There are several publicly traded U.S. Royalty Trusts with interests in the oil and natural gas sector that are worth a look for investors seeking high current income. Their projected next twelve month yields are in the range of 8-10%. They also hold appeal for investors who would like to own assets whose performance is linked to the change in oil and natural gas prices without exposure to a leveraged corporate balance sheet, or the potential for poor corporate management.
San Juan Basin Royalty Trust (NYSE: SJT), and Permian Basin Royalty Trust (NYSE: PBT) are the two U.S. Royalty Trusts that this article will focus on, though there are a number of others. There are detailed descriptions of the trusts available on the trust websites and in documents available at the SEC website (http://www.sec.gov/). The goal of this piece is to provide a concise description of each, and a summary of why it might be an attractive investment.
San Juan Basin Royalty Trust:
Principal Asset:
This trust owns a 75% net overriding royalty interest in certain properties located in Northwestern New Mexico. These properties are virtually 100% natural gas producing.
Unit Information:
Recent Price $14.99 as of 3/17/2009
Number of Units Outstanding 46,608,796
Market Value $698,665,852
2008 Distributions $3.069833
Most Recent Monthly Distribution $0.09889 per unit paid 3/13/2009
History of the Trust
The trust was formed by Southland Corporation in November 1980 to contain the royalty interests on the above mentioned properties. The income producing properties are operated by Burlington Resources Oil and Gas (BROG), a division of Conoco Phillips. BROG retains a 25% interest in the properties.
Production outlook
The actual production of the properties linked to the trust has exceeded the trust’s published production outlook since its inception in 1980. Current estimated future net revenue per unit is $15.83 (2008 10-K).
Going back 10 years to 1998, the estimated future net revenue per unit was $5.18 yet actual distributions per unit have totaled $20.40 during the intervening period. (Based on SEC filings) This means that someone who purchased a unit of SJT at its 1998 high price of $9.37, and still held it today would have received $20.40 in distributions and would own a unit with a market price of $14.99. Today the estimated future net revenue per unit is $15.83 and the current unit market price is $14.99, so the units are available at a multiple of estimated future net revenue of 0.95x. This compares with a multiple of estimated future revenue of 1.8x in 1998, so on this basis the units are cheap relative to that time.
Income Potential in the near term
Borrowing from the work of well-regarded energy analyst Kurt Wolff, he estimates that distributions per unit over the next 12 months will be $1.25 (http://www.mcdep.com/). Should he prove correct then the yield for the next 12 months is a potentially tax advantaged 8.33%. While only an estimated income based on estimated monthly distributions, this is an appealing yield relative to many other income-related alternatives, particularly since this comes with no balance sheet leverage.
Tax Benefits
There is favorable tax treatment of the distributions for individuals who hold the units in taxable accounts. Depletion allowances provide an opportunity for taxable investors to shield close to 100% of the unit distributions from income taxes in the early years of ownership. Investors should consult with an accountant to obtain a better understanding of these.
Permian Basin Royalty Trust:
Principal Asset:
The trust’s principal assets are a 75% net overriding royalty interest in oil and gas producing properties in Crane County Texas and a 95% net overriding royalty interest in other oil and gas producing properties carved out by Southland Royalty Company from its properties in Texas. The production from these properties is approximately 2/3 oil and 1/3 natural gas.
Unit Information:
Recent Price $9.94 as of 3/17/2009
Number of Units Outstanding 46,608,796
Market Value $463,291,432
2008 Distributions $2.39136
Most Recent Monthly Distribution $0.04356 per unit paid 3/13/2009
History of the Trust
The trust was formed by Southland Corporation in November 1980 to contain the royalty interests on the above mentioned properties. Burlington Resources Oil and Gas is the operator of record for the properties in Crane County, Texas. The Texas Royalty Properties consist of royalty interests in mature producing oil fields. They contain approximately 303,000 gross and approximately 51,000 net producing acres. Riverhill Energy performs all accounting operations related to these properties and Schlumberger Technology Corp. performs summary reporting of monthly results.
Production outlook
The actual production of the properties linked to the trust has exceeded the trust’s published production outlook since its inception in 1980. Current estimated future net revenue per unit is $6.906 (2008 10-K).
Going back 10 years to 1998, the estimated future net revenue per unit was $2.01 at that time yet actual distributions per unit have totaled $10.96 during the intervening period. (Based on SEC filings) This means that someone who purchased a unit of PBT at its 1998 high price of $5.19, and still held it today would have received $10.96 in distributions and would own a unit with a market price of $9.94. Today the estimated future net revenue per unit is $6.906 and the current unit price is $9.94 so the units are available at a multiple of estimated future net revenue of 1.44x. This compares with a multiple of estimated future revenue of 2.6x in 1998, so on this basis the units are cheap relative to their valuation in 1998.
Income Potential
Borrowing from the work of well-regarded energy analyst Kurt Wolff, he estimates that distributions per unit over the next 12 months will be $0.97 (http://www.mcdep.com). Should he prove correct then the yield for the next 12 months is a potentially tax advantaged 9.8%. Given that this comes with no balance sheet leverage, this is appealing relative to many alternatives in the market place. Of course, the risk cuts both ways in that if commodity prices fall further then the yield will not be earned as expected.
Tax Benefits
There is favorable tax treatment of the distributions for individuals who hold the units in taxable accounts. Depletion allowances provide an opportunity for taxable investors to shield close to 100% of the unit distributions from income taxes in the early years of ownership. Investors should consult with an accountant to obtain a better understanding of these.
Note: As of 3/23/2009 clients and principals of South Shore Capital Advisors are now holders of San Juan Trust (SJT)
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South Shore Capital Advisors Insights contain the authors' opinions and do not constitute a recommendation to buy or sell securities. They are intended for the enjoyment of the reader and are not specific advice for any individual reader. Each person's investment circumstances are unique and investment advice should only be rendered by an investment professional who has taken the time to develop a thorough understanding of the advisees circumstances. Any or all of the contributors or their affiliates may hold positions in securities mentioned and they may trade for their own accounts. In cases where the position is held at the time of publication, appropriate disclosure is made.