In God We Trust; In Trusts Not So Much

Includes: COP, GNI, WHX, WLL
by: David White

Whiting USA Trust I (NYSE:WHX) was formed in October 2007 by Whiting Petroleum Company (NYSE:WLL). WLL conveyed a term net profits interest to the trust that represents the right to receive 90% of the net proceeds from WLL in certain existing oil and natural gas producing properties. The net profits interest entitled the trust to receive 90% of the net proceeds from the sale of production of 9.11 MMBoe, which is equivalent to 8.20 MMBoe attributable to the net profits interest, after which the trust will be terminated.

Currently WHX sells for $6.04 per share/unit on the NYSE as of March 1, 2013. The last four distributions to unit holders were $0.577618, $0.512336, $0.688853, and $0.723387 for a one year total of $2.502194. This amounts to a dividend of 41.43% annually. The most recent pay date was March 1, 2013. The trend in distributions seems to be downward, but with this great a dividend, there would seem to be nothing to complain about. Oops! There is!

The trust is currently predicted to be terminated June 30, 2015. With a decline rate of 9% to 11% a year, the above dividends will decline by approximately 10% each year to $2.25, and $2.03 for the next two years. The last four months' dividend (from March through June 2015) would amount to approximately another $0.65. This is a total payout of $4.93 (or roughly $5) between now and when the trust terminates. If oil and gas prices go down in a recession, the payouts could be considerably lower. WHX is only 80% hedged. Plus, its oil hedges are at a floor of $74.00. If oil falls, the payouts will suffer dramatically, especially since costs to produce the oil have to be paid before any dividends.

In other words, an investor would likely receive $4.93 or less for his/her $6.04 investment in WHX on March 1, 2013. With the small amount of time left before the trust terminates (about 2.33 years) the possibility that oil prices will rise enough to dramatically alter this picture seem remote. Keep in mind that the US Fed has already told you it intends to keep rates low until mid-2015 at least. This should tell you that any economic pick up will be mild and slow.

The oil hedges ceiling is at $141.72/barrel (with a floor at $74/barrel), and the natural gas collars have a floor of $6.50/MMBtu and a ceiling of $14.27 MMBtu. If I were an investor, I would dump this dog as quickly as possible, especially with a US recession likely coming in 2013. Why would anyone want to pay good money to get less money back in the future?

This stock isn't good for the investor in WHX, but it may provide a lift to WLL when WLL gets the remaining production from these properties back on approximately June 30, 2015. There promises to be considerable residual production. WHX has an average analysts' recommendation of 4.7. Why that number is not 5.0 (the strongest sell) is beyond me. WLL, on the other hand, has an average analysts' recommendation of 1.9 (a buy). It is a much better investment. If you are interested, here is a link to a more thorough discussion of WLL.

Great Northern Iron Properties (NYSE:GNI) was founded in 1906. It has undergone many changes in organization since then. At the close on March 1, 2013 the stock price was $80.88. GNI has paid quarterly dividends for the 2012 year of $5.25, $3.50, $3.00, and $2.25. The $5.25 dividend pay date was January 31, 2013. These dividends total to $14.00 for the 2012 year. This was a dividend of 17.31% for FY2012 at a share price of $80.88.

In 2011 GNI paid dividends of $5.75, $4.00, $3.00, and $2.25. This totaled $14.50 for the 2011 year. Averaging the two results, one might ballpark the average yearly dividend return as $14.25 per year per share/certificate. This sounds like a fantastic return. However, you paid $80.88 per share for the trust certificates/shares; and unbeknownst to the unwary, this trust will be terminated on April 6, 2015 - a little over two years from now. This means you will only be able to collect these great dividends for two more years.

Then what happens? There are still great assets. Do they get divided up? Unfortunately these assets do not go to the shareholders. Per the trust agreement, the Trust's mineral properties and active leases will at the end of the trust be transferred to the reversioner. The reversioner is the Glacier Park company, which is a subsidiary of ConocoPhillips (NYSE:COP). This termination of the trust doesn't enrich the shareholder in the least. It only enriches ConocoPhillips. You might use this as a reason to invest in COP, but it is not a reason to invest in GNI. COP has a P/E of 8.67 and an FPE of 9.68. It has an average analysts' recommendation of 2.6 (a hold). It has a dividend of 4.50%. With a price/book (mrq) ratio of 1.48, it is a much better income investment than GNI.

By my calculations the shareholder in GNI will get about another two years (plus a little) of dividend payments plus the monies in the principal charges account after the Trust termination expenses. As of December 31, 2012, these amounted to an addition final distribution payout of approximately $8.39. Optimistically a shareholder might receive about $37 per share more. Since investors will at the end of the trust receive nothing for their shares, those investors who bought GNI on March 1, 2013 effectively purchased a loss of about $43 per share.

In other words they effectively bought a more than 50% loss over the next two years, if they keep the stock. The age old phrase "caveat emptor" (let the buyer beware) comes to mind. GNI is another dog that I would get rid of as quickly as possible. There is no telling when the stock price will decide to go down to its realistic value. This is something less than $35 per share.

I do not mean to say that all trusts are bad investments. Many REITs are great investments. However, investors need to be wary of trusts. You should know all of the particulars before you buy one. Just looking at the yield is an extremely bad practice.

Good Luck Trading And "Be Careful Out There" (Hill Street Blues morning roll call warning).

NOTE: Some of the above fundamental financial data is from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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