A 14% Yield With Upside Potential On A Pure-Play Trust

Where do you think the price of crude oil will be in the coming quarters – up, down, or sideways? The US Energy Information Administration (the EIA) sees oil prices continuing to stay at better levels in 2017 and 2018:

(Source: EIA.gov)

The futures market seems to agree with this assessment, and shows prices which are a bit higher – in the ~$ 51-52 range over the next 12 months:

(Source: CME Group)

One narrative which we’ve heard from seasoned Energy Patch hands is that the market isn’t pricing in the possibility of possible disruptions, which, given the tensions in some production areas, could potentially cause further upward pressure.

If you’re looking for exposure to the price of oil, there are some trusts out there which can accomplish that and pay you an attractive distribution yield. We just dipped our toe in the water with MV Oil Trust (NYSE:MVO), a pure play trust which gets over 98% of its income from oil. We’d like to hear from you about your favorites.

Profile

The Trust was formed on August 3, 2006, under the Delaware Statutory Trust Act pursuant to a Trust Agreement among MV Partners, LLC, a Kansas limited liability company, as trustor, The Bank of New York Mellon Trust Company, N.A., as Trustee, and Wilmington Trust Company, as Delaware Trustee.

The Trust was created to acquire and hold a term net profits interest for the benefit of the Trust unitholders pursuant to a conveyance from MV Partners to the Trust. The term net profits interest represents the right to receive 80% of the net proceeds from production from the underlying properties. The term net profits interest consists of MV Partners’ net interests in all of its oil and natural gas properties located in the Mid-Continent region in the states of Kansas and Colorado. The underlying properties include approximately 1,000 producing oil and gas wells.

The net profits interest is passive in nature, and the Trustee has no management control over and no responsibility relating to the operation of the underlying properties. The net profits interest will terminate on the later to occur of (1) June 30, 2026, or (2) the time when 14.4 million barrels of oil equivalent (“MMBoe”) have been produced from the underlying properties and sold (which amount is the equivalent of 11.5 MMBoe with respect to the Trust’s net profits interest), and the Trust will soon thereafter wind up its affairs and terminate (Source: MVO site).

MVO issues a 1099 at tax time. There is further information about OID at the end of this article.

(Source: MVO site)

Distributions

MVO pays a variable quarterly distribution, which fluctuates with the price of oil (BOE = one stock tank barrel of oil equivalent, computed on an approximate energy equivalent basis that one Bbl of crude oil equals six Mcf of natural gas and one Bbl of crude oil equals 1.54 Bbls of natural gas liquids).

MVO pays in a January-April-July-October cycle. Distributions are generally paid by the 25th day of the month following the end of a calendar quarter.

As oil prices improved in 2017, MVO’s payouts jumped dramatically from a $ .12 to $ .16 range in Q3-4 ’16 to a $ .225-.25 range in Q1-2 ’17:

The Trust’s expenses tend to range in the $ 200-222K range, and averaged ~9% of cash proceeds available over the past four quarters.

MVO should go ex-dividend soon, probably around 10/12/17, with a payout on 10/25/17. It’ll probably announce the Q3 ’17 distribution this week.

You can track MVO’s current price and yield in our High Dividend Stocks By Sectors Tables (in the Basic Materials section).

Since MVO’s quarterly distributions are tied to the price of oil, we put together a table which ties the distribution ranges to oil price ranges over the past eight quarters.

The Trust paid out $ .20-.25 when oil was in a $ 44.50 to $ 47.50 range, but dropped all the way to $ .03 when oil was bottoming out in the mid-$ 20 range.

Overhead – There are some outlier quarters, such as Q4 ’16, when operating costs rose to $ 5.88M, and dropped net profits to $ 1.997M vs. $ 2.577M in Q3 ’16.

“As is customary in the oil and natural gas industry, MV Partners pays an overhead fee to Vess Oil and Murfin Drilling to operate the underlying properties on behalf of MV Partners. The operating activities include various engineering, accounting and administrative functions. The fee is based on a monthly charge per active operated well, which totaled $ 3.2 million in 2014, $ 3.2 million in 2015 and $ 3.0 million in 2016 for all of the underlying properties for which MV Partners was designated as the operator. The fee is adjusted annually and will increase or decrease each year based on changes in the year-end index of average weekly earnings of crude petroleum and natural gas workers.” (Source: MVO 10-K)

These Q4 ’16 figures are from MVO’s Q4 press release, which is typical of the figures the trust issues each quarter. It also files quarterly and annual SEC reports, with more information – particularly in the annual reports:

(Source: MVO site)

Total volume has been pretty steady over the past seven quarters and averaged ~192K for the past four quarters.

