Wall Street Transcript Interview with Ethan Bellamy, Senior Analyst at Robert W. Baird & Co.: U.S. Oil and Gas Royalty Trusts Require a Cautious Investment Strategy

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 of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs and Equity Analysts. 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 more.

In the following excerpt from the High-Yield Equity Securities Report, an expert analyst discusses the outlook for the sector for investors:

TWST: You cover both MLPs and royalty trusts. Would you start by talking a little bit about how the two types of investments compare? What similarities and differences are important to point out?

Mr. Bellamy: I would say that most investors are more likely to be familiar at this point with master limited partnerships. In my view, royalty trusts - and we're talking specifically about U.S. royalty trusts, not Canadian income and royalty trusts, which effectively went away in 2006 - are on average a distant and less attractive cousin to MLPs.

What the two groups of securities have in common is that they both lack entity-level taxation, and they both operate in energy. Other than that, the differences I would say are more pronounced.

Starting with the key takeaway that most investors can and should carve out a position in their portfolios for an MLP basket or a wrap product that gets exposure to MLPs, in my view, trusts are much more situation-specific, and I would not make a broad recommendation that most investors have a trust allocation as a matter of practice.

MLPs are growth-oriented public entities designed to build upon success over time - to grow, to acquire, to build both distribution to investors and unitholder value, whereas trusts are finite asset pools that cannot be replenished through acquisition. They can reinvest in the asset base, typically on an annual basis, but they're not going out there and making new investments and are much more limited in terms of capital structure and how they're run.

There are 99 energy and resource MLPs in existence. They have superior liquidity. They trade in aggregate about $2 billion a day, versus only about $50 million of average trading value for royalty trusts. The total MLP market cap is just north of $400 billion, versus only about $10 billion for royalty trusts. And importantly, MLPs have posted market-beating returns...

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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