Enduro Royalty Trust (NYSE:NDRO) is a new dividend income idea. Quality trusts have one goal in mind: pay dividends to investors. As an income seeker, that is exactly what I want. In this article I will highlight Enduro Royalty Trust's (NDRO) dividend prospects.
Enduro Royalty Trust Background
Enduro Royalty Trust is a Delaware statutory trust formed in May 2011 by Enduro Sponsor. The business model is 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. Enduro Sponsor, the parent entity, will retain the remaining 20% of the trust's profits.
Oil and Natural Gas Properties
Enduro Royalty Trust's properties are broken down into 2 core regions. The first is the Permian Basin region. The second is known as the "East Texas North Louisiana" region. As with most trusts, the properties include producing wells and non producing sites for further oil exploration. The properties are located in the following U.S. states: Texas, Louisiana and New Mexico.
Permian Basin Region
The trust's assets in the Permian Basin of New Mexico and West Texas were purchased by Enduro Sponsor. The purchases were from sellers Samson Investment Company in January 2011, and ConocoPhillips(NYSE:COP) in February 2011.
ConocoPhillips sold their assets due to their stream lining focus. In this article, "ConocoPhillips Spin-Off Will Create Larger Dividend Stream", I highlight the ConocoPhillips' management's decision to spin off their refining and marketing business. The Permian Basin asset sale enhances ConocoPhillips's focused strategy to eliminate small oil reserves.
Competing Trust in Permian Basin Region
Permian Basin Royalty Trust (NYSE:PBT) also has assets in the Permian Basin. The original prospectus is from 1980. Permian Basin Royalty Trust has paid dividends since 1980. Permian Basin Royalty Trust has paid out $1.05 per share in dividends through the 3rd quarter of 2011.
"East Texas North Louisiana Region" Regional Assets
Enduro Royalty Trust's properties in the Haynesville Shale area in East Texas and North Louisiana were purchased by Enduro Sponsor from Denbury Resources (NYSE:DNR) in December 2010. Denbury Resources is a $6.6 billion market cap energy corporation. Denbury Resources is a growing independent oil and natural gas company. The company is the largest oil and natural gas producer in both Mississippi and Montana. In addition, the company owns significant operating acreage in the Rocky Mountain and Gulf Coast regions.
Enduro Royalty Trust does plan to pay a monthly dividend. Enduro Royalty Trust did announce a dividend of 31.4 cents per share for the month of December. The trust has announced plans to pay monthly dividends, per the SEC S-1A, page 14:
The first dividend of 31.4 cents, however, should not be expected for future months. The first dividend represents "net profits generated during the calculation period from July 1, 2011 through September 30, 2011 as provided in the conveyance of net profits interest to the Trust".
For future periods, investors should expect to receive 13.5 cents per share. The annual dividend is $1.62 per share. This calculation, per SEC filing page 47, currently provides an 8.9% calculation based upon a $18.19 share price.
The trust has hedges in place thru October 31st, 2012. The hedges, per SEC filing page 47, are $87.75 per oil barrel and $4.19 per million cubic feet of natural gas (MMcf).
Enduro Royalty Trust raised $300 million by selling 13.2 million shares at $22 per share. The trust began trading on November 3rd. The trust, on December 2nd, closed at $18.19. This is a significant hair cut to the initial public offering price.
Jon Brumley, the Enduro Sponsor CEO, has a vested interest in Enduro Royalty Trust's success. The sponsor retains a 20% ownership stake. Here is a look at the Enduro Sponsor management team (click to enlarge):
Jon S. Brumley Background
Jon S. Brumley has been the Chief Executive Officer of Encore Acquisition Company since January 2006. Mr. Brumley was Encore Acquisition Company's President since 2002. Mr. Brumley has been the Chief Executive Officer, President, and a director of Encore Energy Partners GP since February 2007. Jon S. Brumley is the son of Mr. I. Jon Brumley, who is an Enduro Sponsor manager.
Mr. I. Jon Brumley's Background
Mr. I. Jon Brumley has been Encore Acquisition Company's Chairman of the Board since 1998. Mr. Brumley has been Encore Energy Partners GP's Chairman of the Board since 2007. Mr. I. Jon Brumley is the father of Jon S. Brumley.
He has a Masters of Business Administration from the Wharton School of business. His intellect and skills were sought out, in 1996, by billionaire Richard Rainwater and T. Boone Pickens.
Mr. I. Jon Brumley fathered Permian Basin Royalty Trust and San Juan Basin Royalty Trust (NYSE:SJT) in 1980. San Juan Basin Royalty Trust is a staple New Mexico trust that keeps delivering monthly dividends month after month. San Juan Basin Royalty Trust is one of my favorite trusts to follow because of its 1980 lineage.
The producing assets are mature and low risk. In many ways, master limited partnership (MLP) Linn Energy (NASDAQ:LINE) compares closely to Enduro Royalty Trust. They both focus upon low risk assets.
80% Oil and 20% Natural Gas Mix
The Enduro Royalty Trust's expected oil production is expected to be 80% of the company's revenue stream. Natural gas will provide the remaining 20% of the revenue stream.
Enduro Royalty Trust Compared to Linn Energy
Linn Energy's mandate is to own mature, long life assets. Because Linn Energy is an exploration and production MLP, the company must focus upon acquiring new properties. Linn Energy owns the Linn Energy's General Partnership (GP) Incentive Distribution Rights (IDR).
On December 1st, Michael Linn officially retired from Linn Energy. Mr. Linn is now only a director. Mr. Linn was the founder of the company and well respected in the energy sector. Mark E. Ellis, the Chief Executive Officer, was named the Chairman of the Board. Mr. Ellis has been with Linn Energy since 2006.
The trust will pay dividends for a finite time span. A trust owns depleting assets. A percentage of each dividend will be considered a return of capital.
Enduro Royalty Trust is a passive security. The trust pays out dividends based upon asset production. Kinder Morgan Energy Partners LP pays General Partner Incentive Distribution Rights to its Parent, Kinder Morgan. Kinder Morgan Energy Partners LP's quarterly distribution is reduced because Kinder Morgan's General Partner role extracts a significant portion of Kinder Morgan Energy Partners LP net income stream.
I would recommend investors buy Kinder Morgan because of their General Partner Incentive Distribution Rights ownership. Investors should avoid Kinder Morgan Energy Partners LP due to the heavy financial burden the General Partner places on gross income. Kinder Morgan Energy Partners LP has a toll bridge business model. The company receives a fee for oil and natural gas that travels over its pipelines.
Enduro Royalty Trust is approaching my target price of $15 to $16 entry point. Due to the expected $1.62 annual dividend, a $16 Enduro stock price would provide income investors a 10% dividend yield.