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For natural resources investors nothing appears as straightforward as buying San Juan Basin Royalty Trust (NYSE:SJT) and waiting for Nat Gas to go up. This trust receives 75% of the profits from long life gas wells that also produce a little oil and distributes it monthly.

For a stock that should be selling at $8.00/sh, this royalty trust defies all quantitative analysis. The reserves are performed annually according to SEC guidelines. The current evaluation was done at $4.82/mcf resulting in discounted future revenues that equate to $8.25/sh. Nat Gas prices are below $3.00/mcf and at this price the discounted future revenues would equate to $5.00/sh.

Current acquisition/divestitures of mature gas properties are sold at $2.50/mmBtu of proved reserve in the ground. This would place the value of all reserves at about $7.65/sh.

You would think one would get a 10% dividend for a depleting asset but at the current dividends of 5cents/sh this would equate to only a $6/sh stock price. But dividends do not drive the share price.

There is no shortage of buyers for this stock. As gas prices remain low, the stock price has risen even though operating costs are higher and the capital costs have been reduced. (Lower capital expenditures will result in a steeper production decline in the next 6 months).

The bottom line, people don't buy this for the dividend. They are buying and then waiting to sell when gas prices go up. When prices go to $4.00/mmBtu, SJT will be $20/sh based upon buyers belief that nat gas will go to $6/mmBtu. The risk is if gas prices rise to the $3.00 but not higher than this key $3.00 support level, then you will only get a 5% dividend based upon the $14/sh price. The market will push the stock price to a level of a 6% dividend. If gas prices stay at $3.00/mmBtu then distributions at a 6% level will compute to a $12/sh price.

The boring quantitative details:

SJT gas price is slightly higher than Nymex due to oil and nat gas liquid sales:

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

SJT Gas Price $/mmBtu

4.18

4.18

3.70

3.19

3.21

2.65

2.25

Nymex Price

3.76

3.52

3.36

3.08

2.68

2.45

2.19

Dividend

0.1189

0.1088

0.0860

0.0825

0.0695

0.0707

0.0522

Operating expenses are higher as a percentage of sales indicating a large fixed component.

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Operating Exp, $m

2,780

2,868

2,644

2,330

2,440

2,105

2,145

Percent of Sales

22.8%

22.9%

24.0%

24.2%

25.6%

27.2%

31.6%

Capital Expenditures have declined (but SJT recently announced accounting error adjustments that will result in higher capital expenditures)

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Capital Expenditures

1,623

1,808

2,470

1,034

1,922

964

1,001

Source: San Juan Basin Royalty Trust - Natural Gas Bulls Defy Fundamentals