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Hugoton Royalty Trust Message Board

  • rhianni rhianni Jul 20, 2012 2:03 PM Flag

    HGT full dividend value < $8

    Disclosure: I've been long HGT in the past. Currently neither long nor short as I have been waiting for more info on the 3 lawsuits current going on. The following is a VERY ROUGH estimate as to the amount of total dividends HGT has left. I'm making no estimate on the DURATION of the trust has in years just the final payout...

    Taken from the 2011 annual report page 3...
    "Estimated future net cash flows from proved reserves of the net profits interests at December 31, 2011 were $658 million. Using an annual discount factor of 10%, the present value of
    estimated future net cash flows at December 31, 2011 was $335 million. Proved reserve estimates and related future net cash flows have been determined based on a 12-month average gas price of $4.67 per Mcf and a 12-month average oil price
    of $92.92 per Bbl, based on the first-day-of-themonth price for each month in the period, and year end costs"

    $335 million will be paid out to the 40 million shares = $8.375/share based on $4.67 Nat gas.

    Taken from Q1 2012 report page 5
    Lawsuit 1: Fankhouser: Oklahoma and Kansas wells. Settlement cost for HGT is $29.6 million paid out from future payments = $0.74 per share.
    Lawsuit certified Dec 2010, agreement April 2012 (17 months)

    Lawsuit 2: Roderick: Colorado(?), Oklahoma, and Kansas wells.
    The Kansas wells that overlap lawsuit #1 Fankhoser has been merged into lawsuit #1.
    The Oklahoma wells that overlap lawsuit #3 has been merged into #3
    The only thing this lawsuit still covers on its own are the Kansas wells not under Fankoser lawsuit.
    Seeing as how Kansas is 7.7% of proven reserves of the trust (p12 of the annual report) and this lawsuit is only the Kansas wells not already having damages I cannot see this causing much overall impact.

    Lawsuit 3: Chieften Royalty: This is the unknown factor as it covers Oklahoma wells which is 66% of HGT.
    Lawsuit certified April 2012. If it takes 16 months to sort out like Fankhouser did then will won't know the damages for another year (August 2013)

    My rough estimate is that HGT will pay $7.635 per share before it expires based on $4.67 nat gas. Yes nat gas prices could go up but with the overcapacity in the energy industry as a whole and demand what it is I just cannot see it returning to the $6-$8 range that we used to enjoy. $3-$6 seems to be a more realistic range.
    Plus we have another lawsuit.

    Given all the above I find it interesting that HGT has settled in the $6.50 - $7.50 range since the big May drop is pretty close to what I have calculated above.

    I do not think we are ever going back to $14. No bounces. No technical analysis reversions, no yield chasers.

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    • 22value might be right if you in a 7 dollar camp that seems a little high. I am in the 5-5.50 range with spikes as high as 8 and drops as low as 3

    • You've all but said I am wrong so lets here your ideas as to why it was at $22

    • Good comments, $3 might be a good price to speculate on value long term, $7 is too high. One factor that could save it is gas rising to $8 plus with export in a few years, the reserves, new activity, would explode at that price vs $4, or if a new play becomes reality on the acreage, that could happen, the Miss Lime play is 16 million acres. With the price at $8, every gas play would explode, not sure this one would be the best.

    • Agree with your calculations. I believe though your estimates for long term natural gas prices are low. The over supply situation will be addressed this winter. If you look at the EIA website you will see that natural gas storage levels are slowly going back to the high end of the 5 year average and maybe there by October. Gas builds for the summer have been very low due to increase natural gas generation and lower prodcution. If the winter is normal gas could spike well above $5, on the concern that storage levels will be to low going into the summer, and with production growth down (the rig could for natural gas wels is lows in the last 15 years). This will of course induce more drilling and start the cycle again. The other factor that will affect natural gas prices is the EPA. They will probably invoke controls on discharge of fracking fluids from the wells which will add costs as much as 50 cents for horizontal drilled wells. I would expect natural gas will settle in average price of $5-$5.50 range. with spikes higher. What we have seen is perfect storm for natural gas prices, one of the warmest winters on record, overproduction of horizontal drilled wells partly due to drilling wells before leases expire, and lack of understanding by the industry of total system demand. 5-5.50 is still a really low price for natual gas given todays environment. On an MMBTU bases oil would have to be about $35 per bbl to give the same heating value.

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