In 2014, royalty trusts have been a graveyard for investors seeking yield. In January, Great Northern Iron (NYSE:GNI) fell from $67 to $23 in a week and never recovered. In June, Dominion Resources (NYSE:DOM) fell from $11 to $7 in two days and never recovered. The reason for both sell-offs was the same: a critical mass of shareholders suddenly woke up to the fact that the shares were selling for more than the value of their future distributions. It made a lot more sense to sell than to hold.
A similar fate awaits Whiting Trust USA I (NYSE: WHX). Its trustee said as much in its most recent distribution announcement (August 8, 2014). Repeating language from its annual report, WHX's trustee wrote:
"To the extent that the Trust units are trading at a price substantially in excess of the aggregate distributions that may be reasonably expected to be made prior to the termination of the Trust, the market price decline in Trust units is likely to include one or more abrupt substantial decreases."
What is the trustee talking about? WHX closed Monday at $2.29, yet future distributions add up to only $1.32, plus or minus 15-20 cents. The shares are overvalued by almost a dollar, or 75 percent. And the overvaluation can't persist beyond March 2015, when both the price and the future distributions are guaranteed to hit $0. Today it makes a lot more sense to sell than to hold.
The relevant information is clearly disclosed on WHX's FAQ page, where we read:
"Q - How long are the trust's distributions expected to last?
"A - Based on independent engineering at December 31, 2013, the trust is expected to terminate in March 2015….
"Q - What will be the value of the units when the trust terminates?
"A - Zero."
You can't fault the trustee's honesty!
It's not hard to estimate WHX's final distributions. There are several ways to get similar answers. The simplest approach goes like this. WHX sells oil and gas and distributes 90% of the net profits to shareholders. To estimate future distributions, just start with the units of oil and gas that WHX will sell until termination, and multiply that by the expected profits per unit.
We know exactly how much oil and gas WHX will sell. WHX will terminate when it has distributed the profits on 8.20 million barrels of oil equivalent (MMBOE), of which 7.60 MMBOE had been sold as of June 30, 2014. So just 0.60 MMBOE remain (0.60=8.20-7.60). WHX projects that it will sell the last 0.60 MMBOE over the next 3 quarters, finishing by March 31, 2015, and making the last distribution soon after.
What distributions will result from those sales? We can get a good idea by looking at recent history. Over the past 4 quarters, WHX sold 0.99 MMBOE of shareholders' interest and announced $2.18 in distributions (including the most recent distribution that went ex-dividend on August 15). So WHX has distributed $2.20 per MMBOE ($2.18/0.99). At that rate, selling the last 0.60 MMBOE will result in distributions totaling $1.32 (=2.20x0.60).
There's 15-20 cents of wiggle room around that estimate. If WHX remains as profitable as it was in the most recent quarter, it will distribute $2.44 per MMBOE, or $1.46 total. If it reverts to the low profits of the previous quarter, it will distribute $1.87 per MMBOE, or $1.12 total.
There's no way to justify the current price of $2.29. If you're a current shareholder, your best move is to sell. You'll make $1 per share more by selling today than you will if you hold to termination.
We've been here before. Repeatedly since 2011 WHX has been knocked down to fair value only to pop up again, like an inflatable punching bag. We're in the late rounds now, and after its next tumble WHX may not get up again.
Do you want to be holding it when that happens?
Disclosure: The author is short WHX.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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