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Sabine Royalty Trust: Why You Should Put This Resilient, 6.8%-Yielding Oil And Gas Trust On Your Radar

Apr. 01, 2021 4:02 PM ETSabine Royalty Trust (SBR) Stock24 Comments
Aristofanis Papadatos profile picture
Aristofanis Papadatos
8.47K Followers

Summary

  • SBR has proved remarkably resilient to the pandemic.
  • SBR is offering a 6.8% distribution yield, which is likely to increase in the next two years thanks to the expected recovery from the pandemic.
  • The only risk factor is the natural decline of the reserves of SBR in the long run.
  • However, the reserves of the trust have historically exceeded the estimates by an impressive margin. They have also grown in the last three years.

Despite the coronavirus crisis, the S&P 500 (SPY) has nearly doubled off its lows about a year ago and thus it is now trading at a new all-time high, at a sky-high trailing price-to-earnings ratio of 36.0. As a result, it has become particularly challenging for investors to identify stocks with an attractive dividend and resilience to the pandemic. Sabine Royalty Trust (NYSE:SBR) is a bright exception, as it is offering a 6.8% distribution yield and has proved one of the most resilient oil stocks to the pandemic. Therefore, income-oriented investors should put this stock on their radar.

Business overview

Sabine Royalty Trust is an oil and gas trust that was founded in 1982. It has royalty and mineral interests in producing properties and proved oil and gas properties in Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas. The trust has no operations or capital expenses. It just distributes the royalties it receives from its produced commodities (minus general and administrative expenses, which consume 5%-8% of royalties) to its unit holders.

The energy sector is one of the most severely beaten sectors due to the coronavirus crisis. The pandemic caused an unprecedented 9% plunge in the global demand for oil products, from 99.7 million barrels per day in 2019 to 91.0 million barrels per day in 2020. This decrease in demand resulted in suppressed prices of oil and refined products and thus it is only natural that all the oil majors and refiners either incurred losses or saw their earnings collapse in 2020.

Sabine Royalty Trust was not immune to the pandemic but it proved one of the most resilient oil companies. In the full year, its average realized prices of oil and gas decreased 19% and 25%, respectively, over the prior year. However, the trust grew its production of oil and gas

This article was written by

Aristofanis Papadatos profile picture
8.47K Followers
I am a chemical engineer with a MS in Food Technology and Economics. I am also the author of 2 mathematics books ("Arithmetic calculations without a calculator" and "Word Problems") and perform almost all the calculations in my mind, without a calculator, making it easier to make immediate investing decisions among many alternatives. I invest applying fundamental and technical analysis and mainly use options as a tool for both investing and trading. I have nearly achieved my goal of early retirement, at the age of 45. In my spare time, I follow Warren Buffett's principle: "Some men read playboy. I read financial statements".

Analyst’s Disclosure: I/we 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (24)

arb-inv profile picture
Just bumped into this stock. Can someone explain the "tax free" comment below as I presumed the income would be taxed as a standard dividend?
7865671 profile picture
@arb-inv "Tax free" comes from SBR being an oil royalty trust. The entries are made on schedule E where depreciation is deducted from the income. (Look under tax information at http://www.sbr-sabine.com/ for details. Click on any year to download the tax packet with the detailed info.)
I've owned SBR for over 10 years and every year I've shown a loss, so the income is "tax free" at that time. Of course the basis is adjusted downward by the depreciation amount, so if/when you sell any proceeds above your adjusted basis are subject to a recapture tax at your current marginal tax rate. That's when the taxes hit. So I don't sell.
arb-inv profile picture
@7865671 -- Thanks very helpful. Do you run into the issues related to the need to file in different states that they mention. I like the look of the opportunity here but in the past have run into lots of complexities with MLPs and tax filings where it has ended up costing me more in tax prep fees than I received in income which is crazy.
7865671 profile picture
@arb-inv To be clear I am not a tax professional nor do I use a tax service. I try to follow tax laws as best I can, but I agree with you that the state tax laws applying to non-residents are crazy given the small (negative) percentage of income applicable vs the cost and time to file. SBR's largest non-Texas source of revenue by a wide margin is Oklahoma (maybe 15%-20% in any given year); that state's tax packet states for nonresidents:

"Except as otherwise provided for in the Pass-Through Entity Tax Equity Act of 2019, every nonresident with Oklahoma source gross income of $1,000 or more is required to file an Oklahoma income tax return. A nonresident partner may elect to be included in a composite partnership return, see Rule 710:50-9-1."

So I understand that >$1,000 gross in any given year that is OK sourced means one should file. But the state's tax packet also states these are the sources of income taxable to a nonresident are (note item #5):

(1) Salaries, wages and commissions for work performed in Oklahoma.
(2) Income from an unincorporated business, profession, enterprise or other activity as the result of work done,
services rendered, or other business activities conducted in Oklahoma.*
(3) Distributive share of the Oklahoma part of partnership, estate or trust income, gains, losses or deductions.*
(4) Distributive share from Sub-chapter S Corporations doing business in Oklahoma.*
(5) Net rents and royalties from real and tangible personal property located in Oklahoma.
(6) Gains from the sales or exchanges of real and tangible personal property located in Oklahoma.
(7) Income received from all sources of wagering, games of chance or any other winnings from sources within this
state. Proceeds which are not money shall be taken into account at fair market value.

