Kaiser makes bear case on BPT

"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.

Comments (12)
  • A Prudent Investor
    , contributor
    Comments (1192) | Send Message
    Many institutions own BPT and not just retired investors who want yield. Let's see how long this short seller can keep his short on with a larger yield to carry. Not long.
    15 Jan 2014, 03:05 PM Reply Like
  • samhilwani
    , contributor
    Comments (21) | Send Message
    Another short seller is trying to make a bear case for BPT. Oil prices will go up and the short on stock will cover quickly. The trust has high yield and it would be a mistake to short BPT.
    15 Jan 2014, 04:57 PM Reply Like
  • BPfix
    , contributor
    Comments (17) | Send Message
    Wait til the oil prices shoot up and the stock goes back through the roof, the people that sold will be crying in their Corn Flakes. Gas and oil prices are pretty high right now, and back on the rise again. Wonder if this scare tactic will drive it back down into the mid $60 range again, time to load up if if does.
    15 Jan 2014, 05:10 PM Reply Like
  • Caleybale
    , contributor
    Comments (74) | Send Message
    This same argument was made last year or so and it ripped BPT down from $109 to $72. I don't like owning BPT at $75 when reports like this come out. Guess it's time to scale back in soon and get the cost average to $40...
    15 Jan 2014, 05:21 PM Reply Like
  • Ford289HiPo
    , contributor
    Comments (1005) | Send Message
    We heard the same thing several years ago when everyone was screaming about peak oil in ANWR and declines in production.
    16 Jan 2014, 12:02 PM Reply Like
  • mike1232
    , contributor
    Comments (5) | Send Message
    The fact that he didn't mention Alaska oil production tax reform tells me all I need to know.....
    16 Jan 2014, 12:08 PM Reply Like
  • dgpesch
    , contributor
    Comments (10) | Send Message
    How can you publish this analysis without even mentioning the More Alaska Production Act. Under the act, the tax burden of the trust will fall dramatically. True, there is a push to repeal the act, but it is in place currently for 2014.
    16 Jan 2014, 12:10 PM Reply Like
  • Kimballoman
    , contributor
    Comments (2) | Send Message
    My only concern would be that oil production is on the rise and ultimately oil will fall. Long bpt
    16 Jan 2014, 03:42 PM Reply Like
  • BPfix
    , contributor
    Comments (17) | Send Message
    If the economy ever does rebound, you will see a huge spike in oil prices due to demand.
    16 Jan 2014, 05:35 PM Reply Like
  • Delta Investments
    , contributor
    Comments (7) | Send Message
    Hedge fund, no wonder. Took dividend on Jan. 13th, I'm sure. I respect most of the writer's on Seeking Alpha but should this really be allowed.? Did same thing to Kinder Morgan.
    17 Jan 2014, 05:48 AM Reply Like
  • Bill Cunningham
    , contributor
    Comments (2692) | Send Message
    I watched the mock interview of Kaiser by his boss on the Hedgeye website, and it is short on detail (but long on sarcasm). In it, he makes reference to the high cost of hedging oil prices due to backwardation etc. The only way the figures in his chart make sense would be if he using an expensive hedging technique and then only showing the net annual distribution after subtracting out this high cost of hedging. This makes no sense at all; you either like BPT or you don't and you go long or you go short. If you want to hedge a long position in BPT, invest in companies that would benefit from a decrease in oil prices, or simply diversify.
    I didn't hear him discuss the $33 NAV or the 9.7% cost of capital quoted above. Are there further details of his analysis available anywhere?
    6 Feb 2014, 07:36 AM Reply Like
  • Clayton Rulli
    , contributor
    Comments (3408) | Send Message
    please kevin... short BPT. Just do it.
    17 Jun 2014, 01:07 PM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Screener: Search and filter by asset class, strategy, theme, performance, yield, and much more
ETF Performance: View ETF performance across key asset classes and investing themes
ETF Investing Guide: Learn how to build and manage a well-diversified, low cost ETF portfolio
ETF Selector: An explanation of how to select and use ETFs