HEARD ON THE STREET: BP Could Defer To Royalty

19th Jul 2010 19:42

By Liam Denning A DOW JONES COLUMN A quick sale of its Alaskan assets to Apache Corp. would be a neat way for BP to raise cash. But there is no guarantee of that deal happening, so it's worth examining other options. A possible route is one BP has taken before: the creation of a royalty trust. BP Prudhoe Bay Royalty Trust has been listed in New York (ticker: BPT) since 1989. The trust owns 16.4% of the first 90,000 barrels per day of BP's oil from the Prudhoe Bay field in Alaska. The oil sells at a price tied to average oil prices, net of costs and production taxes. The bulk of profits, exempt from corporate tax, are paid out. This structure offers investors more direct exposure to spot oil prices than funds invested in oil futures. For example, the US Oil Fund is down by half since its inception in April 2006, despite Nymex crude prices having risen 11%. BPT units are up 22%. BPT would also be unaffected by any regulatory crackdown in derivatives markets or increases in corporate tax rates. And it offers a dividend yield of more than 9%. BP could conceivably create a "BPT 2". Prudhoe Bay's declining production is of concern. However, BPT's royalty payments should run through 2023, according to a consultants' report attached to the last 10-K filing. The same report pegged the net present value of BPT's future revenues at $836.6 million, based on 2009 oil prices. BPT's market capitalization of $1.9 billion suggests investors are betting on oil prices to rise. Raising a couple of billion dollars would only get BP so far. But if corporate buyers for Alaska prove elusive, why not tap the broader market? (Liam Denning joined The Wall Street Journal from the Financial Times, where he wrote for the Lex column. Previously, he was an investment banker at Goldman Sachs. He can be reached at 212-416-3618 or by email at [email protected]) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires July 19, 2010 14:42 ET (18:42 GMT)