Why Investing in BP Prudhoe Bay Royalty Trust can be Lucrative

Dear PGM Capital Blog readers,

In this weekend blog edition, we want to discuss with you, why investing in BP Prudhoe Bay Royalty Trust can be Lucrative, for long term investors.


The Prudhoe Bay Oil Field is a large oil field on Alaska’s North Slope and is the largest oil field in both the United States and in North America, covering 213,543 acres (86,418 ha) and originally containing approximately 25 billion barrels (4.0×109 m3) of oil.

The amount of recoverable oil in the field is more than double that of the next largest field in the United States, the East Texas oil field.


A royalty trust is a type of corporation, mostly in the United States or Canada, usually involved in oil and gas production or mining. However, unlike most corporations, its profits are not taxed at the corporate level provided a certain high percentage (e.g. 90%) of profits are distributed to shareholders as dividends. The dividends are then taxed as personal income.

Royalty trusts typically own oil or natural gas wells, the mineral rights of wells, or mineral rights on other types of properties.

An outside company must perform the actual operation of the oil or gas field, or mine, and the trust itself, – in the United States – may have no employees. Shares of the trust generally trade on the public stock markets, but the trust itself is typically overseen by a trust officer in a bank.

Royalty trusts allow investors to speculate directly on commodities such as gas, oil, or iron ore without having to buy futures contracts, or use the other investment vehicles traditionally associated with commodities, since the trusts trade like stocks.


The BP Prudhoe Bay Royalty Trust (NYSE: BPT) is a United States oil and natural gas royalty trust, engages in owning and administering the royalty interest. The company was founded on February 28, 1989 and is headquartered in Houston, TX.

BP Prudhoe Bay Royalty Trust is the largest conventional oil and gas trust in the United States. Its assets are in the huge Prudhoe Bay Oil Field, the largest oil field in North America.As of the end of 2012 the Trust claimed to have proved reserves of 75.517 million barrels of crude oil.


Standard Oil Company and BP Exploration, both now branches of British Petroleum (NYSE: BP), set up the trust on February 28, 1989. They distribute royalties on a portion of the oil produced from the Prudhoe Bay Oil Field, typically 16.4246% of the first 90,000 barrels of net daily production.

In their 2011 Annual Report, the Trust estimated it would continue to make royalty payouts through at least the year 2027.


Advantages of Royalty Trust:

Royalty trusts typically pay enormous dividends by Wall Street standards, making them popular with investors, particularly during times when the price of oil is high, or other market sectors are performing poorly.

They are a powerful investment tool for people who wish to invest directly in extraction of petroleum or mining of other materials, but who do not have the resources or risk tolerance to buy their own well or mine. Additionally, since trusts often own numerous individual wells, oil fields, or mines, they represent a convenient way for the average investor to diversify investments across a number of properties.

Also, since commodities are considered a hedge against inflation, the popularity of royalty trusts as investments rises as interest rates rise, and their shares often rise as a result.

BP Prudhoe Bay Royalty Trust:

On March 16, the Trust reported its financial results for the quarter ending December 31, 2016.

Comparing these results against the companies peers, showed increases in operating (EBIT) and pretax margins. EBIT margins improved from 98.10% to 98.66% and pretax margins widened from 98.10% to 98.66% as can be seen from below charts.

As can be seen from below chart, the company reported its best earning from the past 5 quarters and more than double than the average earnings of its peers.

On Thursday, April 6, the company declared a dividend of $US1.0983038 per Unit, payable on April 20, 2017 to share holders on record on April 16, 2017. Based on the closing price of Friday April 7, the shares of the Trust have a dividend yield of 17.87%

Based on the following point we have a BUY rating on the shares of the Trust

  • We classify BPT-US as Harvesting because of the market’s relatively low growth expectations despite its relatively high returns.
  • The company has a successful operating model with relatively high net profit margins and asset turns.
  • BPT-US’s return on assets currently and over the past five years suggest that its relatively high operating returns are sustainable.
  • The company’s level of capital investment seems appropriate to support the company’s growth.

Last but not least, before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that commodity prices as well as well as the securities of their producers, can be very volatile and that sharp corrections might happen in the short term.

Yours sincerely

Eric Panneflek

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