Issue 1: Oil well operator needed to solve the water injection well pressure issue without a significant decrease in production.
In regards to the water injection well pressure issues, we knew that the operator, Pacific Coast Energy Company LP (PCEC), had to either resolve the issues, get an extension on their compliance waiver, or reduce the pressure causing a reduction in production that would be seen in the dividend announcement posted the end of February. The first good news on this front was that we did not see a drop in production in the February dividend announcement, which showed 76,221 barrels for the month; compared to 79,147 and 75,270 reported the two months prior. Not seeing a drop in January production (announced in February for the dividend paid in March) was certainly hopeful. It was later verified in the annual report that the issue was resolved and signed off by California Department of Conservation's Division of Oil Gas and Geothermal Resources (DOGGR):
"During the second half of 2016 all three injectors were successfully reworked to optimize their injection capacity while remaining below the new maximum injection pressures allowable. All three injectors were inspected by DOGGR and signed off as in compliance with the revised regulations. The result has been a reduction in water injection capacity by approximately 30% and approximately 75 Bbl/d of oil less production (60 Bbl/d net to the Trust's 80% interest). PCEC is exploring opportunities to increase injection capacity which may require additional capital expenditures." 2016 10-k
The 75 barrels per day (2,250 per month) drop in production is a minor impact. Well production seems to be likely to continue above 70,000 barrels per month for developed properties into the near future. Note that they are continuing to work through a similar problem with the Remaining Properties, but in the short term this is not really a concern since the Remaining Properties have only a small impact on the dividend compared to the Developed Properties.
Issue 2: The company that operates the wells (PCEC) needs to continue to keep expenses low.
In regards to keeping expenses down, the last two monthly reports have not had any alarming expenses. As a result the trust has been profitable:
- Jan 31 dividend announcement: $415,000 net profit
- All to debt repayment
- Feb 27 dividend announcement: $850,000 net profit
- $663,000 final debt repayment
- $188,000 paid in dividends ($0.00487/share)
Notice that the total profits in the first two months of this year were $1,265,000. Most of this went to pay off the last of the debt so only $188,000 counts towards cash for distribution for 2017. Now that debt is paid, looking forward it seems very likely that ROYT will have the $2,000,000 in cash for distribution in the next 10 months to avoid termination at the end of 2017.
Also notice, if all of the profit were passed in dividends, the March dividend (announced in February) would have been over 2.2 cents instead of just under a half a cent.
So what will next dividend be?
Buena Vista or Midway oil market prices are the best indicators of ROYT realized oil prices. Side-note, realized oil prices for ROYT are typically less than the market prices (I believe due to transportation costs). Let's look at oil prices and profits for the last two months, and consider profits in the near future:
|Dividend Announcement Date||Midway Oil||Buena Vista Oil||Net Profits per Share|
|Jan 31, 2017||$47.80||$52.35||$0.011|
|Feb 27, 2017||$49.75||$54.30||$0.022|
|Mar ??, 2017||$50.33||$54.88||??|
|Apr ??, 2017||$51.98||$47.42||??|
First a couple of clarifications, the average oil prices are for the month prior to the announcement date (i.e., profits from oil pumped and sold in January are given to the trust and announced in February, to be paid as a March dividend). The last row is the average for only the partial month (through March 20).
Now to summarize what all this means. Notice that oil prices for the monthly dividend to be announced in March (coming out this week or next), are slightly higher than the prior month. There could always be a surprise capital expenditure that wipes out profits for the month, but I expect profits to be similar to last month and be paid entirely in dividends resulting in about two cents per share. Even with recent drop in oil prices, dividends seem likely to continue.
Disclosure: I am/we are long ROYT.
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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