Natural Gas and Oil Royalty Trusts: New Billion Dollar Float (HGT)

The widely-held market cap “float” of Hugoton Royalty Trust (HGT) more than doubled to $1.25 billion on April 24, the ex-date for the distribution of HGT units by XTO Energy (XTO). The HGT market cap of 46% reflects the limited marketability of the units until now.

The increased supply will be fully evident on the payment date of May 12, when certificates will be delivered and accounts will be credited with HGT units. Probably anticipating the potential selling of HGT units by some XTO owners, HGT stock price has declined 18% in 2006 to reach the lowest McDep Ratio among income stocks in our coverage.

With an unlevered cash flow multiple (EV/EBITDA) at 8.0, HGT is the lowest of long-life natural gas oriented U.S. royalty trusts. After 24% of the cash flow is reinvested, the remaining amount that is expected to be distributed in the next twelve months is 9.3% of unit price. In reviewing the weekly analysis for most of the past five years, we believe that the units are attractive for income investors.

Meanwhile, the recently declared lower cash distributions reflect natural gas production in February which contrast with advancing prospects for future distributions that will accompany rising oil and natural gas prices.

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Kurt Wulff's McDep Associates offers realtime, independent research services for investors in the energy and utilities sectors. For more information, go to www.mcdep.com or email Mr. Wulff at [e-mail].