Buy These 3 High-Yield Trusts For Profits From The Coming Oil Price Spike

| July 2, 2019

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Crude oil has been on a roller coaster over the last two months. The WTI benchmark price peaked at more than $65 per barrel in late April. The peak was followed by a steep decline to just above $50 per barrel.

Many pundits used the price drop to predict a global economic slowdown. They were wrong, and in the last 10 days of June, the price of oil staged a historic recovery and now trades just under $60.

With July 4th a few days away, the summer driving season should give a boost to oil demand and push the price up even farther. Royalty trusts produce income derived from the production and sales of commodities, typically oil and natural gas.

This type of investment will produce both a nice income and capital gains as the price of crude oil moves higher.

An energy royalty trust earns all or most of the profits from oil and gas production out of acreage designated to the trust. These are not companies, and there are no management teams.

A trustee collects the trust’s shares of earned royalties or profits and passes them on to investors. When you invest in a trust, you purchase units, not shares. Most royalty trusts pay monthly distributions which vary from payment to payment.

The amount you earn from a royalty trust can go up with rising energy prices and if the operator of the trust properties increases the amounts produced. Some of these trusts have existed since the 1970’s and have paid distributions for decades.

Newer recovery techniques developed over the past decade allow operators to “restart” production in older wells, boosting trust income. Keep in mind, as a trust unit owner, you are not investing in the oil company operating the wells. You are receiving a portion of the profits from the oil and/or gas produced by the wells.

The obvious downside to these trusts is that if energy commodity prices fall, so will the distributions and the trust unit prices. These commodities are priced based on global supply and demand forces.

Especially crude oil, with natural gas moving towards a global system. The International Energy Agency forecasts that current oil demand of 98 million barrels per day will grow by an average of 1.2 million barrels per day per year for the next five years.

The combination of growing demand and several years of under investment point steadily or even sharply rising prices for crude oil. Energy royalty trust prices as well as distributions move in parallel with the price of crude.

I view these trusts as a way to get direct exposure to energy commodity prices and to own assets with values not driven by stock market sentiment. The May-June price drop in crude oil has put these trusts on sale. Here are three trusts to consider.

MTR Chart

Mesa Royalty Trust (MTR), incorporated on November 1, 1979, owns property interests in the Hugoton Area (Kansas) and the San Juan Basin (Northwestern New Mexico and Southwestern Colorado).

The Trust does not engage in any operations. An average of the last three distributions gives MTR an 11.5% yield on the current $11.22 unit price.

Remember that for all royalty trusts, monthly distributions will vary, sometimes dramatically.

SBR Chart

Sabine Royalty Trust (NYSE: SBR) was established as of December 31, 1982. The trust holds royalty and mineral interests in producing and proved undeveloped oil and gas properties in Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas.

The total distributions paid from 2014 through 2017 show how the payments mirror the change in the price of crude oil. Note that oil reached its recent peak in 2014 and low in early 2016. Here are the total distributions per unit for the four year period:

  • 2017: $2.368370
  • 2016: $1.93403
  • 2015: $3.10520
  • 2014: $4.09779

Recent distributions give SBR a current yield of 7.0%.

PBT Chart

Permian Basin Royalty Trust (PBT) incorporated in 1980. The trust owns royalty interests in 33 Texas counties with most of the production coming from the Waddell Ranch properties located in Crane County which is in the heart of the Permian oil play.

Six major fields on the Waddell Ranch properties account for more than 80% of the total production.

The Waddell Ranch properties are mature producing properties, and all the major oil fields are currently being waterflooded to facilitating enhanced recovery.

Based on recent distributions, the PBT current yield is 6.15%.


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Category: Commodity Stocks

About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments, and 30 Day Dividends, a specialty income service that takes advantage of opportunities for relatively fast, attractive profits around potential dividend payouts.