BPT - BP Prudhoe Bay Royalty Trust

[thepupil]

Somewhat similar to Great Northern Iron Ore (which caused years of pain and torture for short sellers and then one day worked), this stock is hilariously overvalued, but not particularly actionable given the borrow (currently quoted at 100% on IB).

 

A VIC author and Hedgeeye pointed out the ridiculousness when oil was much higher

 

https://app.hedgeye.com/insights/35651-hedgeye-energy-why-bpt-is-a-one-dollar-bill-selling-for-two

www.valueinvestorsclub.com/idea/BP_PRUDHOE_BAY_ROYALTY_TRUST/119753#description

 

You can buy puts but they only go to June 2015 and you start like 15% behind (better than paying 100% borrow though).

 

Anyways, I'm sure lots of you knew about it, just thought it was kind of funny.

[oddballstocks]

Owned this one years ago and made a lot of money riding it to the sky.  Agreed there are structural factors at play that make this a great short if you can short.  I sold either at the end of 2007 or early 2008 when they started to announce when production would end.  At the time there was so much hype around high gas prices no one seemed to care.

 

Wonder if this will eventually go bust and turn into a shell someone will re-use for something else.  It'd be interesting to see this come up in another 5-10 years "Activist takes reigns at BPT with plans to..."

[bizaro86]

Thanks for posting this! I really like this as something that's overvalued and has significant built in decline. It's a great short because there's no tail "we hit a gusher" risk, since their production is contractually capped. I just bought a small put position, and I feel the only material risk here is cost of rolling. If oil prices skyrocket I'm still net long oil due to my employment, so I consider this a hedging position.

 

One question on what seems to be a potential significant upside. Does anyone know the termination condition for the trust? If oil declines a bit more WTI will be < their costs + taxes. Does that automatically end the trust if it goes on for a certain period of time? Is BP obligated to make some sort of final value payment?

 

[bizaro86]

Termination of the Trust

The Trust will terminate if either (a) holders of at least 60% of the outstanding Units vote to terminate the Trust or (b) the net revenues from the Royalty Interest for two successive years are less than $1,000,000 per year (unless the net revenues during the two-year period have been materially and adversely affected by certain extraordinary events).

 

6

Table of Contents

 

Upon termination of the Trust, BP Alaska will have an option to purchase the Royalty Interest at a price equal to the greater of (i) the fair market value of the Trust property as set forth in an opinion of an investment banking firm, commercial banking firm or other entity qualified to give an opinion as to the fair market value of the assets of the Trust, or (ii) the number of outstanding Units multiplied by (a) the closing price of Units on the day of termination of the Trust on the stock exchange on which the Units are listed, or (b) if the Units are not listed on any stock exchange but are traded in the over-the-counter market, the closing bid price on the day of termination of the Trust as quoted on the NASDAQ Stock Market. The purchase must be for cash unless holders of 60% of the Units outstanding authorize the sale for non-cash consideration and the Trustee has received a ruling from the Internal Revenue Service or an opinion of counsel to the effect that such non-cash sale will not adversely affect the classification of the Trust as a “grantor trust” for federal income tax purposes or cause the income from the Trust to be treated as unrelated business taxable income for federal income tax purposes.

If BP Alaska does not exercise its option, the Trustee will sell the Trust property on terms and conditions approved by the vote of holders of 60% of the outstanding Units, unless the Trustee determines that it is not practicable to submit the matter to a vote of the Unit holders and the sale is made at a price at least equal to the fair market value of the Trust property as set forth in the opinion of the investment banking firm, commercial banking firm or other entity mentioned above and on terms and conditions deemed commercially reasonable by that firm.

The Trustee will distribute all available proceeds to the Unit holders after satisfying all existing liabilities of the Trust and establishing adequate reserves for the payment of contingent liabilities.

[vox]

Does anyone understand how the calculation of the production tax works?

 

The dividend announced 1/6/15 was $2.6884053 per unit. There was average daily production of 96,315 barrels per day.

 

Based on my calculations, average WTI price in 2014Q4 was ~$73.20 per barrel. Based on the announced distribution, the royalty revenue for the quarter has to be around $57 million. The only way I can reach the $57 million revenue number is if the average production tax was $0.

 

The verbiage from the 10-Q states: "On April 14, 2013, Alaska’s legislature passed an oil-tax reform bill aimed at encouraging oil production and investment in Alaska’s oil industry. On May 21, 2013, the Governor signed the bill into law as chapter 10 of the 2013 Session Laws of Alaska (the “Act”). Among significant changes, the Act eliminated the monthly progressivity tax rate implemented by the 2006 Amendments and ACES, increased the base rate from 25% to 35% and added a stair-step per-barrel tax credit for oil production. This tax credit is based on the gross value at the point of production per barrel of taxable oil and may not reduce a producer’s tax liability below the “minimum tax” (which is a percentage, ranging from zero to 4%, of the gross value at the point of production of a producer’s taxable production during the calendar year based on the average price per barrel for Alaska North Slope crude oil for sale on the United States West Coast for the year) under the Production Tax Statutes. These changes became effective on January 1, 2014."

