3 oil and gas royalty trusts with extreme returns

Oil and gas trusts are among the highest yielding stocks in the stock market, making them attractive candidates for income investors. On the other hand, in contrast to famous oil giants like Exxon Mobil (XOM) and Chevron (CVX), they offer a different distribution each month, this distribution is very volatile due to changes in oil and gas prices.

Therefore, investors should check to see if these trusts’ current generous distributions are sustainable over the long term before purchasing these stocks.

Below, we will discuss three oil and gas royalty trusts that offer exceptionally high distributive yields.

royal oil

Sabine Royalties Trust (SBR) is an oil and gas trust established in 1983. The fund includes royalties and mineral interests in oil and gas properties in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. It generates about two-thirds of its revenue from oil and the other one-third from gas.

Sabine Royalty Trust is one of the highest quality oil and gas trusts. When it first started, it had an expected reserve life of only 9-10 years but it has been around for four decades and is likely to stay afloat for several more years; A trust has fixed assets, which means it cannot add new assets to its portfolio. This is a big difference from the famous oil giants, which can expand into new fields. Another difference is the purely upstream nature of the trust, which makes the trust more sensitive than integrated oil companies to oil and gas price cycles.

Like all oil companies, the Sabine Royalty Trust was hurt by the pandemic-induced plunge in oil prices in 2020. However, the fund proved to be much more resilient than expected. Its distributed cash flow (DCF) per unit is down only 25% in 2020. This is an admirable performance given the energy industry is going through one of the fiercest downturns in history. history. To be sure, most of the major oil companies and all the refineries suffered huge losses that year.

Even better, the Sabine Royalty Trust is now thriving thanks to the sanctions that Europe and the United States have imposed on Russia because of its aggression in Ukraine. Before sanctions, Russia produced about 10% of global oil production and a third of natural gas consumed in Europe. Due to the sanctions, the global oil and gas market has become particularly tight. As a result, oil and gas prices have surged to a 13-year high this year.

The Sabine Royalty Trust has benefited greatly from the upper wind. The trust has provided a total distribution per unit of $8.65 in 2022. This is a 10-year high for the trust. The total distribution in 2022 is more than double the peak annual distribution 10 years ago of $4.03, reached in 2013 and 2014. The total distribution in 2022 is equivalent. corresponding to a yield of 10.1%, the highest in nearly 10 years for stocks. Overall, the current business landscape is ideal for the Sabine Royalty Trust.

On the other hand, given the highly cyclical nature of oil and gas prices, it is prudent to expect these prices to deflate in the coming years. It should also be noted that the aforementioned surge in oil and gas prices has triggered a global energy crisis, putting many households under heavy pressure. This has led most countries to initiate a record number of renewable energy projects in an attempt to diversify away from fossil fuels. When all of these projects come online, they will likely affect oil and gas prices. Therefore, it is reasonable to expect oil and gas prices to moderate in the coming years.

Notably, they have undergone a sharp correction from the recent peak and therefore they are currently trading below their level just before the start of the war in Ukraine. This is a strong bearish signal, as it indicates that the impact of the war has been absorbed by the global energy market. In summary, the Sabine Royalty Trust is one of the highest quality and most flexible oil and gas trusts yet carries an all-time high risk due to the cyclical nature of oil and gas prices.

Meanwhile at the farm’

Permian Basin Trust Fund (PBT) is an oil and gas trust (approximately 70% oil and 30% gas), based in Dallas and incorporated in 1980. The shareholders of this fund have 75% of the net profit above money. copyright to Waddell Ranch Properties in Texas and 95% of the shares override the royalty interest in the Texas Royalties Properties.

The Permian Basin Royalties Trust has similar characteristics to the Sabine Royalties Fund but it exhibits more volatile performance and is less reliable. In 2020, it has reduced DCF per unit by 43%. Worse still, despite a strong post-pandemic energy market recovery in 2021, the Permian Basin Royalty Trust has not benefited from that recovery due to high operating costs for Trang properties. Waddell camp and thus its DCF per unit fell another 4% that year.

