High yield income seekers don't have to go any further. Royalty trusts pay high distributions and sometimes have a majority of the production hedged to guarantee specific yields. In this article, I will highlight 5 trusts with specific mandates to pull hydrocarbons out of the earth's crust and pay substantial distribution yields. Readers will need to perform due diligence to determine how much of a good thing has already been priced into the trusts. I'll add my views and hopefully we can make some money with great trust distributions. The following trusts pay 10% or plus distribution yields.
Chesapeake Granite Wash Trust (CHKR)
Chesapeake Granite Wash Trust began trading on November 11th, 2011. The entity is a Delaware statutory trust designed to own royalty interests by parent Chesapeake (CHK) in 69 horizontal wells. The producing wells are located in the Colony Granite Wash area within western Oklahoma. These are known as the producing wells. Chesapeake Granite Wash Trust will own 118 horizontal development wells. Parent Chesapeake will develop these wells by June 30, 2016. The trust has a finite life expiring in 20 years.
The trust is expected to pay at least $3.10 in annual distributions between 2012 thru 2015. 69% of net revenues and 47% of production are estimated to be from oil and natural gas liquids. Natural gas liquids have a high correlation to the price of oil. The trust will hedge about 50% of production and 37% of expected revenues. Zero production will be hedged after the third quarter of 2015.
The hedged, per page 60, oil production has a weighted average price per barrel of $87.42. Natural gas liquids are hedged at a weighted average price per barrel of $43.01. These hedges end September 30th, 2015. Here is a look at last week's oil prices:
I am focused upon the return of invested capital prior to a return on capital. Shares are trading at $27.38 due to the higher oil prices.
Chesapeake Granite Wash Trust has high early year distributions so investors can receive their capital back. The increase in oil will provide a catalyst for potential higher distributions in future quarters.
For the period beginning September 1, 2011 to November 20, 2011, Chesapeake Granite Wash Trust announced its distribution of 72.77 cents per unit. This distribution will be paid on March 1, 2012. The abnormal timing of the distribution payment is credited to the effort to coincide the payment of production proceeds to the trust with the distribution for the period. This distribution is 7% higher than the targeted distribution of Chesapeake of 68 cents per unit for the same period due to higher prices than estimated in the Prospectus.
I am focused upon the return of invested capital prior to a return on capital. Shares are trading at $27.38 due to the higher oil prices. Chesapeake Granite Wash Trust has high early year distributions so investors can receive their capital back. The increase in oil will provide a catalyst for potential higher distributions in future quarters.
I recommend investors buy Chesapeake Granite Wash Trust for the upcoming distributions. I recommend using hedging strategies, including protective puts, to mitigate potential capital share losses.
MV Oil Trust Units (MVO)
MV Oil Trust was formed in August 2006. The trust derives royalties from properties based in Kansas and Colorado. These assets, as of June 2006, had a reserve life in excess of 50 years. The trust differs from the distribution targets set by other trusts.
MV Oil Trust will terminate when 14.4 Million Barrels of Oil Equivalents (MMBoe) have been produced from the properties conveyed to the trust. The trust will terminate, if the production quota is not met, on the later date of June 30th, 2026. The trust currently provides distributions based upon unhedged oil production.
MV Oil Trust Units just recently released its quarterly distribution for the period ending December 31, 2011. The unit holders of MV Oil as of January 17, 2012 received 83 cents per unit. The net profits interest of MV Oil Trust comes from the natural gas and oil properties of MV Partners, LLC. Net profits interest differ from royalty interests in the sense that where royalty interests occur as long as the investment is not used to cover operational costs and come from gross revenues, net profits interest is created from investments not for operations, and the returns come from net profits, as the name implies. The Bank of New York Mellon Trust Company, N.A.'s role in MV Oil Trust is as the trustee of the MV Oil Trust.
The leased properties in oil and natural gas of MV Oil Trust are located in Kansas and Colorado. In the El Dorado, Augusta and Valley Center Fields area, Vess Oil operates the natural oil and gas wells on MV Oil Trust properties. Augusta Fields produced more than 48 million barrels of oil in 2010. In the Valley Center wells, production for Vess Oil in 2010 was at 25 million barrels.
I own MV Oil Trust due to the Middle East tensions. Oil continues to go up and MV Oil Trust will pay a higher distribution based upon higher unhedged oil production. I recommend investors buy MV Oil Trust due to the increased geo political tension.
