People love high dividends.
No matter what else is being teased and touted, it seems, the ones that get forwarded to me en masse are the emails touting the high-yielding MLPs, trusts, REITs or plain old dividend-focused stocks that pay out unusually high amounts of cash every month or every quarter … and it’s hard to blame you, our fabulous Gumshoe readers, for this interest — after all, I love a handful of coins in my pocket as much as anyone, and, like many of you, I suspect that I’ll treat cash better than will some of the companies whose stocks I hold. If someone’s going to make a foolish acquisition or buy a silly toy, I’d prefer the private jet to be in my driveway instead of the CEO’s, after all.
OK, so maybe not a jet. Perhaps a new shovel? We end up piling stuff up so high here at Gumshoe HQ that we’re constantly wearing ’em out.
But anyway, you get the point — people love high current yields (even if lower, growing dividends often pay out better over time), and the newsletter guys love selling ’em to you. This one comes from Elliott Gue for his Energy Strategist newsletter, which is is “high end” letter that currently costs around $600/year, and it’s all about the resurgence of US energy trusts.
Energy trusts in the US were a pretty moribund business for a while — there have been several big ones, including the big BP Prudhoe Bay trust that he teases and that offered up high yields for a long time, but while the Canadian Trusts were taking over investor attention ten years ago the US trusts got more or less ignored for a spell. After all, the Canadians had a big advantage: they had the flexibility to buy and sell assets, make investments, or otherwise increase their size … the US trusts were and are more hamstrung and passive, with income tied to usually a single batch of existing oil or gas fields and no corporate ability to buy new fields or invest in the fields.
So that’s a bit of the back story … in recent years, though, with companies eager to monetize their slow-decline fields in order to reinvest without debt, or just to “realize value,” the US producers have started up several more new trusts that have started to catch the attention of yield-hungry investors.
Which one is Gue touting? Well, here’s a bit of his spiel:
“My first pick hides 13,000 feet below Western Oklahoma.
“It’s yielding 13.0% today and set to pay out even more tomorrow.
“On the Osage Plains, the wind carries whispers of a supersized 13% dividend yield—a stunning income bonanza gushing from a bizarre geological formation.
“Better yet: This U.S. royalty trust is so new, many brokers and websites still list its yield as zero—giving you a rare opportunity to scoop up high-yielding units before the investing public catches on.”
Well, the wind isn’t exactly whispering in the Plains today — more of a holler — but we get the point. Brand new yield, on probably some long-standing discoveries in Oklahoma. And something bizarre? Hmmmm… let’s see what else he tells us about our new yielder:
The “bizarre” part is an “underground beach” that he calls the “subterranean riviera”:
“Thanks to a strange geological formation—a massive underground ‘beach’ 160 miles long and 30 miles wide—you’ll be able to count on whale-sized quarterly royalty payments pumping up your cash flow for years to come.”
And he even gives the brief description of oil trusts:
“These trusts allow investors to own a stake and collect royalties from some of the most productive oil and gas fields in the U.S.—Prudhoe Bay being Exhibit A.
“Royalty trusts have unusual qualities different from other investments.
“First and foremost, they aren’t subject to corporate taxes. Yes, you read that correctly. No corporate taxes.
“The trusts pass earned income and profits directly to individual unit holders (that’s you) who pay tax on their share of the income. This eliminates the double taxation occurring when the IRS taxes dividends at both the corporate and individual level.
“There’s even more upside to these trusts.
“Royalty trusts almost always boast high-dividend yields—often much higher than typical corporate yields. I consider these unique investments (only 15 such trusts exist) a superb tool for those who desire to invest directly in top wells, oil fields and mines—such as my new top-secret pick in Washita County, Oklahoma.
“It’s my favorite royalty trust today—paying gigantic yields due to a distinctive sandy formation created 350 million years ago when the middle of the North American continent lay submerged beneath a warm, tropical sea.”
We’re told that the value of these deposits, which he says are in the “tight sands” in Oklahoma, have soared as horizontal drilling and fracking (or fracturing, or fraccing, or whatever term you like) have made them economically viable … and as prices for natural gas liquids (NGL’s) have gone up with oil even as “dry” natural gas has foundered.
And some more details:
“The trust is sponsored by the most active and experienced producer in the entire Oklahoma tight sands.
