Today it’s finally time to get around to what has probably been the most-requested teaser ad of the last few weeks — if you haven’t seen it, it comes in under several different headlines all comparing this “Mainz” income stream to the thousands raked in by Bill Clinton, Barack Obama, and teases us that we can also get a piece of what is “one of the great low-risk ways to get rich in America.”
So I can see why so many folks are asking. I, too, would like to get rich with low-risk. Preferably, I’d also like to start with very little money (Oh, wait, I’ve got that part covered!)
How do they get our attention and try to convince us to subscribe to Matt Badiali’s S&A Resource Report? Here’s a taste:
“The $84,550/Month Super-Secret ‘Mainz’ INCOME STREAM of Ex-President Bill Clinton
“Did you know former U.S. President Bill Clinton collects more than $84,550 PER MONTH in personal income… all thanks to one super-secret income stream!
“And here’s the best part…
“Regular Americans are now cashing in on this secret as well…”
I’ll spare you some of the foofaraw that chews up a few pages in this teaser ad (or 10 minutes of your life, if you’re actually watching the video version of the ad — something I never have the patience to do), but Badiali apparently uses this “Mainz” term because Mainz, Germany was the birthplace of modern printing (Gutenberg’s movable type, etc.). That modern printing technique enabled, for the first time, mass production of intellectual and creative work … which made it possible to make money by creating that work in the form of … royalties.
Yes, this is all just a big spiel to sell you on the idea that royalties are a nice way to get rich (don’t worry, there are some specific investments too — more on that in a moment). Of course, most of us are not going to get rich in quite the way Bill Clinton did, by writing a popular memoir and collecting a monthly payout for the royalties on the book, but investors certainly do invest in royalty streams even if they didn’t create the original work — one of the few financially sensible things Michael Jackson did was buy the Beatles catalog, after all, and he earned the income from those hugely popular songs for years.
And more importantly, there are also several publicly traded entities that generate royalties — Badiali gives examples of a few of the esoteric ones in his ad that he’s not specifically recommending, like the one that gets royalties from use of the A&W Root Beer name (that’s actually a Canadian income fund, trades at AW in Toronto and AWRRF on the pink sheets) and the one that gets royalties from a 25,000 song catalog including standards like “Little Drummer Boy” (that’s the Mills Music Trust, ticker is MMTRS over the counter but it almost never trades, has a trailing yield of about 8.5%).
But those who recognize the name probably know that Matt Badiali is a resource investor, so it will not surprise you to hear that the “Mainz” income streams he’s actually recommending generate their royalties from oil and gas — and thankfully, he provides a few clues about which of these investments he likes.
He first tells us that owning royalty interests is better than ordinary oil and gas stocks because the potential returns are bigger (he gives an example of one royalty company that was 500X more profitable than ExxonMobil stock over the past dozen or so years); and the investment is safer (royalty companies don’t generally take on the risky exploration or production, they just own royalties and sit back to collect their money if the project pans out).
Plus, of course, there’s that lovely income bit, which clearly appeals to lots of investors — he tells us that if we buy the four investments in his special report, which he calls Oil and Gas Royalties: The Real Secret to Generating Huge Returns in America’s Petroleum Market, that we’ll be getting royalty checks, on average, once every nine days.
So which four investments is he recommending? Well, you can ask him if you want, and he’ll tell you if you sign up for a subscription to his newsletter … or you can read on as we check out the clues and feed ’em into the mighty, mighty Thinkolator to see which companies these are.
Ready? Number one …
“New oil & gas royalty stream NOW ONLINE
“As I’ve shown, the absolute best time to get in on these royalty interests is at the beginning…
“And, not too long ago, a new royalty interest went public on the New York Stock Exchange…
“Since going public, this investment is up 219%. But as we’ve seen with other royalty interests… these gains are just the very tip of the iceberg.
“This income stream enables you to collect royalties from more than 3 MILLION acres of oil and gas rich land in 25 states, including: The Williston Basin of North Dakota and Montana, the Marcellus Shale region of Pennsylvania and New York, the Barnett Shale region of Texas, and the Fayetteville Shale of Arkansas.
“Not to mention, dozens of other oil and gas-rich properties in Oklahoma, Colorado, Louisiana, New Mexico, and Utah just to name a few.