 

Will the forward tax burden be 0 assuming WTI prices stay low?

[thepupil]

Just an update here:

 

At current strip pricing and 0% production tax rate I get to gross distributions of $21 / share compared to $54/share stock price. With 0% depletion rate and 0% discount rate, I get to $24.

 

With 7% depletion and 7% discount rate, stock is worth $17.

 

Borrow now at just 4%.

 

Short it, but don't tell anyone with lots of money.

[thepupil]

In case anyone wants to see the work

BPT.xlsx

[supertutti]

It is not allowing me to download your spreadsheet. But I am interested. Did you buy puts, or short?

[thepupil]

short, if there was no such thing as borrow costs and margin calls (in a pure academic intrinsic value based world), i'd make this a 100% short. Since those things exist, it is a 4% short. try downloading again? if not, you can easily build it yourself. this company is incredibly easy to model. it is not incredibly easy to make money shorting it.

[thepupil]

In refreshing my model for the current strip, at 0% depletion and 0% discount rate, this is worth $18.80. I've also added columns in order to account for potential big moves up in oil

 

At Strip + 10: $35.48

At Strip + 20: $55.34

At Strip + 40: $104.86

 

The current stock price implies a $15 move up in the strip with 0% depletion and 0% discount rate.

 

With a 7% discount and 7% depletion rate, it looks more grim and you have to get the strip to move up $27 for BPT to be worth the current stock price.

 

Strip               13.61 -70%

Strip + 10       24.23 -46%

Strip + 20       35.97 -20%

Strip + 40       62.12 38%

27.0               44.78 0%

 

There is a huge margin of safety here in that the stock is very clearly worth less than it trades for, but there is no margin of safety in the sense that a short has no idea when the stock will react to this. Upcoming distribution cuts will probably help. 4Q will be a bout 70 cents down from 2Q's 1.62 if prices stay where they are, but that still doesn't mean the people who hold this are going to wake up and say "oh shit, it's actually worth $18"

BPT_2.xlsx

[benhacker]

This is great Pupil, thanks for sharing this.  Idea doesn't seem to need that much discussion...

[thepupil]

FWIW, I see a 40% cut to last q's dividend announced in the next coming week and have increased to a giant short (hedged with $45 calls).

[thepupil]

with the end of the q, we have all information except for production and taxes. Oil averaged $46.5 this Q so the royalty per barrel will be

 

46.5 - $30.91 = $15.60 minus taxes (I'm using $1.00) = $14.60

 

3Q production these past 3 years has ranged from 56K to 70K (because of maintenance) so that's base case of 0.56 to 0.71  per share distribution announcement.

51% - 62% cut quarter over quarter base case with minimum of 38%*

 

*the mathematical maximum to the distribution (minimum to the cut) is 91 cents (90,000 bpd and 0 per barrel production taxes), 38% cut.

 

The only question is if the market will care about a 38-60% distro cut.

 

 

[thepupil]

http://seekingalpha.com/article/3545286-bp-prudhoe-bay-trust-potential-38minus-60-percent-imminent-cut-to-dividend-worth-67-percent-less-than-current-price

 

It won't get longs to sell and will probably only crowd out borrow, but I thought it would be fun to write this (it's not the best and let's other previous articles do the explaining). the comments are always entertaining.

[rykelsap]

Why have you hedged with calls? Why not hedge with a long WTI futures position instead? You'd have to pay the negative roll on the hedge but isn't this better than paying for time decay on the calls?

[Novak]

The third quarter distribution is $0.703 on production of 72,694.

http://finance.yahoo.com/news/bp-prudhoe-bay-royalty-trust-205900402.html

At the top end of thepupil's production and dividend estimates.

 

[thepupil]

Why have you hedged with calls? Why not hedge with a long WTI futures position instead? You'd have to pay the negative roll on the hedge but isn't this better than paying for time decay on the calls?

 

the answer is i'm hedged with both. I bought the Oct 16th 45 calls for 30 cents to hedge my short term supersized position. I would never take such a huge position without a direct hedge. considering this hit $45 today and went above my max loss (so far), I'm happy i hedged and fixed my downside.

 

Production was indeed at the high end of the past 3 yrs average for 3Q.

 

We'll see what happens tomorrow....probably nothing. People who own this are either

 

a) sophisticated and hedged with options and engaging in short squeeze / borrow harvest strategies (Susquehanna/Citadel),

b) so ignorant they don't understand how shitty a risk /reward it is (retail, the SA crowd that blames short sellers), or

c) own it for other reasons (for example Guggenheim owns it in an ETF which may bring up the "yield" of its portfolio and help market the ETF).

 

Articles like this don't get any of those to sell.

 

Assuming production was at the maximum 90,000 barrels per day for the third quarter (which is highly unlikely) the dividend will be cut to about 90 cents, down from 2Q's 1.47.

