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  • rdravin rdravin Nov 14, 2013 10:29 AM Flag

    Fallacy in SA Trust Evaluation Article

    SA came out with article "Enduro Royalty Trust: A forcast ..". Basically, it said NDRO is overvalued at 12++, and should be worth about 8-9 assuming 8 to 10% discount rate and medium prospects for future reserves.

    The article is well written and extensive. Perhaps, some Eco professor will give it an A. However, there is one minor assumption which throws out the whole conclusion that NDRO is expensive.

    The fallacy concerns future oil and gas prices over the life of the trust. Declining production will continue to 2030 - 17 years assuming no expanded production due to discovery of new reserves or tecnology enabling horizontal fracking.

    Prices? Here is what the SA article said :
    Therefore, I set future oil and gas prices equal to the value of NYMEX futures contract prices for WTI Light Sweet Crude and the Henry Hub, respectively. As of 11/12/13, these values are similar to those for spot sales today and gradually move to long term values of $80.75/BBL for oil and $5.26/MCF for gas.

    The assumption is the prices will be stable and "move to $80.75/BBL. Oh? There will be no inflation? There will be no increased demand from emerging economies. There will be no declining production in tapped out oil fields? What does history say?

    There is no straight line price increase in oil. Geopolitics create bumps in the road. But, there can be no doubt that all majors currencies (dollar, euro, yen) are experiencing major depreciation as money supply expands. Bet on 6% inflation in oil. And that is why NDRO is a $17 stock yielding 10-12%.


    Sentiment: Buy

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    • if the history of oil prices is 6% inflation in oil - the price of oil now would be around $150.
      With USA producing 3 million barrels a day more by 2016 the price of oil will stay around $80-$85 .
      This article assumption is correct

    • Float = 24 million.
      Institutional Holdings = 53.20%
      Target Price = $17.76

      Sentiment: Strong Buy

    • Thanks.

      Sentiment: Strong Buy

    • why don't you just but oil contracts - seems like you are spending a lot of energy here

    • Seems with all the bashing being done to Enduro that maybe some people might want the stock price to go lower. Does anyone know if the SEC can get involved in these pumping and dumping schemes. Almost seems to be the reverse of pumping in order to short. Just my opinion.

      Sentiment: Hold

      • 1 Reply to mysticstock51
      • well if the SEC doesn't care that they spin out these PE invests into trusts at absurd prices, with mythical production and distribution estimates, with promises of future production from advances, and the stock price drops 43% with the sponsor selling on the way down --- why should they care about having a little fun pumpin and dumpin

    • I think evaluation should not be based solely based solely on future oil and gas prices, production and distributions because those numbers are not solid. Morever, unit price is falling too fast to rely on distribution income. Rather. evaluation should also be based on the lack of success Enduro Partners has had selling its shares to the public. The IPO sale of 13,200,00 units at $22 was not good for the purchasers as the price never recovered. Similarly the secondary sale of 11,200,000 units at $13.85 hasn't been good for the public so far.

      I do not think there is anything especially ominous in the partnership's sale of its units, except that they have obviously made a business decision to cash out. McDep took comfort in the partnership's prior 66% ownership of the trust units on the theory that they would not have retained all those units unless the underlying properties have great promise. Well, they no longer own 66%, and I can't take comfort in their current 26% ownership, as they will probably sell that too. That is their business model.

      • 3 Replies to jolzter
      • couldn't disagree more. i admire your confidence in the markets, but, i think 90 percent of royalty trust owners buy because they found these trusts when conducting a search on a screener for highest yield - they never turned the first page of a 10k. since i am investing in trusts for the long haul, all i care about is my NPV calculation which is based on my assumed production and pricing numbers - when the price is less than my NPV, i buy - been working for me for ten years.

      • u nailed it.....

        assuming they actually were using the sale to pay off their credit line, what does that say about the returns they expect from their shares - like 3%? If the returns were really going to be good, why wouldn't they have done a private transaction?

        Jonny Brumley - the apple falls far from the tree

      • Partners will keep 26% ownership in NDRO - controlling stake to keep trust around.

    • If I recall, Mcdep is at 17 based on 100 oil - a much more reasonable expectation for oil prices

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