U.S. Oil and Gas Royalty Trusts Offer High Current Yield: Are they Safe?

Wall Street Transcript

67 WALL STREET, New York - May 6, 2013 - The Wall Street Transcript has just published its High-Yield Equity Securities Report offering a timely review for serious investors. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Increasing Demand for Midstream Assets - U.S. Energy Infrastructure Build Out - Oil and Gas Transportation Infrastructure Demand - Master Limited Partnerships Distribution Growth - Low Treasury Yields and MLP Dividends -

Companies include: SandRidge Energy, Inc. (SD), Chesapeake Energy Corporation (CHK), Breitburn Energy Partners LP (BBEP) and many others.

In the following excerpt from the High-Yield Equity Securities Report, a leading Oil and Gas MLP and Royalty Trust industry analyst discusses the outlook for this high yielding sector for investors:

TWST: So the search for yield is driving a lot of the interest. How does the boom in oil and gas exploration and production in North America play into that?

Mr. Bellamy: In some ways it's much less relevant for trusts from a fundamental standpoint, but in other ways it's very significant for the formation of trusts. For example, SandRidge (SD) has sponsored a number of trusts, and that has been an important corporate finance tool for them. It's effectively a strategy for monetizing assets and plugging holes in their cash flow budget, which is, I think, key. They are trying to develop the Mississippi Lime formation, and they need cash flow to do that. They and somebody like Chesapeake (CHK) as well have carved out these trusts and effectively monetized that asset base, and they're able to achieve a high price for those assets in the trust market, so that is an important rationale and one reason these have been available.

On the other hand, just to go back to the performance in 2012, there may be a bit of a hangover on performance and a little bit of investor distaste at the losses that those trusts have achieved, and therefore that's probably a limiting or gating factor for trust issuance in the very near term.

TWST: Is there any kind of investor who you'd say these would be most appropriate or suitable for?

Mr. Bellamy: An investor who is risk-tolerant, who is nimble and who has an understanding of the energy sector. I would definitely discourage someone who is looking for fixed income or has a significant risk aversion from owning most of these trusts. Now, when you throw a blanket statement over a group like that, certainly there will be some outliers. I mentioned earlier a couple of trusts that we like, but even those are going to have above-average commodity-price sensitivity, so I would say younger, more aggressive investors with higher risk tolerance are better suited for trust positions.

TWST: Do you think we'll see any new offerings of royalty trusts this year?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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