- Macro fundamentals in the oil & gas industry have pushed dividend yields from 10.7% to 17.36%.
- Behavior of equity valuation mirrors oil price action such that the high achieved this year was used as support in 2018.
- Bullish medium-to-long term oil and gas outlooks coupled with great dividend number suggest this investment vehicle is an excellent long play.
The MV Oil Trust Fund (NYSE:MVO), based in Houston, TX, holds the net profits from mineral interests of approximately 800 oil and gas wells located in Kansas and Colorado owned by MV Partners, LLC, based in Kansas. According to Simply Wall St., MVO has returned approximately 228.5% of equity to shareholders compared to 99.7% for the broader U.S. oil and gas market and 39.1% for the U.S. stock market. In addition, the current P/E ratio sits at 20.3x (lower than the S&P 500’s P/E ratio of 29.3) but the P/S ratio sits at 19.0x. Current fundamentals in crude oil may prove bullish for this investment vehicle long-term.
While analyzing the applicability of the tri-peak fractal pattern (more information here) to several investment options, it was found that the chart of MVO exhibited interesting technical traits that warranted further investigation and study. Largely, MVO tracks spot crude prices with relatively visually good correlation. However, certain movements within the price action, especially in recent months, has warranted technical investigation of price levels to further elucidate how the Trust may react under certain market sentiments and price volatility levels in crude oil. Furthermore, the tri-peak fractal pattern shall be applied to the stock in the daily chart and an outlook for future price action shall be constructed on this basis.
Figure 1: Figures from Oct. 5 2021 Press Release
According to a net cash distribution press release from early October, as shown in Figure 1, net profits from produced volumes of 165,777 BOE (barrels-of-oil-equivalent) for the third quarter of 2021 exceeded $5.5 MM with net cash available for distribution totaling just below $4.2 MM. Examining the historical distribution amounts and net profits from 1Q16, this has been the highest net cash distribution amount since 3Q18, when net cash distribution amounts totaled approximately $4.8 MM. Low prices since the end of the bull market in 2014-2016 have made a direct impact on the trust to the point where despite prices achieving higher highs forecasted to jump higher, the valuation of the Trust has not significantly changed from the peak of approximately $45/share achieved in 2011 – the height of the commodities bull market.
Figure 2: Stability and Growth of Payments
Inferred sensitivity, therefore, to oil prices makes this a good long-term hold given good fundamentals in the price of oil (CL1:COM). With oil price sensitivity in play, it has been observed that the debt-to-equity of this Trust has been decreasing consistently since 2015. Currently, according to Simply Wall Street, the dividend yield stands at 17.36%, ranking MVO within the top 25% dividend payers in the United States who on average pay out approximately 3.5%. Shown in Figure 2 is a plot of historical dividend payouts and dividends per share. While dividend payments have not been as strongly covered by earnings over the short-term past, future price action in crude oil futures and market sentiments may bring increased revenues that facilitate both an increase in revenue and a further forecasted increase in dividend payouts.
Description of Price Action
As explained in our previous article, the price chart shows a near-idealized case where the pattern could be applied – there are three peaks identified with a 46-bar-long ascending channel encompassing the price range of the bullish run until the present day. The peak achieved at the channel’s resistance during the bull run, which was repeatedly tested before the drawdown, was not able to reach the same price level or higher as the first peak shown in the figure above. The price action left the end of the time frame testing the bottom of the channel despite the test of the channel’s lower bounds and the subsequent move higher.
The RSI indicator is near the halfway mark away from being overextended and is seemingly trending towards the halfway point. In addition, the MACD indicator is currently signaling a near-bullish approach towards the signal line, suggesting that a bullish move is very likely over the next few days which needs to be confirmed with an inversion of the signals. However, this could morph into a slight sideways consolidation for a few days before a bullish run may be initiated. Depending on how the price action behaves within the 96-bar time frame on the spot crude oil price chart, further conclusions can be made about expected outcomes on MVO.
Interestingly, for much of the bull run year-to-date (YTD), the price action has taken a parabolic path towards the first peak identified in the chart. No significant high-percentage price drawdowns have been noticed except for the most recent one from the YTD price high after the first peak in the fractal pattern. Consequently, there was a trough achieved with the extended drawdown of the price action into the ascending 46-bar channel identified for the fractal pattern. The next bull run within the channel has also shown to trace the path of another parabola into the high, where the upper bound of the ascending 46-bar channel was repeatedly tested. In both instances of the parabolic price ascent, the price action experienced a general high coupled with elevated RSI and MACD readings.
The weakness of the RSI readings observed in the price action after the initial parabolic support breaks down is likely suggestive of the subsequent peak’s confirmation owing to a trough formation consolidating within the same time frame resulting in the bull run seen within the channel. The optimized entry time frame denoted by the trough is compounded in effective entry opportunity by the presence of the price action during the same time frame below the 50 EMA. When the price action tested the lower bounds before leaving the channel, it bounced off this moving average and has remained above it in the present.
Current price levels in MVO are nowhere near the levels achieved between 2008 and 2014, even with oil prices approaching 2018 levels and set to surpass them to all-time highs in the future. In addition, fundamentals including the global energy crisis are laying the foundation for uber-bullish conditions in the oil and gas sector. Given the production volumes from wells owned by MV Partners LLC, it is likely that revenues will increase drastically on account of long-term bullish fundamentals offsetting declining revenues from potential declines in production at static oil and gas levels.
Interestingly, when examining the historical data, the $10.25 price level was tested several times throughout 2018 and was broken through twice. The levels achieved in the oil price during this period of time were similar to the levels achieved currently in the futures market. In addition, given the historical precedence of the fundamentals of positions and production volumes being handled by the trust coinciding with higher price levels, this trust is significantly undervalued and is poised for higher growth in an expected oil and gas bull market. Implicitly, therefore, it is warranted to conclude that MVO is undervalued in the medium-to-long term and is poised to make serious gains both in net cash distribution and in equity holdings.
This article was written by
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