Hugoton, Juan Basin Royalty Trusts Round the Bend in Income Distributions

Market prices for natural gas imply that buy-recommended Hugoton Royalty Trust (HGT) and hold-rated San Juan Basin Royalty Trust (SJT) are rounding the bend now in monthly and quarterly income distributions. Concentrated entirely on natural gas, HGT and SJT are among the lowest in stock price as measured by McDep Ratio and ratio to 200-day average.

The market action appears extreme as it appears to match the decline in short-term (12 month average) natural gas price more than long-term (72-month average) natural gas price. Believing that long-term investors have an opportunity presented by short-term traders, we have maintained our buy recommendation on HGT. As for timing, the maximum physical pressure on spot natural gas may be during the next few months as winter storage fills earlier than usual. Realizing that short-term price can be volatile and unpredictable, we retain the option to upgrade our rating on SJT to buy.

Monthly Distributions Depend on Drilling Deductions and Price
A slight difference in timing of HGT and SJT in rounding the bend in distribution declarations is due in part to the pattern of development expenditures subtracted from cash flow before making the distribution. HGT makes deductions that are more anticipatory and gives guidance on future deductions furnished by the operator of the properties, buy-recommended XTO Energy (XTO). SJT takes deductions when payments for development drilling are made by the operator of the properties, buy-recommended ConocoPhillips (COP).

Index prices are already known for the next three monthly distributions because index prices are set at the beginning of each month and distributions declared in mid-month lag real-time price by two months. Thereafter we take price from the futures market which can change every trading day. Indeed, the recovery is taking longer than futures prices indicated when we last published monthly projections for HGT and SJT. Realizing that detailed projections tied to futures prices are continually changing, we update weekly the end result, Distribution for the Next Twelve Months.

Originally published on July 10, 2009.

Comments

[Thomas J. Gordon]

I think nat gas prices are below where I originally got involved in sjt back in the early 2000's. I think the supply picture for nat gas has changed in the u.s.. wsj says there are all these new important finds in the u.s.. Hard to believe that any operational thing that sjt does is going to make up for nat gas being < $4.

2009 Aug 03 12:05 PM

[fla10000]

I have been a long time owner of SJT and HGT, but sold all in February. Bought back in in March and sold out at the last dividend distribution declaration. There are other dividend plays that are yielding 9 -10 percent currently. I will get long in both names late October to mid November unless they break down again under $10.00.

I have a price target of $22.00 to $24.00 for both stocks by Q1 2011. I am in no hurry to get back into these two companies unless someone knows something I do not.

Feel free to contact me at [e-mail] .
fla10000

2009 Aug 05 05:38 PM

[whidbey]

I have NG in several forms and the virtually universal perception that NG will rise in the winter, or when the fallacy of Obama energy becomes clear, is nice to think of, but alas I am not really seeing it.

Demand for NG will not build so long as heating oil remains plentiful on the east coast. The longer run hope is that petrol becomes so costly that they give up these damned electric cars and get to NG which is, of course, the right answer. I have some hope for NG in electrical generation, but demand is down for KWHs so we must wait.

2009 Aug 10 12:38 PM