As I explained in a previous article, BP Prudhoe Bay Royalty Trust (BPT) employs a fixed cost schedule when determining its quarterly distribution. For 2019, the Chargeable Costs are set to increase by 19%. Given the recent decline in oil prices, this places the first quarter distribution at risk.
The formula for determining the quarterly distribution can be derived from the trust’s 10-K, and can be written as:
(WTI Price - (Chargeable Costs x Cost Adjustment Factor) - Production Taxes) x 0.164246 x Daily Net Production x Days in Quarter / Unit Count = Quarterly Distribution
For 2019, the Chargeable Costs increase to $23.75. The Cost Adjustment Factor, which is the Consumer Price Index divided by 121.1, is approximately 2. Production Taxes at the current price of oil have historically been $1.67. This equates to total expenses of $49.17.
Following an almost 9% rally to start the year, WTI Crude most recently closed at $49.79. If the average WTI Crude price for the first quarter amounts to $49.17 or less, however, BPT’s first quarter distribution risks dropping to $0. Even with an average WTI Crude price of $50, the distribution will only amount to $0.05 or less—a far cry from the average distribution of $1.27 paid out for 2018.
BPT’s price has been buoyed by its high yield, which averaged 17% just prior to ex-dividend for 2018. Therefore, BPT is at risk for a significant decline in price at some point following the upcoming ex-dividend date next week.
The take home: Expect significantly lower distributions for 2019, with the possibility that one or more may be eliminated.
Disclosure: I am/we are short BPT. 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.