With natural gas, the commodity, deeply depressed, we believe it is time for investors to accumulate and be patient in stocks like Mesa Royalty Trust (MTR), the Income and Small Cap with the lowest McDep Ratio, 0.43. The trustee made news on July 28, 2009 with the filing at the Securities and Exchange Commission (SEC) of the quarterly reports for the periods ended March 31, 2008 and June 30, 2008. As a result, we now know volume, price and costs for operations for those periods, but not since then.
Existing investors continue to receive regular quarterly income from distributions declared monthly. The monthly disclosures also attribute royalty income separately to the Hugoton properties and the San Juan Basin properties. Coincidentally, we have recent disclosures from two other royalty trusts with the relevant names, Hugoton (HGT) and San Juan Basin (SJT). By analogy with HGT and SJT we estimate volume, price and costs that will enable MTR to pay a distribution of $1.76 in the next twelve months. That places the distribution yield at 7.4%, near that for HGT and SJT. Despite a similar yield, we estimate Net Present Value (NPV) that leads to a lower McDep Ratio than for HGT and SJT. A higher reserve life supports greater value relative to the distribution.
The delay in financial disclosures stems from a shift to an independent engineer, DeGolyer and MacNaughton (D&M), for making annual estimates of reserves for the San Juan Basin properties. An estimate as of December 31, 2007 has been released with the filing of the annual report to the SEC for 2007 earlier this year. We await the 2008 version as well as the quarterly disclosures for the remainder of 2008 and the first two quarters of 2009.
MTR can’t be for every investor, considering the small size of the trust at less than $50 million in market value. Trading in the shares is light and price swings can be exaggerated.
Finally, the McDep Ratio does not tell us when the value we estimate will be recognized. There are widespread fears of further price weakness for natural gas between now and November 1 when seasonal demand is light and there is no obvious place to put the clean fuel that is currently being produced. Either a new source of demand has to open up, displacing coal in power plants, for example, or supply has to be curtailed. Astute traders might make a buck on calling the short-term price. Our conviction lies with long-term investors who see unusual opportunity to make new investments.
Originally published on July 31, 2009.