“In fact, since going public in 2003, this investment has outperformed all major U.S. oil and gas stocks like Exxon, Chevron, Shell, and ConocoPhilips”
Well, this is a bit of an oddity — the match is not exactly perfect, but from those clues it sounds to me like Badiali must here be teasing a stock I own as well, Dorchester Minerals. Dorchester is a press-shy Master Limited Partnership (MLP) that owns mineral rights on over three million acres in 25 states, and yes, they do have acreage in those key areas — Williston/Bakken, Marcellus, Barnett, Fayetteville, etc. The share price is not up 219% since they were created in 2003, but you can probably get to that number if you reinvest the distributions — DMLPs distribution policy is to essentially pay out as much as they can of their incoming revenue, so like most MLPs they pay out far more than their “earnings” and much of it is classified as “return of capital” and just reduces your tax basis (meaning it’s effectively tax-deferred). Unlike the “real” depleting trusts, DMLP has some flexibility and can reinvest or acquire new assets.
As I said it’s not a perfect match — they have not grown their ol reserves 43% over the last four years, nor have they grown the gas reserves 500% over that time period … like most royalty and trust-based investments, DMLP earns income from wasting assets, meaning that they’re essentially turning reserves into cash, they’re focused more on maintaining and replenishing reserves (as a way to keep the cash flow coming in the future) than on growing them. Their overall reserves are down slightly for the life of the company, though they’ve replaced about 2/3 of what they’ve depleted, and the reserve level is probably down 10% or so from where it was in 2005. Still, they do have some divisions that have booked big reserves growth — their Net Profits Interest properties have booked something like 500% reserve growth over five years and those are mostly in gas, but that’s just a portion of their assets. So I could be wrong on this, but I’m unaware of any royalty-based companies that went public in 2003 and have this kind of footprint.
As I said, I own Dorchester shares (units, really) and I also profiled them this month for the Irregulars (before I bought them — this is a recent purchase), so if you want to see a more exhaustive look at the stock you can check that out here if you’re a paying member of the site. I like the decent royalty pass-through income (yield around 6%), but I also think there’s more room for growth than investors seem to appreciate.
If you think I’m wrong about this one, I’m listening. But in the meantime, there are three more:
“Royalty Stream #2
“This income stream enables you to collect royalties from more than 3,950 natural gas wells in the San Juan Basin of New Mexico (one of the largest and most productive gas fields in the country). If you’d put $10,000 into this opportunity ten years ago, you’d be sitting on more than $205,000 today. So far, this royalty stream has mailed 273 consecutive oil checks to shareholders. Even if they never acquire another cubic foot of natural gas … they have enough reserves to keep sending you royalty checks until 2020!”
Well, you won’t be surprised at this name: This must be San Juan Basin Royalty Trust (SJT), which owns a 75% royalty on net income (almost all from natural gas) from the wells (almost all operated by ConocoPhilips) in that basin. And yes, they have said that “conservative estimates” indicate at least another 10-15 years of life for the trust (meaning, there’s a least enough profitable reserves left to produce in the basin). SJT is a grantor trust, like most US energy trusts, so they can’t do anything — they just collect the money.
If there are more wells drilled on their parcels that produce more gas then their income goes up, and new reserves can be booked on their existing holdings, but the trust itself can’t invest in new royalties, buy new land, or anything like that they take expenses off the top and maintain a small reserve but otherwise just send whatever cash comes in out to unitholders as a monthly dividend (taxable as income, though the taxes can be a bit trickier than a standard stock when you account for return of capital and/or depletion allowances … still might be easier than MLP K-1 tax forms, I haven’t ever owned one of these and I’m not sure).
But we’ve got a couple more to find — what are they?
“Royalty Stream #3
“This royalty stream enables you to collect royalties from the Hugoton field of Kansas, the San Juan Basin field of New Mexico and Colorado, and the Yellow Creek field of Wyoming. That’s more than 140,000 acres of oil-rich property (and more than 1,700 wells). So far, this royalty stream has mailed 272 consecutive oil checks to shareholders. A $10,000 investment 22 years ago would be worth more than $75,000 today.”
