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Hugoton Royalty Trust Message Board

  • meekrob1 meekrob1 May 21, 2012 10:58 AM Flag

    10-Q Settlement Just the Tip of a Big Iceberg

    Fair disclosure: I am short HGT.

    The disclosure in 10-Q that HGT will be unlikely to make payments from it's KS and OK properties for 18 months is disturbing. But the details of that case, Frankhouser vs. XTO (Frankhouser), when combined with the 2 other cases where HGT shares liability with XTO, Roderick vs. XTO (Roderick) and Chieftain vs. XTO (Chieftain) should cause HGT holders to shudder with fear.

    These 3 cases essentially share the same facts in that royalty holders allege XTO shortchanged them by selling the products from their wells to an XTO-owned gathering system in a way that disadvantages the royalty owners. The following link is to a court document in the Roderick case:

    If you read through the document, you will see the Frankhouser case only covered 67 wells in KS and 161 wells in OK. Roderick will cover all non-Frankhouser wells in KS and Chieftain will cover all non-Frankhouser wells in OK. How many wells is that...? Roderick should cover 383 wells in Kansas and Chieftain should cover 912 in OK. Recall, the Frankhouser case that was just settled and cost HGT $29.6 mm and will impact payouts for 18 months only pertained to a total of 228 wells.

    The Frankhouser settlement should also worry HGT holders for 2 other reasons: 1) it establishes precedent for the Chieftain and Roderick cases; 2) XTO is incentivized to settle because it can stick HGT for 80% of the settlement costs. Why else might XTO be inclined to settle the Chieftain case? Read the court document link I provided for this quote: "Chieftain alleges tort claims to recover punitive damages and Roderick does not." Does XTO want to risk punitive damages even if HGT covers 80% of them..? I don't think so, especially after settling the Frankhouser case.

    Now, I know I may have made some of you holders mad. I am sorry, but I am just presenting the facts as I read them in this court filing. XTO could see this through trial and win and HGT would not be affected by the Chieftain and Roderick cases. I am taking the otter side of that bet. Before you transact in HGT do your own due diligence and don't rely solely on what you read on a message board. Happy to hear any feedback, both positive an negative.

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    • Thank you very much. Well done. Do you know which gathering system the Frankhouser production went through?

    • I learned about the gathering systems by skimming the court documents available online. For example, here is a document from the Roderick case filed in June last year:

      If you look at page 4 and 5 you will be able to figure out the number of wells covered in the Roderick and Cheiftain cases (i.e., Roderick is all Kansas wells not part of the Frankhouser settlement and Chieftain is all Oklahoma wells not part of the Frankhouser settlement). The gathering systems are mentioned on page 5.

    • thanks for the discussion on the other outstanding cases. where did you learn about the gas gathering systems involved?

    • Patrick, I think the trust officer you spoke with missed the nuance of this argument. If you look at HGT's 10-K, there is a section that shows that 85% of future net cash flows from proved reserves is from OK and KS (the balance being from WY). I think this is what she meant and NOT that 85% of HGT's current dividend comes from the small number of wells covered by the Funkhouser settlement. Thus, if HGT settles in the Chieftain and Roderick cases, the hit to HGT could be substantial, especially from the Cheiftain case.

      Also, fwiw, in the case they just settled, only 1 gas gathering system was involved. In the Chieftain case 3 gas gathering systems were involved, and, as in the Funkhouser case, these gathering systems were 100% owned by XTO. Given that XTO is a large company with systematic processes, I have to believe the pricing practices at the gathering systems in the Chieftain case were identical to the pricing practices at the gathering system involved in the Funkhouser case that was just settled. It was the pricing practices at the gathering system that were the heart of the Funkhouser case, so I feel fairly confident that Chieftain and Roderick plaintiffs will prevail, given that the Funkhouser case provides a roadmap with how to proceed.

    • I warned on this on this board on May second after they posted the 10Q on the previous Friday (check out older posts). The settlement will preclude distributions being paid from Kansas and Olklahoma properties until revenues exceed costs (plus interest / from the original prospectus) for eighteen months based on the current prices and production at the time of the 10Q. Obviously, the price of gas and production rate can change the duration, but it will not change the fact that production of a depleting asset will not pay distributions (the only reason to hold these type of trusts) to unit holders for an extended period while the wells lose reserves to pay for a lawsuit settlement. Add the potential for future lawsuits as mentioned by the post today(again this was in the original 10Q I highlighted a few weeks ago)that could further impair distributions while draining finite reserves, makes this a terrible investment given what is currently known. In my opinion this trust could trade back to the single digits until more certainty about future distributions and resreves become clear.

    • This is all fine and good however insurance will be used for much of this loss. Somebody is really missing the boat here.

    • Sorry, I should have said the trustee as you are right, no IR. And she was very knowledgeable about the trust and all the issues. Almost too much of a lawyer though when I was asking her for insight as she would only give me what has happened in the past. She said that for a long time that the other part has contributed very small for basically its entire past. That is why she estimated it around 15%.

      Since HGT has fallen from $14 to $11.50 this is becoming like a JPM situation. What is lost in the stock and what was lost from the event are becoming two seperate things. For example, lets say the div is $0.08 a month. 18 months of that * 85% is $1.22. We are down $1.36 so the loss is basically priced in already. But of course that won't stop this thing from going lower if people want to sell/short. I'm more interested in what it will be worth in 18 months than where people take it over the next 2-6 months.

    • Patrick, when you say you talked to HR, did you mean IR? Was that IR at XTO (read: Exxon)? As a trust, HGT doesn't have IR; they have a trustee and I would wonder how much someone in a trust dept at Bank America branch in Dallas might actually know. Having said that, you may be right, but I would like to be able to verify this data point, as it is, admittedly, a weak point in my argument.

      Even if the wells in the Chieftain and Roderick suit only contribute a small % of current dividends, the Chieftain suit covers production back to 2002. Maybe these wells produced much more a few years ago and only suffered sharp declines in recent years..? I have no way of knowing, but, again, it's that uncertainty that means HGT should have a higher yield (and axiomatically, a lower price).

    • Thank you for the info meekrob. I'm long HGT and mad but not at you. You
      1: presented info to us
      2: Disclosed you were short
      3: were not condescending or have a "I told you so".

      Its the rare gem of a thread like yours that gets me to look at yahoo at all these days.

    • Not a single reference about this mess in articles about HGT posting on SA.

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