I have been patienty watching HGT's collapse and subsequent pending recovery. I have my reservations about some of the lofty projections I have seen regarding what the distributions will be once the royalty issue is behind them. One thing I wanted to focus on has been the continued reduction in investment. Just a few years ago XTO (now ExxonMobil) was investing nearly $1 million monthly in drilling capital. Now we are seeing values half of that amount. If you trend the monthly production, you will see that it is dropping...very slowly, but it is dropping and without increased investment, it seems likely that volumes will keep dropping till they get to a point wher the additional investment can offset natural decline.
Long story short, in a year, if they are paying out $.50-$.60 unit, is it worth a 8% yield?
I think the current price is attractive, but hard to justify a higher price. Yes, the Hugoton properties are long lived and low risk, but the lack of aggressive investment means dwindling volumes.
I would say you are underestimating the the long duration optionality of HGT, being a perpetual, to a highly volatile natural gas market that is trading near long term lows. I also think the 50-60 cents is a low estimate, and there is potential upside with arbitration. Furthermore, the trustee is doing its fiduciary duty to shareholders and the sponsor has no financial issues. It is also trading very low compared to other royalty trusts in terms of PV10 as well as Mboe. Regarding capex, if gas prices move up, my bet is that the drilling investments will increase. If you look at some of these perpetuals, the PV10 can remain unchanged over multiple years, as much as 10, as prices and technology change.
I fully understand the enduring nature of the trusts. The point is, the Hugoton production has been in steady decline for the past 7 or 8 yrs. Capex would need to increase significantly to arrest the decline and reverse it.
At current pricing, you can expect to collect around $.05-$.06/unit/month.