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Hugoton Royalty Trust Message Board

  • Gungagalonga Gungagalonga Jun 14, 2004 11:41 AM Flag

    Short Sale Opportunity?

    Realizing that most people frequenting this board are long, I wanted to bounce the counterintuitive idea that HGT may make a decent short entry at this point.

    Sure nat gas is strong now, but the risk/reward for holding HGT has diminished to the point that its yield can't support. Long term, this is a depleting asset, as shown in the Trust's consistent production decline.

    Bottom line-- when the ramped up OPEC production hits our borders, it will pressure oil prices which will pull nat gas down with it. If only psychologically.

    Long term I'm still bullish on energy, but the risks involved with holding this publicly traded royalty trust greatly outweigh the income stream it produces at its current price valuation. Basically, HGT currently has too much downside potential at $20-22/share relative to the cash flow it produces with little opportunity for production growth.

    Thoughts?

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    • I guess it all depends on your risk tolerence and cash flow needs. There are some decent Bond/Treasury ETF's out there that yield 3-5%.
      They still put your principal at some risk, but much less than these royalty trusts at these levels in my opinion. Yields on CD's and mmkts will likely start increasing with interest rates, albeit slowly. I've seen some CD and Mmkt yields between 2-5% lately, depending on the amount and duration, etc.

      There are many other cash flow security options out there, it's just a matter of finding ones that balance your risk tolerence, but get you closer to your goal.

      I would talk to a professional brokerage or money management office. I'm not a licensed broker or advisor, just someone with a little knowledge about oil & gas, economics and general equity trading.

      good luck.

    • What then would you recommend as far as a cash flow security? I really liked the idea about a having a monthly cash flow but I see your point about losing the principle. Any advice, thanks.

    • Macsmile2 inquired if I know anything about Cross Timbers Royalty Trust (CRT).

      I was referring to them (CRT) and not HGT when stating they have significant San Juan Basin exposure.

    • none from san juan. all from OK,KA,WYoming. Most from Hugoton gas field in KA.

    • Mac,
      CRT has a different underlying asset portfolio that I am not as familiar with vs. HGT. A big percentage of the cash flow comes from the San Juan Basin, so I would get familiar with the production profile on this and the other significant properties in the Trust.

      However, I see the same fundamental weaknesses in CRT that I see in HGT. At $28-$30/share, the yield is currently hovering around a mere 7.75%. Hardly worth the downside commodity risk for the cash flow in my opinion. Especially in light of the fact that commodity prices are also likely closer to a peak than not.

      Bottom line, I feel CRT (like HGT) is topped out and very fully valued at this level. I wouldn't buy here.

      I'll look into the underlying properties in CRT and let you know shortly.

    • Gunga...

      do you have the same sell opinion on CRT? It's another royalty trust formed by XTO? It's much smaller in market cap.

      I've spent the morning researching and comparing the two, and I'm very curious as to your opinion. Thanks in advance.

    • I happen to agree that HGT is overpriced here. I sold my position recently and will look for a better entry point in the future,,,regards

    • You didn't include interest rate (reinvestment) risk in your assumptions. When the Fed raises rates, fixed income investments drop in price. While at the AAA level, you will most likely get your principal back, you will take a hit since the coupon interest from the bond will be below the current rate ergo there will be some dimunition in your return.
      Good luck.

    • Oops, missed that edit in my haste. Thanks.

      I meant to suggest, as a more appropriate example of my point, muni's for their generally fed & state tax benefits. Currently around 3.75%-4% for 10 year A-AAA.

      Point is though, both Treasuries and Munis offer 4-5% yields, preserve your principal reasonably risk-free and offer substantial tax benefits.

      HGT at this level offers a 7-9% gross yield (probably 5.5%-7.5% net) with some minor tax benefits but puts your principal in a high risk parallel with commodity prices. Furthermore, your principal is essentially depleting and will end up worthless at some point should you buy and hold for the next 10 years or so. Relentless production declines will pace this reduction in net assest value, with each year likely showing reductions in proved reserves.

      Investors buying HGT in this environment and at this valuation remind me a bit of some of the old dot-com frenzy. My feeling is they're chasing HGT due to its exposure to a commodity that is very fully priced and will likely be shocked when it turns.

    • Treasuries are state tax free...not fed

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