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BPT Share Price Explained

|Includes: BP Prudhoe Bay Royalty Trust (BPT)

BP Prudhoe Bay Royalty Trust (NYSE:BPT) is structured in such a way that the future dividends can be estimated fairly closely assuming:

  • Maximum oil production of wells,
  • Continuation of current tax on oil by State of Alaska,
  • No change in Consumer Price Index, and
  • Ignoring trust administrative fees.

With these assumptions future BPT dividends are based entirely on the price of oil. The following table can be used to estimate a future quarterly dividend based on only the price of oil for that quarter. A zero indicates the trust will lose money and thus will use up cash reserves, take on debt, and pay a zero dividend; if the price of oil increases in the future, repayment of debt and rebuilding cash reserves will dig into future dividends. If the trust goes 2 years without a dividend it will dissolve.

WTI Price Per Barrel

Year

30

40

50

60

70

80

90

100

2016

0.00

0.49

1.10

1.72

2.13

2.50

2.88

3.25

2017

0.00

0.48

1.09

1.71

2.12

2.49

2.87

3.24

2018

0.00

0.16

0.77

1.39

1.80

2.17

2.55

2.92

2019

0.00

0.00

0.35

0.97

1.38

1.75

2.13

2.50

2020

0.00

0.00

0.03

0.65

1.06

1.43

1.81

2.18

2021

0.00

0.00

0.00

0.33

0.74

1.11

1.49

1.86

2022

0.00

0.00

0.00

0.01

0.42

0.79

1.17

1.54

2023

0.00

0.00

0.00

0.00

0.10

0.47

0.85

1.22

2024

0.00

0.00

0.00

0.00

0.00

0.15

0.53

0.90

2025

0.00

0.00

0.00

0.00

0.00

0.00

0.21

0.58

2026

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.26

2027

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

One can also see that at the current oil price of around 40 per barrel, the trust will pay a total of 3*0.49+4*0.48+4*0.16 = $4.08 in dividends before dissolving. The key here is that the mechanics of the trust are such that the trust is set up to start winding down starting in 2018 regardless of the price of oil. For more detail on how these were calculated continue reading. A BPT share price above $4.08 for BPT stock is a bet that oil prices will rise in the near future and stay there.

Some time ago, BP oil successfully established oil wells in Alaska that were likely to continue to pump 90,000 barrels a day for many years to come. In 1989, BP traded some of their future profits for cash. They created a publicly traded trust with an agreement to put a portion of future profits from these oil wells into this trust. The calculation for the profits given to the trust was pre-set by the trust documents and result in the equation below. The actual dividend per share can be found by subtracting trust administrative costs from the equation below and dividing by the 21.4 million shares outstanding. The administration costs typically have a negligible impact to the dividend on a per share basis.

  • WTI Price is the average WTI market price per barrel of oil for the quarter.
  • Tax is the average severance tax per barrel charged by the state of Alaska for the quarter.
  • Cost (currently 17.1) is an amount, predetermined by the original trust creation documents, paid by BPT to BP for managing the wells and getting the oil to market. This was set to increase very slightly each year until 2018 after which it will increase sharply, essentially sun-setting this trust in the near future. More on this below.
  • CPI Adj. is an adjustment for inflation based on the consumer price index.

ยท Production is the barrels of oil produced during the quarter, maxed at 90,000 barrels a day (times the number of days in the quarter, usually 92 days). In other words, if BP pumps more than 90,000 barrels a day only profits on 16.4246% of the first 90,000 barrels per day will be given to the trust. If BP pumps less than 90,000 barrels a day, profits are based on 16.4246% of actual production.

The Cost variable for a given year is predetermined. Tax and CPI Adj are unlikely to change significantly in the near future. Thus, an investment in BPT is essentially a bet on both continued production of these oil wells and the market price of oil. Assuming a best case scenario of continued production of 90,000 barrels a day allows the calculation of an optimistic expected dividend for a given market price of oil.

The per barrel Tax values were estimated by interpolating (and extrapolating for $40 and $30 oil prices) using previously reported taxes in BPT quarterly reports for different oil prices over the last year and a half.

