October 15, 2002; Kurt Wulff Quoted on Royalty Trusts by Paul Sturm in SmartMoney

Sturm's Screen
Get Paid to Wait

By Paul Sturm
October 15, 2002

.......... for conservative investors who enjoy owning real assets, several almost-forgotten oil and gas royalty trusts offer attractive current income as well as the potential for fat capital gains.............

  Your Own Piece of the Oil Patch
Handy insurance if an oil crisis brings down the rest of the economy, nice yield and a tax benefit, too.
COMPANY LOCATION
OF WELLS
PRICE* 52-WK.
HI-LO
CURRENT
ANNUAL
INCOME ($)
CURRENT
ANNUAL
YIELD (%)
Cross Timbers
(CRT )
San Juan Basin (N.M.) 17.40 20-15 1.45 8.33
Hugoton
(HGT )
Hugoton Field (Kan. & Okla.) 11.03 13-9 0.77 6.98
Sabine
(SBR )
5400 properties 22.61 26-15 2.05 9.07
San Juan Basin
(SJT )
San Juan Basin (N.M.) 11.38 13-9 0.79 6.94
* Prices as of 9/3/02.
Data: Company reports; NetScreenPro by Multex

.... Once upon a time, energy stocks were glamorous. In the early '80s many big companies spun off their energy operations to raise cash — a move akin to the urge to do Web spinoffs during the Internet bubble. When the operations were oil- or gas-producing wells, deals were occasionally structured as royalty trusts. Think of them as holding companies created to do nothing but pass along income.

About a dozen royalty trusts have NYSE listings, but no one pays much attention. There's no investment banking revenue to attract brokerage firms. There are no executives with stock options and a story to tell. There aren't even any employees — just a few bankers hired by the trustee to mail out monthly checks. And, of course, oil and gas are classic 'wasting' assets. Eventually, the wells run dry, and your trust shares will be worthless. Despite all this, royalty trusts aren't disappearing as fast as you'd think. The audited reserve life of the trusts in my table averages only 10 years, but that's a conservative number. Oil production keeps improving, and higher prices would make it profitable to pump reserves that are marginal today.

Kurt Wulff, a former Wall Street analyst who studies royalty trusts, figures that new technology will more than double estimated reserve life. Wulff doesn't follow Sabine (its diverse holdings are a plus, but difficult to track). But based on current prices of energy futures, he thinks Cross Timbers, Hugoton and San Juan are trading today at an average 25% discount from present value. For more of Wulff's ideas, see www.mcdep.com.

Two other strong points: One, royalty trusts are an inflation hedge and handy insurance if an oil crisis brings down the rest of the economy. Two, they attract smart people. The billionaire Robert Bass has a sizable stake in San Juan, as does respected money manager Jean-Marie Eveillard, whose First Eagle SoGen funds are actually making money this year. My table gives a sense of the relative position of each trust. But be cautious about the numbers. Even though yields have averaged close to 10%, payouts vary depending on oil prices and well upgrades. San Juan distributed nothing in December and January, but 40 cents in March 2001. There are also tax advantages. Unit holders can deduct depletion, which defers much trust income. Nice — but not the reason to invest.