Hugoton Royalty Trust: Indications of Sustainable Yield

Buy-recommended Hugoton Royalty Trust (HGT) offers high estimated distribution yield and low McDep Ratio among the 14 oil and gas income stocks in our weekly analysis. Because the distribution yield we project for HGT is after reinvestment that may sustain natural gas producing volume, it may be an indication of a sustainable yield, rather than a temporarily high yield.

Mr. Bob R. Simpson, chief executive of buy-recommended XTO Energy (XTO), the operator of HGT’s properties, likes to think in terms of the proportion of cash flow that must be reinvested to keep production from declining. Reinvesting 20% of HGT cash flow in 2004-2005 was not enough, but 30% may work.

Commodity price also helps. When the Henry Hub natural gas price index on a two-month lagged basis was $6.96 a million btu in 2007, income distributions were $1.73 a unit. Futures prices a few days ago on a two-month lagged basis were $10.04 for the year ended March 31, 2009, up 44%, and our estimate of distributions for the same period is $3.04, up 75%.

Estimated Net Present Value [NPV] of $34 a unit is supported by the relationship of cash flow multiple and reserve life.

Originally published on April 18, 2008.

Comments

[Michael Fit...:]

I agree HGT is a buy. I was surprised last week when the Fed cut rates to 2% and here is an energy royalty trust yielding over 9% (NINE PERCENT) and it traded down?? What a great buying opportunity. HGT will do well even if nat gas prices stay at current rates or go down a bit. However, over time I believe nat gas will rise and HGT's price appreciation+distribut... should way outperform the overall market. Permian Basin Trust is another winner (PBT) in this respect. Where else can you get steady yield like these trusts in today's market, and with an investment in a bullish area like energy? I own em both.

2008 May 05 08:10 AM

[jjason:]

Permian Basin Trust (PBT), on Yahoo Finance, has the following fundamentals:

Market price $22.57, PE 15.56, Yield 10%, Price to Book 788.21, Book Value $0.028, PEG 0.96, Price to Sales 15.04, Estimated eps $2.24. Market Cap $1.05 Billion, no debt.

I find this very interesting. I would wonder how the book value of almost three cents is calculated? I downloaded a S&P report that confirms the figures I have posted.

Seems odd to me that this company has such a high market cap.

2008 May 05 11:56 AM

[Nate C:]

Nice post. Thanks

2008 May 06 02:09 AM

[User 187882:]

Most likely is that it is a trust. All earnings after expenses are distributed to unit holders. As an owner of the trust you actually own the wells, just as if you had invested in a partnership.

2008 May 06 08:21 PM

[jjason:]

To user 187882... I know it is a trust. I just don't understand why, if a trust unit is worth about three cents, someone is willing to pay over $20.00 per unit?

2008 May 12 10:20 AM