SandRidge Mississippian Trust (SDT) is off and running as a publicly traded company. The trust has been trading in a fairly tight range and offers income investors ample value to their income portfolios. Income investors go where the money is. SDT began trading post-IPO on April 7th. My analysis presents 2-compelling reasons to purchase SDT shares.
Strong Parent Company Relationship.
SandRidge Energy (SD) is a $4.8-billion market cap company active in the Mid-Continent, Permian Basin, Gulf of Mexico, and the Gulf Coast. SDT's IPO provided SD a 38.4% interest in SDT. The conveyance of this interest provides a catalyst and incentive for SD and SDT to proactively provide positive returns to shareholders. SD has a vested interest in the SDT's success in delivering positive cash flow.
Owning SDT is reinforced by SD's management team. Although the two entities are clearly differentiated in legal filings, SD personnel provide insights on what properties are assigned to SDT's cash flow focus. The trust will include currently producing oil and natural gas properties. A key business relationship is the currently non-developed wellheads which are planned for development. If SD is unable to deliver due to financial difficulties or economic factors, SDT will suffer negative cash flow consequences.
Long-time oil dividend investors will recall Whiting USA Trust I IPOs and their relationship to Whiting Petroleum. SDT will benefit in a similar fashion. When dealing with oil and money, having a solid partner in your corner is the difference between success and failure.
High Return on Investment via Collars
Price swaps and collars are in effect for the early years between 2011 and 2015. Oil is hedged via price swap contracts at prices ranging between $100.94 - $104.15 Natural gas is hedged via collars at $4.00 - $8.55 price points per mmbtu.
The first SDT distribution has an anticipated ex-dividend date of August 15th, 2011. Each quarter should provide patient investors a return of their initial outlay, and subsequently provide a steady stream of ongoing cash flow thru the peak of the 2014 - 2015 calendar years.
The trust requires SD to initiate new wells and deliver on existing wells, in which SDT has an interest, for the years 2011 - 2015. The beginning years are high-return flow through years for regaining invested dollars. The investor should familiarize themselves with the expected present value of annual present value calculations of 2011-2015 distributions.
The quarterly target cash distribution between August 2011 thru December 2015 equals $12.818. The trust, however, has a lifespan thru March 31, 2031.Currenlty SDT trades at $26.40 per unit. Assuming the investor receives $12.818 by December 31, 2015, 48.5% of the initial investment will be recovered in 4-years. This does not factor in net present value of future year distributions. The investor, however, continues to receive distributions through calendar year 2031. This continual payout provides a catalyst for the income investor to more than recoup their initial SDT investment cash outlay. The one caveat in this picture is the fiscal health of SD. SDT requires SD management to act responsibly and timely. New wells must be developed and cash flows accrued for SDT to succeed.
Disclosure: I am long SDT.