I’ve been a fan of Royalty Trusts for a while now – particularly after I saw them drop in value last November, following that WSJ article which reminded everyone that these vehicles do have a termination date. At the time, I mentioned WHX as a perfect example. The yield looks great, until you realize that the trust is expected to terminate on August of 2015. Take a look at it now, it’s informative about how strange the market is… yahoo shows a 37% “yield” (really just return of capital), but at $6.40 per share with just over 2 years to go, you’re probably only going to end up with 74% of your investment paid back when the shares become worthless.
As you know, I’ve been following SDR for a while as it seemed to me it was unfairly hit by negative news on the parent company SD. As it turns out, the Mississipian Basin where SDR is based holds significantly less oil in relation to natural gas than expected. The trust is still expected to continue through 2031, but with lower expected payouts as NG is cheap in the US right now. SDR hasn’t missed any of its target distributions so far, but that is partly because they have accelerated the drilling schedule. However, I still feel that the shares have been hit harder than warranted and will hold significant value.
PER is a trust in the Permian basin – which has a much higher and well known oil to gas profile – but has also been hit as a former holding of parent company SD. If you still believe in the emerging market growth story, oil should remain strong as more people in places like India and China start driving. Oil is set much more by the world price than natural gas (which is expensive to liquefy and ship), so it is expected to keep its value despite the North American energy boom.
If you’re interested in these, here’s an article with solid research that you might find interesting. It isn’t easy to dig up all of the information about termination dates and hedges and other information that Daniel Moore compiles to compare 5 energy trusts side by side.
I head out to India tomorrow so I’ll have to stop here. It’s not at all work related, I just got the opportunity to go with a friend who grew up there and I didn’t want to pass it up. Anyway, here’s the article:
Disclosure: I own both SDR and PER.