IPO Preview: Enduro Royalty Trust, November 2011

| About: Enduro Royalty (NDRO)

Based in Austin, Texas, Enduro Royalty Trust (proposed symbol NDRO) scheduled a $317 million IPO with a market capitalization of $792 million at a price range mid-point of $24 for Thursday, November 3, 2011. The full IPO calendar for the week of October 31 includes four scheduled IPOs.


NDRO’s projected yield of 6.75% from an oil trust is not particularly exciting. Nitrogen fertilizer limited partnerships, such as CVR Partners (NYSE:UAN), Terra Nitrogen (NYSE:TNH) and even this week’s nitrogen fertilizer’s IPO of Rentech Nitrogen Partners, L.P. (NYSE:RNF) offer better returns, in the 9% range. RNF is a spin-off from Rentech (NYSEMKT:RTK).


NDRO is an oil trust put together by industry veterans who are playing an arbitrage game. They are buying properties from sophisticated industry insiders and then re-packing their recent ‘acquisitions’ for the unsuspecting public market.

For example, two of NDRO’s properties come from Denbury Resources (NYSE:DNR), $6.7 billion market cap and ConocoPhillips (NYSE:COP), $101 billion market cap, both very sophisticated oil companies.

About Oil Trusts

These trusts often attract investors with their relatively high yields. This makes the shares sensitive to interest rates, as share prices are likely to decline in periods of rising interest rates, and to rise when interest rates fall.

Royalty trusts in the United States and Canada usually involve oil and gas fields or mines that are at or past their production peak, and will gradually decline in output as well as revenue.


Enduro Royalty Trust was formed in May 2011, by Enduro Sponsor to own a net profits interest representing the right to receive 80% of the net profits from the sale of oil and natural gas production from certain properties in the states of Texas, Louisiana, and New Mexico.

This is basically a financial transaction to create net worth for the oil executives (and perhaps the investment bankers) putting this deal together.

The projected annual distribution rate is 6.75% for the 12 months ended September 2012, which is a little higher than some master limited partnerships. NDRO, however, is a trust whose assets will be depleted yearly although NDRO executives plan to acquire other producing assets to deplete over time.

Limited partnerships have more value if the general partner is a well-regarded entity in the business that is economically motivated to increase the partnership’s value. An example is OilTanking Partners (NYSE:OILT).


NDRO, on the other hand, buys producing oil properties that are depleting, then re-packages them for sale to the public at a (hopefully for NDRO) higher value. The sellers are all very sophisticated players in the business so don’t expect the public to get an especially good deal, after the NDRO middlemen extract their slice of the pie.

Projected Cash Distributions

For the 12 months ending October 31, 2012: $1.62 per trust unit, 6.75% projected return at the price range mid-point of $24 (S-1, page 47.)

The projected financial information was based on the hypothetical assumption that prices for oil and natural gas remain constant at $87.75 per Bbl of oil and $4.19 per MMBtu of natural gas during the twelve month projection period (S-1 page 12.)

Enduro Sponsor

Enduro Sponsor is a privately-held Delaware, limited liability company engaged in the production and development of oil and natural gas from properties located in Texas, Louisiana, and New Mexico. Enduro Sponsor was formed on March 3, 2010. Management of the EnduroSponsor mostly are executives form Encore Acquisition Company (“EAC”).

EAC was a private company that owned the Predecessor Properties prior to March 9, 2010, at which time Denbury Resources (DNR) [$6.7 billion market cap] acquired the properties in connection with its acquisition of EAC. Enduro Sponsor then acquired the Predecessor Properties on December 1, 2010.

Encore Energy Partners LP (NYSE:ENP) a master limited partnership whose general partner was owned by NDRO executives (through Encore Acquisition Company) from February 2007 until March 2010.

The trust units do not represent interests in, or obligations of, Enduro Sponsor., which will own 60% of the Trust post-IPO.

Underlying Properties

The Underlying Properties were acquired in three separate transactions and are located in two different geographic regions: the Permian Basin and East Texas/North Louisiana.

Enduro Sponsor’s oil and natural gas properties in the East Texas/North Louisiana region were acquired from Denbury Resources Inc. in December 2010.

Enduro Sponsor’s oil and natural gas properties in the Permian Basin of Texas, and New Mexico, were acquired from Samson Investment Company and ConocoPhillips Company (COP) in January 2011 and February 2011, respectively. CON has a market cap of $101 billion.

As of December 31, 2010, approximately 99.3% of the wells on the Underlying Properties were operated by the Third-Party Operators.

Enduro Sponsor has entered into hedge contracts with respect to approximately 69%, 70% and 57% of expected production of oil and natural gas production for 2011, 2012 and 2013, respectively, from the total proved reserves attributable to the Underlying Properties in the reserve reports.


The trust units may lose value as a result of title deficiencies with respect to the Underlying Properties.

Enduro Sponsor may transfer all or a portion of the Underlying Properties at any time without trust unitholder consent, subject to specified limitations.

Enduro Sponsor may sell trust units in the public or private markets, and such sales could have an adverse impact on the trading price of the trust units.

After the closing of the offering, Enduro Sponsor will hold an aggregate of 19,800,000 trust units, assuming no exercise of the underwriters’ option to purchase additional trust units. Enduro Sponsor has agreed not to sell any trust units for a period of 180 days after the date of this prospectus without the consent of Barclays Capital Inc. The risk is that the Enduro Sponsor will increase the supply of stock by selling it into the market.

The amount of cash available for distribution by the trust will be reduced by the amount of any costs and expenses related to the Underlying Properties and other costs and expenses incurred by the trust.

The trust will indirectly bear an 80% share of all costs and expenses related to the Underlying Properties

Trust dissolution

The trust will dissolve upon the earliest to occur of the following: (1) the trust, upon approval of the holders of at least 75% of the outstanding trust units, sells the Net Profits Interest, (2) the annual cash available for distribution to the trust is less than $2 million for each of any two consecutive years, (3) the holders of at least 75% of the outstanding trust units vote in favor of dissolution or (4) the trust is judicially dissolved.

Use Of Proceeds

The net proceeds of $290 million are allocated as follows: .$110 to repay debt, $15 million to Enduro Sponsor, $165 million for future acquisitions.

Enduro Royalty Trust

NDRO, C+, 6

Post IPO shares: 33mm

Oil/gas trust


Austin, TX

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.