One last item. How long to own these trusts. The answer is about 7 to 8 years. Why 7 to 8 years? Because at a yield of 8 to 10% that is a doubling time of about 7 to 8 years. Meaning your entire investment will be paid out as a dividend in the 7 to 8 year time frame and the shares you own at the time will be 100% profit.
So if you believe like I do that the scientifically the solar cycle might be more significant on Global warming basis than previously thought and that we have the potential to enter another Maunder Minimum and corresponding extremely cold stretch of weather lasting decades, then where do you invest in natural gas?
So the answer is the Natural gas trusts San Juan Royalty trust (SJT), Hugoton Royalty trust (HGT), and Mesa Royalty Trust (MTR). I would highly recommend that anyone interested in natural gas investing read the McDep articles on these trusts and other energy investments that Kurt Wulff puts out an energy analyst who has been successful in the business for 30 or 40 years. You can search the web to find his site.
Beyond his views, here are my three micro write-ups on the three natural gas trusts.
SJT - The largest of the three classic natural gas producers. An absolutely must hold and 40% of the portfolio. Some prime areas of control that could be targeted by fracking as well.
HGT - Hugoton, potential loss from a court ruling, but that only effects ten months of distributions and this news has been out for over a year meaning that all investors have accounted for this in the price of the stock. 30% of your investment. If you really do you research this is an additional deep layer of natural gas that has never been developed, and if natural gas were to remain elevated in price development of this layer would extend the royalty trusts lifetime for a considerable period of time.
MTR - The smallest of all three trusts, and more thinly traded, but often overlooked as a significant source of stable long term natural gas dividends (30%). The real play here is that Kurt Wulff estimates that this has a reserver life of 30 years or more. So buy this now and sell it in 20 years.
And lastly from a non-royalty trust basis I would consider Encana (ECA). The largest producer in Canada.
And may your winters be frigid and your summers torrid.
My last item along these lines "Seattle-based Plum Creek, a timber real estate investment trust, will pay $74 million in cash and $860 million in a 10-year installment note."
So with cash degrading at 6% a year that equates to a 51 million a year discount each year the Fed keeps stimulating. And if you figure that inflation vs stimulus is out of of whack i.e. since 2007 they have added 25% stimulus to the US economy, but only gotten 2% inflation and 2% growth we have 25% minus 6% = 19% gap in money in the system to inflation.
So they have a built in discount of about 20% on the deal or $180 million already.
I prefer to think about fixed assets in terms of their value versus the Federal reserves stimulus. 85 billion a month times 12 = 1 Trillion a year. Then you factor in total GDP at say 16 trillion. 1/16 Trillion = 6 percent. Money is being diluted at 6 percent so Plumcreeks land holdings and lumber are going up about 6% a year.
So the financing is way below that appreciation rate.
Lastly and I know I can be long winded. What are the risks to owning Plumcreek long term? Well unlike a lot of other companies the company is back buy land, 6 million acres. An extraordinary amount that isn't going anywhere ever. A lot of safety in single holding. No amount of monetary stimulus, American debt, or natural disaster will ever wipe out the land.
So Plumcreek now represents in terms of land holdings after the MeadWestvaco a company on par with Weyerhauser about 6 million acres of land.
With MeadWestvaco purchase the purchase price of the underlying land is about $1388 per acre. For timber land this dirt cheap when you consider they own the land and negotiated the wind and mineral rights as well.
I think it is best to think about the additional issuance of shares to purchase the land more like floating the land on the stock market as opposed to the bank which is a good idea. Why do I say this? Plumcreek owns the land outright and they are basically saying to you the shareholder we will add this land to the other 5 or million acres we own and manage it as timber land. Since the land is geographically in the same region as other Plumcreek holdings they can save on the entire enterprise by using their existing infrastructure. Based on this any reduction in share price should be met with strong buying all the way back up to the $49 to $50 price range that was in place the day before. The only argument against that would be if you thought they couldn't manage 10% more land for timber than they already do i.e. they would lose efficiency as a company. Highly unlikely since this is their core business and PCLs core strength.