Hugoton Royalty Trust (NYSE:HGT) is currently operating at a deficit, making less from their net profit interests than it takes to run the trust. Thankfully the Trust has reserves to continue operations for some time, but it is difficult to predict when prices will rebound enough for the Trust to become profitable again. However, because there is a two month delay between when oil and gas attributable to the trust is sold and when the income is paid out as a dividend it is possible to calculate with some certainty what the next two months dividends will be based on the most recent two months worth of historical price data.
Oil and gas trusts such as Hugoton are a type of investment where unit holders own the right to a certain percentage of the profit from a field of wells and future wells until some defined expiration. It is an investment primarily because as the price of oil changes, presumably, so will the value of the trust since its net profit interests are tied directly to oil price. Another reason to invest in oil trusts is that not only will the underlying stock price change, but the periodic dividend payouts may also change.
All Trusts pay their profit in batches, paying a month's or a quarter's worth of profits in a single dividend. Additionally, because payment is not immediate, and the Trust must take time to handle financial paperwork, there is often an extra delay between when oil and gas is drilled and sold, and when that profit is paid out as a dividend. The aim of this article is to take advantage of this delay and use recent prices with an estimate of current well production to calculate a future dividend.
Looking at the two most recent filings in January and February relating to gas sales of November, and December respectively, Hugoton related properties sold 1,273,000 Mcf of gas at $1.89/Mcf in November, and then 1,276,000 at $1.92/Mcf in December for total revenues of approximately $2,405,970 and $2,449,920 respectively. However, In January, there were production expenses of $1,570,000 overhead expenses of $1,059,000, and budgeted development costs of $300,000 that were also deducted. In February, production expenses had decreased to $1,426,000, overhead costs decreased to $1,053,000, and budgeted amount for development costs was decreased to $187,500. Notice that these revenues are not enough to cover the expenses of those months leaving total deficits of $523,000 for January, and $217,000 for February.
However, the fact that the operation is generally unprofitable has not stopped the Trust from being able to take some income from with its 80% net profit interest (This is because its profit interest is separate in each field, so while the Kansas and Wyoming properties were unprofitable, the Oklahoma property remained minorly profitable). In January it collected $15,000, and in February, it collected $52,000. However, each month the Trust had administrative fees of $139,000 and then $95,000 creating Trust deficits of $124,000 in January and $43,000 for February which were paid for from cash reserves of approximately $1,000,000.
Notice that while In November and December the Trust's natural gas was sold for approximately $1.90 per Mcf, the average market price was higher (by different amounts depending on the market: Henry Hub, NYMEX, etc.). Additionally, the market price for gas did not increase enough in January or February to make the Trust profitable. Even if either month were a minorly profitable, the Trust has stated in its filing that its first priority will be to replenish its reserve supply before paying out dividends. Moreover, Henry Hub natural gas futures predict the price of natural gas will stay below $2/Mcf until June.
Thus we can be relatively certain the Trust will not pay a dividend in March or April. It prices stay at their current level or go lower, the Trust as well as the entire drilling operation on net will continue to operate at a loss, and no dividends will be paid. Currently, the futures market looks as though prices will stay depressed for quite some time into the future (many months). I hope to publish a second article analyzing potential future scenarios for distributions after April within the upcoming weeks. As a disclaimer, there is litigation in progress, and the results of the litigation could affect the distributions the Trust is able to distribute in the future, but I have no expertise on that. As a final disclaimer, I have no position in Hugoton Royalty Trust and will not open a position in it within the next week at least.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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