2011 Performance Review For 8 High-Income Oil And Gas Royalty Trusts

by: Zvi Bar

A royalty trust is a type of corporation that is usually involved in oil and gas production or some type of natural resource mining. Unlike most corporations within the United States, a royalty trust's profits are not taxed at the corporate level so long as the bulk of the trust's profits (at least 90%) are distributed to shareholders as dividends. Those distributions are then taxed as personal income, and not at the lower corporate dividend rate. T. Boone Pickens created the first royalty trust in 1979.

This system is similar to real estate investment trusts (REITs), in that it avoids double taxation of corporate income that is distributed to shareholders. Generally, royalty trusts have high yields that remain well above the average corporate dividend yield, even after paying income taxes. These companies usually own only the claims or the land where a resource can be harvested. Another company performs the actual extraction, under license from the royalty trust. In the United States, royalty trusts may be designed to have no employees, and several have none. Some REITs are also designed this way.

Below are 8 royalty trusts that are publicly traded in the United States. I have provided their current yields as well as their 1-month, 3-month and 2011-to-date performance rates.

BP Prudhoe Bay Royalty Trust (BPT), Cross Timbers Royalty Trust (CRT), Hugoton Royalty Trust (HGT), MV Oil Trust (MVO), North European Oil Royalty Trust (NRT), Permian Basin Royalty Trust (PBT), Sabine Royalty Trust (SBR) and San Juan Basin Royalty Trust (SJT).

The performance of these companies' shares within 2011 is varied, with exactly half positive and half negative, not counting the provided yield. The average performance of these trusts is a 3.65% appreciation with a 6.78% yield.

Trust companies often own multiple individual claims, but in the U.S., trusts are not allowed to acquire additional properties once they are formed. This is very different than the MLP model, where new assets are often dropped into an already existing MLP.

Since these royalty trusts are restricted to their initial properties, these royalty trusts will be depleted over time and the royalties they pay out should decline in accordance with that depletion until the trust is eventually dissolved. These royalty trusts are also often rather illiquid, meaning individuals should be wary of investing in them if they may need to liquidate the investment in the near-term.

Presently, these royalty trusts offer above average income and the potential for increased yield in a rising interest rate environment, largely due to their commodity exposure. If interest rates were to rise and oil demand and/or price continues to grow, or at least remain stable, future dividend increases appear possible for several oil trusts.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.