Stock price for buy-recommended Hugoton Royalty Trust (HGT) ought to rebound from a 12% decline on March 19 because monthly volume that was reported to decline by 13% actually increased by 2%. As a result, the monthly distribution declared for March was $0.14 a unit compared to our estimate of $0.18. Occurring on the last day of winter when investor interest also turned away from other natural gas stocks, the distortion of the Hugoton disclosure appeared to be magnified.
The trustee explains in the release that payment for 14% of volume was received after the end of the month and therefore not included in the calculation of volume for the latest distribution. Using the new low price for HGT and taking account of latest futures prices for natural gas for the next twelve months, we see a distribution yield of 8.8%. We include a gentle decline in production from HGT’s long-life, low cost reserves while we wait for firming price from rising demand for clean energy that would accompany economic growth.
Though more drilling on HGT’s properties would be competitive, the near-term trend of natural gas price is signaling that producers should delay further development efforts until consumers need more fuel. No company is more insistent on considering longer term implications in drilling decisions than the soon-to-be operator of the trust’s properties, buy-recommended ExxonMobil (XOM). While gaining long-term value, investors in HGT can receive attractive current income.
Originally published on March 22, 2010.