Permian Basin Royalty Trust Looks Enticing With 9% Yield And Increased Production

Sep.22.13 | About: Permian Basin (PBT)

Shares of Permian Basin Royalty Trust (NYSE:PBT) jumped only 1% on Friday. That small increase came after announcing an increased cash distribution and improved drilling results. With a yield north of 9% and improvements in several financial areas, shares look attractive here.

Permian Basin Royalty Trust announced a monthly distribution of $0.106 for the month of September. The company, which pays monthly dividends, hasn't paid out over $0.10 a month in quite some time. Here is a look at the payouts for the current 2013 year:

  • January: $0.05
  • February: $0.036
  • March: $0.058
  • April: $0.061
  • May: $0.088
  • June: $0.078
  • July: $0.072
  • August: $0.089

As you can see, September's payout is a significant boost from what shareholders have gotten so far in 2013. Based on Friday's closing price of $13.84, the new payout would represent an annual yield of 9.2%. Back in 2012, Permian Basin paid out dividends over $0.10 for the entire first half of the year. With improving results, shareholders should expect this new higher payout trend to continue.

In September, Permian Basin reported improved production for both oil and gas. A higher recognized price of oil, which is the majority of the company's business (81% in 2012), offset a slight weakness in the price of gas. At the company's Waddell Ranch and Texas Royalty properties, Permian recognized 46,804 bbls of oil and 83,550 Mcf of gas. The average prices were $102.58 and $6.06 for oil and gas respectively.

The results from September were an improvement on the prior month's 41,538 bbls and 79,860 Mcf of net to trust production. The improved results go back to higher capital expenditures to improve production and create additional wells.

These capital expenditures hit the company in the second quarter, when recognized net to trust revenue was $11.1 million, versus $16.1 million in the prior year. Operating as a grantor trust, the company only recognizes revenue from actual oil and gas production. Net to trust revenue is the result from revenue after all expenses based on Permian Trust's respective ownership percentages.

Permian Basin Royalty Trust owns the following:

  • 75% interest in Waddell Ranch property - 78,715 producing acres, as of 12/31/12 had 889 productive oil wells, 64 gas wells, and 177 injection wells
  • 95% interest in Texas Royalty property - 303,000 producing acres

Here is a look at the current proven reserves of the company, which show the value and potential future revenue for Permian Basin Royalty Trust:

Oil (Mstb)

Gas [MCF]

Net Cash Flow ($M)

10% Discount CF ($M)

Proved Developed Producing

5,817

15,591

$595,183

$331,071

Proved Developed Non-Producing

305

1,277

$33,147

$11,410

Proved Developed

6,122

16,848

$628,398

$343,481

Proved Undeveloped

307

1,428

$34,193

$11,579

Total Proved

6,429

18,276

$662,533

$354,060

Click to enlarge

There are several risks with an investment in Permian Basin. The company operates as a grantor trust, which means dividends are taxed as ordinary income. However, with its unique structure, shareholders don't have to worry about a K-1 form at tax season, which normal MLP owners do. The company also has a limited amount of reserves and must replenish or recognize the end of its life cycle when reserves run out. A fall in the price of oil or gas could also hit shares of Permian Basin hard.

Permian Basin Royalty Trust is a great stock for income investors, as it pays a monthly dividend. The stock is also a bet on rising oil prices in the triple digits. The company is pricing and valuing its reserves in the $80s and $90s, providing instant upside to assets and net revenue going forward with higher values. The company also offers an opportunity to take advantage of several years of spending to earn more in the future.

Shares of Permian Basin are up 10.5% in 2013. Despite this rise, shares have a near double digit dividend yield and show signs of increasing the payout once again. Shares traded above $20 for much of 2011 and 2012. The company is gaining steam and coming back strong as the result of higher spending for several years. Now is the time to take advantage of a depressed share price from the sellers who bailed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.