I think this one must be the tiny Mesa Royalty Trust (MTR), which is indeed in the Hugoton Field, the San Juan basin, and the Yellow Creek Field — most of their income comes from the San Juan Basin, just FYI, and like most royalty trusts they calculate your distribution amount monthly.
And one more …
“Royalty Stream #4
“This royalty stream enables you to collect lucrative gas royalties from more than 1,600 wells in one of the largest domestic natural gas producing areas in America. This unique investment hasn’t missed a monthly royalty payout since it began 11 years ago. That’s 136 consecutive payouts. A $10,000 investment back then would be worth more than $54,000.”
I think this one must be Hugoton Royalty Trust (HGT), which owns the net profit interest royalties of some XTO (now ExxonMobil) producing gas fields, mostly in the Hugoton Field but also elsewhere. They did go public in 1999, and XTO distributed the shares they had held in 2006.
Most of these trusts are fairly similar, with the distinctions generally coming in the fields they own properties on and the level of proven reserves, and the expected remaining life in those reserves. Most of them are also valued more or less similarly, with almost all of these trusts owned predominantly by individual investors who buy and sell based largely on the yield, with assumptions about future natural gas prices (most trusts hold royalties predominantly on gas properties) and the depletion rate for those royalties (which often, from what I can tell, ranges from 3-7%).
The yield for most of these trusts is currently in the 6% range (Hugoton’s trailing yield is a bit higher, around 8% — which would tell you, probably, that investors think the profitable life of that trust will be shorter, or they’re likely to distribute less in the future than they did in the past), and as with other income-producing investments they compete for investor attention with bonds, REITs, MLPs and other high-dividend investments, so if bond yields go up dramatically, for example, the yield on these trusts would likely have to rise as well, which, absent increases in the distribution from higher gas prices or higher production, would mean that the unit price would have to drop.
As always with any depleting trust, do be careful about reinvesting your distributions — it can work extremely well to compound your returns and I almost always do so for my income-producing investments, but depleting trusts are different: if the reserves are depleting too fast and the life of the trust starts to shorten, investors will drive the share price down to make sure the yield gets them a good overall return for the expected life of the trust (to simplify: for example, if the trust says they have five years of expected production left you’d be crazy to buy shares with a 10% yield — that means you’re planning to invest $10 and get only $5 back in five years, you’d want at least a 20% yield to make sure you get at least your original investment back … all else being equal, which it rarely is). Every investor has to make that decision for themselves, just something to be aware of as you calculate your version of the future. Higher yield almost always means shorter expected life (or some trust-specific negative, things like a weaker producer or rising costs, for example).
The life of the trust can always expand if new production is identified on land where they own a royalty interest, or if prices go higher, it’s just that they can’t go out and buy a new property next door to keep the money flowing. Trusts are created with the idea that they will eventually expire, though they can certainly continue producing for far longer than the initial reserves would have predicted, since more discoveries, new extraction technologies, or higher prices that make more extraction profitable can all increase reserves. One publicly traded trust has decided to euthanize itself and distribute the proceeds to unitholders (That’s Torch Energy Royalty (TRU), I don’t know the story of this one but shareholders made the call to disband almost three years ago — they’re apparently still paying distributions as they liquidate the trust).
And likewise, do note that trusts and royalty owners generally have very little power over their property — they collect what is produced, but they don’t usually get a say in how much to produce, and they can take a big hit if wells are shut in because of bad performance, or because oil or gas prices fall too much to make the wells profitable for the operator. Trusts generally are formed for stable, producing assets, as most of these are to the best of my knowledge (which varies greatly), but be careful about assuming any “guarantee” about the level of future production — or about future energy prices.
If you’d like to learn more about trusts or about a few of the newer ones, there was a good article this month in Oil & Gas Financial Journal about trusts, including the more recent ones to come public and about the general appeal of them for energy producers (they can monetize some of their reserves and continue to operate the wells, and get money to expand without diluting shareholders directly or borrowing). If you want to know about all the US-listed royalty trusts, (one of which is actually a holder of royalties on oil and gas production in Germany, but almost all others are US-only production) tickerspy maintains an “index” of them here.
Full disclosure: In case you didn’t notice above, I do own units of Dorchester Minerals. I do not own any other stock/trust mentioned, nor have I yet written a bestseller to generate my own “Mainz” royalties … and I will not trade in any of the above investments for at least three days.
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