Q2 and Q1 ’17 had substantial improvements in gross proceeds, net profits, and total cash available for the Trust, thanks to big jumps in oil prices – average BOE prices jumped 72% in Q1 and 24% in Q2, continuing to improve after oil bottomed out in February 2016:

These TTM figures reinforce the importance of oil pricing to MVO – prices jumped by 15.69% over the past four quarters, which resulted in a 22% rise in gross proceeds, a whopping 89% jump in net profits, and ultimately caused a 72% rise in distributions/unit. Trust expenses, which are relatively steady, subsequently shrank from 15% to 9% of cash proceeds available. The Trust maintains 11.5M units, of which MV Energy, LLC owns 25%, and VAP-I, LLC owns 12.5%.

(Source: MVO ’16 10K)

Risks

The two big gorillas in MVO’s cage are future oil prices and reserves.

Reserves: On the 2016 annual report, it listed the results of a study done by CG&A, independent petroleum and geological engineers:

“As of December 31, 2016, the underlying properties produced predominantly oil from approximately 1,000 wells, and the projected reserve life of the underlying properties was over 50 years.”

“Based on the reserve report, CG&A estimated that the trust would terminate June 30, 2026 based on the calculation that 14.4 MMBoe would have been produced from the underlying properties and sold (which amount is the equivalent of 11.5 MMBoe in respect of the trust’s right to receive 80% of the net proceeds from the underlying properties pursuant to the net profits interest) prior to this date.” (Emphasis ours)

“OK, doc, give it to me straight, how much longer have I got? We assembled a table that attempts to answer this question. The annual report said that, “As of December 31, 2016, cumulatively, since inception, the trust has received payment for approximately 7.4 MMBoe of the trust’s 11.5 MMBoe interest.”

That means that the trust was entitled to the proceeds of 4.1M additional BOE as of 12/31/16. The trailing BOE production volume was 767K, which meant that MVO got paid on ~614K BOE.

If this production rate is maintained, there should be over six years left of future payouts, before MVO has received its entire 11.5M BOE interest. This may happen as early as 9/1/2023.

Of course, this is merely a projection, and the final date will be impacted by well depletions, volume from newer wells, and improved technology, among other things. The trust does spend funds on capex in order to maintain and improve its wells. We’ve listed the capex figures at the end of this article.

MVO’s Reserve statement shows that 81% of its oil wells were “proved developed” wells as of 12/31/17:

It also provided a net Present valuation of estimated future Net Cash Flows from the trust’s net profits interest – NPI.

(Source: MVO 2016 10-K)

Oil Prices

This five-year chart details how closely MVO’s price/unit is tied to the price of oil. When oil was up around $ 100 in 2013, MVO was $ 21.52. As oil bottomed out in early 2016, MVO went as low as $ 3.19, and has since recovered to ~$ 5.50, as oil is at $ 52.14.

MVO has underperformed both WTI oil and the market over the past year and year-to-date, but has outperformed over the past month:

Valuations

We wanted to get a sense of how MVO’s valuations compared to another similarly sized energy trust, so this table compares it to VOC Energy Trust (NYSE:VOC). VOC has a very similar market cap, but it does get a wee bit more income from natural gas, ~4.4% in 2016.

MVO is getting a premium price/book valuation vs. VOC, but the market is demanding a higher dividend yield and a lower P/E.

Financials

One of the reasons for that higher yield is probably the closer termination date for MVO – 2026 vs. 2030 for VOC. VOC has very similar, low trust expense levels – both trusts have operating margins of ~90% and no debt. MVO shows much higher ROA and ROE levels.

Options

MVO’s option yields aren’t currently that attractive, but you can see details for over 25 other income-producing trades in both our Covered Calls Table and our Cash Secured Puts Table.

Trust Assets

Capex

“As substantially all of the underlying properties are located in mature fields, MV Partners does not expect future costs for the underlying properties to change significantly as compared to recent historical costs other than changes due to fluctuations in the general cost of oilfield services. MV Partners may establish a capital reserve of up to $ 1.0 million in the aggregate at any given time to reduce the impact on distributions of uneven capital expenditure timing. As of June 30, 2017, $ 1,000,000 was held by MV Partners as a capital reserve.”- (Source: MVO Q2 ’17 10-Q)

Definition: Original Issue Discount (OID) is a type of interest that is not payable as it accrues. OID is normally created when a debt, usually a bond, is issued at a discount. In effect, selling a bond at a discount converts stated principal into a return on investment, or interest.

Summary

We rate MVO as a speculative buy, based upon the potential for attractive distributions over the next six quarters. Given the mid-$ 5 valuation, if MVO is able to pay out distributions of $ .22, you’re looking at a 16%-plus yield. Even a $ .15 quarterly distribution would approach an 11% yield. However, if you don’t want exposure to oil prices, MVO is definitely not for you.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Articles posted on SA aren’t meant to be all-inclusive white papers, by any means. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Disclosure: I am/we are long MVO.

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 business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more stocks trading at less than $ 1 per share and/or with less than a $ 100 million market cap. Please be aware of the risks associated with these stocks.

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