Mesa Royalty Trust (NYSE:MTR) offers pure natural gas income with no debt and no hedging, but limited trading liquidity. The practical alternatives for most investors are buy-recommended San Juan Basin Royalty Trust (NYSE:SJT) and buy-recommended Hugoton Royalty Trust (NYSE:HGT). Persisting lower regional natural gas price discounts contribute to higher estimated distribution yield for the next twelve months for each trust of 8.4% for MTR, 6.9% for SJT and 5.9% for HGT. Offsetting the higher distribution expectation for MTR, we reduce estimated Net Present Value (NPV) to $48 a unit from $56 following the September 19 disclosure of reserves and operating results for the year 2008. Despite that change, MTR has the lowest McDep Ratio among natural gas producers.
Trading in the stock is limited because the trust is less than a tenth the size of SJT and HGT. MTR now has the shortest reserve life index when previously it had the longest. To analyze MTR we also look closely at our outlook for SJT and HGT because the three share concentration on natural gas in traditional long-life large fields. Underlying volume normally declines gently though there are opportunities to hold it stable with more reinvestment not considered here. Distributions declared monthly through the third quarter 2009 follow a similar pattern. Up-to-date distributions help in projecting cash flow while we await operating results for 2009 quarters.
Conservatively Reported Reserves Need Adjustment for Equity Valuation
Last week’s disclosure apparently completes MTR’s two-year transition to reserves estimated by a conservative independent engineer, DeGolyer and MacNaughton. SJT went through a similar reduction in reserves when it changed independent engineer to Cawley Gillespie from Miller and Lents. HGT’s reserves are estimated by Miller and Lents. Choice of engineer may be the most important differentiating factor in the ratio of Adjusted Reserves/NTM Production. The short reserve life indices of 8.0 years for MTR and 9.1 for SJT are unrealistically low, in our opinion, compared to 13.4 years for HGT. The lower numbers are useful for tax payers, lenders and buyers of property from unwilling or uninformed sellers. The lower numbers can mislead investors if the context is not considered carefully.
Originally published on September 28, 2009.