Rising natural gas price stimulated by cold weather and economic recovery leads us to increase estimated distributions for the next twelve months to $1.77 and $1.50 a unit respectively, implying cash yields of 9.7% and 8.7% for buy recommendations San Juan Basin Royalty Trust (SJT) and Hugoton Royalty Trust (HGT). Micro cap Mesa Royalty Trust (MTR) may pay 11.3%. The three unhedged natural gas trusts declined more in stock price in the financial panic of 2008 than did hedged oil income stocks Encore Energy Partners (ENP) and Linn Energy (LINE). The government bailout allowed financial institutions to give cash in satisfaction of hedges to ENP and LINE. That enabled the two stocks to maintain level distributions despite more volatile underlying cash flow from the higher cost of oil operations.
Then in 2009, the delayed price recovery of natural gas relative to oil delayed the stock price recovery of natural gas trusts. Throughout the financial panic, each of the five stocks recorded a rising volume trend when we adjust for the units issued, debt raised and cash reinvested, distorted only by fluctuations in the value of hedges in Linn’s case.
Lower HGT NPV to $21 a Unit from $23 to Match SJT
At the same time that economic and industry timing appears to favor buying HGT and SJT, we make a modest correction to estimated Net Present Value (NPV). A year ago, HGT’s relatively better volume trend in 2008 gave us a reason to set NPV above that of SJT. The relative trends reversed in 2009 with HGT slipping relative to SJT. As a result we lower NPV for HGT to $21 a unit from $23 where it matches SJT, coincidentally. With a sharp eye, one can see undulating trends with advantage shifting each year between SJT and HGT. More important than the small differences, both stocks are pure plays on the upside potential of natural gas in the 2010s.
Originally published on January 8, 2010