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Hugoton Royalty Trust Message Board

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  • norris_3845 norris_3845 Mar 12, 2001 12:25 PM Flag

    questions abt NG trusts

    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.

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    • 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.


    • 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?

      • 1 Reply to macunix
      • If you figure depletion in then the trust will loose value over time. This should, lower the unit price of the trust. However, if interest rates drop so that a lower payout is very competitive to bonds, then that would support the price. It all boils down to you assumption about depletion rate, gas prices, and prevailing inflation.

        I invest through a self-directed IRA and have not paid much attention to the tax consequences of depletion. Does someone else on this board have an answer for that?

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