San Juan Basin Royalty Trust: Earnings Estimates Are Too Low

The oil and gas story is alive and well and looks to be into the foreseeable future. San Juan Basin Royalty Trust (SJT) looks very well positioned on the higher moving price of natural gas, but has experienced some negativity as recent costs have been higher than expected, cutting into earnings and the last few distributions. Looking forward, this trust looks to have capacity for the next ten years, as they have resources of over 50 trillion cubic feet.

Year over year we have seen oil and gas production decrease 10%, but with realized oil prices doubling last year this coming quarter could be very good for earnings. If we look at average price attained last year gas was $6.11 per Mcf, and oil $63 per barrel. Last year saw a decrease in the collected price of natural gas and that was the main contributor to negativity with respect to earnings. Capital expenditures have also been a problem as 2006 was very large and there wasn't enough of a decrease for last year. I believe we will see these expenditures come down this year more in line with 2005 numbers. The trust estimates capital expenditures will decrease by $5 million for this year.

Decreased expenses are not the only reason I believe SJT will beat earnings; the ever-increasing price of oil and gas should help things along. Gas will be most important to SJT's bottom line as it accounts for over 80% of revenues. Since SJT's contracts are classified, as per the Trust's annual report, we are notified after the fact what earnings SJT will garner.

Current quarter earnings are estimated to increase 30% year over year. The earnings estimate seems to lag, as they are stating that this will occur while revenue increases are estimated at over 145%. One of these two figures are not right and I believe it to be the earnings as the only affect on this number could be costs, as SJT seems to be better this year even with a higher realized price. Even if earnings meet expectations, the stock seems to have value as the PE is at 16, setting the PEG ratio at a very inexpensive number. Current growth rates see the PE shrinking to 12 next year.

The current chart is very bullish. Money flow has been increased since January. The 50-day simple moving average was eclipsed on May 2nd. The current trend has the stock going to $57. I see this stock coming in ahead of earnings, as we have with most oil and gas companies. Buy before earnings or for long term.

Comments

[Steven Ward:]

SJT is indeed a good buy now. I have advised people that have Canroys to start looking at American oil and gas MLP's and RT's. My only caution is that we do not know of any future tax consequences that maybe imposed by a new President. With the Canroys we now know the consequences.

However, SJT would still be a good investment along with several others.

2008 May 13 08:50 AM

[Philip Obal:]

IMHO, there are two American Oil & Gas Trusts that everyone should check out. TELOZ and WHX (new). Both of these have significant oil and some natural gas. Both are accelerating in unit prices (another name for share price), since OIL is going up.

The trusts have a 3 month delay - so when OIL has gone up... you have to wait 3+ months to see it in the dividend.

2008 May 13 09:54 AM

[elliot_mllr:]

Hugoton (HGT) is another excellent US royalty trust primarily gas weighted.

2008 May 13 11:08 AM

[JET1C:]

I prefer to check the long chart when choosing these trusts. I'm also looking for consistancy. SJT is amazing (but certainly not the only one) Can you imagine owning a $10 stock in 2002, during the depths of the Dot-Com implosion and getting a 19% dividend paid MONTHLY. This stock started 2002 at $8.95 and ended at $13, a 33% gain. Now, of course it is selling for a reasonable 16 times earnings, forward PE of 11.60.

Now that is value. Forget the likes of TELOZ which pays a QUARTLY dividend intermittantly and is subject to the annual hurrican seasons.

2008 May 13 11:17 AM

[yank:]

The political risks for oil companies and trusts profits are rising. A Clinton/Obama presidency will assuredly ruin any meaningful stock market rally. Letting the tax cuts expire, raising the capital gains tax and dividend tax will result in massive outflows from the stock market. Personally if that happens I go to a 100% cash position. The Dems are "poison" for this stock market.

2008 May 13 11:43 AM

[User 166441:]

Hey Yank!! - Can you elucidate on your comments about the tax consequences of the Dems getting in? Obama is a shoo-in so what will happen to my dividend and share price? THANX -- CHUX67

2008 May 13 12:29 PM

[Chancer:]

yank:

I won't let the libs drive me out of the market into 2% CD's. Actually, history does not show that the market does bad under democrat admininistrations. The dems cannot change the tax code without congress.

Besides, most of my mutual funds are international, energy, and commodities. My individual stocks are mostly in mining.

The dems may hurt some but not all investments.

2008 May 13 12:35 PM

[Itsonlymoney:]

What happened to the economy and market under Bill Clinton? I can't remember.

2008 May 13 12:44 PM

[willowtree:]

The concern re Investor-unfriendly tax moves by a possible Dem president is very legit because both houses of Congress will be even more overwhelmingly Dem/ left wing than current. Probably "veto proof majority".
Even a republican President will have a tough job dealing with them.

2008 May 13 01:11 PM

[Mmarrkk:]

Economy did great under Bill C., AFTER the GOP tax cuts were put in place. And then at the end of his terms, we had a nice little drop into a slowdown which didn't manifest itself until a year after he was out of office, but be very clear, it was caused by the previous admin's lack of action/direction.

Your international investments won't be safe as Hussein/Hillary will let the tax cuts die and you will see massive increases in capital gains and dividend tax rates, no matter what company you are invested in. And if you own oil/gas, look out. They want to screw those over extra special.

And is there really a republican running for president? I believe there are 3 demoncrats/socialists running. One just so happens to have an R next to his name. But he is not a republican. He is the lesser of the 3 evils, but he will cause massive problems too. Kind of like a choice between a 7.9, 7.6 or a 7.1 earthquake. You'll choose the 7.1 but rather have none at all

2008 May 16 04:17 PM

[TaxRECapGai...:]

how is it that we spend $150B a year on Iraq and get no oil, but when the demos propose $15B a year for alternative energy, that is unacceptably high. hope Bush has a great retirement, and is selected CEO of an artificial limbs maker. if not, let's promote a cage match between Bush and bin Laden with flamethrowers. whomever comes out alive gets 50% of the pay per view take, the rest goes to Iraqi orphans and hospitals.

2008 Jun 17 07:41 PM