5/28/2015

PacificCoastOilTrustUpsItsDistributionPacificCoastOilTrust(NYSE:ROYT)|SeekingAlpha

PacificCoastOilTrustUpsItsDistribution
May27,20151:42PMET
by:CaseyHoerth

Summary
PacificCoastOilTrustraiseditsdistributionto2.8cents.
Unitsarepricingintheexpectationoffurtherdistributionincreases.
IfBrentCrudeaverages$80orhigherinthecomingyears,thistrustisagreatbargain,butifpricesremain
here,returnswillbemeager.
PacificCoastOilTrust(NYSE:ROYT),atrustoperatinginmatureoilfieldsinLosAngelesandSantaBarbara
counties,justdeclareditsdistributionforthemonthofJune.Thetrustwillpay2.8centsperunit,wayupfrom9/10ths
ofacentlastmonthandabout8/10thsofacentthemonthbefore.Inmyopinionthisdistributionincreaserepresentsa
verypositivedevelopmentforthetrust.
Thisarticlewilldoafewthings.First,itwillmodeldistributionsgoingforwardbylookingatthetrust'spricerealization
trendsandcoststructure.Second,thisarticlewilltakealookatvaluationsandwhatinvestorsareexpecting.

Aboutthetrust
PacificCoastOilTrustwascarvedoutofholdingsofPacificCoastEnergyCompany,aprivatelyheldcompany
foundedbyRandyBreitenbachandHaroldWashburn.Thetrustreceives80%ofnetprofitsfrom"developed"
properties,plusanother25%ofnetprofitsfromits"remaining"acreagedrilledbyPacificCoastEnergyCompany.
"Developed"propertiesareestimatedtohaveaboutthirteenyearsofreserveliferemaining."Remaining"properties
shouldhavesignificantlymorereservelifeduetosteamfloodingpotential.
Thetrustisawaterfloodoperatorthatissteadilytransitioningtoasteamfloodoperator.Aswaterfloodingexhauststhe
crudeoilreservesitcanexploit,PCECmustswitchtosteamflooding,whichisasomewhatmoreexpensivemethodof
crudeoilproduction,butcanalsogetatadditionalreservesintheground.
PacificCoastOilTrustsellsitscrudeoilontheBuenaVistaandMidwaySunsetmarkets.Thesetwoindicesare
stronglylinkedtoBrentCrude,butsometimestradeatadiscounttoBrentCrudemarkets(and,importantly,donot
correlatewiththemoreamplysuppliedWTI).

Whydistributionsareup
It'snothardtoseewhydistributionsareupversuslastmonth.InMarch,reportedrealizedpriceswere$40.88per
barrelondevelopedpropertiesand$39.59onremainingproperties.InApril,thosefigurestickedupto$47.50per
barrelfordevelopedpropertiesand$46.07forremainingproperties.Asfarascostofproductiongoes,operating
expensescomeouttoabout$31perbarrelasoflastyear's10kreport,butwhenwefactorinmaintenancecapex
drilling,thetrustwasaboutcashflowneutralwhenrealizedpriceswerearound$39or$40perbarrel.Keepinmind
thatdistributionstypicallylagcashflowbytwomonths,soJune'sdistributionisbasedonrealizedpricesinApril.

http://seekingalpha.com/article/3215516pacificcoastoiltrustupsitsdistribution

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5/28/2015

PacificCoastOilTrustUpsItsDistributionPacificCoastOilTrust(NYSE:ROYT)|SeekingAlpha

CourtesyofNASDAQ
Withthatinmind,let'stakealookatBrentCrudeabove.CrudeoilpricesinAprilstartedlowatabout$58inAprilbut
workedtheirwayupto$68bytheendofthemonth.InMay,BrentCrudestoppedrisingbutstayedrelativelyhigh.
Therefore,IexpectJuly'sdistributiontobehigherthanJune's.Ipredictadistributionofsomewherebetweenthree
centsandfourcentsforJuly.

Valuation
Consideringthatthedividendwillbe2.8centsnextmonth,thetrustwouldpayanannualizeddividendof33.6cents
peryear.Withasharepriceof$3.90,that'sadividendyieldofabout8.6%.Ifweassumenoadditionalvaluebeyond
thetrust'sproveddevelopedreservesofthirteenmoreyearsofproduction,thatmeans,ifdistributionsremained
constant,investorswouldgetbackonly113%oftheirmoney,orabouta1%annualreturnoverthenextthirteenyears
ofproductionliferemaining.That'snotaverygoodreturn,butinmyopiniontherelativelyhighunitpricereflectsthe
beliefinvestorshavethatrealizedcrudepriceswillcontinuetorise.
Isthetrustabuyrighthere?Theanswertothatquestiondependsonwhatfuturedistributionswillbe.Therearemany
movingpartstothisequation.Forexample,operatingcostswillriseasthetrustgraduallyshiftsfromwaterfloodingto
steamflooding.Crudeoilpriceswillalsogreatlyeffectfuturedistributions,aswillfurtherabilitytodevelop
steamfloodingandaccessreservesbeyondthatwhichis"proved"and"developed."Forthesakeofsimplicity,let's
assumethatnoreservesarediscovered,andoffsetthatbykeepingproductioncostsconstant.
IfweassumeafiveyearaverageBrentCrudepriceof$80,weshouldgetanaveragedistributionof8centsper
month,or96centsperyear.(Thisestimatewasbasedondistributionsbackwhenrealizedpriceswere$88perbarrel,
wheredistributionswere9.2cents.)At96centsperyear,thetrustwouldyield24%atthisunitprice.Assumingthirteen
moreyearsofreservelife,that'sa320%returnofcapital,whichismuchbetter.
Ofcourse,I'mnotsurewhatBrentCrudewillaverageoverthecomingyears,butIdobelievethatitwilltrendhigher.
Duetocongressionalmandate,theUSisunabletoexportitsglutofcrudeoil(thoughitcananddoesexportrefined
gasoline),andthisprovidessomeinsulationtoBrentCrudefromthefastestgrowingcrudeoilproductionsourcesinthe
world.Therefore,IbelievethatPacificCoastOilTrustremainsarelativelygoodplacetobe.Nextmonthshouldsee
higherdistributions.

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