Recently my focus has been more
on the income-oriented dividend stock, like MLP’s or REIT’s (the real estate
prices are somewhat looking to stabilize). I came across once such name BP
Prudhoe Bay Royalty Trust. The stock offers a hefty yield.
Let’s take a look
BP Prudhoe Bay Royalty was set
up in 1989 by The Standard Oil Company and BP Exploration - part of BP - along
with The Bank of New York to passively administer overriding royalty interests.
The company holds overriding royalty interests, which entitle it to a royalty
on 16.4246% of the first 90,000 barrels of the average actual daily net
production of crude oil and condensate per quarter from the working interest in
the Prudhoe Bay oil field located on the North Slope in Alaska. The Trust owns
net interests in proved remaining reserves of 55 million barrels of crude oil
at the site. This roughly works out, for another 15 years or so based on
current estimates, i.e. till the year 2024 to 2025.
For those who might be worried
and say that the reserves are an estimate, please be informed that the trust updates
the status of the field all the time, hence one will get an early warning in
case of a sudden disappearance of the crude.
Dividend Analysis
The company recently declared
quarterly dividends of $3.61/share which works out to a hefty annualized yield
of 15.42% (as of 24th
March, 2010). This can be a bit misleading as historical distributions show
that the dividends have varied every quarter based upon the exploration
activity and the crude price.
Below is the historical analysis of the DPS,
since 2000 which I have used to calculate the average 5 years and 10
years yield, in order to achieve a realistic figure.
Benjamin Graham emphasizes that, one
should use long term trend of earnings and not just rely on recent data, to
evaluate stocks (this concept is used to derive the P/E for the indexes). I have applied the similar concept to derive a realistic yield, i.e. D/E
(Dividend/Yield).
Graham and Dodd P/E Ratio
“Security Analysis,” by Graham
and Dodd, notes that those authors argued the earnings (the denominator in
the P/E equation) should not be the most recent 12 months, but should look back
“not less than five years, preferably seven or ten years.”
Graham and Dodd believed P/E is
valuable tool in stock analysis, but a year or less of earnings data does not
necessarily reflect whether a business can generate earnings on a sustainable
long term basis. A single year’s data can be more reflective of the overall
economy than of a company’s future prospects, and could be “deeply misleading”
when it comes to predicting the company’s long term prospects.
The shares of BPT were down to $85.05
(on 19th March), but since rebound and current price stands as 93.42
(as of 24th of March). The YTD performance of the stock is 12.86%.
The stock touched 52 Week H/L of $98.75/ $63.25.
Chart 1: From Jan 2009
till 24th March 2010
It’s worth noting that the trust
is not particularly liquid, with about an average volume of 250,000 shares a day, so a spike in
volume can really ramp up volatility.
Chart 2: From Jan 2002
till 24th March 2010
But if, one wants an energy
stock that will not be whipsawed by volatility in crude, BPT is a great low-beta
investment.
Comparative Analysis
Below are the two charts,
factorized to 100, showing the performance of BPT (white line) Vs S&P Oil
Refining Co.’s Index - OR (orange line) and S&P Oil Producing Co.’s Index -
OP (green line). Since Jan 2009 BPT has roughly returned 38%, OR 8% and OP 40%
Chart 3: BPT Vs OR
& OP
One can argue that the stock has lagged the sectoral index, but compared to S&P
500 it is delivered similar results (chart4). Since Jan 2009, both have returned roughly similar returns. BPT 24% and
S&P 500, up to 25%
Chart 4: BPT Vs S&P
500
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