Cross Timbers, Mesa Royalty Trusts Look as Compelling as Encore Energy

Includes: CRT, ENP, MTR
by: Kurt Wulff

The founding chairman of Encore Energy Partners (NYSE:ENP) made a timely purchase of units that put a bottom on stock price at least for now, if not indefinitely. In the past nine days, Jon Brumley purchased about 35,000 units at an average price of about $10 a unit, boosting his holdings to about 170,000 units. Mr. Brumley believes in the appeal of long-life resources such as those held by ENP as well as by the three royalty trusts he founded, Permian Basin Royalty Trust (NYSE:PBT), Cross Timbers Royalty Trust (NYSE:CRT) and hold-rated San Juan Basin Royalty Trust (NYSE:SJT). ENP has bought financial derivatives that indicate the partnership would receive about $100 a barrel for most of its oil production in 2009. Fortunately, the likelihood of actually collecting from ultra-leveraged counterparties in the derivatives is higher after the global government bailout of the financial industry. As a result, a distribution yield of 12% in 2009 seems assured. On a longer term basis, small cap oil producer ENP at $14 a unit and a McDep Ratio of 0.81 offers attractive value, in our opinion.

Since a 57% stock price gain in a week for ENP is quite a move, investors might look for related stocks that have not shown such recent strength. Thinly-traded Cross Timbers Royalty Trust immediately comes to mind. CRT and thinly-traded Mesa Royalty Trust (NYSE:MTR) are the only two income stocks to decline in the past week. Both have high quality natural gas resources most concentrated in the San Juan Basin of New Mexico and Colorado. Investors may need no reminder that a little buy interest can move stock prices a lot for CRT and MTR and, conversely, the stocks should not be held in accounts that may be required to sell on short notice.
Thirteen income stocks have a median distribution yield of 10.4% for the Next Twelve Months ended December 31, 2009. Estimates use November 28 closing quotes for stock prices and settlement prices for futures for next twelve months deliveries of Light, Sweet Crude Oil at $60.40 a barrel and Louisiana Natural Gas at $6.90 a million btu.

Originally published on November 28, 2008.