MVO - MV Oil Trust: Avoid This Dividend Trap

2023-06-14 02:14:35 ET

Summary

• MV Oil Trust offers a high dividend yield of 17.5% on a TTM basis but is likely a dividend trap due to its net profits interest agreement expiring in 2026.
• Investors may receive between $5.00 and $6.00 cumulative dividends per share before the trust's termination, but the residual value of the properties is unlikely to be significant.
• MVO stock should be avoided, and existing shareholders may want to consider exiting their positions.

MV Oil Trust ( MVO ) appears to offer one of the highest dividend yields in the energy sector - 17.5% on a TTM basis. Although the dividend was cut in the last quarter, on the back of falling oil prices, the annualized dividend yield remains well into the double-digit territory. However, looking at the company closely, I think this is a classic situation of a dividend trap, where the high yield lures some investors in, but is very unlikely to be sustainable.

As the net profits interest should expire in 2026, the entity will be dissolved and its properties liquidated. I doubt that the liquidation will lead to any significant cash inflows as the reserves will likely be nearing exhaustion by 2026. The total dividends that shareholders receive in the meantime will likely fall short of reaching today's market price of the company. Therefore, the stock seems like a dividend trap and investors should consider an exit.

Company overview

MV Oil Trust is a company with net profits interest in oil and gas producing properties in Kansas and Colorado, USA. The entitlement is for 80% of the net proceeds from those properties. However, this scheme has limited duration. According to MVO's fillings :

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.

Given the fact that as of 31 March 2023, the attributable production to MVO has reached 10.9MMBoe and the approximate annual figure is 0.5MMboe, likely condition (2) will come first, setting the termination date at 30 June 2026 or approximately 3 years from now.

Dividend overview

MVO has been paying regular quarterly dividends to its shareholders with the TTM distribution amounting to US$2.15, resulting in TTM dividend yield of 17.5% - amongst the highest in the sector. Of course, the TTM value is boosted by the Q2'22 and Q3'22 distributions, which benefited from record-high oil and gas prices. Now as those prices have fallen, the distribution to shareholders was reduced. Still, taking the Q1'23 DPS of US$0.35 and annualizing it results in double-digit dividend yield of 11.5%.

However, in three years - in 2026 dividends will come to an end and so will the trust. From today to the termination day, I expect that investors should receive between US$5.00-US$6.00 cumulative DPS. The difference between that and today's share price of around US$12.00 could theoretically be attributed to the residual value of the properties which will be sold after the termination.

Property liquidation is unlikely to bring significant cash

However, the problem is that the reserves of the properties will likely be nearing exhaustion by mid-2026. The reserves summary indicates a steady decline during the last three years and with around 0.5MMboe of annual attributable production, the resource base will be exhausted in 3 years, unless new additions are made.

Looking to the property value through its NPV as of 2022 year-end the estimated NPV of the Proved reserves, discounted at 10%, is bellow US$70M, despite using quite high energy prices in the calculation (Brent price of US$93.67/barrel and natural gas price of US$6.36/MMbtu). Note, that the US$70M estimation includes the dividend payments to be made between 2022 year-end and the liquidation of the trust. For comparison, the enterprise value of MVO is approximately double that amount at US$140M.

Conclusion

The compelling story of MVO's high dividend will likely come to an end rather soon. With the net profits interest agreement expiring in mid-2026, all shareholders could hope for is the cash inflow from the sale of the properties. However, at the current rate of reserve depletion, in mid-2026 there will be almost nothing left in order to justify significant sale price. For that reason, I think the stock should be avoided and existing shareholders could consider an exit.

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