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Safe, Easy 7.4% Income from Decrepit Oil Fields

By Matt Badiali, editor, S&A Resource Report
Friday, December 10, 2010

Owning an old, beat-up, decrepit oil field is lucrative. Fortunately, you don't have to be an oilman or industry insider to do it.
 
In addition, the way these ownerships are set up means shareholders make money regardless of whether the oil price goes up or down.
 
Let me show you how it works...
 
 
One of the oldest and largest oil fields is Prudhoe Bay, discovered in 1968 in northern Alaska. At its peak, Prudhoe produced 1.5 million barrels per day. Now, production is only 189,100 barrels per day.
 
In other words, the field is in decline. But it still accounts for about 4% of U.S. oil production. And it remains the largest oil field ever discovered in North America and the 13th largest in the world. More importantly for you and me, it's one of the safest sources of cash in the market.
 
BP, the current operator of the field, set up an investment vehicle called a "royalty trust" around Prudhoe Bay's production. A royalty trust is a simple business built around income from a long-lived asset (like a mine, a book, or a song). The trust receives the income and passes it directly on to shareholders, while paying little or nothing in corporate income taxes.
 
The BP Prudhoe Bay Royalty Trust (BPT) is one of the simplest ways to own oil income in the stock market. BPT has rights to 16.4% of Prudhoe's first 90,000 barrels of production per day.
 
Like I said, Prudhoe Bay is an old field. Nearly all the reserves are developed. The wells are drilled, the pipes are laid. Now, it just pumps the oil. And it costs just $14.50 per barrel to keep up the infrastructure.
 
So think about it this way: With the oil price over $88 per barrel, each barrel of oil pumped out of Prudhoe is worth $73.50 ($88 minus $14.50). The trust is entitled to 16.4% of that on the first 90,000 barrels. So it receives $12 per barrel for 90,000 barrels per day... every day.
 
The trust earned $45 million last quarter, $47 million in the second quarter, and nearly $50 million in the first quarter this year. It's a lot of cash. And almost all of it went right to shareholders. That's the great thing about oil and gas royalty trusts... we get paid.
 
It's a simple, boring business that does nothing but send cash to its shareholders. That cash comes from producing the most necessary commodity of all – domestic oil.
 
Today, BP Prudhoe Bay Trust will pay $8 per share in dividends. Each share costs $118. That means the yield is 7.1%. I can't think of another investment that will pay us 7.1% as safely as domestic oil production.
 
BP Prudhoe Bay Trust isn't the only one of its kind. There's a whole class of oil and gas royalty trusts. Here's a quick list:
 
Name
Ticker
Yield
Whiting USA Trust
WHX
11.5%
MV Oil Trust
MVO
8.1%
Hugoton Royalty Trust
HGT
7.6%
Dominion Black Warrior
DOM
7.5%
BP Prudhoe Bay Trust
BPT
7.1%
Mesa Royalty Trust
MTR
7.0%
San Juan Basin Royalty Trust
SJT
6.8%
Cross Timbers Royalty Trust
CRT
6.6%
Sabine Royalty Trust
SBR
6.4%
Permian Basin Royalty Trust
PBT
6.2%
Dorchester Minerals
DMLP
6.2%
Average Yield
 
7.4%
 
Of course, any oil and gas investment comes with risk. There are commodity risks and company risks. These companies aren't all the same. And commodity prices could fall. So do your homework and use a trailing stop.
 
But as you can see, you have plenty of opportunity to generate safe income from domestic oil and natural gas. And it's one of my favorite ways to collect consistent income in this uncertain market.
 
Good investing,
 
Matt Badiali




Further Reading:

To make it big in the oil industry, there is one man you need to know – genuine Texas "wildcatter" Cactus Schroeder. Cactus recently sold $200-per-acre land in an unconventional oil field for $10,000 per acre. And now he's telling us how. Get the details here: Unique Oil Stocks That Should Rise Hundreds of Percent.
 
Matt loves unusual commodities. And this one is sitting where gold was years ago... cheap and hated, with lots of upside. Learn how you can earn enormous returns here: An Unusual Kind of Commodity Stock That Can Return 1,000%.

Market Notes


AMAZING SILVER ADVICE FROM MATT BADIALI

Matt Badiali's recommendation to buy "Commodity X" is turning out to be incredible advice. Just ask readers who took him up on his S&A Resource Report recommendation to buy "Commodity X" player Silver Wheaton...
 
Silver Wheaton (SLW) is an unusual precious metals company we've featured many times in this column. It operates no mines of its own. It finances lots of early-stage mining projects... then collects slices of revenue later when some become producing mines. It's a wonderful, "profit heavy, asset lite" business that provides leverage to rising silver prices.
 
SLW's "wonderfulness" can be seen in the two-year chart below. In the summer of 2009, shares traded for around $7. They now trade for more than $40. This is a nearly 500% increase in value... which makes it one of the biggest stock market winners of the past few years (Matt's readers are up about 425%).
 
When we look at this amazing chart, we're reminded of legendary investor Jim Rogers' classic quote: "Markets will rise higher than you think is possible and fall lower than you can possibly imagine." We place silver and silver stocks like Silver Wheaton in the "could rise higher than you think is possible" category. It's a trend you don't want to be out of in the coming years...

Silver Wheaton's extraordinary uptrend

In The Daily Crux



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