The NET royalty shown on my federal tax has always been negative. So the gross OK sourced amount in some years may have exceeded $1,000, but NET has always been negative. So if I file an OK state tax return, I'd show a negative amount for OK sourced income (for example, if my federal schedule E for 2020 is -$900, I'd estimate the OK portion is -$138.) Taxes shouldn't be owed on negative income, so I don't file. The other states' portions are much lower than OK; NM is next at about 3-4%, so now it's a -$35 amount. Tax professionals may object to this line of reasoning but I can't justify the cost and time to file for these small amounts.

Just as a side on how entangled this can get, the SBR packet says that NM and OK withhold taxes on payments to nonresidents via the payors of the oil and gas proceeds. SBR then files NM and OK tax returns for a refund that they distribute the Unit holders. SBR says that Unit holders who transfer their Units before NM or OK refunds are received by the Trust or after the refunds are received but before the next Monthly Record Date will not receive any portion of the refund and such Unit holders may effectively incur a double tax. I'm not sure how the payors can have real time Unit holder info for resident vs nonresident or which monthly payments include the tax refund. So in theory, the NM and OK state taxes were withheld and refunded, but it's not clear when any of this took place so how can one file for a refund? If the Unit holder has a 100,000 units maybe this makes sense to dig out the details, but for the average investor I just don't see it.
Steven Miller profile picture
Can someone remind me if this issues a K-1?
Steven Miller profile picture
I hit enter on this too fast. I don't think it has a K-1, but tax filing looks complicated. sbr-sabine.com/...
7865671 profile picture
@Steven Miller No K-1 for SBR. I've owned SBR for years and use H&R basic tax software no problem. SBR sends a tax booklet along with your holding details and instructions on where to input the numbers on the tax form. Depreciation is based on your purchase date and price and it's easily calculated from a simple form you fill out on SBR's website.

I really like the "tax free" income and showing a "loss" on my taxes that even offsets other unrelated income. When you sell you are subject to recapture taxes, but I simply just won't sell.
Steven Miller profile picture
@7865671
If H&R basic can do it than I presume TurboTax can do it, too. It's just that it took me about 22 hours to do taxes this year, with software, and I am twitching more now than I have in the past. I don't want an investment adding to the agony. Are there any other TurboTax users out there? How does it do with a Roth and with a regular account?
bryan555 profile picture
Very much appreciate your note at the end, about buying near technical support, and suggesting a price. It's hugely helpful, as we can just drop a "stink bid" on it, and tuck it away.

Certainly would be grateful if other SA writers would follow your example.
7865671 profile picture
I would be surprised if we see 27.50 again anytime soon with oil prices showing support in the mid-50 range. At SBR's current price, it would be yielding >10% based on the expected increase in the royalty amounts. And that's a 10% yield that is 100% taxed deferred until you sell (or tax free if you hold forever or donate the shares to charity.)
Biological profile picture
The beauty here is that SRT is a trust; there are also large tax benefits to be had (check your advisors) and there is no over-paid management making poor calls. It's a variable-rate bond kind of thing that goes ka-ching 12x p.a. It also provides some entertainment value as the dividends vary a bit.
Suncitybill1 profile picture
Puts cash flow into your account every month but the flow is highly connected to the price of oil and gas. I have had a long position since the end of 2016.
Patrick Irish profile picture
With rising distributions I have a nice chunk of this. Its mailbox money with a future yield over 10% if my math is right.
ChuckXX profile picture
OIL & GAS??? You must not pay much attention to the DC Rads.
Biological profile picture
@ChuckXX You are right; but until Kerry stops flying in private jets, the "Hollowood" (mis)intelligentsia stop driving 8-cylinder SUVs and other assorted, nameless eco-confused, guilt-ridden know-nothings all start riding around burros to get their lattes, I am not in the least worried. It is all optics and virtue-signaling. Yes, there will be some sacrifices (XL pipe) that does NOTHING for global whatever (but benefits Buffet's rail assets, he is a liberal, and USDP, GS's oil by rail MLP,...GS being a left-leaning contributor). You see, REAL climate fighting (if we were in an emergency which we are not) requires inconveniences: no private jets, tiny 4-cylinder hybrid limos, suburban transport by burro -- I have yet to see a liberal sign up for these.
bryan555 profile picture
@Biological Thanks for the comprehensive list of Fox news talking points. You watch Fox, so we don't have to,. 👍
ChuckXX profile picture
@Biological A Big THANK YOU goes out to you. YOU get it when the MASSES don’t. The only energy name I own is EPD which if you are an energy investor then you know WHY I own it. I own 9,000 shares of EPD but am certainly concerned about what I see Now Coming out of the RADS in DC. We are truly living in scary & dangerous times. I know millions & millions never pay attention until its too late. Which is really a shame. If you can find it look up some of the writings of Governor Abbott from Texas as to the TOTAL CHAOS that Biden has created at the Border. These people in charge now are Pure Evil.
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