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SandRidge Mississippian Trust I (SDT -9.5%) is cut to Sell from Hold with a reduced $13 target...
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Tuesday, March 5, 12:17 PM ETSandRidge Mississippian Trust I (SDT -9.5%) is cut to Sell from Hold with a reduced $13 target price at Wunderlich, citing a weakening distribution outlook due to higher costs, lower production and a higher mix of natural gas being produced. Investors may be attracted to SDT's yield, but the firm says investors should focus on the trust's risk profile. SDR -4.9%, PER -2.5%.
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What is strange is why SDR (Sandridge Trust II) wasn't downgraded (and "only" went down 5%).
It's not bullet proof. It depends on the expected proven reserve of the MS Lime play (which has come in gassier based upon the wells drilled).
Buy the way, I keep a pocket dictionary with me at all times (home and office).
If you buy SDR at $12.25 (or whatever price you get) or SDT at $12.75, you get cash flow protected by subordinated units for awhile, and then you are exposed to commodity pricing. Gas at $3.50/mcf isn't the end of the world, and this could increase (maybe to $4) if we get normal weather patterns and enough shut ins and capx reductions directed towards gassier plays. And remember, LNG exports should start around 2015, and it will be interesting to see if this provides a "floor" for NG..
All I'm saying is model the cash flows, using both the subordinated cash flow levels and the target levels. You might be surprised.
By the way, I thought that the trust bore expenses for only the gathering, marketing and taxes related to the production. Why do some brokerage houses cite "rising costs" when they are relatively fixed?
If you use the subordinated payments as a floor (25% of the units are subordinated), then you are set to receive a minimum of $2.17 in '13, $2.36 in '14, $2.55 in 2015 and (maybe) $2.43 in 2016. Let's disregard 2016, as SD has accelerated their development well drilling program. That's still around $7 for the next three years, at a minimum.
Gas prices have been pretty solid at around $3.50/mcfe lately. SDR produced 1758 mmcfe last reporting quarter and sold the gas production at an average price (hedged) of $2.64/mcfe. Total funds available for distribution totaled $26.481mm.
If you use the $3.50 price instead of $2.64, this jacks up funds available for the unitholders by about $1.5 million. This does not offset the loss of 50 thousand barrels of liquid production (a $5 million loss when compared to last quarter), but this should be considered as the development wells get gassier.
My point (which is not a buy recommendation) is that at $12.25 (today's close for SDR), if you subtract three year's of subordinated payments ($7), then you are paying a $5.25 remainder for royalty payments lasting 15 years and that may average over $1/year.
Other factors to consider is how much you trust Ward, does Iran rattle the energy markets, and how long the steep price discount that NG bears to oil will last. Remember NG has sold for over $10/mcfe in the past, and on an energy equivalency this equates only to $60 oil. (6:1)
Even the worst investments become attractive at the right price!
Just like the Apple story. How do you invest in uncertainty?
Don't let the cat out of the bag yet. These are my back of the envelope calculations.
SDR with current prices of oil and gas pay out $18 dollars plus $2 at the time of termination, roughly about 5% return per year, inflation hedged.
PER story is even nicer, since this is mostly an oil related trust, in slow declining assets. My back of the envelope says north of $20 plus at least $2 at termination at current oil prices, I'm guessing more than that.
So, yes, market overvalued these before, now it's undervaluing them. Still think PER is safer out of SDT/SDR - the decline curves are much more certain.
The SD trusts seem to be driven by fear at the present. Yes, there are production mix issues, and I'd rather own oil than gas. (BTW - Did you hear that China is now the number one importer of oil, displacing the US?). But there are also some interesting trends surfacing - Westport up, Ford announcing big increases in NG fueled vehicles, as well as an improving economy. I don't think NG will be as cheap in the future as it is now - in some ways (esp. environmentally) it is more valuable than the black gooey stuff.
The analysts are issuing sell recommendations for the royalty trusts the same way they are dealing with JC Penny - i.e., they are selling low. But they also bought high - where were these analysts when SDT was $33?
Which brings me to my conclusion - be sure to sell these trusts when they are overvalued. It might be a political scare (Iran), or they (SD) might jack up production (they still have a lot of wells to drill), or it just might be price related as world wide demands firms. I'd sell north of $20 unless the price deck changes dramatically.
This is just plain old herd mentality.
Look at everyone downgrading AAPL. Where were they when AAPL was trading at $700?
With respect to PER, SDR and SDT, I've been buying this thing up every day for the last 2 days. Doing the same with JCP today.
Look at BBY. 3 months ago, the stock traded below $12 a share. Currently, it's over $19 a share. Has that much really changed?
Look at GRPN, it took less than one week and the firing of its CEO.
Anyway, I dipped my toes today in AT. For an electric ute to drop 60% without a power plant meltdown brings out the sharks. I didn't like AT at $15, but it seems like the 7% divvie s/b covered by cash flow now ;)
anyway, I agree with alot of the posts- the 'analyst' usually fail to analyze anything until it has already happened...Ihad one young broker lose about $40k of my money before I realized he knew less than I did- but he cleaned up well and someone knew his dad.
SDT and SDR are both Mississippian (which refers to the geologic period of the hydrocarbon formation, such as Devonian, Pennsylvanian, etc., and not the location. These wells are in Kansas and Oklahoma). SDR and SDT have both sold off dramatically as the actual well performance from newly drilled wells has disappointed - not enough oil for the economics. But, if natural gas is the future, then NG prices should rally, and they have increased from a bottom of $2/mcfe to around $3.50/mcfe today. Also, most of the sell off for the trusts has been based on one quarter's results.
These royalty trusts represent a hedge against inflation and last until the 2030's, so they are long term in nature.If you have doubts against fiat currency and think that we are looking at inflation in the future, these trusts should at least keep up with inflation. They will/should pay at high levels (compared to their current prices) until the subordination period expires, and then you are fully exposed to commodity price risk. The trusts were originally priced around $20, and SDT rose to over $33, but then receded.
I think these trusts were sold to the public without everyone understanding the production risks. At least the wells aren't producing water (yet ;)). The risks were outlined in the SEC filings, but not everyone reads those docs.
I can't recommend any buy/sell decisions, but I do recommend understanding the subordination scheme in place during the development phase of the trusts and watching the production profile of oil/NGL's/NG. Economic decisions should be based on today's price (the past is water under the bridge) unless you need a tax loss.
This, to me, is an example of market inefficiency. But, yes, I'll enjoy it.