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BP Prudhoe Bay Royalty Trust (Ticker BPT)

This Dividend is Going to ZERO 

BPT (“the Trust”) is a grantor trust entitled to 16.4246% of the net proceeds from the sale of crude oil and condensate from its working interest of Hilcorp North Slope in the Prudhoe Bay oil field located on the North Slope in Alaska. The Trust distributes these proceeds, net of costs, to its shareholders/unitholders on a quarterly basis in the form of a dividend. Based on our research, we have found that the BPT dividend for the first quarter of 2023 is HIGHLY likely to be 0 and that future dividend payments are at risk. As a result, we have initiated a short position in the stock.

Calculating The Dividend 

The amount of proceeds available to distribute as a dividend is based on 3 easily predictable factors: the average price of oil across the quarter, the per barrel costs assigned to the trust, and the amount of oil produced by the underlying property.

The Price of Oil

Based on publicly available WTI (West Texas Intermediate) price data, we have found that the average price of oil was approximately $78.12 in January, $76.83 in February, and will be less than $76.83 for the month of March. Therefore, the Trust’s average selling price for 1Q23 should be between ~$73-78.12.  

The Costs Assigned to the Trust 

Per BPT’s most recent 10k, which is publicly available online, there are three components that determine the per barrel costs assigned to the Trust: “Chargeable Costs”, the “Cost Adjustment Factor”, and “Production Taxes”.

The per barrel proceeds available for the Trust to distribute is determined by a simple formula: Average Selling Price - (Chargeable Costs x Cost Adjustment Factor) - Production Taxes 

Chargeable Costs 

As per the 10k, the Chargeable Costs assigned to the Trust are contractually fixed at $34.75 per barrel and will increase by $2.75 per year in the future. These costs are not tied to the actual production cost at the property.

Cost Adjustment Factor 

The Cost Adjustment Factor is simply the ratio of the CPI (Consumer Price Index) published for the most recently passed February, May, August, or November vs. the CPI for January of 1989. If the average price of oil is below $18 for the quarter, then the Cost Adjustment Factor will remain the same as the quarter prior. Essentially, this number will remain the same or increase perpetually - unless we enter a deflationary environment.  

For 3Q22 the Cost Adjustment Factor was 2.281 and is 100% likely to be higher for 1Q23. Conservatively assuming a Cost Adjustment Factor of 2.281, the chargeable costs per barrel for 1Q23 will be $79.26 - higher than the average price of oil across that same period. This indicates (with almost 100% certainty) that there will be no proceeds available to distribute as a dividend to BPT shareholders for 1Q23.

Production Taxes 

In recent periods, Production Taxes came in between $2-4 per barrel and are likely to remain within that range. 

Amount Produced

Contractually, the Trust is entitled to no more than the proceeds generated from the production and sale of 90,000 barrels of oil per day, regardless of how much more oil is produced by the underlying property. 

The volume of production has ranged between 65-75,000 barrels per day in recent periods and was 70,200 in 4Q2022.

The Amount Produced is not an important factor when the per barrel costs assigned to the trust exceed the average per barrel selling price. Regardless of production volume, the dividend will be $0.00 in this scenario. 

Additionally, the Trust is prohibited in engaging in borrowing transactions (except for transactions related to paying off the liabilities of the trust), so BPT is unable to raise debt to finance a dividend payout. 

The Next Dividend Will Be Zero and Future Dividends are At Risk

See the table below for a detailed calculation of proceeds available for distribution for BPT’s 1Q23 dividend:

Note: assumes a production volume of 70,200 barrels per day. 

As we have demonstrated, the total costs per barrel assigned to the Trust are around $81.56 and will remain near this level for the rest of the year. In the future, the cost per barrel will increase by ($2.75 x Cost Adjustment Factor) every year. The Trust’s ability to pay a dividend is dependent on oil prices averaging above ~$81.56 each quarter this year, ~$87.84 next year, and so on as the chargeable costs increase. With each passing year, the Trust’s likelihood of distributing dividends decreases significantly. As the market recognizes this, starting with the 1Q23 dividend, the value of this stock will drop significantly. 

Historical Yield and Pricing Implications 

BPT has historically posted an average TTM (trailing twelve months) dividend yield of around 15%. Even if BPT is able to catch up in later quarters and pay out an annual dividend of $0.25 per share, the stock would trade at ~$1.66 (assuming that its priced to maintain a yield of 15%) - an 81.56% downside from its current trading price of ~$9.00 per share.