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Buy, Sell, or Hold: BP Prudhoe Bay Royalty Trust

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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons and decide whether it's possible upside outweighs its risks. Let's take a look at BP Prudhoe Bay Royalty Trust (NYSE: BPT  ) today and see why you might want to buy, sell, or hold it.

Founded in 1989 and based in Austin, Texas, BP Prudhoe Bay Royalty Trust is a $1.7 billion “grantor trust,” holding royalty interests in Alaska’s Prudhoe Bay oil field. Its stock has fallen 31% over the past year (actually, it lost about that much in a single week!), but over the past 20 years, it has averaged annual gains of nearly 23%.

The first thing to like about this stock is its dividend, which is yielding a massive 11.9%. When you consider that a five-year government bond doesn’t even yield 1% and a 30-year Treasury was recently yielding 3.15%, 11.9% looks darn good.

It’s important to know that BP Prudhoe Bay is a royalty trust, which is a lot like a real estate investment trust (REIT), as both are required to pay out almost all of their earnings in dividends. Royalty trusts have their performance completely tied to income generated by particular operations in a particular oil or gas field. Thus, when the well runs dry there, so does the trust. Royalty trusts generally expire after a set period. BP Prudhoe Bay’s reserves are currently expected to last some 12 years, and the dividends are expected to peter out around 2027. So investors are not in any immediate danger.

The company will benefit from increases in the price of oil and boosted production levels. Its focus on oil over gas is another plus these days, with the price of natural gas historically low and many expecting oil’s price to rise.

One reason that the stock plunged about 30% last year was that some in the media suggested that it was overvalued, with its market capitalization exceeding the expected sum of its future dividends. That is indeed worrisome, but my colleague Sean Williams has explained that we can’t really know what the future dividends will total, and that assuming that the price of oil rises between now and 2027, they may well go up.

While some like that BP Prudhoe Bay’s fortunes are tied to a single oil field as it offers a lot of focus, others are less keen to have all their eggs in that one basket. If for some reason production fell sharply in Prudhoe Bay, this stock could take a big hit.

Another reason to consider not holding this stock is if you’re not comfortable with it. If you don’t have a good grasp on the oil industry and on how royalty trusts (especially this one) work, then this might not be a good fit for you. Also, if you own this stock, it would be smart to keep up with its performance and prospects regularly, as it’s not one to own forever.

Hold (off)
Given the reasons to buy or sell BP Prudhoe Bay, it's not unreasonable to decide to just hold off on it. You might want to wait for the price of oil to rise or to develop more confidence in the company’s future expected dividend payouts being sufficient, considering its market value.

You might also check out some other interesting royalty trusts, to see if they seem like better bargains than BP Prudhoe Bay. Perhaps take a look at Mesabi Trust (NYSE: MSB  ) , which takes some of the proceeds from iron mined by a Cliffs Natural Resources subsidiary. It recently yielded a whopping 8.3%, and like BP Prudhoe Bay, its dividends are not expected to expire anytime soon. A possible downside for the stock is a slowdown in demand for ore, which has been one of several issues for Cliffs, which has seen its stock tumble 69% over the past year.

Another one to consider is SandRidge Mississippian Trust I  (NYSE: SDT  ) , one of SandRidge Energy’s two royalty trusts. Its yield was recently an enormous 18.1%, though like other trusts, the payout will fluctuate over time. SandRidge Energy has born some criticism regarding its corporate governance, but it has made some smart moves in the recent past, such as shifting its attention from gas to oil. The Trust is down more than 52% over the past year, in part due to disappointing recent earnings. That spells opportunity for investors who see a rosy future.

The verdict
I'm intrigued by this company and its hefty dividend and may end up adding it to my portfolio one of these days. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

Investors were startled after SandRidge plummeted when natural gas prices reached 10-year lows, but with the company focusing on growing liquids production, the future looks optimistic. If you are unsure about the future of this emerging oil and gas junior and are looking to find out more about its strengths and weaknesses, then check out The Motley Fool's premium research report detailing SandRidge's game plan and what to expect from the company going forward. To get started, simply click here now!

Read/Post Comments (1) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2015, at 8:33 PM, PatriotEnergy wrote:

    Owning oil and gas royalties are still a good way to beat the flat yields (which haven't improved since this article was written). When oil prices turn, these are going to be brilliant investments again and many are being sold at fire-sale prices now.

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