Special Situation Investing
Special Situation Investing
MV oil trust (MVO)

MV oil trust (MVO)

Short valuation summary of soon to be liquidated MV Oil Trust

Welcome to Episode 79 of the podcast where we aim to jump-start your investment research through our short and actionable investment summaries.

Today, we once again revisit the world of oil and gas royalties to see why MV Oil Trust provides investors with a unique opportunity to profit.

MV Oil Trust was formed by MV Energy Partners in 2006 as a means to develop oil producing acreage in southern Kansas and eastern Colorado. The resulting net profits interest entitled MV Oil Trust to 80% of the profits from the then 18.7 MMBoe of proved reserves on the 43,882 net acres that the trust controls. The mostly oil and limited gas resources on the property were described in the trust’s founding documents as having a 50-year expected lifespan.

MV Oil Trust is a passive entity set to continue distributions until the later of two events takes place. First, when the trust produces a total of 11.5 MMBoe or second, in June of 2026, which is 20 years after the trust’s founding. Unlike some passive trusts, MV Oil’s acreage can be developed with new wells and sections of land can be sold when it is advantageous to the trust’s unit holders. Vess Energy Group, which manages operations on the land, has added to the well count over the life of the trust.

At present the trust has no debt, a market cap of $137 mm, and nearly $1 mm in cash reserves. The trust yields a 17% annualized dividend and has remained profitable since its inception nearly 20 years ago. In fact, MV Oil Trust with dividends reinvested produced a near identical return to the S&P 500 since its inception despite a shale revolution that saw falling profits for most oil and gas operators over the last decade. This performance is most likely attributable to the beneficial pass through nature that royalty companies provide, a benefit which has been discussed extensively in past write-ups.

On the surface, MV Oil trust appears no different than any of the two dozen or so publicly traded oil and gas royalties available in the US. The trust’s upcoming liquidation date, however, is the catalyst behind this potentially special situation. As of the trust’s last filing, it has produced 10.8 MMBoe total since its 2006 inception. This means that only 700 MBoe remains to be produced before the 11.5 MMBoe threshold is met and the trust is one step closer to its preset liquidation requirement. At present production levels investors can expect nine to twelve months of continued production and dividends before the 11.5 MMBoe authorized production level is met, at which point the trust will cease to receive oil and gas payments. Upon the trust’s liquidation, its royalty interest will be auctioned off, with proceeds distributed to shareholders along with any other assets or cash held by the trust.

In light of this, investors must ask themselves what the trust’s remaining assets are worth and how long it will take to realize a profit from those assets. Warren Buffet famously simplified this all important calculation by comparing it to one of Aesops famous sayings that dates back to 600 BC. Buffett jokes that Aesop was a very intelligent man, not intelligent enough to know that it was 600 BC, but highly intelligent nonetheless who stated that “a bird in hand is worth two in the bush.” Once you’ve figured the first part of the equation out, all that remains is to figure out exactly how many birds are in the bush and how long it will take to get them out.

In the case of MV Oil Trust, you have a market cap of $137 mm that if purchased outright would entitle the owner to about $21 mm in remaining profits. The $21 mm in profits represents the remaining oil to be produced prior to the 11.5 MMBoe total production granted to the trust in 2006. The remaining profits represent an approximate 15% return on investment to anyone who purchased the entire trust today, which while reasonable would represent a loss if the trust’s share price went to zero and the holder had no right to the sale of the remaining oil and gas interest. In this case, however, investors do have a claim against the sale of the remaining oil and gas interest and so we must estimate its value and add it to the $21 mm in remaining royalty income that any owner of the trust would receive.

Publicly traded oil and gas royalty sales are rare and comps are difficult to produce but Sitio Royalties provides investors with a few examples that are informative. Our first comp involves Sitio Royalties publicly disclosed purchase of 19,700 net royalty acres from Foundation Minerals in which the company payed $323 mm for the acreage. The purchase price divided by the acreage purchased indicated that about $16k per acre was paid in the transaction. Applying that price per acre times MV Oils 43k net acres indicates a $720 mm valuation for MV Oil’s properties. The actual valuation of the property is probably much lower than the number given in this one comp as valuations differ greatly based on location and quality of the acreage involved but in any case the remaining valuation of the trust’s acreage is potentially well above the current $137 mm market cap.

Sitio Royalty company also provides us with our second comparable oil and gas royalty purchase. In the company’s most recent transaction it merged with Brigham minerals paying approximately $1.7 billion for Brigham Minerals 35 MMBoe of producing reserves or about $50 per Boe purchased. At this price MV Oil’s remaining 1.5 MMBoe of reserves represent a $75 mm valuation. MV Oil Trust itself estimates the value of its remaining post liquidation reserves at approximately $80 mm.

The key thing for investors to remember is that oil prices are the primary driver behind any estimation of reserves as the lower the price of oil is the less reserves are economically recoverable and the higher the oil price is the more reserves are economically recoverable. In other words, oil reserves are not a pure estimation of oil in the ground but rather represent a combination of oil in the ground and the difficulty involved in accessing that oil. If oil prices rose to $100 per barrel, MV Oil Trusts remaining oil reserve valuation would grow to $150 mm which combined with $21 mm in remaining oil royalties would indicate that $170 mm worth of birds still remain in Aesop’s proverbial bush. This valuation would yield investors a 24% return between now and the trust’s liquidation.

Against a backdrop that includes multi-decade low US Strategic Petroleum Reserve levels, historically low rig count activity, declining OPEC production and the global push toward decarbonization the consensus estimate is for higher oil prices going forward. Even if higher oil prices prove temporary and work themselves out over the next few years it would seem that MV Oil Trust’s liquidation sale will come at an opportune time for investors. A time when oil prices are high and demand for royalty acreage is also high. With major oil and gas producers having under invested in reserves over the last decade many are turning to M&A activity to shore up their supplies which again bodes well for the timing of MV Oil Trust’s upcoming liquidation sale and final distribution to shareholders.

With that we hope you enjoyed this short but actionable write-up designed to jumpstart your own investment research. As always we appreciate your questions and your support and encourage you to try out the Fountain podcasting app where you can both earn bitcoin for listening and stream micro payments to your favorite content creators. We look forward to bringing you more original research and we will see you again next week.

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Special Situation Investing
Special Situation Investing
Actionable value investment write-ups and insights