2023-04-04 15:13:17 ET
Summary
- Based on my calculations, there will undoubtedly be no distribution to BPT unitholders in mid-April for the first quarter.
- Unless oil prices increase to an average of more than about $84 per barrel in the second quarter, there will not be any distribution then either.
- Although future BPT distributions and possible termination dates are extremely leveraged to changes in oil prices, being long BPT is most likely a losing bet.
Update
This is a brief update to the lengthy article I wrote on BP Prudhoe Bay Royalty Trust ( BPT ) in early January: BP Prudhoe Bay Royalty Trust: 'You Could Be Injured in a Fall '
In that article, I estimated that the upcoming January distribution (prior to subtraction of a minor amount for administrative expenses) would be a bit under $.32/unit, as indicated in the first column of the table below.
The actual distribution announced on January 6 was $0.2974297 per unit, which was after administrative expenses of $275,000, or a bit over $.01/unit. The second column provides the actual factors which BPT reported in its press release then. My estimate was only $.01 off then.
BPT Royalty Calculations (Author and BPT SEC Flings)
Calculating a distribution for the quarter just completed is quite easy; it will be zero. I have estimated that for there to be any distribution, WTI (West Texas Intermediate oil) would have needed to average above $83.45 in the first quarter; it actually averaged only about $76.65 based on EIA data .
There are two main factors which caused the Adjusted Chargeable Cost incurred by the Trust to go up at the beginning of the year. The first factor is the "Chargeable Cost." Per the Trust indenture, it increases by $2.75 every year. The second item is the CPI factor, which increases in line with inflation. It increased by a little over 1% in the three months between November'22 and February '23. The result is that the Adjusted Chargeable Cost increased by over $7 at the beginning of the year.
Production taxes are based on the market price of the oil. Therefore, every time the breakeven cost increases, the breakeven production tax must be increased a bit as well.
As a result, even though a healthy $.31 distribution was made in January with WTI averaging $82.53 in Q4, even if WTI had averaged the same price in Q1, it would still be almost a dollar short of the required breakeven price.
Despite the surprise OPEC production cut and resultant surge in WTI the last couple of days, to $81 or so, oil is still about $3 under my estimate of the Q2 breakeven price of $84.35. Keep in mind that any deficits early in a quarter must be made up for later.
In addition, due to the lack of Trust earnings in the quarter just ended, the Trustee will need to utilize some funds from the reserve account to pay expenses. The reserve would need to be replenished prior to any future distributions. One quarter's shortfall would only decrease the distribution by a penny or two per unit, but multiple quarters of a shortfall would become material, and of course, if there are no (or even minimum) distributions for eight quarters, the Trust would be liquidated.
For further details see:
BP Prudhoe Bay Royalty Trust: No Dividend For You!