Fracking Stocks: Avoid This One At All Costs!
Every so often you come across something that’s simply too good to be true.
Maybe it’s a diet promising you’ll lose weight by eating nothing but chocolate chip cookies. Or maybe it’s a small device that can power your home for free. Just buy “top-secret” blueprints off the internet and you’ll be laughing all the way to the bank.
You have to wonder who actually falls for such claims.
Well, I just came across an investment that’s too good to be true…
And even though there are obvious warning signs, investors are piling into this “fracking stock” like there’s no tomorrow.
You see, this holding purports a 67% annual dividend yield. I imagine there are a few investors out there who think they’ve struck the jackpot with such an enormous return. Maybe they’ll become a millionaire through the power of compound interest.
Sounds pretty good, right?
While such huge dividend payment is undeniably tempting, a little due diligence reveals this high yielder is destined for disaster.
Let me explain…
First of all, the asset is question is the Whiting USA Trust 1 (WHX). Since it’s a trust, WHX relies on net profits interest (NPI) from underlying oil and gas properties for the seemingly hefty payout.
But here’s the deal.
Ever since Whiting Petroleum (WLL) created the trust in 2008, they’ve clearly stated- “the NPI will terminate when 9.11 mmBoe of oil and gas have been produced and sold from the underlying properties.”
What happens when NPI terminates?
The trust will wind up its affairs and shares will go to zero ($0)…
That’s right, WHX will be worthless.
Despite this fact, investors are collecting shares at a feverish pace. According to a November 7th press release from Whiting, “trust units are trading at a price substantially in excess of the aggregate distributions that may be reasonable expected to be made prior to the termination of the trust.”
The only way WHX can trade at a premium to its remaining distributions is if uninformed investors are gobbling up shares!
Boy, aren’t they in for a surprise in early 2015. That’s when Whiting estimates the NPI will cease and WHX shares will become worthless.
Now let’s be clear…
It’s not like Whiting is trying to pull a fast one here. The company has clearly stated its intentions for WHX since the get go. But with shares currently trading at a substantial premium to the actual oil and gas assets left in the ground, it’s clear investors aren’t listening.
Folks, let me put it very simple terms. WHX’s 67% dividend isn’t what it seems. Shares are destined to fall off a cliff… and soon.
Whatever you do, avoid this “fracking stock”!
Until Next Time,
Justin Bennett
Category: Energy
