An oil trust with a 17% dividend

BP's Prudhoe Bay Trust dropped sharply last week, boosting its yield to a 17% dividend. But is it a buying opportunity?

By InvestorPlace Mar 22, 2010 1:08PM

The BP Prudhoe Bay Royalty Trust (BPT) is a favorite among income-oriented dividend stock investors. The stock offers a hefty yield, and since it’s a “depletion trust” based on the life of its reserves, it’s not as tied to oil prices as other stocks in the energy sector.

But after dropping 13% in two days last week, some are wondering if it is time to cut this stock loose -- or time to buy more now that the dividend yield is now about 17%.


Let’s take a look:


First, though the BP Prudhoe Bay trust does have a finite life span, it is no where near the end of the road. There is still a lot of oil there, for maybe another 15 years or so based on current estimates, and BPT updates the status of the field all the time so it won’t come as a shock when the rigs run dry. So if you’re worried about the depletion of this depletion trust, take a deep breath. It won’t disappear any time in the next few years.


Because of the clear life and supply of this fund, it’s also not as susceptible to crude oil price swings as the rest of the sector. While it won’t rally as much when crude is soaring, it also won’t drop as much when demand is soft. Consider the recent glut of crude supply and weak demand -- Exxon Mobil (XOM) is down about 3% in the last six months while BP’s Prudhoe Bay Royalty trust is actually up about 20%.


The real question though is whether the 13% drop late last week is a correction because the price of BTP shares got too far ahead of reality. Oil went up $12 from the Feb low, and BPT went up over 15% a share … that’s not typically the way a depletion trust trades.


It’s worth noting that the trust not particularly liquid, with about 200,000 shares a day, so a spike in volume can really ramp up volatility. The rebound in shares today (about 6% as of this writing) indicates that some people may be buying back in after stop losses created a slippery slope on Friday that pushed shares below a reasonable valuation.


But whatever the reason for the drop, the dividend yields of this stock is now a whopping 17% after the slide in shares. Even if the upside potential may not be out of this world, a decade of dividends that are that big may make this depletion trust worth your while. Similarly, if you want an energy stock that will not be whipsawed by volatility in crude, BPT is a great low-risk investment because of its “depletion discount” that is priced into shares.


However, as a pure energy sector play you won’t get the pop from other pure oil and gas stocks. The 20% surge against the sector in the last six months is not typical, so keep in mind the old axiom that “past performance does not indicate future returns” with BPT.


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