- "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.
From other sites
at CNBC.com (Dec 10, 2014)
at CNBC.com (Dec 2, 2014)
at CNBC.com (Oct 28, 2014)
at CNBC.com (Oct 10, 2014)
at CNBC.com (Jun 26, 2014)
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