Does anybody have experience with oil+gas royalty trusts

swissaustrian · Dec 12, 2014

The current plunge in oil prices has crushed prices of all oil related assets, including oil and gas royalty trusts. Here is a quick description of what they are:

Everyone loves collecting large cash payouts, especially with short-term interest rates near zero.

Well, royalty trusts are one corner of the market that offers what can still be considered high yields.

These energy trusts own oil- and natural gas-producing properties (or mineral rights) along with the associated wells. Investors can own a portion of the trust, which entitles them to a share of the cash flows. Trusts provide investors with 7% to 15% yields with this simple investment idea.

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Collecting Royalties

Oil royalty trusts have no physical operations, management, or employees; nor do they own the equipment that extracts the oil. This allows for high payouts to trust unitholders.

The trust units trade like stocks, and the payouts are similar to dividends.

Royalty trusts enjoy two special tax benefits – they aren’t taxed at the corporate level, and investors can reduce their taxable income by utilizing the oil depletion allowance.

Here are the major risk factors:

Oil trusts are depleting assets, which means they have a finite life. Once the oil or gas from a trust’s field is exhausted, the trust ceases to exist. Obviously, the share price drops to zero once this occurs. In some cases, new wells can be brought online to replenish lost output.
Fluctuations in commodity prices will affect trust income and therefore share prices. Many trusts hedge their exposure to oil and gas prices to smooth out their royalty payments.
Some trusts have “automatic cost acceleration” provisions, which means the payouts will decline over time unless the price of oil rises sufficiently.
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http://www.wallstreetdaily.com/2014/05/12/oil-royalty-trusts/

I am just starting to do some research on them, but basicly here is what I'm thinking:
1. Eventually oil will trade higher again once the oversupply from shale oil diminishes due to lower short term prices and rapid ressource depletion on shale plays. Most trusts dont own shale plays, but traditional sources.
2. Some of these trusts collect royalties from oil and gas, but the gas market has not experienced a crash like oil. These trusts are somewhat diversified. Still, their prices have dropped significantly, too.

Conclusion:
Some of these trusts might be a good medium to long term investment. I don't think one has to rush into them right now, though.

What do you think? Does anyone have experience with royalty trusts?

ancona · Dec 12, 2014

While I have no experience with these, I think that it looks like a simple play. Buying when there is blood in the streets has proven to be a successful strategy for a lot of people, so why not for you.

benjamen · Dec 12, 2014

I have instead opted for oil related companies such as XOM, CVX, BBL, BP, ect.

ancona · Dec 12, 2014

Since oil has a 50 handle for now, I would watch for a bit before dipping in, since the Saudis could let this get down as low as forty before the real pain sets in for them. The US not so much, since it's hurting domestic production already.

This could very well be a planned, coordinated thing by Saudi Arabia.

rblong2us · Dec 12, 2014

ancona said:
This could very well be a planned, coordinated thing by Saudi Arabia.

Something changed in the relationship between USA and Saudi Arabia when Obama failed to get a strong enough justification to go into Syria.

We have seen the rhetoric from various pols and leaders turn negative and reports about what happened around 9/11 that seem to be trying to blame the other side.
Its like theres been a big fall out and a need to punish .......

I am more inclined to go with the idea that Saudi is trying to break the US home based oil market and that its not the US trying to damage Russia.

It could even be a joint effort by Russia and Saudi with China quietly encouraging from the sidelines.

This is a dirty game with high stakes.

ancona · Dec 12, 2014

They had better be careful what they wish for. If they manage to destroy our shale oil extraction, then along with that comes a bond collapse, triggering of all manner of derivatives and about six million unemployed. This could crash the whole thing. Banks are on the hook for over fifteen trillion in loans to these drillers, and if they go under, so do the banks.

11C1P · Dec 12, 2014

My sisters ex husband's family owned land in the badlands they found oil on but when she was married to him in the 80's his share of royalties was usually in the $50-$100 month. His mom got a lot nicer check though. I know a lot depends on if you have both mineral rights and surface rights, plus if you have water rights to the water in the area, that is a huge factor as well. Other than that I really don't know that much. I just hope it gets down to $50.01 and holds, cause if it goes below $50 apparently the oil companies in the state get 1 year of tax free oil.

Does anybody have experience with oil+gas royalty trusts

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Does anybody have experience with oil+gas royalty trusts

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