Published Mon, 09 Jan 2012 14:48:08 GMT on The Motley Fool
Three different oil and gas royalty trusts IPO'd in 2011, much to the joy of dividend-appreciating investors. In a business that is incredibly capital intensive, energy companies have begun to fund production costs by creating royalty trusts focused on a specific region or play.
These trusts can be complicated from a tax and paperwork perspective, but they are fairly simple to understand otherwise: Oil and gas comes out of the ground; money goes into your pocket. With that in mind, let's take a look at four of 2011's most popular oil and gas royalty trusts.
SandRidge Mississippian Trust I (NYSE: SDT) SandRidge Energy (NYSE: SD) is the dominant player in the Mississippi Lime right now. The company is developing two regions there and uses this trust as a specific investment vehicle for investors interested in the play.
Production in the Lime for the third quarter of 2011 jumped 50% over the second quarter of this year and a whopping 653% increase over the same time last year. Per its initial prospectus, the trust will reap 50% of the royalties from 123 wells drilled by Dec. 31, 2014.
Distributions from those royalties are paid to shareholders in quarterly installments. Trust distributions in 2011 topped expectations, and the stock performed well after its IPO in April, creating value for investors in two ways. SandRidge expects the trust to distribute $2.82 per unit in 2012, though that number may very well exceed expectations again.
SandRidge Permian Trust (NYSE: PER) SandRidge Energy's other trust is in West Texas' Permian Basin. An August 2011 IPO makes this the youngest trust on the list, with plenty of upside.
The trust owns an 80% royalty interest in 509 developed oil and gas wells, and a 70% interest in 888 more wells yet to be drilled. Perhaps the most important percentages in this story, however, are the ratios for the composition of the trust's estimated 21.8 million barrels of oil equivalent: 96% liquids, 4% gas.
As most investors are well aware of by now, oil and natural gas liquids are far more lucrative than natural gas, and this trust is a great way to take advantage of the situation.
Chesapeake Granite Wash Trust (NYSE: CHKR) Chesapeake Energy's trust aiming to exploit the mid-continent Granite Wash play is another one that raced out of the gate. The trust was created in June and IPO'd in November. Its first distribution covered the last two months of the third quarter and was good for $0.58 per unit, 7% higher than the initial distribution outlined in its prospectus.
The trust's assets are in western Oklahoma; it receives 90% of royalties from 69 existing wells, and 50% of the royalties on 118 wells drilled in the future. Chesapeake has more wells in the Granite Wash than any other operator, and it estimates its reserves at 200 million boe.
The trust is set to expire in 2031.
MV Oil Trust (NYSE: MVO) MV Oil Trust's assets are focused mostly in Kansas but also in Colorado. All together, the trust collects profits from about 1,000 producing oil and gas wells. It is one of the highest-yielding royalty trusts right now at 9%.
The trust IPO'd in 2006 and is set to expire in 2026, or when its assets have produced 14.4 million boe, whichever occurs later. Given that it has been established longer than most of the trusts above, let's take a look at its payout history so far:
Year Total Distribution
Source: Morningstar and company statements.
The trust hedged the price of oil at an average of about $65 through 2010, but freed from that yoke, distributions climbed in 2011.
Two distinct ways trusts differentiate themselves are by region and operator. Before investing in a particular vehicle, make sure you do your due diligence and understand the potential profitability of a region, as well as the ability of the operator to keep production on track.... Read more