Pacific Coast Oil Trust's Monthly Net Profits Interest Calculations and Their Impact on Unit Valuation

The Pacific Coast Oil Trust (OTC: ROYTL) has long been a case study in the fragility of income predictability and unit valuation dynamics within master limited partnerships (MLPs). As of October 2025, the Trust reported a cumulative net profits deficit of $10.9 million for its developed properties and $129,000 for its remaining properties, underscoring a persistent inability to generate sufficient cash flow to sustain distributions to unitholders, according to the Trust's monthly NPI announcement. This financial strain, compounded by legal disputes with its operator, Pacific Coast Energy Company (PCEC), and a $1 million fully drawn letter of credit to cover administrative expenses, raises critical questions about the role of Net Profits Interest (NPI) calculations in shaping MLP valuations and investor expectations.

NPI Methodology and Operational Challenges

Pacific Coast Oil Trust's NPI calculations are derived from gross proceeds from oil and gas sales, minus operating expenses, property taxes, and development costs, as outlined in that announcement. For instance, in August 2025, the Trust reported revenues of $2.3 million from developed properties but incurred $2.4 million in operating expenses, resulting in a $0.1 million operating loss, the announcement shows. The average realized price for these properties was $57.08 per Boe (barrel of oil equivalent), yet this revenue failed to offset the Trust's administrative and operational costs, including a $202,000 shortfall in the same period, as the announcement notes.

The Trust's NPI structure also includes a 7.5% overriding royalty interest on remaining properties, which generated $33,000 in August 2025 but contributed to a cumulative deficit of $129,000, according to the announcement. These figures highlight the precarious balance between revenue generation and cost management in NPI-based MLPs. Unlike traditional MLPs that derive stable cash flows from midstream infrastructure, Pacific Coast Oil Trust's reliance on volatile oil prices and aging assets exacerbates its financial instability.

Historical Trends and Dissolution Risks

Historically, the Trust has faced significant net profits deficits, particularly in 2020 and 2021, when annual cash proceeds from NPI and royalty interests fell below $2.0 million, triggering dissolution proceedings, as detailed in the Trust's announcement. By 2025, the cumulative deficits had grown to over $11 million across its developed properties, with no clear path to recovery. This trajectory aligns with broader MLP industry trends, where entities with declining cash flows and opaque governance structures often see unit valuations collapse. For example, MLPs that fail to meet distribution coverage ratios-typically defined as distributable cash flow (DCF) divided by distributions-risk eroding investor confidence and triggering sell-offs, as noted in an MLP valuation primer.

The Trust's financial struggles are further compounded by allegations of mismanagement. In 2025, PCEC faced whistleblower complaints regarding inaccurate data on asset retirement obligations, casting doubt on the reliability of the Trust's financial disclosures, as the announcement indicates. Such governance risks are particularly detrimental to MLPs, where transparency is critical for maintaining unit valuations.

NPI and MLP Valuation Frameworks

In the broader MLP landscape, NPI calculations play a pivotal role in unit valuation. MLPs typically derive value from predictable, fee-based cash flows, such as those from pipelines or storage facilities, which allow for stable distribution growth and lower valuation volatility, as discussed in the MLP valuation primer. However, Pacific Coast Oil Trust's NPI model diverges from this norm. Its income is tied to the performance of oil and gas properties, which are subject to commodity price swings and operational risks. This divergence creates a mismatch between the Trust's structure and the expectations of income-focused investors, who often seek MLPs with long-term, inflation-protected cash flows.

The tax treatment of MLPs also influences unit valuation. Distributions are often treated as return of capital, reducing the investor's cost basis and deferring taxable income until the units are sold, a point covered in the same MLP valuation primer. While this structure supports income predictability, it introduces complexity in tax reporting via Schedule K-1 forms, which can deter retail investors. For Pacific Coast Oil Trust, the combination of low cash flows and tax complexity has likely amplified its unit valuation challenges.

Conclusion: A Cautionary Tale for MLP Investors

Pacific Coast Oil Trust's experience underscores the importance of aligning NPI calculations with sustainable cash flow generation in MLPs. While the Trust's structure theoretically allows for income predictability through NPI, its operational and governance shortcomings have rendered this promise unfulfilled. For investors, the case of ROYTL serves as a reminder that MLP valuations are not solely determined by yield but by the underlying financial health, transparency, and operational efficiency of the partnership. As the Trust navigates its dissolution risks and legal challenges, its units remain a high-risk, speculative bet-a stark contrast to the stable, fee-based MLPs that dominate the sector.