Williams Coal Seam Gas Royalty Trust: Income You Can Believe In

Williams Coal Seam Gas Royalty Trust (NYSE:WTU) - March 4, 2009 Closing Price: $4.05

52-Week Range: $3.86 (March 3, 2009) - $11.25 (Aug. 11, 2008)

Yield: Variable - 10-Year Low/High Annual Payout = $0.88/unit-$2.51/unit.

The Williams Coal Seam Royalty Trust was formed in December 1992 to acquire and hold net profit interests in proven natural gas properties in the San Juan Basin of New Mexico and Colorado. The only assets of the Trust are the cash and cash equivalents (being held for payments of expenses, liabilities and Unit holder distributions) and the Royalty Interests. ‘Royalty Interests’ consist of a net profits interest [NPI] in the underlying properties.

Under Delaware law WTU pays no corporate tax rate and passes through all net income directly to its Unit holders who are then liable for taxes on the distributions received. The earnings per Unit essentially match the dividends declared each year. Income varies with natural gas prices.

The company has no debt – short or long term. Here are the per unit numbers for this outstanding Royalty Trust since 2000:

click to enlarge

Final numbers for 2008 are not yet in but annual distributions were $1.47/unit. The final quarter of 2008 included an extra $0.357338/unit due to a “true up” adjustment. The Q1 payout for 2009 was $0.113811.

WTU holders have received total income of $13.24 per unit over the past 9.25 years for an average annual distribution of $1.43. At Tuesday’s virtual decade low unit price of $4.05, that would represent a 35.3% average annual income if the coming years provide the same distributions as those of the past.

Even at the first quarter’s depressed level of $0.113811 the current year would bring $0.4552 per unit or 11.24% in current yield. Compare that with your money market or bank CD rate today to see if it might look attractive.

Best of all is the capital gains potential. Will natural gas prices stay at their present depressed levels or will they pick back up over time? I’m willing to bet they’ll go significantly higher. The actual prices of WTU units have never been cheaper. The 52-week low was hit during Tuesday’s trading.

A return to even previous actual annual LOW prices would bring exceptional gains while a rebound toward old highs in the $9 - $23 range would provide huge capital gains on top of the substantial current income stream.

Unless you are looking for a total collapse in natural gas pricing, WTU units seem to offer the perfect blend of high income, extraordinary upside and low risk.

Disclosure: Author is long WTU units.

Comments

[tk77mann:]

How is it doing the income taxes for this kind of trust? Doing the taxes for limited partnerships (like BPL and FUN) are a pain, but I have never done any tax filings for gas trust units.

Would love the income, but is it worth the IRS paperwork every year?

Mar 05 10:59 AM

[mc2406:]

IRS Schedule E using info received from the trust. Extra work, but worth the effort-- the cost depletion alone might wipe out any current income recognition.


On Mar 05 10:59 AM tk77mann wrote:

> How is it doing the income taxes for this kind of trust? Doing the
> taxes for limited partnerships (like BPL and FUN) are a pain, but
> I have never done any tax filings for gas trust units.
>
> Would love the income, but is it worth the IRS paperwork every year?

Mar 05 11:20 AM

[Conan the B...:]

I haven't followed them for years, thanks.

Mar 05 04:15 PM

[biomedlives:]

I understand that, unlike the Canadian royalty trusts, WTU does not acquire additional reserves as time goes by. What is the estimated lifetime of its existing reserves?

Mar 06 08:51 AM

[MikeyLV:]

Reserves are not that important... this from the 2007 annual report (2008 not available):
The Trust will be terminated on December 31, 2012 or earlier if certain events occur.

So you have 3-1/2 years. Looks like reserves will cover that.

Mar 06 01:02 PM

[biomedlives:]

According to the prospectus, the trust will distribute the assets to its holders when it terminates. The income over the remaining 3.5 years may not cover the current purchase price, so the value of the assets (reserves, discounted value of the royalty stream, or something else) that the trust will have on the termination date is important.


On Mar 06 01:02 PM MikeyLV wrote:

> Reserves are not that important... this from the 2007 annual report
> (2008 not available):
> The Trust will be terminated on December 31, 2012 or earlier if certain
> events occur.
>
> So you have 3-1/2 years. Looks like reserves will cover that.

Mar 18 11:30 AM

[Another BSD...:]

Now that WTU has announced that there is no dividend to be paid this quarter and the units' price has fallen, I've been looking for the author's follow up since the original recommendation was posted above last March. I even checked the author's blog but found that not only has the author not commented on the current status, but apparently he has removed all reference to WTU from his blog.

What's with that?

Aug 08 03:11 PM

[rlp4:]

Does anyone know what the estimated distribution will be if the trust goes until the end in 2012?

Nov 04 07:53 PM