A royalty trust, according to Investopedia, is:
“A type of special-purpose financing created to hold investments or their cash flows in operating companies. These trusts are neither stocks nor bonds but investment trusts (a legal entity). Royalty trusts buy the right to royalties on the production and sale of a natural resource company and pass on the profits to trust unit holders.”
They are somewhat similar to MLPs, and royalty trusts generally offer investors extremely high yields- which is their main benefit. Royalty trusts are almost exclusively found in the U.S. and Canada, and tend to own oil and/or gas wells. For further reading on the advantages of royalty trusts and their comparisons to MLPs, click here. The bottom line here is that royalty trusts can deliver high yield with many other advantages (like avoiding the corporate income tax) in today’s yield-starved environment. They also have finite existences (they eventually expire as assets become depleted) and are required to pay out almost all of their cash flows, although these cash flows can swing and fluctuate greatly (due to their ties to commodity prices and production). Listed below are a few to consider:
High yield in the Gulf of Mexico
Marine Petroleum Trust (NASDAQ:MARPS) ), through its subsidiary, Marine Petroleum Corporation, operates as a royalty trust in the United States. As of Sep. 19, 2012, Marine had an overriding royalty interest in 58 oil and natural gas leases covering approximately 217,056 gross acres located in the Central and Western areas of the Gulf of Mexico, off the coasts of Louisiana and Texas. The stock has a relatively tiny market cap of around $28 million, with around a million in cash and no debt.
The royalty trust was organized for the sole purpose of providing an orderly, and practical means for the administration and liquidation of rights to payments from certain oil and natural gas leases- primarily in the Gulf of Mexico, according to their website. Also, according to the trust’s site, “The term of the Trust is set to expire on June 1, 2021, unless extended by the vote of the holders of a majority of the outstanding units of beneficial interest,” which means that at the termination date “the net proceeds from any sale or liquidation will be distributed in a final distribution to the Unit holders of record at that time.”
The best thing about this trust is the dividend- yielding 8.3%. Shares of the trust, which are technically considered “units of beneficial interest” are traded just like a regular stock on the market. Investors should continue to remember, however, that the “dividend” is technically classified as royalty income – which is taxed as ordinary income at marginal rates like the payouts of any other royalty trust.
BP Prudhoe Bay Royalty Trust (NYSE:BPT) ) operates as a grantor trust in the United States. The company holds overriding royalty interests constituting a non-operational interest in minerals in the Prudhoe Bay oil field located on the North Slope in Alaska. The Prudhoe Bay field extends approximately 12 miles by 27 miles and contains approximately 150,000 gross productive acres. As of December 31, 2011, its estimated net remaining proved reserves were 82.304 million barrels of oil and condensate, of which 73.476 million barrels were proved developed reserves, and 8.828 million barrels were proved undeveloped reserves. The company was founded in 1989 and is based in Austin, Texas. The trust currently yields almost 12%.
Even more yield
Sandridge Mississippian Trust I (NYSE:SDT) ), a statutory trust, engages in the acquisition and holding of royalty interests in specified oil and natural gas properties located in the United States. As of March 31, 2012, its properties consisted of royalty interests in the initial wells comprising 36 producing wells and 1 additional well undergoing completion operations; 60 additional wells that were drilled and perforated for completion; and the equivalent of approximately 57 trust development wells to be drilled in the Mississippian formation covering Alfalfa, Garfield, Grant, Major, and Woods counties in Oklahoma. The company was founded in 2010 and is based in Austin, Texas. This trust pays out a current yield of 14.5%.
Royalty Trusts can offer extremely high yields, but are also heavily tied to commodity prices, and in many cases, a specific oil field. These trusts make a good investment if an investor believes that the price of oil will stay high, and an even better play if natural gas prices increase. Investing in these royalty trusts is almost like investing directly in the commodities they are tied to, accompanied by a nice inflation-beating yield.
Royalty trusts with high yields can create a good stream of income for an investor, but as always, it is up to the individual investor to determine if this kind of investment is right for them. Royaltytrusts are not operating bussinesses– they have no employees or management. They purchase rights to royalties and distribute the income tounitholders. This makes them more of a financing vehicle, with payouts that are often tied directly to the energy assets that they hold- which means the payouts can also fluctuate dramatically. Do not touch these trusts if you do not think energy prices are going higher, because with dropping prices your precious yield may also evaporate. Otherwise, enjoy the yield.
All financial data and company profiles obtained from Yahoo Finance
The article Looking for High Yield? 3 Royalty Trusts to Consider for 2013 originally appeared on Fool.com and is written by Joseph Harry.
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