Protected Principal Retirement Strategy: Royalty Trusts Redux

Includes: CHKR, ECT, PER, VOC
by: Akaralph

Many of the U.S. and Canadian royalty trusts have announced their distributions for the recent quarter. I always hold my breath when they do, since they tend to vary from quarter to quarter.

The Protected Principal Retirement portfolio currently holds positions in four U.S. and one Canadian royalty trust.

U.S. Trust Positions:

Chesapeake Granite Wash Trust (NYSE:CHKR) - [20% natural gas, 30% natural gas liquids, and 50% oil]

ECA Marcellus Trust I (NYSE:ECT) - [100% natural gas]

SandRidge Permian Trust (NYSE:PER) - [2% natural gas, 98% oil]

VOC Energy Trust (NYSE:VOC) - [100% oil]

Canadian Trust Positions:

Freehold Royalties Ltd. (OTCPK:FRHLF) - 37% natural gas, 4% natural gas liquids, and 59% oil]

Our strategy for royalty trust holdings was to try to have holdings in both U.S. and Canadian natural gas, natural gas liquids and oil - which I think we have attained.

Our original article on royalty trusts (here) provided an overview of what they are, how they work and what we might expect from them. Let's take an updated look:


CHKR has to date paid four quarterly distributions; two in 2011 and two thus far in 2012. Each has exceed the subordination threshold that appeared in their S-1 filing. Briefly, the subordination threshold is (should be) the floor for quarterly distributions until a prescribed number of quarters subsequent to completion of drilling obligations. In the case of CHKR, the subordination threshold terminates after the fourth full calendar quarter following completion of Chesapeake's drilling obligations.

CHKR has also a quarterly target distribution. This is exactly what it says - the amount that ideally, they aim to distribute. In the case of CHKR, the initial two quarterly distributions exceed the target distribution, while the most recent two quarters did not. In addition, there is also an incentive threshold, a point above which Chesapeake will receive 50 percent as "incentive".

CHKR is expected to announce their most recent quarterly distribution this week.


Since beginning public trading, ECT has paid three quarterly distributions, each of which has exceeded the subordination threshold, but has been less than the indicated target distribution.

All of the drilling appears to have been completed, and their subordination threshold period will end at the close of 2012. After that date the distribution will primarily be based upon the pricing of natural gas.

ECT should be announcing the current quarterly distribution within the next week or so.


To date, PER has paid five quarterly distributions, going back to the second/third quarter of 2011. Each of their distributions has significantly exceeded the subordination threshold and the targeted distribution. The most recent announcement was made last week for a distribution of $.625, to be paid on November 29 to holders of record on November 14. Thus, November 9 will be the last day to purchase PER and still receive the distribution.


VOC is a little different kind of trust, in that there are no subordination thresholds - their distribution is tied to the price realized for oil during each quarter.

They have paid distributions since July 2011, and the most recent declaration of a $.46 distribution was, to say the least a disappointment. Apparently one well did not play out as expected, and the trust announced that this would have ramifications on future quarterly distributions. They did not reveal how many quarters though. It should make me feel better to say that VOC is our smallest position, but it does not.


Freehold (OTCPK:FRHLF) continues to plough ahead and the monthly distribution of $.14 does not waver. I have been very pleased with FRHLF's performance since becoming a member of the Protected Principal Retirement portfolio, and have no intention of making any changes here.

Other Candidates

I published an article presenting an overview of Eagle Energy Trust (ENYTF) (here). This, like FRHLF is a Canadian trust, and I continue to watch it with the idea of initiating a position if the price drops below $10 a share.

There are a large number of other U.S. royalty trusts (seems like more every week) that I continue to monitor (SandRidge Mississippian Trusts I, and II). Both of these have announced substantial quarterly distributions (especially I), and both are substantially off of their 52 week highs.


In light of recent announcements, I have added to existing positions in both PER and CHKR. I believe that CHKR should announce a payment in excess of the subordination threshold indicated in their S-1 ($.63) as the pricing of natural gas has increased substantially since the prior quarter's distribution.

I am not losing sleep over VOC - we own it in the very low $20s and hold relatively few shares. At present levels, our yield is still well over nine percent, and I believe that once the drilling problem is resolved the distributions will once again get back to prior levels. This being said, I am not interested in adding to the position.

With respect to ECT, I am going to wait on the announcement before deciding if it is prudent to add to the portfolio's position. A distribution in excess of $.70 would get my attention.

As I mentioned previously, (ENYTF) is probably worth a nibble below the $10 level.

Disclosure: I am long CHKR, ECT, PER, VOC, OTCPK:FRHLF. 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.

Disclaimer: The information presented is not meant to constitute buy or sell recommendations for any of the stocks mentioned. These ideas are intended to provide readers with potential stocks to evaluate to determine if they should or should not be a part of an individual's portfolio.