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Permian Basin Royalty Trust Has Become Less Attractive

Aristofanis Papadatos profile picture
Aristofanis Papadatos


  • PBT has rallied 37% since I recommended purchasing the stock about four months ago.
  • PBT is now offering a 10-year low distribution yield of 3.6%.
  • Also, given its lackluster distributions in the last three months, despite the favorable prices of oil and gas, investors should take their profits.

About four months ago, I recommended purchasing Permian Basin Royalty Trust (NYSE:PBT) for its attractive distribution and its cheap valuation. Since then, the stock has rallied 37% and hence its distribution and its valuation have become less attractive. Even worse, the distributions of PBT in the first quarter of this year have remained depressed despite the rally of the price of oil and gas to pre-COVID levels in recent months. As a result, PBT has become less attractive and thus investors should take their profits and wait on the sidelines for a more opportune entry point.

Business overview

Permian Basin Royalty Trust holds overriding royalty interests in some oil and gas properties in the U.S. It holds a 75% net overriding royalty interest in Waddell Ranch properties, in Texas, and a 95% net overriding royalty interest in the Texas Royalty Properties, which include various oil fields. Overriding royalty interests are not subject to the costs of development, operation and maintenance of the properties. PBT has a striking difference from the well-known oil producers, such as Exxon Mobil (XOM) and Chevron (CVX), namely its static assets. In other words, the trust cannot add new properties to its portfolio.

The energy sector is one of the most severely beaten sectors by the coronavirus crisis. The pandemic caused the sharpest decrease in the global demand for oil products in decades, 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 last year and thus all the oil majors and refiners either incurred losses or saw their earnings collapse in 2020.

PBT was inevitably hurt by the pandemic. In the full year 2020, its average realized prices of oil and gas plunged 24% and 44%

This article was written by

Aristofanis Papadatos profile picture
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 (11)

Anyone have insight into how well the Hoz wells have performed? I think they have drilled at least 3?
Yes, don't buy a royalty trust with a 73 well workover campaign that's increased it's net oil production to over 110k barrels per month (2-3x 2008 production levels) right as it pays it's debt off. This trust is going >$25 plus once the dividend 10x's after Blackbeards 2020/21 well campaign is repaid. Expect massive price rally around January/February timeframe. Welcome to the commodities super cycle nay sayers. You're in for a rude awakening if you're sleeping on this until the dividend pops.
HaroldRamis profile picture
@Morpheus1 nice call. you should be writing a blog ;-)
kwayne01 profile picture
The interest that PBT derives its revenues from is a Net Profits Interest not an Overriding Royalty Iterest. The NPI interest is affected by capital spending and operating expenses.
CincinnatiRick profile picture
@kwayne01 Which means that there is a time lag before the drilling activity pays off...a cyclicality to which the author is apparently oblivious. That said...the top line royalty payer Sabine, is nevertheless a better proposition over time and a much steadier income source. DMLP is also largely a top line payer and a viable choice if you don't have a K-1 phobia (it's really just all royalty income and a simple tax entry).
When was Permian Basin Royalty Trust EVER attractive.

I had a well known broker once tell me the best use of royalty trusts is for high yield chasing investors in their 70s and 80s who wanted high income and didn't care what their estate's beneficiaries would get after they die.
I've held this Trust for many years. It was a great return for many years. There have been many changes in the companies involved with PBT operations over the years. From Conoco Phillips, BRI, BROG, and perhaps others The distribution has dropped tremendously due to a myriad of excuses from the management. The latest problem I think was created when Blackbeard Operating took over operations for the Waddell Ranch property. Latest commentary from them in the monthly reporting states an excess cost deficit cumulative of $7.8M. The latest increases in oil prices are not enough to cover the costs. Expect the low distributions for years to come. I've got my average cost down (purchases from over $20/sh to a little over to $3/sh over 12 years) to
a level where my total returns exceed my investment but it has taken years to get to that point. I tied up a lot of capital in this one. I am ready to sell.
The distribution is abnormally low because they drilled a bunch of wells which PBT has to pay for. Once paid off the payout should normalize and possibly increase due to new production. If you follow SJT you will see the future divvies will jump dramatically once the new wells are paid off. I will accumulate under $4. I predict this stock will double in six months.
rrb1981 profile picture

Yes, you have to wait for the market, which does not understand the upfront costs that are absorbed and have to payout, to misprice PBT and then buy it.

This trust will be around for many more years to come, especially if pricing holds steady.
Patrick Irish profile picture
@rrb1981 Then we have to calculate the depletion from the new wells and figure out the payout as those level off 3 years out. That isn't going to be easy and lots of guess work in there. Unless my conservative scenario shows it as a steal for future distributions, its hard for me to get interested. And this doesn't even get into the fact that operators can steal the show for years if they want (or in ROYT's case, forever).
rrb1981 profile picture
@Patrick Irish Yes indeed. I typically trade SBR and DMLP.

PBT is interesting though.
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