Royalty trusts are interesting investment vehicles. Like Master Limited Partnerships (MLPs), they are typically high-dividend, tax-advantaged energy investments that are required to pay out a certain amount of their proceeds to investors.
Unlike MLPs, owning a royalty trust doesn’t mean you own part of a business — you merely own the royalties from certain mining or drilling projects. The present value of these projects is always fluctuating (as you’ll see with VOC, HGT, and PBT), because proven reserves become more or less valuable as the underlying commodities advance or decline in value.
Let’s take a look at these three royalty trusts and see what they can offer you, the investor.
Royalty Trusts to Consider: VOC Energy Trust (VOC)
Performance (2016): +30%
VOC owns oil and natural gas wells in Kansas and Texas, and investors (a.k.a. “unitholders”) are entitled to 80% of the net proceeds from those projects.
One of the most important things to know about a royalty trust is when it will stop paying royalties and be dissolved, as well as what the “terminal value” will be.
At a certain point, all royalty trusts must die, because they rely on the extraction and production of fossil fuels. When royalty trusts stop paying royalties and reach the end of their life, they can either have some terminal value from the sale of remaining assets, or simply expire worthless.
In this case, VOC will expire worthless in 2031 although it could expire sooner if gross proceeds attributable to net profits interest are less than $1 million for two straight years.
Royalty Trusts to Consider: Permian Basin Royalty Trust (PBT)
Performance (2016): +42%
Recovering oil prices have been the catalyst for PBT in 2016, as shares rocketed more than 40% higher.
Managed by ConocoPhillips (COP), PBT is another royalty trust with large exposure to Texas. Specifically, unitholders are entitled to 75% of net royalties from Waddell Ranch in Texas and 95% of various other royalty producing properties in Texas.
Through the end of 2015, Waddell Ranch held over 360 net productive oil wells, 66 net productive gas wells and 120 net injection wells. PBT pays distributions (dividends) to unitholders monthly, and the most recent 3-cent distribution in May was the highest of the year.
The trust had shelled out just a penny a share in every other month of the year except February, when unitholders received two cents.
Royalty Trusts to Consider: Hugoton Royalty Trust (HGT)
Performance (2016): +14%
Hugoton, more than PBT or VOC, is a natural-gas-oriented royalty trust. HGT owners are entitled to 80% of the royalties from natural gas properties in the Hugoton region of Oklahoma and Kansas, the Anadarko Basin in Oklahoma, and the Green River Basin in Wyoming.
About 76% of HGT’s net profits last year came from natural gas, and 78% of its proven reserves by estimated net profits are natural gas as well.
Be careful with Hugoton, though: Historically speaking there’s been greater demand for natural gas during winter months than summer months. Also, between 2014 and 2015, estimated future cash flows based on current reserves plummeted 88%, largely because of both natural gas prices and oil prices that were cut in half.
If energy prices can continue to rally, HGT is worth a gander — and so are PBT and VOC.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at email@example.com.