MV Oil Trust Poised For Big Equity And Dividend Gains

Summary

• 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.

William_Potter/iStock via Getty Images

Introduction

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

Fundamentals

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.

Recommendations

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.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Comments

[The Troll under the Pipeline]

well, yeah this was a pump piece because anyone who trades the oil trust using technical indicators deserves to have their lunch money stolen...

But MVO is actually worth looking at. Payment was baked at the end of November due to how income timing works. Could see as high as 40 cents for Q4. Its worth noting thats despite Q4 being one of the higher operating cost quarters as various taxes ect hit then. A spring to summer oil rally could boost MVO's payments substantially higher.

[PianoCat]

MVO expires in 2026 so there’s no “long term” whatsoever. This looks like a pump piece.

[Patrick Irish]

This isn't an ETF, its an oil trust. It also expires on June 30th, 2026. To mess up one of those and not list the most important fact tells me how little the author knows about this trust.

Over 90% of this article was gobbly-gook, lots of talk with no substance, numbers with no context. Know what doesn't matter? ROE, stock market return, O&G return, PS, tri-peak fractal pattern, debt:equity, Simply Wall Street rankings, average payout of dividend stocks, dividends covered by earnings, RSI indicator, MACD indicator, 96 bar (or any other number) time frame.

The only thing that matters is (Volume * price of oil) - expenses. Calculate that each year and adjust for a 5% decline rate in volume and discount the money by 5% until this trust expires. If you can't stomach the price of oil moving, hedge it out. Those 3 sentences are all you need to know here and if you can't figure that out before you hit the buy button you should move on.

For all the short term indicators, they mostly don't matter. Even if a technical buy or short looks good on the chart, if oil moves against you a few % after you place your trade and its the wrong direction you are likely to lose. And if you can guess the price of oil in the next week, you shouldn't be messing around in this.

[Safari9]

@Patrick Irish Good to run into you again. It's been a long time. And thank you for saving me a more fulsome reply.

Full disclosure, I am short MVO, but will likely close out soon; it is more of a hedge for my long position in VOC. For anyone considering an investment in a oil, natural gas, iron ore, etc. trust, figure out exactly how it works and model it out. (can it drill new wells, when does it expire, who owns it, where it is located, is it hedged, which quarters do the big expenses typically come in, what are the relevant prices for the production months used in the next distribution, what is the typical difference in prices it receives to WTI or Henry Hub, where is it in its distribution cycle, is it a monthly or quarterly payer, etc.) Take a look at the charts for MSB and NRT. These things can turn on a dime; it helps to know in advance what would be impactful news. Not a good idea to buy and hold, but money can be made. Sorry to preach. Good luck to all!

[RobandB]

@Patrick Irish Thank you, sir. The author is so completely clueless it's embarrassing. He doesn't even know this is a trust, a very rare trust with a termination date. Does he really think MVO will pay well in excess of $9 in dividends before June 2026? It won't.

[Patrick Irish]

@Safari9 And your added details help people figure out 99% of the puzzle here. Btw, the short isn't bad from a fundamental thing but the borrow rate I'm seeing is 37% so I would try to find other things to hedge against VOC. Perhaps even a PUT option on USO. If you go deep enough in the money, maybe VOC distribution pays the time premium and still gives you upside? Good luck.

[65wildcat]

Can this be held in a IRA ? K-1?

[Safari9]

@65wildcat Yes, you can hold in your IRA; trusts don't issue K-1s.

[65wildcat]

@Safari9 - thank you