Never having owned a Royalty Trust before, I'd like to know how things eventually end up. When the oil either runs out, or it becomes economically infeasible to continue production, how are things cashed out? Should have done more research, but at the price I got in, and the royalty percentages paid, I got greedy. Thanks for any answers.
Liza and some others .... would you accumulate more PBT at this time? Just curious on your thoughts - I'm rather new to the trust scene, but know about reserve depletion etc. Thanks in advance for any insights they're much appreciated and just wonderd your "gut" feeling as I've been following this stock for some time now.
Trusts are financial instrument used to mitigate quick return on capital and corporate taxes. In the O&G business, project require a significant capital up front. The pay back is realized over the life of the oil or gas production. This may take 20 or more years. The capital invested is locked up and the pay back are under the IRS procedures, such as amortization of prime equipment etc.
The worth of the project is the oil or gas in the hole. It become good business to sale the oil or gas production as soon as profit are realized. A trust does just that, the owner of the oil or gas in the hole transfer the production by establishing a trust. The units of the trust are the forecast production, another way to look at units is a loan the owner makes to recoup his capital quickly. The price the owner pays is a distribution which represent the interest rate based on the value of the production at currant historical prices minus the owner expenses due to production cost as well as management cost.
Trusts have governance that take into account the end of the production. Since the worth of each unit represent the oil or gas in the hole, the unit price will represent the real worth of the oil or gas in the hole. No more production, unit price equal zero. The trust does not own any equipment or facilities. When investing in a trust, closer the production gets to zero, and the demand will dictate the units price. The moneys the trust management must keep to manage the trust is the only amount that will be distributed at the trust dissolution. The owner equipment has nothing to do with the trust.
The way to value PBT is simple. Add up the time-discounted total future dividends per share that can be expected until the oil runs out. Do they add up to $22.00? If not, then you are playing a fool's game buying these shares, and you will inevitably get burned.
At that point, the remaining assets would be sold and proceeds distributed to unitholders. But if the oil has run out or is economically unfeasible the proceeds from any sale are likely to be insignificant. So you should only count on getting distributions for as long as the trust continues to operate (which should be a while yet). Don't count on any large final payout.