adjusted chargeable cost calculation becomes the most significant factor governing the value of this instrument rather than the price of oil going forward.
With respect to diversification, the debate is whether 10 stocks are enough or whether you need 30 or more. Doing an internet search will bring up many articles on the subject. A quote from an excellent Globe and Mail article is as follows:
"In his influential 1949 book The Intelligent Investor, legendary value investor Benjamin Graham argued that a portfolio of just 10 to 30 stocks provides adequate diversification. Increasing the number beyond that may reduce volatility marginally, but at the expense of higher transaction costs and more time required to monitor the portfolio."
Investors, even some of those who read articles like mine, still seem to think the entire distribution is income rather than cash flow (which includes some principal return), and they are investing for this reason.. If it were all income, the IRS would tax the entire amount rather than only part of it. .
BP Prudhoe Bay Likely To Report $150 Million Decrease In Discounted Future Cash Flows [View article]
I'm simply trying to provide an analysis and explanation of the facts, and we'll know in a few weeks whether I have it right or wrong. If I'm substantially off, I'll write a mea culpa. Also, if I simply wanted to talk down the price of the stock, I would have ended my discussion when I came up with a projected discounted cash flow figure of $60, rather than providing an explanation as to why I feel this understates the value of the company. I could have used it to irresponsibly conclude that the stock was 33% overvalued. Instead, I provided what I feel was a reasoned analysis of the numbers.
I would encourage people to look at bullish articles as well, in particular, the ones written by Andrew Poulis. He has no facts to back up his bullish opinion and thinks he's getting dividends, as opposed to distributions. He is actually reinvesting his "dividends" and states that he has sold all his "stocks" except this and three others, violating the first rule of diversification. People love his articles, though, because he has validated their decision to invest in BPT. I encourage investors to read both his articles and mine with a critical eye and make up their own decisions, and if you find anything factually wrong in mine, I welcome criticism. Additionally, anyone who is a long tem investor for the anticipated cash flows of the Trust shouldn't be bothered by any short term price fluctuations. If you think my articles are unduly negative and are unjustifiably pushing down the price of BPT, I'm providing a great buying opportunity for any bulls out there.
Basic Materials And Energy Dogs: Top 10 Net 43.75% Gains By February 2014 [View article]
Although I stated I my previous comment that the article was misleading, I did not mean to insinuate that you are purposely trying to mislead anyone. You were just perpetuating a common misconception that equates the distribution with income. I'm trying to make sure investors don't overpay based upon a misconception. After all, they're actually putting in the effort to look at this site in an attempt to make a good decision.
I'd also like to clarify that BPT is not a marketing entity. It is simply a financial instrument with no employees and is represented by a bank trustee.
Basic Materials And Energy Dogs: Top 10 Net 43.75% Gains By February 2014 [View article]
Petroleum And Resources Corp: An Attractive Alternative To BP Prudhoe Bay [View article]
You are right about there being an extra discount in Adams Express (ADX) , which is an affiliate of PEO. I was actually thinking about writing an article highlighting that discount, although I'm not sure if the discount has as much impact as you seem to be implying. I am also long ADX.
For those who are not familiar with Adams Express, it is a diversified closed end fund with its two biggest holdings being Apple and PEO, at roughly 4.5% each, and it trades at a slightly larger discount to NAV of about 13.9% My understanding is that the NAV discount is calculated using PEO's market price rather than PEO's NAV. If you used the NAV, the discount would be about 14.5% by my calculation. It's another great fund, also with a 6%+ distribution policy, if you are looking for a general equity fund as opposed to an industry specific one. I picked PEO for this article because I wanted to compare BPT to another company in the same industry.
Petroleum And Resources Corp: An Attractive Alternative To BP Prudhoe Bay [View article]
You very well could be correct that BPT's return has been better during this period, although Morningstar doesn't publish any figures for BPT. It has been a pure play on the WTI price, which has tripled since January of 2003, when it was a little over $30/ bl. I have a little trouble imagining it will triple again in the next 10 years, but if it does, this will be a great investment. There is also the Adjusted Chargeable Cost Calculation I keep harping on, which will be a drag on BPT's earnings going forward, so I think PEO or any of the alternatives you suggested will perform much better. I feel that an important aspect of successful investing is to recognize when circumstances have changed. ( "Past results are no guarantee of future performance.")
BP Prudhoe Bay: A Derivative Security In Disguise [View article]
I'm glad to see some cooler heads have now responded to my article.
BP Prudhoe Bay: A Derivative Security In Disguise [View article]
BP Prudhoe Bay: A Derivative Security In Disguise [View article]
The family royalty interests you are referring to, which I assume are not publicly traded instruments, most likely fit my traditional understanding of a royalty trust, where you are sharing in the true economics of the wells, and if additional reserves are discovered that can be retrieved economically, you share in the benefit. BP Prudhoe Bay does not operate this way, although I assumed it did when I first invested. Once the Adjusted Chargeable Cost surpasses the WTI price per barrel, trust holders share none of the benefit of any additional reserves discovered and eventually extracted, no matter how large and no matter how cheaply they can be extracted.