BPT versus OIL over the last six months

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The deal by Vale of Brazil and Anglo-Australian BHP Billiton with Japanese and Chinese mills marks the end of the 40-year-old benchmark system of annual contracts and lengthy price negotiations. The industry instead agreed to move to quarterly contracts linked to the nascent iron ore spot market.

“The benchmark system has ended. There is no comeback,” said a senior mining executive directly involved in the talks.

The world’s top ore miners stand to profit hugely in the short term from the new price system. One executive estimated that the profits of the big three producers, Vale, Rio Tinto and BHP Billiton, would be boosted by at least $5bn this year.

Those BHP puts I bought as a quasi-hedge on AYSI should plummet even further now, but maybe it will cost less to reload. I guess that depends in part on to what extent this iron ore news is already priced into the BHP shares.

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BPT versus OIL over the last six months

I’ve owned the royalty trust BP Prudhoe Bay (NYSE: BPT) for a few years. Back when oil hit $147 per barrel, BPT hit an all-time high of about $106 per share. Today it closed at $97.88 with oil at about $82 per barrel. Yahoo! Finance shows a forward dividend yield of 15% on BPT, but that looks too high. Based on the distribution estimates by ‘RoundRobinJack’, a Yahoo! Finance message board commenter whose analysis I have come to respect, BPT’s forward yield might be closer to 8.7% at the current unit price. I bought a few of the $85 strike, SEP 10 puts on BPT today for $3.50 each.

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One year chart for USEG

U.S. Energy Corp. (Nasdaq Capital Market: USEG) issues its annual report. Here’s the full filing, via the SEC’s website, and here are the company’s highlights via its press release. Nothing too surprising here; the investment thesis remains on track since I last blogged about this company. These were the highlights the company listed in its press release:

Selected Highlights for 2009 and Period Subsequent to December 31, 2009

* Entered into a Drilling Participation Agreement (“DPA”) with Brigham Exploration Company (Nasdaq:BEXP – News) (“Brigham”) to earn working interests in up to fifteen 1,280 acre spacing units in Brigham’s Rough Rider project area located in Williams and McKenzie Counties of North Dakota; USE has elected in to participate in all 15 initial wells;
* Successfully drilled and completed the first six wells under the DPA with Brigham;
* Produced approximately 1,000 net BOE/D in fourth quarter 2009 and exited 2009 with an average rate of 1,400 net BOE/D for the month of December 2009;
* As of March 12, 2010, daily net production from all of wells was approximately 1,175 barrels of oil and 1,780 Mcf of natural gas (1,470 BOE/D);
* Increased revenue $7.34 million over prior year, primarily due to increased oil and gas revenue in the fourth quarter 2009;
* Increased proved reserves by 453% or 889,738 BOE over prior year (1,086,203 BOE net proved reserves as of 12-31-09);
* Retired $16.8 million construction loan on the Remington Village project in Gillette, Wyoming;
* Received the $1 million annual option payments for 2009 and 2010 from Thompson Creek Metals Company Inc. in 2009 pursuant to the terms of the Exploration, Development and Mine Operating Agreement signed in August 2008;
* Raised $24.3 million after offering costs in underwritten public offering of 5,000,000 shares of common stock at a price of $5.25 per share;
* Increased line of credit from $5 million to $10 million;
* Ended year in position of strength with approximately $55 million in cash, cash equivalents and treasuries with nominal debt on the balance sheet.

The company’s conference call is scheduled for next Tuesday. Last year this time, there was exactly one question on the call, and I remember noting that it was one of the shortest conference calls I’d ever listened to. The company was trading for less than its net cash back then.

Incidentally, USEG now has options traded on it. This must have started fairly recently. Checking Portfolio Armor, put protection on USEG is extremely expensive though — I had to set my threshold (the maximum decline in the value of the position I indicated I was willing to risk) to 31% before I was presented with any optimal put options (Portfolio Armor will not present a solution if the cost of protection is greater than the loss you are looking to protect against¹). Not too surprising, I suppose, given the stock’s volatility in recent months, and the paucity and iliquidity of its put options.

¹To do otherwise would be analogous to presenting a quote for collision insurance with a $500 premium to someone whose car had a book value of less than $500.

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The OTM puts on the two airlines, UAUA and RJET, have been melting like a bar of soap in warm water, as shares in those airlines have spiked up recently. The rest of the OTM puts, with the exception of the DIA puts which are flat, and the TBSI puts which are up about 100%, are down as well. At this point, I think I’ll sell all of these puts about a month before they expire, and start creating a new put basket for the second half of the year around the same time.

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