There’s been a lot of talk about the impact of the three settlements on the unit holders. Using the size of the Frankhouser settlement and scaling it up to cover the rest of the affected wells Sourdough came up with a potential of $118,800,000 while a few weeks ago Meekrob came up with about $197,000,000. I think the differences may be in the number of wells that are actually operating and have been operating. Regardless, I think you have some good approximate estimates of what XTO has potentially been shorting its royalty holders on the properties they manage for the unit trust.
From there everyone has been trying to figure out how much unit holder future distributions it’s going to take to pay 80 % of what XTO owes. Doom and gloom.
But wait. How about the other side of the coin? The settlement XTO has agreed to pay out to Land Royalty holders is for two things:
1. Royalty owners have been unfairly been paid royalties that were an unfair discount from the market value of well production based on the price XTO sells to its subsidiary, Timberland. Depending on the well gas geological formation, that price is 80-85% of market price XTO ultimately sells the pipeline gas through another XTO sub, to Duke. The parties apparently have agreed it is an unfair discount from the market price and quantified it in the settlement. It appears, in the annual report, that the unit holders distribution calculation starts at the same 80-80 % price XTO sells to Timberland, in other words, like the royalty owners, the trust unit holders never would have seen any of this unjust enrichment by the down-stream subsidiaries either.
2. Land royalty owners haven’t received any distributions on the Frankhouser wells for the very valuable NGL that has been extracted by Timberline over the years. Again the parties apparently have agreed that the royalty owners have a production interest in the wells that includes the NGL, and have quantified it in the settlement. Likewise, htere is no inclusion of NGL income in the HGT annual report and you would expect the law to confirm that unit holders have a profits interest in the wells and therefore are entitled to that same lost NGL income.
So perhaps the unit holders aren’t liable for the unjust enrichment they never saw. No, in fact maybe unitholders are DUE the same sort of undistributed income over the life of the trust XTO is currently ready to settle with the Frankhouser royalty owners for.
But how much back distributions could be due unit holders if this applies to all the wells covered in the three class action suits?
Extrapolating the 255 well $36,000,000 settlement, to all the wells involved, let’s start with Sourdough’s more conservative estimate of $118,000,000. Royalties typically represent 1/8 of the revenue. Does that 1/8 imply that XTO has been able to siphon $944,000,000 in extra profits from the production of these wells through its subsidiaries in the last 15 or so years. By the same logic shouldn’t the unit holders have received 80% of those extra profits XTO took? That equates to $18/unit in back distributions!
I think it is worth looking into a potential unit holders class action. I just talked to the lawyers that have successfully moved the Frankhouser suit toward settlement, and they agree.
By the way, speculators keep in mind a class action seeking past distributions may not have much impact on future unit price since it would only benefit unit holders of record over set period in the past and would be paid by XTO/XOM and maybe B of A, not future unit holders.
As I've said, I'm more interested in back distributions for those of us that have owned HGT. I'm not trying to figure out what HGT is presently worth - good luck with that. I have no faith in what you might find, or the timeliness of any information you might get from the trustee or XTO on the negotiations of these new lawsuits. That sort of information will be confidential (as it should be with a puclically traded security).
The place for information is the royalty holders' law firm. That's where I'm going. Maybe a new class rep..
If you are long HGT over the past years feel free to e-mail me. email@example.com is a one-off address I can use for this.
Nothing is clear about HGT. After the dust settles I'll send someone down to the oil fields in Oklahoma and Kansas to "poke around" and I plan on writing a letter to the trustee asking that it pursues an explanation and accounting from XTO as to exactly what happened. That is ceretainly the trust's DE minimis obligation as a fiduciary with respect to this unusual situation. The unit holders are due, at the very least, a completee explanation as to the events.
You are right. OTOH 1 subject to what NPV parameters you're using Fankhouser discounts (i.e. the bad news) appear to be discounted in HGT's price for all fields, 2 I don't know the future value of many other stocks with greater comfort, yet invest in them, and 3 the slow market response to the 10-Q (and presumed expert Wulf's apparent ignoring it altogether) suggest the market for HGT is not efficient; inefficient markets offer better profit opportunities than efficient markets.
