MVO - MV Oil Trust: 12% Yield Crude Oil Play

2023-10-15 09:15:00 ET

Summary

• MV Oil Trust is a royalty trust that earns income from crude oil production, with 99% of its income coming from crude.
• The trust has seen a decline in net profit interests and distributable income in Q1-3 2023 compared to 2022.
• MVO has a trailing dividend yield of 11.77% and has outperformed the market in 2022 but has trailed in 2023.

Are you familiar with Royalty Trusts? These are entities within the Exploration & Production, E&P, Energy industry, which earn income via an arrangement with an E&P company that handles the operations on the Trust's property, and pays the Trust a % of the income. MV Oil Trust (MVO) is virtually a pure play on Crude oil, with ~99% of its income coming from crude.

Company Profile:

MVO's earnings are based upon an a profits interest of 80% of the net proceeds attributable to the sale of production from the underlying properties during the term of the Trust. "The net profits interest will terminate on the later to occur of (1) June 30, 2026 or (2) the time when 14.4 million barrels of oil equivalent (“MMBoe”) have been produced from the underlying properties and sold (which amount is the equivalent of 11.5 MMBoe with respect to the Trust’s net profits interest), and the Trust will soon thereafter wind up its affairs and terminate.

As of June 30, 2023, cumulatively, since inception, the Trust has received payment for 80% of the net proceeds attributable to MV Partners’ interest from the sale of 13.8 MMBoe of production from the underlying properties (which amount is the equivalent of 11.0 MMBoe with respect to the Trust’s net profits interest)." (MVO Q2 '23 10Q)

Earnings:

The revenues that MVO receives from oil production generally lag production by ~ 1 month. 2022 was a big year for MVO, with Net Profit Interests, NPIs, jumping by 125%, which, in turn, resulted in Distributable Income/Unit also rising by 125%, as the unit count remained stable, at 11.50M units.

The average price received for crude oil sold during 2022 was $87.86 per Bbl, while the average price received for crude oil sold during 2021 was $51.97 per Bbl.

Q1-3 2023 has had a much lower amount of NPIs, which have run between $3.94 to $4.55M, vs. the 2022 average of ~$6.8M/quarter. Distributable Income has ranged between $3.74M to $4.37M.

As MVO hasn't issued a 10Q for Q3 '23 yet, we estimated its Q3 '23 administrative expenses at $.29M, an average of those for Q1-2 '23.

NPI's have declined 32% in Q1-3 '23, while Distributable Income is down 31.56%. Administrative expenses are up ~13%, whereas the future expenses reserve is down 57%.

Dividends:

MVO's most recent distribution was $.38/unit, which went ex-dividend this past week on 10/13/23. Its trailing dividend yield is 11.77%. It has an impressive 5-year dividend growth rate of 43.39%, which will most likely decline when the total dividends for 2023 are known.

So far in 2023, the average quarterly price received for crude oil has run from $69.94 to $72.67/bbl, much lower than the $87.86/Bbl average in 2022.

2023 quarterly volume has ranged from ~148K to 155K, down ~2% vs. 144.5K to 163.04K in per quarter 2022.

Total distributions are down 42% for Q1-3 '23, vs. the huge 125% rise in 2022, whereas Distribution coverage is at 1.07X, the same as 2022.

Debt & Liquidity:

MVO has no debt. However, "Under the terms of the Trust Agreement, the Trustee is allowed to borrow money to pay Trust expenses. MV Partners has provided a letter of credit in the amount of $1.8 million to the Trustee to protect the Trust against the risk that it does not have sufficient cash to pay future expenses." (Q3 '22 10Q)

Performance:

Unlike 2022, when MVO outperformed the market by a wide margin, it has reversed, and trailed its industry, the Energy sector, and the S&P 500 so far in 2023.

Valuations:

MVO is a smaller than average trust, with a $150M market cap. Its trailing dividend yield is roughly in line with trust averages, whereas its trailing P/E, P/Sales, and P/Book valuations are lower than average.

While the trust is due to terminate on June 30, 2026, or, moreover, when the equivalent of 11.5 MMBoe with respect to the Trust’s net profits interest have been produced and sold, investors should keep an eye on its corpus, i.e. capital or principal amount.

This has decreased from $7.91M as of 12/31/21 to $6.4M as of 6/30/23:

MVO hasn't published its Reserves amount since the 2022 10K, which listed 1,550 MBOE, and also 27 MBOE on Proved undeveloped reserves added in 2022.

Parting Thoughts:

Although 6/30/26 is listed as its termination date, MVO has received 11.0 MMBoe as of 6/30/23, vs the equivalent of 11.5 MMBoe received listed as a trigger for terminating the Trust. It appears that MVO is much closer to its limit for Net Profit Interests, NPIs.

However, the curious statement that was listed in its 2022 10K was that the Trust intended to spend $1.3M in Capex in 2023-2026:

"MV Partners expects total capital expenditures for the underlying properties during the four years ending December 31, 2026 will be approximately $1.3 million. Of this total, MV Partners contemplates spending approximately $0.3 million to drill a saltwater disposal well and approximately $1.0 million for recompletion and workovers of existing wells. MV Partners expects that these capital projects will add production that will partially offset the natural decline in production otherwise expected to occur with respect to the underlying properties." (MVO 2022 10K)

We rate MVO a Hold. It has an attractive yield, but there's a lack of clarity as to how long its NPIs will continue to support high distribution levels.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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