Dividend investors often stick with safe, blue chip stocks as an investment strategy. While this is a valid approach, it also means these investors are missing out on certain opportunities which also provide a greater risk-reward profile, especially among stocks with lower market capitalization. Enduro Royalty Trust (NDRO) exhibits great fundamentals, a high dividend yield, and low risk, making it a worthy choice for both dividend and value investors willing to benefit from oil and gas rights. Nevertheless, this investment opportunity is not suitable for every investor, and there are some key factors to consider before investing in this small cap.
Enduro Royalty Trust is a Delaware statutory trust formed by Enduro Resource Partners to own a net profit interest representing the right to receive 80% of the net profits from the sale of oil and natural gas production from certain of Enduro Resource Partners' properties in the States of Texas, Louisiana and New Mexico. Enduro distributes dividends on a monthly basis, although it should be noted that the specific amount of the periodic distributions is expected to fluctuate, depending on the proceeds received by the Trust as a result of actual production volumes, oil and gas prices and variances in expenses. At the time of writing, Enduro trades at $13.09.
On October 21st, Enduro announced a cash distribution of $0.1512 per unit, its second highest monthly distribution in 2013. It attributed the increase in October's distribution to a 9% increase in NYMEX oil prices from June to July 2013, in addition to a rise in oil volumes, resulting in $1.0 million in additional oil revenues for the properties underlying the Trust. Gas volumes remained stable, but the average price decreased by 6%. In addition, Enduro noted proceeds from the settlement of hedge contracts at approximately $0.5 million.
In other news, Enduro Royalty Trust recently closed a public offering on October 2nd by Enduro Resource Partners LLC (Enduro) of 11,200,000 trust units at a price of $13.85 per unit. It intends to use the net proceeds from the sale of its trust units to pay down a portion of the outstanding borrowings under its senior secured credit facility.
Weak Stock Performance Post-IPO
Enduro went public in November 2011, pricing its 13.2 million unit IPO at $22.00, below the initially indicated range of $23.00-25.00. Since then, the stock has significantly underperformed the market, with its latest closing price of $13.09 representing cutting down its market capitalization by more than 38%. Enduro used to compare well to its peers, such as San Juan Basin Royalty Trust (SJT), Permian Basin Royalty Trust (PBT) and Sabine Royalty Trust (SBR), but as of late it became the ugly duckling of the group. To evaluate whether this underperformance is a reflection of true performance or has created an attractive entry point, let's look at the company's dividend history and fundamentals.
Based on October's dividend, Enduro is attributed a dividend yield of 13.86%. To be safer, I prefer to look at dividend yields on an annual basis. Over the past 12 months, Enduro's monthly dividend averages at $0.1231, or $1.4476 for the year. This gives Enduro a lower but still highly attractive dividend yield of 11.29%. Monthly dividends dropped earlier this year, but they have since been restored to average levels. The company's payout ratio is a high 98%, but we do of course expect at least 90% of earnings to be paid out by the royalty trust, as this provides exemption from corporate income taxes. Still, a 98% payout really requires Enduro to be able to continue to maintain or grow its earnings.
Key Value Indicators
With a YoY decline of 25% in the stock price, and a payout ratio at 98%, investors need to really deep dive into the earnings history of the company before making any investing decisions. As you can see in the table below, Enduro is averaging a 31% decline in revenue and earnings per share compared to the previous year, but only decreased dividends by 9%. This is flagging some serious concerns as to whether Enduro will be able to keep its dividends stable or even grow them. However, a downward revision would still leave dividend investors with an attractive dividend yield at a cheap price.
From a fundamental perspective, Enduro Royalty Trust does present some appeal to value-driven investors. The company's valuation seems low based on its trailing and forward P/E ratios of 8.79 and 7.92 respectively. In addition, Enduro currently trades at 72% of its book value, has zero debt, and boasts a decent return on equity of 7.80%.
The average brokerage recommendation for Enduro Royalty Trust is a Moderate Buy, with a target price of $17.75, presenting an upside of 35%. Out of the four brokerage recommendations, two rate the stock as a Strong Buy and the other two rate it as a Hold.
Enduro Royalty Trust is expected to report earnings on 11/14/2013, and investors would do well to keep an eye on the release. The main concern surrounding the stock is the negative EPS growth compared to last year, which is why waiting for the earnings report in mid-November may be the right choice for the more risk averse investor. Nevertheless, for the right investor, Enduro Royalty Trust presents a very interesting investment opportunity. The current price represents an attractive entry point with a 11.29% dividend yield and potential for 35% upside. In addition, Enduro is trading at a significant discount to book value and has zero debt. For investors who are more confident in Enduro's earnings potential, now is the time to buy.