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BP Prudhoe Bay Royalty Trust Offers Consistent 9.9% Yield as Oil Prices Climb

Companies / Oil Companies Sep 29, 2011 - 06:50 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleJack Barnes writes: With oil prices far from record highs, but expected to rise in coming months, it's time to examine oil-related investments - especially those with high yields.

The West Texas Intermediate (WTI) benchmark was approaching $90 a barrel two weeks ago, but has since slipped more than 7% due to concerns over the European debt crisis.

Recent oil price fluctuations also stem from crude oil supply issues. Libya's revolution trimmed production of light sweet crude normally destined for the European refining complexes. This has helped keep a floor under oil prices, while the global economies start to price in a slowdown in growth.

But prices won't stay down for long.

Paired with supply constrictions, growing global demand will again push prices over $100 a barrel next year. The International Energy Agency reports that worldwide oil demand will rise by 1.2% (to 89.3 million barrels a day) this year and 1.6% (to 90.7 million barrels a day) in 2012.

That's why I like this energy investment that pays a juicy dividend.

It's the largest conventional U.S. oil and gas trust, has assets in the largest North American oil field, and, best of all, it yields 9.9%.

That's pretty amazing when you consider that the U.S. government will pay you less than 2% per year to hold one of its 10-year bonds.

And as oil prices climb, that dividend will only get sweeter.

I'm talking about BP Prudhoe Bay Royalty Trust (NYSE: BPT), a high-yielding energy stock that's a "Buy" in this uncertain market environment.

BP Prudhoe Bay Royalty Trust Delivers Consistent Payout
BP Prudhoe Bay Royalty Trust, founded in 1989, operates as a grantor trust in the United States. It was established by subsidiaries of BP PLC (NYSE ADR: BP) and The Bank of New York Mellon Corp. (NYSE: BK).

The company holds overriding royalty interests in minerals in the Prudhoe Bay oil field - the largest U.S. oil field - located on the North Slope in Alaska. The trust receives a percentage of revenue from the average actual daily net production of crude oil per quarter from the Prudhoe Bay oil field. The field contains approximately 150,000 gross productive acres, and had an average production rate of 243 barrels per day in 2009.

The BP Prudhoe Bay trust has estimated net remaining reserves of 78.2 million barrels, with 67 million of these already considered proven developed reserves. That means there's 90% confidence these barrels can be developed with minimal additional investment.

The trust pays out 100% of its profits to investors. It's averaged more than a 10% yield over the last five years, giving long-term investors some cash flow stability while yield from other products has fallen. The company has delivered a yield of 9.9% for the last trailing twelve months, with expectations it will remain consistent in the near term.

The trust will eventually wind down its dividend payments as the volume of oil slowly decreases in the Prudhoe Bay area - but not for a while. I believe BP Prudhoe Bay makes a great cash-flow investment now, with a window of about five years in which it should outperform in the sector before long-term payout issues arise.

The stock price has a beta of 0.8, meaning it moves slower than the Standard & Poor's 500 Index. This is good; it's not going to be an investment that will move suddenly up or down, but should instead provide a nice, steady dividend stream over the long term.

The company has a market cap of $2.3 billion, and a price/earnings (P/E) ratio of 11.9. BP Prudhoe Bay Royalty Trust closed at $105.92 yesterday (Wednesday).

Action to Take: Buy BP Prudhoe Bay Royalty Trust (NYSE: BPT) (**).

In today's world of extremely low dividends and highly volatile markets, it's always nice to find an investment that has a long-term history of paying out a yield of about 10%.

Together with San Juan Basin Royalty Trust (NYSE: SJT), which I recommended as a "Buy" on Aug. 22, BP Prudhoe Bay should give investors a nice increase in their average yield per investment.

Let's look to pick up some BPT shares at market. While we normally use limit orders below the current price to try and buy additional shares at a lower basis, this is one of those investments where it is both liquid enough and paying out a high enough yield that we can comfortably buy our position now, and let our dividend or covered call strategy pay down the cost basis on the position.

(**) Special Note of Disclosure: Jack Barnes has no interest in BP Prudhoe Bay Royalty Trust (NYSE: BPT).
About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning twice a week. In his previous BSH column last week, Barnes analyzed Coeur d'Alene Mines Corp. (NYSE: CDE).

Source :

Money Morning/The Money Map Report

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29 Sep 11, 11:11
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