Market oil price ($/barrel)

Tax

($/barrel)

30

0.92

40

1.32

50

1.71

60

2.11

70

5.61

80

9.70

90

13.79

100

17.88

The CPI adjustment was assumed to be steady at 1.807 moving forward. This is the lowest value for the four dividends paid in 2015 (ranging from 1.807 to 1.835).

Using these assumptions (lowest recent CPI adjustment, existing tax, max production and negligible trust admin fees), the expected quarterly dividend for 2016 can be calculated for different values of market oil price. For example at $50 oil:

Market oil price ($/barrel)

2016 quarterly dividend ($/share)

30

-0.12 (or zero, using cash reserves and loans to pay costs)

40

0.49

50

1.10

60

1.72

70

2.13

80

2.50

90

2.88

100

3.25

These numbers can be verified by looking at recent dividends compared to the average WTI oil price for the preceding quarter (note the $2.69 dividend paid in January 2015 had a prior accounting error in it, look at the reference to $9,539,000 underpayment in the following quarterly report). Based on this same math, the April 2016 dividend is expected to be zero based on the average oil prices for January, February and the first half of March ($32.3/barrel). Oil seems likely to trade in the $35-40 range for the remainder of March which would make the April dividend positive, but less than 10 cents.

Up until the last few weeks, the price of this stock was generally valued with the assumption that the expected dividends above would hold for the foreseeable future. This is a faulty assumption. The Cost variable above was set to increase 10 cents per year, until 2018. This modest adjustment has an impact of about a cent per share on the dividend; not a big deal. However, in 2018 the Cost variable will increase by $2.80, in 2019 another increase of $3.75, and every year after an increase of $2.75. With the same assumptions above (inflation adjustment of 1.807 and maximum production) these increases cause a decrease in the dividend that can be calculated:

Year

Annual decrease in dividend due to Cost variable (subtract from previous table).

2017

-0.01

2018

-0.32

2019

-0.43

Every year after

-0.32

For example, if oil went to $50 a barrel and stayed there, the quarterly dividends would be

  • 1.10 in 2016,
  • 1.09 (a penny less) in 2017
  • 0.77 (32 cents less) in 2018
  • 0.34 (43 cents less) in 2019
  • 0.02 (32 cents less) in 2020
  • No dividends any year after

You can use the two tables above to estimate the total future dividends paid for different oil price scenarios. The same math, with slightly different assumptions (slightly different value of the CPI adjustment and a lower production rate) was used in the CAS Investment Partners article (March 9, 2016). They stated that at $50.28 oil prices, the trust would pay out a total of $11.59 through 2020 and then go to zero. This actually comes from the BPT February 2019 annual report; CAS just divided a reported number in the annual report by 21,400,000 shares to get $11.59.

One of the challenges is the delay in information. BPT quarterly reports typically come out 1.5 months after the end of a quarter, they report on the dividend paid the previous quarter which is based on oil pumped the quarter before that. Thus the latest SEC filing data is typically six months out of date. Which is why the "current" oil prices referenced in the latest report are at $50.28/barrel. Oil has been trading between $25 and $39 in recent months. This may also explain why prices are staying high, people look at published dividend returns or PE ratios that they assume are current, but are outdated.

Another similar analysis in an article on seekingalpha.com (https://seekingalpha.com/article/3958213-bpt-get-cut-half), uses a predicted forward curve the author seemed to obtain from a commonly accepted forecast for WTI oil prices. The curve essentially started at current oil prices and increased to about $50/barrel in the coming years. They reported that based on these oil prices, the trust would pay out a total of $6.93 in dividends before going to zero.

The core issue is that even if oil increases to a high price in the future, the dividends will be whittled away by the annual increases in the Cost variable set to heavily increase starting 2018.

The total future dividend payments calculated above should be on the conservative side because they assume no future inflation, maximum production, no risk of Alaska going back to a higher tax system, and no discount for time value of money.

The author releases all copyright to the above article. Feel free to use part of all of the information in other works. The math is easy to replicate. Full disclosure, the author has shorted this stock. However, getting this information to investors is important to help them protect their returns.

Disclosure: I am/we are short BPT.

Additional disclosure: I am an amateur investor, and not a trained stock analyst.