After my weekly visit to the pump on Friday, I did not want to post any further stock picks. Not because my love for investing has diminished, but because gas was so expensive I no longer have any money to invest. That little bit of gasoline is causing quite a squeeze on my weekly budget, so I said “enough of this!” What can I do to shield my budget from the swings in gasoline prices?

  • Gas PricesOwn my own gas station? Besides the fact that I don’t have enough money to purchase a gas station, gas stations still buy the gas from the actual producers and are not immune to price changes.
  • Walk to work? Although this would do wonders for my health, the 25 mile hike each direction may cut into my free time a bit.
  • Buy stock in a oil producer (like ExxonMobil)? This is not a bad option since the profits of these corporations will increase along with oil prices but corporate taxes will really cut into your gains.
  • Own my own oilfield? This sounds like the best option, because what is linked closer to the price of oil, than oil.  I called my local Wal-Mart but they didn’t carry oil wells.  So how do I buy one?

Royalty trusts?

A trust provides an ownership interest in a natural resource such as gas or oil. According to Wikipedia, “they are a powerful investment tool for people who wish to invest directly in extraction of petroleum or mining of other materials, but who do not have the resources or risk-tolerance to buy their own well or mine”.  That sounds exactly like what I’m trying to achieve.

Basically, you own the oil through the trust, and for each barrel produced the trust makes a dividend payment to you.  In addition, by being incorporated as a royalty trust, most of these ‘corporations’ are able to avoid taxes all together. (No double taxation on your investments!)

BP Prudhoe Bay Royalty Trust (NYSE:BPT):

BP Prudhoe Bay Royalty Trust is a direct, non-operational ownership interest in the Prudhoe Bay oil field in Alaska’s North Slope. For each barrel that flows through the Trans Alaska Pipeline, BP sends a check to your house. To be more accurate, for the first 90,000 barrels per day, BP sends you a check for 16% of them (in the form of a dividend).

Prudhoe Bay currently has enough proved reserves to last at least until 2024 (somehow they keep finding more oil every day). So let’s do a little calculation on my gasoline bill over the next 14 years.

At today’s prices, I would spend ~$1500 per year for gas.  That means the dividends of 161 shares of BPT would provide enough cash flow to fill my car.  Since the dividend payments move in line with gas prices, 161 shares would fill my car for the next 14 years.  Therefore I can spend around $17,000 today to purchase enough gas to last me for 14 years.  Let’s see how I would fare with some other scenarios.

gas table

So my options are, spending $17k today, or spending between $21k-$35k over the next 14 years.

Obviously this is a quick calculation and leaves out many things you should take into consideration such as:

  • Will renewable energy sources drive down oil prices in the next 14 years?
  • What is the cost of $21k-$35k in today’s dollars?
  • What if BPT runs out before 2024?  What if additional proved reserves are found?
  • Will you buy a newer vehicle that uses less gas?
  • What happens in case of a disaster (such as oil pipeline shutdown)?
  • How does this compare to the returns I could get on my original $17k?

Alternatives:

There are a large number of royalty trusts for every type of natural resource including oil and gas.  Please note that each royalty trust is unique in their payout structure and quantity of natural resource still remaining.  Wikipedia provides you with a very nice list to start researching (http://en.wikipedia.org/wiki/Royalty_trust)

Disclosure:

I don’t own any and but plan on purchasing within the next 60 days

Kevin’s Take:

Daniel makes a compelling argument. I wouldn’t mind investing in this today, but I wouldn’t want to hold for very long. The closer that well gets to drying up, the less valuable the trust will be. When the well finally dries up, your stock is worthless. However, as long as that well is pumping oil, you should make a nice dividend profit.

Important to note that ALL ideas, thoughts, and/or forecasts expressed or implied herein are for informational and entertainment purposes only and should NOT be construed as a recommendation to invest, trade, or speculate in the markets.