Units of Sabine Royalty Trust (NYSE:SBR) are outperforming our expectations as they have most of the time since the trust was formed in 1982. We raise our estimate of Net Present Value (NPV) to $50 a unit, which may be low as was our previous estimate of $45, apparently. One of the confounding factors is that despite reporting minimal proven reserves, the trust has experienced no decline in oil equivalent production for the past six years.
With output stable, oil and gas price explains most of the variation in monthly distributions. Thus, we could simply use futures prices for oil and gas to estimate distributions for the next twelve months. Consistent with that trend, we estimate a breakdown in as much detail as past disclosures support. The expected monthly payouts imply a nice cash yield of 6.9% for 201.
Though stock price is above NPV, the trust has no debt while it ranks by McDep Ratio in the middle of a high-quality group. SBR’s unlevered multiple of enterprise value to cash flow is close to 14.3, which is the theoretical multiple of a constant free cash flow stream delivering the 7% return that is our discount rate for estimating present value. The stock’s actual return for 28 years has been 15% a year according to Bloomberg.
Originally published on November 26, 2010.