The other big risk, of course, is commodity volatility. If oil prices crash then the BP Prudhoe Bay will see distributions crash too and there’s nothing you can do about it.
And I’ll reiterate that a minor risk, as mentioned above, is the tax complexity of these trusts. You get a special K-1 form for your taxes and often you have to file state income tax for the region in which the trust operates. This can be burdensome if you do your own taxes. Most of us mitigate this by going to a trusted CPA every April, but it must be noted here all the same.
Plenty of Time With BP Prudhoe Bay
So the only thing we must ask ourselves, really, is whether we think oil prices will stay firm and whether BPT has enough reserves underground to make it worth an investment.
Admittedly I do not believe that oil will firm up significantly anytime soon – check out my recent analysis of Transocean (NYSE:RIG) for more on that – so I would be reluctant to project significant increases in distributions due to a surge in crude.
However I don’t think prices will crash anytime soon, and that means you can have faith in the history of distributions as long as they can keep up output.
The million dollar question, of course, is reserves. How long can this run last? Well, as of the 2011 annual report the trust said it had 73.476 million barrels of proved developed reserves and another 8.828 proved and undeveloped reserves. Annual production is about 5 million barrels, and waning slightly each year, prompting a depletion date of around 2025 for BPT according to internal estimates.
According to a recent SEC filing, BPT garnered an average oil price of $93.92 in the first quarter which led to a distribution of $2.31. If you think oil will stay in the low $90’s then simply annualize this to $9.24 a year and you get a roughly 8% yield on current prices.
Not bad at all. And even if production is waning slightly, a 7% or even a 6% yield is mighty attractive in this market. If you can hang on to BPT for a dividend like that and then move your principle back out at break-even in a few years, that’s a mighty nice proposition.
The big risk, of course, may be share prices. BPT has run up over 40% since January 2011 not because of surging distributions but more because of a run on high-yield investments. A cut in the payouts or the rise of a more attractive asset class could cause prices to collapse in a hurry. But with the market choppy and the Fed keeping rates low through 2014 that seems very unlikely near-term. Shares should hang tough as long as investors are looking for high-yield, low-risk opportunity.
Just be aware that when the tide shifts away from dividend stocks, you don’t want to be the last one out of BPT. When income investors start to seek growth again and as depletion takes its toll, this stock could hit a wall.
But that wall seems two years or more down the road. Considering the dearth of alternatives and the importance of dividends right now, I think BPT may be a decent place to park some cash for a year or two – presuming you have an accountant to deal with the tax burden.
Do you have a stock that’s on your mind? Drop me a line at firstname.lastname@example.org and I’ll take a look at it.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.