Six U.S. Royalty Trusts, Dorchester Minerals Look Promising for the Long Term

Taking a new look back at the five-year volume trend for no-debt, no-hedge income stocks, we raise our estimate of Net Present Value (NPV) to $32 from $24 a unit for Dorchester Minerals, L.P. (DMLP) and to $60 from $47 a unit for Sabine Royalty Trust (SBR). At the same time we lower estimated NPV to $26 from $34 for hold-rated San Juan Basin Royalty Trust (SJT) and to $32 from $42 for unrated Cross Timbers Royalty Trust (CRT).

DMLP and SBR appear to be registering no decline in volume recently while SJT and CRT appear to be registering a decline of about 3% a year (see charts below, Volume – Revenue Royalty Trusts and Volume – Profits Royalty Trusts).

Meanwhile, continuing low natural gas price limits current cash flow illustrated in minimal distributions for buy-recommended Hugoton Royalty Trust (HGT) in the next few months. A 2% decline rate contributes to NPV of $28 a unit for HGT. The range of McDep Ratios has narrowed for U.S. Royalty Trusts. As a result, we believe that all six of the U.S. Royalty Trusts and DMLP, which has similar characteristics, are attractive commitments. Yet, despite our positive view, five of the seven stocks are among the most out of favor in our coverage measured by stock price to moving average. Investors may need to be patient and have tolerance for possible unfavorable stock price surprise.

Minimal Distributions, Better Value for Hugoton Royalty Trust
On the downside, low natural gas price and low distributions are depressing stock price. On the upside, the price structure in the futures market illustrates a possible recovery pattern. Beyond the latest futures price of $3.60 a million btu for May 2009, the average for the twelve months ending in April 2010 is $4.70 and for the next six years ending in April 2015 is $6.60. Moreover we believe natural gas futures are underpriced relative to six-year oil futures at $69 a barrel, which implies an energy equivalent price for natural gas of more than $11. On the latter basis our long-term natural gas price of $10 for calculating Net Present Value for HGT of $28 a unit looks reasonable to us. Looked at in reverse, current stock price of $10 a unit implies a long-term natural gas price of $4, which is less than the 12-months futures quote.

Some Ratios Too Low for Estimating NPV
Looking to our final comparison, the stable volume trends for SBR and DMLP are strong evidence as to why some reserve ratios are too low for valuation purposes. Similarly, because Ebitda excludes amounts spent by others for revenue royalty beneficiaries, cash flow multiples like EV/Ebitda could be misleadingly high.

Originally published on April 17, 2009.

Comments

[whisperonth...:]

I've had most of these at one time or another, currently hold Cross Timbers and Dorchester, and love those dividends. I even decided to learn how to do all the taxes myself, because it made me more aware of what I was spending, what I was getting, and where all the money was going. (TurboTax helped a bunch with that.) I spent years paying foreign taxes on the Canadian Trusts, and finally found the US version from a Seeking Alpha article early last year, and I haven't looked back since.

May 12 12:28 PM

[BudHarvey:]

The Canadian Tax (15%) on the Conroys' dividends is the same as the Capital gains tax in the US and the Canadian Tax is credited on our Us Income tax return, so there is no tax gain to the US Royalty Trust over the Conroys. By the way, I own both Canadian and US Royalty trust stocks

May 12 12:57 PM

[don't know ...:]

Nope budharvey's out to lunch. Canadian dividend is helf before you receive it. And then if you sell there is a capital gain.
U.S Royality Trust like SBR and CRT carry depletion allowances that reduce your tax liability.

May 12 08:29 PM

[don't know ...:]

Best to look at SBR compared to CRT or others payouts. SBR is more. HGT is paying nothing but when the price is below $10 it is a good buy. I don't believe SBR will go to $60. Nope don't believe it. So we will see if I "don't know nothing'

May 12 08:31 PM

[YoYoMama:]

I've been watching DMLP for a while and this article convince me it's a good buy. Will go for it on the next dip.

May 15 07:37 AM

[einstein p ...:]

PBT just raised it's monthly distribution from 4 to 5.1 cents for May. That's a nice percentage move, especially for a 9 dollar stock.

The price of natural gas remains low by historical standards. Sooner or later, natural gas will be recognized as a major component in the US energy solution. When that happens, both the dividend and the share price of PBT will move much higher.

May 18 01:07 PM

[einstein p ...:]

Make that a twelve dollar and change stock and moving higher, along with the dividend. Natural gas is still cheap and getting cheaper by the day when you compare it to the price of crude. Expect the American and Canadian oil and natural gas companies to move significantly higher in the next few months as geopolitical tensions mount and demand returns faster than supply can be brought back on line.

Jun 02 11:26 PM