swissaustrian
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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:
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?
http://www.wallstreetdaily.com/2014/05/12/oil-royalty-trusts/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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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?