 

What is more likely is production in between 56,000 and 70,000 barrels per day (where they've shaken out in years' past in Q3). If this is the case, then the dividend will be cut to somewhere between 56 cents and 70 cents, which is as high as a 60% decrease to last quarter's dividend.

[NoCalledStrikes]

This stock is prone to extreme periods of irrationality.  I would strongly suggest only hedging with other BPT based positions and not with oil.  You would think oil would be a natural hedge for BPT, but I believe the volatility in this stock is created much more by short positions being forced to buy back in,  than by any macro factor. Heck, if logic is what drove BPT's stock price, it would already be selling for at least 1/3 less than the current quote. I shorted this last year and came to the  conclusion that I was the patsy and got out.  Had I held on, I think my gain would have been no better than the borrow cost at best.

 

[thepupil]

yep, there's definitely an element of big sophisticated guys taking in borrow and driving squeezes or otherwise taking advantage of small time naive short sellers such as myself.

 

Can't be too careful w/ susquehanna and citadel in the top ten holders. At the beginning of this thread borrow was 100%! It's loosened since but can obviously change rapidly, currently 5-6%, very palatable...for now.

 

We'll see if 50% cut changes anything and finally gets longs to sell. I don't want more shorts. I want more longs to sell. Is it a little naive to think an article a few days before a cut that anyone can calculate will move the stock? Yes. Particularly when numerous similar articles have been published.  But why not have a little fun and try to do my part to finally break her? Gotta fight the good fight.

 

Interestingly, I e-mailed 20 or so small time wealth management shops and a couple of bigger guys that own this (listed on whalewisdom) with my article and asked them to do their own analysis "for their clients' sake". None responded.  I thought I'd at least get an f*** you or a "we don't comment on things like this" or even a "i've owned this for 10 years and love the dividend". Nada. Zilch.

 

Bowen Hanes, I'm talking to you!

 

[Guest roark33]

Just as one data point on this.  I have a friend at Susquehanna and all he does is analyze borrow rates and potential short squeezes.  This is one company he has mentioned multiple times in the past.  SHAK was perhaps the best example of their work (I think they bought that every afternoon for a month this past year).

 

One other thing, there was a mining company in Michigan or Wisconsin (maybe somewhere else) that had a predetermined termination date for its existence and the price on the stock still traded on a dividend yield basis right up until the termination date. 

 

Shorting this seems rational, but I think we all know that irrationality can persist for longer than we expect. 

[thepupil]

Just as one data point on this.  I have a friend at Susquehanna and all he does is analyze borrow rates and potential short squeezes.  This is one company he has mentioned multiple times in the past.  SHAK was perhaps the best example of their work (I think they bought that every afternoon for a month this past year).

 

One other thing, there was a mining company in Michigan or Wisconsin (maybe somewhere else) that had a predetermined termination date for its existence and the price on the stock still traded on a dividend yield basis right up until the termination date. 

 

Shorting this seems rational, but I think we all know that irrationality can persist for longer than we expect.

 

yep, you're talking about GNI which levitated above fundamental value for many years and then one day fell 40% on a seeking alpha article that said the same thing as 5 SA articles before it (mentioned in my original post on this thread.

 

i believe the susquehanna trade would be to go long the conversion (buy stock and synthetic short via options) and then make more money on the borrow then the net premium paid to be synthetic short (and i'm sure far more complex things than that). That's why i own calls. This cut of 50% may or may not be the inflection point. So far it doesn't look like it is based on no one hitting the $44 bid in the pre-market.

 

 

[Guest roark33]

Trading up today based on oil, really no surprises here.  Despite totally agreeing with your thesis, pupil, I think the retail people will not sell this for quite some time.....

[thepupil]

stock down 43% since I published my SA article (on oil's move, not the article since anyone who does a smidgeon of DD already knew everything in my article)

 

did not do well despite the move..terrible portfolio management on my part (won't bore with all the details)

 

BPT announced a 60 cent distribution today.

 

I have it going to 25 cents next quarter if futures stay where they are.

 

See total distributions of about $10 left at current strip.

[thepupil]

http://seekingalpha.com/news/3166121-bp-prudhoe-bay-royalty-attributes-proved-reserves-beyond-2020-cas-says

 

A rather glorious 2 day decline in BPT was set off by a small HF highlighting language in the 10-K that warned of the trust's demise. Didn't make much money on this but made some other folks with better portfolio management skills than I some money with the idea. Happy to see the schmucks who owned despite a million warnings against it finally get their comeuppance.

 

At a point I think it's an interesting long; it's fundamentally worth $5-$10 depending on your assumptions but there's a lot of optionality in terms of short squeeze (now at 30% borrow) and oil price spike. Not there yet though, but if it keeps going down 20% a day we will be.

[Sunrider]

Thanks - could you point me to an analysis on how you get to your value estimates?

Much appreciated.

C.