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Are You Surprised ROYT Will Not Pay A Dividend In July?

|Includes: Pacific Coast Oil Trust (ROYT)

You should not be. Most ROYT investors recognize that over the first quarter this year, the trust was taking on debt when oil prices were low. The reports for both the June and July dividend was that the developed properties were making money, but no dividend because profits went toward debt. What may surprise you is that ROYT may take several more months to clear that debt before paying a dividend. So here is the math:

There are two sets of wells "developed properties" and "remaining properties." Developed properties were all set up and productive at the time of the creation of the trust. PCEC (the oil company that manages the wells) pays the trust 80% of net profits from these wells:

Profits from developed = 80% * (Production * realized price per barrel - LOE - CapEx)

Production seems to have been dwindling in recent months. This could be due to less capital expenditures (MUTF:CAPEX) when oil prices were low. The May 24 report for the June dividend had an increased CapEx, resulting in an uptick in production this month. I will assume production maintains the average over the last twelve months of 86,500 barrels per month.

Over the last twelve months, lease operating expenses (LOE) and capital expenditures combined have ranged from $2.1 to 4.1 million. The 4.1M high was during a month when PCEC had to pay a settlement of a couple years of back-taxes and is very much an anomaly. Excluding the 4.1 month, the average of LOE + CapEx over the past 12 months has been $2.8 million.

Because the wells are in California, the Buena Vista Hills is better market price to use than WTI for oil. PCEC consistently gets a lower price than market, averaging about 17% less than market price (ranging from 24% to 8% less over the last 12 months). My guess is that they do not sell it directly at market, but to a third party that pays less than market price in order to cover transport costs to get the oil to market.

I am going to gloss over the Remaining Properties a bit because the impact on the dividend is about one tenth that of developed properties. These properties are not fully developed. PCEC will pay all the costs to develop these wells and the trust is not initially responsible for the LOE or CapEx costs. While these wells are being developed, PCEC pays the trust 7.5% of gross sales. Once PCEC recovers their development costs (this is tracked as "net profits deficit for remaining properties"), the equation shifts from 7.5% of gross profits to 20% of net profits. I think 20% of net will actually result in a lower payment to the trust than 7.5% of gross. It is conceivable that, once fully developed, the production of the remaining properties could become high enough to have a very positive impact on the dividend in the long run. I would love to see another Seeking Alpha member dig into the geology reports and such for these properties to give us an idea of this potential. For now, I will take the average production over the last year of 21,500 barrels per month.

Profits from remaining = 7.5% * Production * Realized Price

Once the profits are paid to the trust, there are two expenses. First, the trust is required to pay PCEC $1,000,000 a year regardless of what happens with the wells, or 83,333 per month. The trust admin expenses range from zero to 200,000 with an average of 70,000

Total profits = profits from developed and remaining - 83,333 - admin costs

Dividend = total profits / 38,583,158 shares.

Expected average results of the trust based on different oil prices:

Market Oil Price

Expected

Realized Oil Price

Expected Total Profits

Expected Dividend

40

33.20

-42,358

0

45

37.35

251,514

0.007

50

41.50

545,386

0.014

55

45.65

839,258

0.022

60

49.80

1,133,130

0.029

The table above uses averages for last 12 months and thus is useful for looking at average dividends over the long run; the variability in the different factors makes this less useful in predicting the dividend for an individual month. For example, the announcement that came out today (June 27), reported a net profit of $518,000 ($642k profits from developed properties minus 124,000 added to the loan), which is double the above chart considering oil has been averaging around $45.

Now about the debt. There are three numbers reported.

  • Net profits deficit on developed properties is essentially zero interest debt for prior losses on developed properties. This has to be cleared with profits before developed property profits can go to the trust.
  • Net profits deficit on remaining properties is tracking the development investment of PCEC to drill and develop the wells on the remaining properties. This number is not really debt, since it only triggers the trust profits moving from 7.5% of gross to 20% of net (7.5% for gross is better IMO).
  • Finally, if the remaining property profits and developed property profits (if there are any) do not cover the payment due to PCEC and the trust admin costs, PCEC has graciously offered to loan money to the trust at 8.5% interest (I did not include interest payments in the numbers above; it is currently less than 10,000 per month).

So to really capture the debt that must be cleared before a dividend is paid, add the developed property net profits deficit and the loan. This is currently $2.0M. Consider how many months it will take to clear this debt with trust profits based on oil prices in the table above.

Buena Vista market price for most of the month of June is averaging in the high 40s (similar to WTI). So if oil stays around $50 per barrel, we could have months where expenses are lower than average; but it will likely take 4 months to clear the debt before a dividend is paid.

What about the risk of the trust dissolving? The trust has to pay $2,000,000 in dividends in a two-year period or it will dissolve. I assume this is not a rolling average but two calendar years. January 2016 dividend was $0.2 million distribution (zero distribution since). So, we need 7-8 month at $50 oil before December 2017 to clear the debt and pay $1.8M in dividends and keep the trust alive. This seems likely.

Bottom line is in the long run, this could be a very good returning stock, but be patient on the dividend, we have a few more months.

Disclosure: I am/we are short ROYT.

Additional disclosure: I am likely to move into a long position in ROYT in the coming months