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Pacific Coast Royalty Trust: Under the Hood

By Elliott H. Gue on Mar. 26, 2014

Pacific Coast Oil Trust divides its underlying acreage into two categories.

  • Developed Properties: Mature oil fields that exhibit predictable production profiles. The trust receives about 80 percent of the profits generated from these wells, the majority of which require only minimal expenditures for work-overs and other maintenance.
  • Remaining Properties: Acreage that includes significant exposure to the Orcutt diatomite formation, an oil-bearing reservoir rock formed from the shells of ancient organisms. Producers extract crude oil from this play by injecting hot steam into the reservoir rock to facilitate the flow of hydrocarbons into the well. Given the initial capital expenditures needed to build infrastructure and develop this play, the trust will receive 7.5 percent of revenue generated from the Orcutt field until the project turns a profit. At this juncture, the trust will receive 25 percent of the net profits.  
     

You can’t beat the management team behind Pacific Coast Royalty Trust’s sponsor. CEO Randall Breitenbach and President Halbert Washburn founded Breitburn Energy Partners LP (NSDQ: BBEP), an upstream MLP that boasts extensive landholdings in California.

The trust disburses virtually all of the cash flow generated from its royalty interests in a monthly distribution to unitholders. Annualizing the trust’s most recent payout equates to a yield of about 11 percent.

No Reservations about ROYT’s Reserves

Pacific Coast Royalty Trust last year reported proven reserves of 10,855 thousand barrels of oil equivalent (mboe), compared to 11,104 mboe in its most recent annual report.


Source: Trust Filings

Our table breaks out the factors behind the increase in Pacific Coast Royalty Trust’s proven reserves. Management attributed much of this increase to improved price realizations on oil and natural gas over the trailing 12 months; an uptick in energy prices boosts the proportion of hydrocarbons in place that the produce can recover economically.

To calculate reserves, the company averages the applicable price benchmarks on the first day of each calendar month over the preceding year.

In 2012, Pacific Coast Oil Trust calculated its reserves based on WTI, which averaged $94.72 per barrel. However, the trust recently switched its oil benchmark to Brent crude oil, which averaged $108.32 per barrel in 2013.

Crude oil accounts for about 98 percent of Pacific Coast Oil Trust’s production and resource base, limiting the effect that movements in natural-gas prices exert on the trust’s reserve estimates. Nevertheless, the trust’s reserve estimates benefited from an average natural-gas price that climbed to $3.67 per million British thermal units (mmBtu), compared to $2.76 per mmBtu in 2012.

These price-related revisions were offset by a 555 mboe decline in reserves because of “conveyed interest volumes,” or hydrocarbons produced by the trust in 2013.

Pacific Coast Oil Trust also lowered its estimate of proven reserves that have yet to be developed to 1.58 million barrels of oil equivalent (mmboe) from 1.609 mmboe; the majority of reserves in this category represent the resource base in the Orcutt diatomite formation.

Revisions to a trust’s reserves because of an improvement in hydrocarbon prices over the trailing 12 months aren’t particularly meaningful. Not only can commodity prices fluctuate dramatically over time, but future oil and gas prices are also far more important to a trust’s cash flow and dividend in subsequent years.

That being said, investors should monitor trusts’ reserve estimates for downward revisions that reflect disappointing drilling results or the conclusion that wellhead economics don’t support the development of certain areas.

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