"Short BP Prudhoe Bay Royalty Trust (BPT -2.8%) is a rare asymmetric risk/reward opportunity," says Hedgeye's Kevin Kasier, just wrapping a conference call detailing his arguments.
His base case - which assumes the current WTI price strip, production declines of 2% per year (fell 4% in 2013), annual inflation of 1.5%, and weighted-average cost of capital of 9.7% - leads to a NAV of $33 per unit, more than 50% below the current price. The last distribution would occur in 2024, and the total undiscounted distributions would foot to just $46 per unit (current price is $75).
Key to Kaiser's analysis are the automatic cost escalations - they're written into the trust conveyance ("written in stone") and adjusted by an inflation factor. At $16.80 per barrel today (not including the inflation adjustment), they really begin to ramp in 2018 ($20-2018, $23.75-2019, $26.50-2020) and won't leave much available for distributions after.
Under what scenario might BPT be worth its current price? Production declines of just 2% per year, and the unlikely combination of zero inflation and WTI crude rising to and staying at $120 barrel.
"The ultimate retail yield chase product," says Kevin Kaiser of royalty trusts in general.