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28 October 2009 at 16:30 IST
Crude Oil spike may last for several months
They do have two disadvantages: * First, the tax regime for Canadian royalty trusts will change in 2011; at present, it’s not entirely clear what effect this have on the dividends and earnings, but it will certainly reduce them.
* Second, some of these companies are hugely overvalued, given the amount of oil they control. BP Prudhoe Bay Royalty Trust (NYSE: BPT), for example, has the right to a 16% royalty on the output of the BP PLC (NYSE ADR: BP) oil holdings in Prudhoe Bay, AK, which have 55 million barrels of proven reserves. Do the arithmetic, and you’ll find that at a price of $75 per barrel, BPT has an undiscounted value of $660 million. However, its market capitalization is currently $1.7 billion. There’s probably some upside potential I’ve missed somewhere, perhaps from secondary extraction or from some possible new discoveries in the holdings, but I doubt if there’s $1 billion worth.
I’ll leave you with two possibilities – of U.S. companies with oil-and-gas holdings that seem attractive. One is Linn Energy LLC (Nasdaq: LINE), which has oil holdings in the Mid-Continent and Western regions, and which uses some of its cash flow to buy new properties. That has a 10.12% dividend yield; its main problem as an oil play is that Chairman Michael C. Linn hedged its entire output for 2009, 2010 and 2011 at more than $100 per barrel last year. That’s a great deal, but it also means that the company’s sales prices are fixed for the next 27 months!
Another possible oil play of the same type is MV Oil Trust (NYSE: MVO). This has net profits interest in oil and gas properties in Kansas and Colorado, with approximately 1,000 producing oil-and-gas wells. It pays out all its income in dividends, so shareholders directly benefit from rising oil prices, as it appears to be un-hedged. In the third quarter, it paid 59.5 cents per share – which on an annualized basis would give it a yield of 13.5%.
Martin Hutchinson is Contributing Editor, Money Morning Courtesy: http://www.moneymorning.com
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