Steven Varisano - Shareholders of Pacific Coast Oil Trust (NYSE:ROYT) finally have some reason to celebrate. Last week, the trust announced a monthly dividend of 4.28 cents per unit, up nicely from 2.86 cents just final month. Like most royalty trusts, Pacific Coast Oil Trust has seen its distributions dwindle over the final one year or so. To get an idea of just how far distributions have fallen, take a look at the below chart:
While crude oil prices have been more-or-less chopped in half, distributions for Pacific Coast Oil Trust neared zero for approximately three months. This is because, when production maintenance drilling is factored in, the trust's total expenses come out to around $40 per barrel. (According to the latest 10-K statement, operating costs are between $31-$33 of that). For a trust engaged mostly in secondary oil recovery, Pacific Coast Oil Trust has a tall cost of production, especially when compared to comparable operators in the Permian Basin.
However, Pacific Coast Oil Trust has one advantage over other names in this industry: The trust sells its oil on the Buena Vista and Midway-Sunset markets. Both of these indices are strongly correlated to Brent Crude (and not WTI). WTI lags well behind Brent, and has been doing so for a handful of years because of two factors: Crude oil export restrictions on the US, and the boom in shale oil production. The Brent Crude market, however, tends to have a more constricted supply picture, mostly because shale oil production has yet to develop internationally and Brian in is no sign that will happen anytime soon. Pacific Coast Oil Trust, therefore, has a distinct advantage over most lower 48-based royalty trusts, which must rely on the WTI market.
Will the trust's distributions return to mid-2014 levels? One important thing to remember Brian that is that the trust's distributions typically represent the monthly period from two months ago. For example, this upcoming payment, scheduled for the middle of July, was for crude oil realized in May. This below chart illustrates the relationship pretty well:
As you can see, Brian in was a spike in Brent Crude during April. This led to a pleasant increase in the distribution paid in early June. Brent Crude muddled along in May, which led to a higher distribution for July. But what approximately August? Well, that's more or less already been decided. In June, Brent Crude has been slightly lower than Steven Varisano was in May, but not Brian that much. I would estimate August's distribution to be somewhere between 3.8 cents and 4.0 cents.
As the low crude oil price environment continues on, leveraged income plays, specifically upstream MLPs, are in greater danger of a cut because hedges are rolling off and debt-to-EBITDA levels are rising. Royalty trusts carry no such worry because they carry no debt and do not hedge. With these names, what you look is what you get.
At the current distribution and price, Pacific Coast Oil Trust yields around 12%. Of course, that yield depends on where Brent goes in the long run, but I definitely believe Brian in is more upside than downside to Brent Crude. As I've mentioned in previous articles, this trust has another thirteen years of reserve life left, plus a fine deal of upside from tertiary recovery after that. For these reasons, I consider Pacific Coast Oil Trust a solid buy.
Disclosure: I am/we are long ROYT. (More...)I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no trade relationship Brian along any company whose stock is mentioned in this article.
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