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Hugoton Royalty Trust Message Board

  • macunix macunix Mar 11, 2001 7:05 PM Flag

    questions abt NG trusts

    i've only recently discovered NG trusts and the
    yields look almost too good to be true. am i missing
    something? with 20-30% yield it's not that long
    before you get the whole initial investment back. i
    understand payouts depend on gas prices but how bad
    can an investment with even half the yield be with
    falling interest rates and weak stock market? i don't
    believe in free linxhes, so.....??

    also how do you chose one trust over another?
    reserves/price or replacement of reserves? looking at
    HGT,LRT and ERF - recently bought some NBP but
    that's a little different. TIA....tom

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    • You need to understand a few points about these trusts:

      1. gas is at or near an alltime high. These trusts were not that good when gas was at $2.50. If gas prices stay high, then these are good deals.

      2. gas is a depleting resource. This means that the assests upon which this trust is based will produce less as time goes on. Traditionally, one assumes a 10% depletion per year. HGT is a bit different because they have an active captial progam and are attempting to slow down that depletion. However, because of that the payout is less.

      3. at some point the trust will terminate. Each have different conditions which will trigger this event.

      4. some trusts buy zero coupons to give a payout at a specified point in time (e.g. NGT which terminates in 2013).

      The upshot is, if you calculate the roi on these investments given the depletion you get rate of returns of about 9 to 10 % given today's gas prices. If gas prices go up, then the roi will increase vastly. If it goes down, then the roi will crash. Particularly at trusts like HGT which do not have a termination date and a zero coupon to back that up.

      • 2 Replies to norris_3845
      • Thanks for all the replies!
        >The upshot is, if you calculate the roi on these investments
        >given the depletion you get rate of returns of about 9 to 10 %
        >given today's gas prices.

        At $3/yr HGT is apparently yielding 20%. You're
        getting that 9-10% by factoring in depletion over
        a longer time period. I guess you'd also assume the unit
        price falls with the payout so I can't just
        sell after a few years for a higher return (if
        gas prices are unchanged). What about interest rates?
        As they fall shouldn't trusts be more attractive
        supporting the unit price?

        Can the depletion be deducted from taxes?

      • Norris:
        I am also new in NG trusts and have a lot to learn.But on the surface,I figure about 20% return=not considering depletion.Feb. distrib. about $0.25,annualized=$3.00.True this was a month of high NG prices but it may be even better this Friday and possibly next month.Based on the futures prices for the next 12 months prices look steady.What am I missing?

        XTO plans to drill 37 wells and workover61 which should give future reserves a boost.I believe this expense was deducted from the Feb. distribution.

        Since HGT does not have zero coupons and no termination date does this affect our investment?
        This seems to be a solid investment based on many factors including a commodity in short supply that is in high demand and is not geared closely to the slowing economy.
        Thanks in advance for any help you can give.
        BTW I live just down the road from you-in Austin.


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