BP Prudhoe Bay Royalty Trust (BPT)

After 10 years the stock could be worthless!. In fact, they predict just that in their 2008 annual report (royalties expected to decline to zero by 2020 -- see note 8 on page 22 of the 10K at http://www.secinfo.com/dsVS7.s2zv.htm#2a8s ).

BPT owns nothing except rights to a percentage royalty on the first 90K barrels/day from the field, after deducting hefty "costs" (which are inflation adjusted) and tax charges. The dollar amount of the royalty is keyed to the WTI (West Texas Intermediate) price. Taxes to the State of Alaska go up with oil price, so if oil prices increase the royalty goes up by a smaller amount.

The dividend should decline sharply in 2009 (vs. 2008) because WTI was over $100/bl in 2008 but under $50 today.

Production dropped below 90K bl/day level last year and is expected to decline further as the field is depleted. Furthermore, if a proposed GAS pipeline is built, gas which is now re-injected into the ground and keeping cavity pressures up will be siphoned off; this will reduce oil extraction rate (BPT does not get royalties on gas). BP has the right to unilaterally cease production if they think is is not sufficiently economic.

So any way you look at it this is a wasting asset, like a stock option with an "expiration" date about a decade away.

Finally, the trust itself calculates that it has a net present value (as of 12/31/08) of $418.57M which is less than a third of the $1.4B current market cap. This implies the stock is 3X over-priced. However I think this calculation assumes oil prices stay unchanged, around $45/bl; if they go way up then presumably royalties would be higher.

About the only argument for buying/holding BPT I can see is as a speculation that the price of oil zooms dramatically upward in a few (but not too many!) years, temporarily increasing royalties by a large amount, and hopefully proping up the share price long enough to take the money and run before the final descent.