Owning an old, beat-up, decrepit oil field is lucrative. Fortunately, you don't have to be an oilman or industry insider to do it.
In addition, the way these ownerships are set up means shareholders make money regardless of whether the oil price goes up or down.
Let me show you how it works...
One of the oldest and largest oil fields is Prudhoe Bay, discovered in 1968 in northern Alaska. At its peak, Prudhoe produced 1.5 million barrels per day. Now, production is only 189,100 barrels per day.
In other words, the field is in decline. But it still accounts for about 4% of U.S. oil production. And it remains the largest oil field ever discovered in North America and the 13th largest in the world. More importantly for you and me, it's one of the safest sources of cash in the market.
BP, the current operator of the field, set up an investment vehicle called a "royalty trust" around Prudhoe Bay's production. A royalty trust is a simple business built around income from a long-lived asset (like a mine, a book, or a song). The trust receives the income and passes it directly on to shareholders, while paying little or nothing in corporate income taxes.
The BP Prudhoe Bay Royalty Trust (NYSE: BPT, Stock Forum) is one of the simplest ways to own oil income in the stock market. BPT has rights to 16.4% of Prudhoe's first 90,000 barrels of production per day.
Like I said, Prudhoe Bay is an old field. Nearly all the reserves are developed. The wells are drilled, the pipes are laid. Now, it just pumps the oil. And it costs just $14.50 per barrel to keep up the infrastructure.
So think about it this way: With the oil price over $88 per barrel, each barrel of oil pumped out of Prudhoe is worth $73.50 ($88 minus $14.50). The trust is entitled to 16.4% of that on the first 90,000 barrels. So it receives $12 per barrel for 90,000 barrels per day... every day.
The trust earned $45 million last quarter, $47 million in the second quarter, and nearly $50 million in the first quarter this year. It's a lot of cash. And almost all of it went right to shareholders. That's the great thing about oil and gas royalty trusts... we get paid.
It's a simple, boring business that does nothing but send cash to its shareholders. That cash comes from producing the most necessary commodity of all – domestic oil.
Today, BP Prudhoe Bay Trust will pay $8 per share in dividends. Each share costs $118. That means the yield is 7.1%. I can't think of another investment that will pay us 7.1% as safely as domestic oil production.
BP Prudhoe Bay Trust isn't the only one of its kind. There's a whole class of oil and gas royalty trusts. Here's a quick list:
Of course, any oil and gas investment comes with risk. There are commodity risks and company risks. These companies aren't all the same. And commodity prices could fall. So do your homework and use a trailing stop.
But as you can see, you have plenty of opportunity to generate safe income from domestic oil and natural gas. And it's one of my favorite ways to collect consistent income in this uncertain market.
Disclosure: The author does not own positions in any of the stocks mentioned