What Does 2011 Have in Store for MV Oil Trust?
With a barrel of crude oil trading north of $90, I think it may be time to discuss a little known stock called MV Oil Trust (MVO). MV Oil Trust is a somewhat complicated stock that is largely owned and controlled by two companies named Murfin Drilling and Vess Oil.
The two companied joined forces in the late 1990's to form MV Oil Partners, which helps drill and produce hydrocarbons from Trust lands in both Kansas and Colorado. MV Partners and MV Oil Trust have an interest in lands located in the mature oil and gas fields of Trapp, Hansen, and Bemis Shutts. The majority of these fields are located in the El Dorado area of Southwest and Northeast Kansas.
As mentioned previously, oil is currently priced at about $91 a barel. In 2006, when MV Oil Trust filed their IPO, the trust was under hedge contracts till December, 31st 2010. The hedge contracts forced MVO to sell approximately 80% of their hydrocarbon production at $65 a barrel. Since oil is significantly above the hedge price of $65, it's worth asking what the value of MVO may be in 2011.
First let's look at the historical production of the trust from its inception in 2006. All charts I present were put together by myself using SEC filings and prices based on the market close on 12/31/2010.
The historical quarterly average for hydrocarbon production has been approximately 241,000 barrels of oil equivalents, which is predominately composed of crude oil.
Second, using the average historical hydrocarbon production rate and average cost of producing the hydrocarbons, we can produce some relatively reliable distribution projections at varying prices for a barrel of crude oil (see chart below). It should be noted that while the current crude spot price may be $91, MVO crude is generally sold off at a $7 discount to the spot price. This cost is incurred for transporting the oil from the well head to the purchaser. Please take this fact into consideration when reading the valuation (e.g., $92 spot price would essentially be $85 oil to the Trust).
Now that we have the distribution projections, let's take the analysis one step further and guess what an appropriate valuation would be for the trust based on these distribution rates.
Oil Trusts can be valued in several ways, one way to value them is based off of the present value of the remaining oil reserves. This valuation method is appropriate in some cases, particularly if a trust has a limited time frame before it's dissolved. However, according to the MVO prospectus the trust will be dissolved no earlier than 2026. With the trust's demise set so far off into the future, it seems more apropriate to bench mark MVO against several of its peers which are generally valued based on the distribution yield they produce. If we look at this Oil Trust Index I created using prices from December, 31st 2010, we can see that most trusts are valued at around a 7% yield, with a price to yield ratio of approximately 15.
So, if we apply the same yield valuation to MVO, what do we get?
The results of this analysis indicate that the trust may be under valued given the current price of crude oil, particularly given that most trusts trade at a 7% yield. I have highlighted in red the $85 a barrell oil line to show where crude oil is today after the $7 discount is applied from the spot price. Furthermore, I've bolded the cell where MVO could trade if investors value the potential annual distribution at 7%. The bold cell indicates that a likely value for MVO in 2011 could be $60 a unit if oil stays in its current price range. The yellow cells on this spreadsheet indicate where the trust is trading today (in the $40 range).
These numbers were put together using data from previous SEC filings, and assumptions were made about future production rates and the future price of crude oil. I encourage investors to do their own due diligence before deciding whether a stock is appropriate for their portfolio.