On the plus side, the Permian Basin Royalty Trust is finally starting to benefit from the exceptionally favorable business environment currently prevailing. In 2022, the trust offered its highest distribution in nearly 10 years per unit of $1.15, five times the distribution in 2021. The distributions $1.15 respectively. with a yield of 4.7%. While this is much higher than the S&P 500’s 1.7% yield, it’s not convincing for a trust. Oil and gas trusts face a strong headwind in the long run, namely the natural decline of their production wells. Therefore, investors need a high distribution yield to be adequately compensated for this risk.

The Permian Basin Royalty Trust has offered an average distribution yield of 6.5% over the past decade. However, the future distribution is unpredictable due to the unknown path of oil and gas prices. Also, as mentioned above, oil and gas prices are likely to correct in the coming years as the impact of sanctions is waning. As a result, the Permian Basin Royalty Trust is likely to face two headwinds in the coming years, lower commodity prices and lower production levels.

Royalties trust with key difference

Hugoton Royalties Trust (CooperativeU) was established in late 1998, when XTO Energy transferred 80% of net profits at several major gas-producing facilities in Kansas, Oklahoma, and Wyoming to the trust. Net profit in each sector is calculated by subtracting production costs, development costs, and labor costs from sales.

The Hugoton Royalty Trust has one key difference from the aforementioned oil and gas trusts – it focuses primarily on natural gas. In 2021, it produces 88% natural gas and 12% oil. It is therefore much more sensitive to natural gas price cycles than most oil and gas trusts. Its unit holders are well aware of this sensitivity.

Between April 2018 and October 2020, the Hugoton Royalty Trust’s expenses exceeded its revenue by a large margin, mainly due to a hold on gas prices. Therefore, the trust did not provide any distribution during that time. Worse still, when gas prices begin to recover in late 2020, the trust must wait for revenue to cover past losses. On July 2, 2021, the drama escalated when Hugoton Royalty Trust announced that it had agreed to sell to XTO Energy for $0.165 per unit in cash. That price is about 90% lower than the stock price at the end of 2017.

Fortunately for those without units, during a special meeting held in December 2021, the deal was rejected by those without units. Even better, thanks to the aforementioned increase in gas prices after the start of the war in Ukraine, Hugoton Royalty Trust resumed paying its monthly distributions into August 2022. distribution halt for more than four years and Hugoton Royalty Trust’s failed attempt to dissolve are stark reminders of the trust’s undue risk.

Hugoton Royalty Trust has provided a total distribution per unit of $0.35 in 2022. This is an 8-year high, as a result of sanctions imposed on Russia. Since Russia supplied about a third of the natural gas consumed in Europe before the war, sanctions tightened the global gas market. As a result, Europe is currently importing a record number of LNG shipments from the US and as a result the US natural gas market has become particularly scarce. This helps explain the rise in US natural gas prices to a 13-year high earlier this year, even though gas prices have recently corrected more than 50% from their peak.

Hugoton has put in place an average DCF per unit of $0.30 per year for the past decade, although there has been a significant decline over the past eight years. The trust is currently offering an exceptionally high distribution rate of 15.0%. This yield is much higher than that of the Sabine Royalty Trust and the Permian Basin Royalty Trust. However, investors should realize that the high yields may be due to the excessive risk of the trust, which is on the verge of disintegration in 2021.

Furthermore, with the natural decline of oil and gas wells production, a long-term downward trend in the Hugoton Royalty Trust’s cash flow is to be expected. Over the past three years, the fund’s total yield has declined at an average annual rate of 5%. With an exceptionally high comparative base forming this year and the natural decline in oil and gas wells, it is prudent to expect a significant drop in DCF per unit over the course of the year. coming years.

Final thoughts

Thanks to their exceptionally high distributed yields, oil and gas trusts are attractive candidates for the portfolio of income-oriented investors. However, investors should be especially cautious given the strong cyclical nature of oil and gas prices.

The ideal time to buy these trusts is during a downturn in the energy industry, when these stocks are undervalued from a long-term perspective. Given the multi-year high distributions and the stock prices of these trusts right now, investors should probably wait for a more opportunistic entry point.

(Please note that due to factors including a low market cap and/or insufficient public float ratio, we consider HGTXU a small cap stock. You should be aware that such stocks are stock.) has more risk than stocks of larger companies, including greater volatility, less liquidity and less publicly available information, and posts like this one can influence to their stock price.)

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