Five Pure Plays in Reawakening Oil and Gas

by: Kurt Wulff

Five Top Line Cash Payers including buy-recommended Dorchester Minerals L.P. (NASDAQ:DMLP) along with Freehold Energy Trust (OTCPK:FRHLF), Cross Timbers Royalty Trust (NYSE:CRT), Permian Basin Royalty Trust (NYSE:PBT) and Sabine Royalty Trust (NYSE:SBR) are trending upward in stock price defined by current quote above the 200-day average. A median McDep Ratio of 1.02 suggests that the stocks are reasonably valued on expected oil and gas prices and investors would receive most of their return in cash distributions. Yet the strong performance of small cap and income stocks along with indications of large companies stepping up acquisitions and investments in North American oil and gas may be omens of further oil and gas price and stock price gains.

Boosted also by the curtailment of deep water oil supply as a result of the spill in the Gulf of Mexico, oil for the next six years has rebounded to $85 a barrel, just under its 40-week average of $86. A hot summer, stronger economy and increased risk of hurricanes has helped near-month natural gas break out to the upside of the 200-day average on June 3, settling at $4.71 a million btu. The signs are encouraging for six-year natural gas, currently $6.01, to resume an uptrend in the next few months above the 40-week average, currently $6.50.

A high projected distribution yield ranging from 6-10% for the next twelve months for the five stocks is subject to almost no financial leverage and derives from onshore U.S. and Canada oil and gas, an essential need in a growing economy. Cash distributions in turn are mostly paid from the “top line” of financial results while others bear the burden of operating costs and capital expenditures.

McDep Ratios range from 0.96 to 1.12. The denominator, Present Value, is a median 13.8 times unlevered cash flow. PV/Ebitda depends on reserve life and whether the resource is natural gas or oil. We attribute the apparent disparity between reserve life and cash flow multiple for DMLP and SBR compared to CRT and PBT to restrictions on operating information available to royalty owners and differing interpretation of reporting rules. Actual volume history paints a more consistent picture. The same considerations apply to FRHLF where we have boosted reported reserves with the addition of probable quantities that Canadian companies provide.

Coincidentally, both FRHLF and DMLP are positioned in the same geologic trend on opposite sides of the Canada-U.S. border. DMLP and FRHLF also share the distinction of having independent management that can issue new units and acquire additional property. That feature shows in the volume trend, unadjusted for units, debt or distributions.

Originally published on June 4, 2010.