“This outfit is the undisputed “boss” of the neighborhood: an energy powerhouse that’s drilled 133 of the 173 existing wells in the region.
“The company’s area of operation in the sands is second to none, spanning 45,400 gross acres located in the heart of a broader oil- and gas-producing region known as the Anadarko Basin.
“What impresses most is the sheer know-how of this strong partner in the trust. A true heavy-hitter in the business, they’ve amassed unrivaled proprietary data on well production history and understand how and where new wells should be drilled.
“This is vital because, in addition to operational wells, the company plans to drill 118 new development wells in the area. These will be completed by 2015. Once completed, trust unit-holders will be entitled to receive 50% of the net proceeds from these wells.”
And one more bit to get you slavering:
“If, in its first four quarters as a public company, the trust generates cash flow that exceeds the incentive threshold, the yield jumps all the way to 17%… possibly 18%.”
So who is it? Well, that’s not a lot of detail but there aren’t all that many trusts to choose from … so we’ll trust the Thinkolator to chew through ’em … and here we go, just a few more moments … aha! Our answer: This is … Chesapeake Granit Wash Trust (CHKR)
This is a trust spun out from Chesapeake Energy, which you’ve undoubtedly heard of — one of the leading natural gas companies in the country, and one of the most aggressive. And yes, Chesapeake is responsible for a huge number of the wells in the Granite Wash region to date, and has 45,400 gross acres in the region, so that matches the clues perfectly.
This particular trust has only two quarters under its belt as a public company, and it’s true that the distribution reported on financial sites like Yahoo Finance is often wrong — they generally just annualize the last quarterly distribution and put that up as the yield, which gives them a yield of 10%+. Which is better than they claim for the somewhat similar (and also new) Sandridge Mississippian Trust (SDT), which comes in as a zero yielder on some sites but also currently yields 10-11%.
What we should probably base the expected yield on, however, is the planned distribution schedule — which they have laid out in great detail in their public filings. You can see from the prospectus that their targeted distributions jump markedly over the next couple years, then start to decline pretty rapidly as, one expects, the wells deplete. And they also list their incentive distributions, over which parent Chesapeake gets more of the cash, and their subordinate distributions, which represent the level under which the parent has to take a hit to their payout share and therefore can be considered a level of support for the distribution (it’s not guaranteed that the distribution can’t drop below the subordinate level, but it would cause pain for the parent if it happened). So far, the distributions have easily beaten the target (by roughly four cents per quarter), so if they continue to “beat” their target like that the effective annual distribution could come out to the $3.25-$3.50 range, which gets them close to a 13% yield ($3.50 would be a 12.5% yield at the current $28 price). If they get to their incentive levels then they’d be yielding well over $4 per year by next year sometime for close to a 15% yield.
I have no idea if that will happen — they are drilling more wells in the Granite Wash trust area, and the trust gets a 50% net share of those wells, but there’s also a very clear projected curve of distribution returns for the stock and, if depletion follows this (probably conservative) curve and prices remain in a foreseeable range (the Trust hedges, but for less than half of production), then you can see a very clear decline in the distributions starting in three or four years, petering out until the Trust ends in 2031. So make your calculations and predictions, and if you buy these kinds of trusts that have a projectable decline rate and an expiration date, be careful about what you do with your distributions — at some point along that curve, the value of compounding dividends is counteracted by the declining asset value.
Elliott Gue has actually written free articles about the Granite Wash trust too, you can see one of them here to get more of his take on the shares.
And he teases a second Trust as well, in the same general region and with a similar 11% yield — haven’t looked into that one yet but I’d wager it’s probably Sandridge Mississippian Trust I (SDT), which is run by Sandridge Energy (SD) … which in turn is run by Chesapeake’s co-founder and which, like Chesapeake, has gotten into trouble with being overleveraged and overexposed to low natural gas prices and tried to reduce that leverage, in part, by spinning out assets to Trusts.
It’s true that the Trust business is picking up a bit in the oil patch again, with some new trusts like these sporting double-digit current income yields (remember, these are pass-through companies, so they aren’t eligible for the lower dividend tax rate), and these two trusts are two of the higher-profile recent offerings. Have a favorite among them, or another preferred high yielder in the energy space? Let us know with a comment below.
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