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US Shale Production Is Set For A Steep Decline

The once-booming U.S. shale revolution…

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Big Oil Tries To Buy Back Investors

Despite the turbulence in oil…

Thomas Miller

Thomas Miller

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Why Royalty Trusts Might Be A Good Buy Now

Energy investors are all basically asking the same questions: When will oil bottom, and when it does, what are the best ways to make money on the turn? As of last Friday, traders became jittery again punishing oil prices down to lows not seen since the bottoming process of 2009. Generally, the consensus is renewed nervousness about Iran soon being able to release its oil on the over-saturated market, plus recent stories that the Cushing, Oklahoma light sweet crude storage facilities (and others) will all be overflowing by next month.

Markets climb a wall of worry. When all this turns, the worry-wall will be that the United States could have an oil shortage because too many rigs are down to keep up with demand. Or, at least something along those lines. But for sure, as markets do, it will be based on one worry or another.

Timing

Only a computer or a fool would try to precisely time commodity markets, especially oil, but this graph compiled by Arthur Berman, underscores at least what the most rational predictions might be of when prices could start to bottom. Look at the forecast into 2015. It shows increasing production (which we have been experiencing) peaking in May, then softening into September.

USCrudeOilProduction

If this holds true, at least the increasing U.S. supply chip will have been taken off the table. Obviously, one has to wonder from this vantage point, how accurate this forecast will end up being, not to mention how the trading pits will react to it.

Related: Misleading IEA Statement Sends Oil Prices Crashing

Next Moves

We are literally in uncharted territory with this oil price move. We could compare 2014/2015 to 2008/2009, but the dynamics are totally different. Then, global economic recovery was the worry-wall investors were climbing. Oil prices wobbled sideways at the bottom for almost three months, before resuming a slow and deliberate climb back. And not without numerous fits and starts, either.

CrudeOilWTICushing

Will 2015 be the same? Doubtful. Primarily because of a totally different supply/demand dynamic. We are far more awash with oil today than 6 years ago, and the upward global demand trend is still intact from a macro perspective.

Royalty Trusts

While there are many options investors can consider, (due diligence, risk tolerance and portfolio objectives are always paramount) one area to not overlook are royalty trusts. These trade on the stock exchanges, so unlike purchasing actual working interest or royalty interest in a well, these are highly liquid. Trusts have no employees, and their only assets are rights to receive a percentage of net income or revenue from an oil and/or gas asset. One very important dynamic of trusts is their finite nature. When the asset is gone, it either has to be replaced, or that income to the trust is lost. Various trusts handle this differently, so extra research is highly advised before making an investment decision.

Related: The Reemergence Of The WTI/Brent Spread

However, along the way, trusts can offer yields that are better than many bonds, plus the potential of equity appreciation once the market turns. While some trusts may not correlate closely with crude prices, many on the list below are off up to 50-percent, or near the equivalent of the drop in oil prices. With yields in excess of 30-percent possible in some cases, plus with beaten-down prices poised for appreciation, this asset class is one that investors may do well to have on their radar.

Below is a partial list of Royalty Trusts traded on public exchanges, with the approximate yields as of December, 2014.

Disclosure: The author does not own shares of any of the stocks listed below, and does not have an intention to purchase in the immediate future.

BP Prudhoe Bay Royalty Trust

Crude Oil (100%)

BPT14.40%
Chesapeake Granite Wash TrustNat Gas (20%)/Nat Gas Liquid(30%)/Crude Oil (50%)CHKR32.77%
Cross Timbers Royalty TrustNat Gas (38%)/Crude Oil (62%)CRT10.80%
Dominion Resources Black WarriorNatural Gas (100%)DOM12.22%
ECA Marcellus Trust INatural Gas (near 100%)ECT23.00%
Enduro Royalty TrustNat Gas (25%)/Crude Oil (75%)NDRO12.74%
Great Northern Iron Ore TrustIron OreGNI19.68%
Hugoton Royalty TrustNat Gas (80%)/Crude Oil (20%)HGT10.35%
Marine Petroleum TrustNat Gas (28%) /Crude Oil (72%)MARPS13.05%
Mesabi Royalty TrustIron OreMSB21.24%

Related: Alan Greenspan Joins The Debate Over Oil Prices

Mesa Royalty TrustNat Gas and Gas Liquids (100%)MTR11.24%
MV Oil TrustNat Gas(2%)/Crude Oil (98%)MVO23.46%
Pacific Coast Oil TrustNat Gas (3%)/Crude Oil (97%)ROYT21.87%
Permian Basin TrustNat Gas (16%)/Crude Oil (84%)PBT15.24%
Sabine Royalty TrustNat Gas(35%)/Crude Oil (65%)SBR7.85%
San Juan Basin Royalty TrustNat Gas(98%)/Crude Oil (2%)SJT8.09%
Sandridge Mississippian Trust INat Gas (25%)/Crude Oil (75%)SDT31.37%
Sandridge Mississippian Trust IINat Gas (15%)/Crude Oil (85%)SDR38.01%
Sandridge Permian TrustNat Gas (2%)/Crude Oil (98%)PER40.43%
Tidelands Royalty Trust 'B"Nat Gas (33%)/Crude Oil (67%)TIRTZ24.19%
VOC Energy TrustCrude OilVOC30.33%
Whiting USA Trust IINat Gas (6%) /Crude Oil (94%)WHZ65.02%


By Thomas Miller of Oilprice.com

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