Protected Principal Retirement Strategy: Perpetual Trusts

by: Akaralph

For those of you who have followed some of my SA articles, you are aware that we allocate a small portion of the Protected Principal Retirement Strategy portfolio to positions in a few oil and natural gas trusts. We currently own Eagle Energy Trust (ENYTF.PK), Freehold Royalties (OTCPK:FRHLF), two perpetual Canadian trusts with which we are quite pleased, and SandRidge Permian Trust (NYSE:PER), a finite life trust, with which we are not altogether happy but optimistic about due to the location of trust assets.

Several years ago (before the days of the finite life trusts), I invested in a few perpetual life trusts. With the recent poor (to say the least) performance of trusts like some of those offered by SandRidge Energy and Chesapeake Energy I have reverted to performing additional research of the perpetual trusts for potential inclusion in the portfolio.

This article will discuss the potential advantages of adding a few of the perpetual life trusts to our portfolio. Those covered herein include Permian Basin Royalty Trust (NYSE:PBT), Dorchester Minerals LP (NASDAQ:DMLP) and San Juan Basin Royalty Trust (NYSE:SJT). While PBT is considered a perpetual trust, in actuality its royalty rights expire when production expires, likely decades away.

Permian Basin Royalty Trust

PBT's concentration is in the Permian Basin in Texas, the largest historical source of oil in North America. It is presently about 20 percent natural gas and 80 percent oil. Over the past several months growth in oil production has been noted for PBT. This should eventually translate into increased monthly dividend payments.

In August 2013, PBT paid a monthly dividend of $.089 as compared to $.057 for August 2012. The current annual dividend is $1.07 (although it will vary based upon production royalties) for a yield of just under 8 percent.

Recently, there have appeared a few articles addressing renewed interest in the Permian Basin as a producing resource. These articles called attention to the eastern and western portions of the basin as being particularly productive and not having the associated higher costs of horizontal drilling and fracking. It is worth noting that PBT's royalty properties lie in 33 of the most productive counties in Texas.

According to Yahoo Finance, PBT's trailing 12-month return on equity has been approximately 4300 percent.

Dorchester Minerals LP

DMLP has concentrations in both the Permian Basin and in the Bakken formation in North Dakota. Approximately 65 percent of its royalties are presently derived from natural gas, and 35 percent from oil.

DMLP pays a quarterly dividend, the most recent amount being $.40 in July of this year. As with the other trusts, DMLP's dividend varies with production royalties. Over the past four quarters it has paid about $1.58 in dividends for a current yield of about 6.6 percent. Increasing oil volumes from both the Permian Basin and Bakken have led analysts to increase dividend estimates for the coming 12 months to slightly in excess of $1.80, or a yield of about 7.5 percent.

Oil production has increased roughly 80 percent in the most recent quarter, which bodes well for DMLP investors.

San Juan Basin Royalty Trust

SJT derives its revenues totally from natural gas produced in the San Juan Basin in northwestern New Mexico. With current royalties based upon a natural gas price of about $3.72/Mcf, and seemingly a consensus that prices will continue to increase, perhaps to the $5/Mcf level, the outlook for increased payouts is a good one.

SJT's August 2013 dividend was $.09, and over the past three months the dividend has increased substantially from the $.04 average of the prior three months. Over the past year the dividend has increased from $.43 annually to the current level of $1.08, a present yield of just over 6.5 percent.

Outlook

I believe that the outlook for each of these trusts going forward is a favorable one. With volatility in the Middle East increasing it is not likely that oil prices will drop below $100/Bbl, and even if that were to happen, I do not think it would remain there for long. The more feasible scenario to me would see oil prices above $120 near term. Should there be a war in the Middle East, one can see oil prices significantly exceeding that level.

Natural gas prices have been mired in the depths for many, many months, and except for a brief spike above $4/Mcf, the mid-$3s have been the point from which a base appears to be building. I agree that if the coming Winter lives up to its expectations as being very cold, we could well see natural gas prices approach the $5/Mcf levels.

Summary

I am not a financial analyst, so I cannot claim to make accurate stock price forecasts. As manager of the Protected Principal Retirement Strategy portfolio I do, however make my own estimates for stock prices prior to purchasing. While I would await a pullback in the price of all three of these trusts in order to increase the current yield before purchasing, my potential target prices are as follows:

PBT - $19.00

DMLP - $30

SJT - $22

Disclosure: I am long ENYTF.PK, OTCPK:FRHLF, PER. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article does not constitute either a buy or sell recommendation for any of the stocks mentioned.