BP Prudhoe Trust: High Yield in Energy

02/10/2017 10:00 am EST


Briton Ryle

Editor, The Wealth Advisory

Until 2013, Prudhoe Bay was the largest oil field in the United States. It spans over 213,000 acres, and it contained around 25 billion barrels of oil when production started back in the late 1970s, observes Brit Ryle, editor of The Wealth Advisory.

So far, BP has pumped over 12 billion barrels of oil out of the ground in this prolific field, but there’s still over half of the original amount in the ground.

And with increases in technology and improvements in extraction techniques, the company expects to get 50% more oil from the field than was initially forecast. That’s at least 5 billion extra barrels.

Our featured recommendation, the BP Prudhoe Bay Royalty Trust (BPT), is a grantor trust. What that means is that the trust holds royalty interest in minerals from the Prudhoe Bay on the North Slope of Alaska.

And owners of the trust are guaranteed a percentage of the profits from selling the oil that’s extracted from that field.

Trusts like this are a great investing tool when you’re talking about any minerals that are being mined (or drilled). There are no wells to run or employees to pay. It’s just a pure play on the price of whatever mineral is being extracted.

In this case, it’s oil. And the trust gets about 16.5% of the profits from the first 90,000 barrels of the average actual daily net production of oil that is pumped from the field per quarter.

When prices were up around $100 a barrel, the trust was paying shareholders around $10 per share — a yield of about 15%. Now, with prices much lower, we’re looking at about $4 per share for a yield of 13.55%.

But as oil prices continue to climb, so will the profit from selling crude from the Prudhoe Bay field. And so will that payment amount. If we see oil prices get back to the $100 range, that’s a yield on cost of over 30%.

And even if prices stay the same, we’ll be looking at half a decade worth of 13.55% dividend payments anyway and will be able to get out of the investment with a nice profit before the well runs dry.

So, I’d say it’s time we take a dip back into the oil patch and get some gains in our traditional energy portfolios.

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