Slick Way to Slippery Profits

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Quick, what has been the top-performing income investment for the last year? 2 years? 10 years? If you named one of the top performing oil and natural gas trusts or limited partnerships, wonderful! You may go to the head of the class, take out your preferred Spiderman comic book, and stop paying attention. All others, keep listening.

In all cases, for the income-oriented investor, who wanted both income and growth, no investment class has been able to touch the trusts and master limited partnerships. Take a look here at one of my favorites: Prudhoe Bay. How does a total return (assuming reinvested dividends) of around 3700% grab you? At a time when mutual funds were very content to tread water, let alone not lose money, $10000 invested in BPT would have given a pre-tax return of $371,315. Or if your rely on the dividends to support your retirement, you would have received $60,977 of dividends over that period, and still have $152,342 at the end of the period.

10 year prudhoe bay

Of course, just because an investment has done well in the past, does not mean it will do well in the future. But the very same forces that have propelled the tremendous increase in the price of oil in the last two decades are continuing to rage: dwindling supplies and increasing demand. Be sure to revisit my earlier post on peak oil.

By the way, Prudhoe Bay’s oil fields are depleting every year, and a safe estimate is the reserves will deplete by as much as 10% a year. As a unitholder in BPT, you are entitled to a portion of 16% of the first 90,000 barrels to flow. Current production is around 90,000 barrels per day. when current levels are at about 340,000 barrels per day. By my estimates, that means that for the next 12 years, you are fairly reasonably ensured of a dividend representing an eighth of a barrel of oil per share. At present oil prices, that works out to around $10 a share. With oil becoming scarcer, both dividends and share values are likely to appreciate significantly.

But in about 12 years, this investment may well have lost its bloom, as production from the field may have declined so sharply as to directly impact unitholders’ share of daily production. Frankly I think it will be time to take a good hard look at this investment well before that. For one thing, technology is likely to have evolved, allowing the engineers from BP to access some or all of the 3 billion barrels of oil that are known to be there, but are too difficult or expensive to get to today. That would give the investment another decade or two of production.

How likely is that? Very likely. Technological advances in the oil industry have been constant and have extended the lives of some Texas oil fields, first estimated at 10 years, to over 80 years!

More significantly, though, is that within 10 years other energy technologies will have started to challenge oil for economic viability. Will it be coal to gas? Biofuels? Solar Energy? Clean Nuclear Energy? I think all of these have their potential, as well as their unique set of challenges. But for 7 to 10 years at least, I don’t think you can go wrong betting on a good return from King Oil.


Disclosure: The Strategic Investor currently owns this investment in his private portfolio.
All investments involve risk. An investment’s past performance is no guarantee of future performance.
Be sure to read our disclaimer. We strongly advise against purchasing any securities without prior consultation of a licensed professional.


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