<<<I just threw in the towel and gave away what I owned because it is nothing but a big gamble. >>
Probably a good call. I am out of HGT as well, except being long some puts.
1) take your loss now, write it off, and watch as the situation clarifies
2) reinvest the money somewhere that can give a current return (since we know HGT is dead in the water for a good long while)
3) when the waters clear here, maybe, just maybe it is worth nibbling again in a year or so.
The problem is that the mineral rights royalty owners are intitled to a percentage of gross sales while HGT and the unit trust owners are entitled to a share of net profits. That means that even if the discounted price for the raw gas is a fair markdown to the calculation of net income it should not have been charged to the mineral rights royalty owners as they were entitled to a fixed percentage of the total value of the wells production and not just a profit interest. This is a very complicated situation but is certainly worth further investigation. One of the problems is that the settlement agreement for the $36,000,000. probably includes a nondisclosure agreement.
I've been thinking about this and the question that needs answering is, "is the cleaning up of the gas and capturing the liquids a legitimate post-production cost and is the amount charged in keeping with normal industry standards for the region from which the production was taken?"
Did the Fankhouser lawyers agree with your assumption ("It appears, in the annual report, that the unit holders distribution calculation starts at the same 80-8 % price XTO sells to Timberland, in other words, like the royalty owners, the trust unit holders never would have seen any of this unjust enrichment by the down-stream subsidiaries either.")?
Just to be clear, are you saying the distribution moratorium is inappropriate as the settlement shouldn't be charged for 80% to unit holders? What specifically in the report makes you say this?
Again let me remind you, I owned HGT as a long term energy income investment from 2006 until I was stopped out last month.
In the big picture right now I’m more interested in the potential for a class action for past and present owners of HGT to reclaim undistributed well production value that may be due.
The value of the NGL’s being extracted from the raw natural gas wells by an XTO subsidiary became very large during the time I owned HGT. There is no accounting for the NGL value in the trust distributions. XTO, by having an intra-company contract to sell raw gas at 80-85 % to its sub, Timberline Gathering and Processing, effectively removes this newly significant income stream from the unit holders (remember how the price of oil has sky rocketed since 2006- NGL’s have gone up with it) . I think it is worth looking into the class action for NGL alone. Interesting, until 2006 XTO itself owned the majority owner of the units but then decided to distribute all its treasury units to XTO shareholders as dividends.
In my opinion while it has proven that XTO has been significantly enriched by NGL sales, there is no evidence the HGT unit holders have been enriched by sale of NGLs, therefore the distribution moratorium is inappropriate.
In addition to NGL’s the royalty owners are also getting compensated for lost value that XTO is taking going from raw, unprocessed gas to pipeline-ready marketable gas (residue gas).
Here’s the link to the last judge’s order on the Frankhouser settlement
Start with page 3 “The undisputed facts establish that XTO....page 5 describes the 80-85% of market price intra-company contract XTO Energy has with its sub, Timberline, which in turn sells the residual gas at market though CTES another marketing sub of XTO to a true unaffiliated third party. It describes how the 80-85% of market price is used to calculate the land royalty share. You can read through the rest of the judge’s finding to get a good idea of what they are fighting over and even the final judge’s decision. It’s about as clear as mud unless you are a lawyer dealing with KS and OK oil and gas. What is clear is that they are fighting over whether that 15-20% Timberline take is an unjust enrichment and a breach of XTO’s fiduciary responsibilities. If you check the HGT Annual Report, page 9, you’ll see the starting place for the unit holders’ royalty calculation is the same 80-85% intra-company contract as described in the Judge’s order’s undisputed facts. Therefore to me it seems clear that unit holders of HGT never saw that disputed 20-15% piece either and therefore were not enriched by it. Accordingly, the distribution moratorium is inappropriate. That’s just my opinion, I’m not a lawyer.