SandRidge Mississippian Trust I (SDT)
SandRidge Missipian Trust I was formed by SandRidge Energy (SD). This occurred in 2010 to hold all the royalty interests for SandRidge Energy for its oil and natural gas explorations. The regions range from the Gulf of Mexico to the Permian Basin. The parent SandRidge Energy still owns around 55% of SandRidge Mississippian Trust I, aside from its incentive distribution rights, but not the public royalty trust. For 2011, more than 100 horizontal developmental wells were scheduled to be drilled in the Mississippian formation, and because SandRidge Missipian Trust I was formed for the purpose of a royalty trust, no operating or capital costs will be shouldered by the trust.
The risks for the royalty interests of SandRidge Missipian Trust I are U.S. Environmental Protection Agency (EPA) suspensions of hydraulic fracturing, the wide fluctuation of gas and oil prices in the global market, or even the fact that SandRidge might not finish its drilling operations in time.
On February 2, 2012, SandRidge Missipian Trust I announced its quarterly distribution for the period ending December 31, 2011. The distribution will happen on February 29, 2012, but only to the holders of SandRidge Missipian Trust I on the ex-dividend date of February 10, 2012. The amount of 79 cents per unit was above the targeted of SandRidge Missipian Trust I.
I recommend investors buy SandRridge Missipian Trust due to the return of capital focus. The units have run up since their initial public offering. The trust will pay at least $3.00 per unit for the first four years. At that point, hedges begin to expire and investors can focus upon the return on capital. The yield is in excess of 10% per year during the first 4 years.
My personal philosophy is to hedge unrecognized capital gains. There are many tools to hedge positions to avoid any sudden downdraft in SandRidge Missipian Trust I unit price.
SandRidge Permian Trust Common (PER)
SandRidge Permian Trust Common concentrates its explorations in oil and natural gas in two properties leased by SandRidge in the Central Basin Platform and the Andrews County Permian Basin, and will hold a part of the profits from the sale or production of oil and natural gas found in the areas.
SandRidge Permian Trust has over 70% of production hedged through March 31st, 2015. The production is 87% oil, 9% natural gas liquids, and 4% natural gas.
On February 2, 2012, SandRidge Permian Trust Common announced its quarterly distribution for the period ending in December 31, 2011. The value to be distributed is $29.1 million for the more than 52.6 million units of SandRidge Permian Trust Common, or at 55.3523 cents per unit. According to the schedule of SandRidge Permian Trust Common, the distribution will be on February 29, 2012.
I recommend buying the shares for the return of capital during the early years. The annual yield exceed 10% for the first 4 years.
VOC Energy Trust Units (VOC)
VOC Energy Trust Units focuses its royalty interests in the production and exploration of oil and natural gas in the properties held by the parent company VOC Brazos Energy Partners, L.P. in Kansas and Texas.
The trust distributions are set up in the similar way of MV Oil Trust. The trust will terminate on the later date of December 31, 2030, or when 10.6 Barrels of Oil Equivalents (MMBoe) have been produced from the properties conveyed to the trust.
The royalty interests include properties in Brazos County, Texas. Woodbine C Sand is still being developed by VOC Brazos, aside from the nearby Kurten Woodbine Unit. For 2011, more horizontal wells have been completed with the necessary multiple fraction stimulations and the maintenance of existing vertical wellbores. An increase in activity was noted in the area, which caused some problems with fractional stimulation services., delaying some of the projects in the area , which according to VOC Brazos, can be from 60 days up to as much as 4 months.
In spite of these delays, VOC Energy Trust Units announced last January 19, 2012 of the company's trust distribution for the quarterly period ending December 31, 2011. 44 cents per unit was available for distribution last January 30, 2012. The potential profits from the delay should affect the next quarterly period for VOC Energy Trust Units, up to maybe even the third quarterly period for the year 2012.
I recommend buying the units due to the oil focus and high distributions to be paid. The sponsors have extensive oil and gas experience in Kansas. The recent quarterly news was due to equipment and personnel not being available for the 4th quarter. The oil remains in the ground to be extracted for unit holder benefits.
All trusts need to be evaluated on their current prices. An appropriate risk versus reward entry price is required to ensure investing success. I personally use hedging strategies to mitigate potential capital losses. The use of hedging differs from each investors' perspective.