Friday Jan 20, 2012
An alert TMP reader asks about the natural gas royalty trusts HGT and SJT, so let's take a look.
CAVEAT I have not attempted to investigate the fundamentals of either of these trusts, their earnings or porbability of pay out. I am merely making a comment looking at the charts.
Now the question is a good one. The chart exhibits that falling off the cliff out of favor look we saw in the overall markets last October.
A Royalty Trust like a Real Estate Investmnt Trust, draws income from producing properties, in this case nat gas fields. Any time one observes a very high dividend in realtion to prevailing rates, one needs to be cautious. Rather than a potential bonanaza, the very high dividend may indicate the potential for a price drop, see above, or a downgrade in the dividend.
The problem here is the falling natural gas price. It has now gone to an even great extreme ratio to crud oil. Yesterday it was a mere 2.3% of th price of crude oil, a lopsided historic extreme.
Now as more companies find gas we are getting to a literal uneconomic situation. How long does it make sense to pay the high fracturing and drilling prices to 'discover' more proudct with a falling price. Trust me, HAL and SLB do not mark down their prices when the price of gas falls.
I note a few predictions opf $2 nat gas and with the drops we are having, who knows?
Nat Gas
As Ed McMahon used to quip to Johnny Carson,
How bad is it? Well here is long term look.
Yes this looks like the sort of extreme where we need to find a fundamental value. Fundamentally the government needs to embrace the idea of America using its own natural gas supplies to face down the $100 Middle East Oil, not tomention the saber rattling in the Straits of Hormuz. Imagine the President telling Iran he didn't care what they did in Hormuz, the USA did not need their product anyway. Hmm, now that would be leadership....
There was finally one positive article from the White House on nat gas this past couple of weeks but that is in stark contrast to the EPA nd Interior and Keystone XL decisions. And without more pipelines to move the rproduct, we read that gas is being flared, burned for nothing, at some locations.
Again, I have not investigated these two Royalty Trusts.
For the same time frame as nat gas above, here is what the Trust looks like.
Here one can see the panic low in 2009 at 6. At far right note the exodus of money in the lower panel. It has already reached an extreme greater than in 2009 at a higher price. That suggests lower prices ahead.
Royalty Trusts are described in this article. After attempting to take over several companies using Mesa Petroleum as a base, Boone Pickes headed another company the name of which I cannot locate. He was ousted from control and the firm, which also as I recall depended on natural gas royalties, eventually discontinued all or most of its dividends. Does anyon remember that firm, it seems to have been forgotten in Pickens most recent re make of himself.
I have beenwatching Chesapeake CHK which pays a much lower dividend but seems to have found support at 23.
I will do some more ressearch. But given the aversion of the Administration to anything carbon, no matter that increases our reliance on other countries from Brazil to Iran, it is hard to see the bottom in nat gas yet. But the lopsided ratio, the extreme drumbeat of the negative news (just like RIG and GM), and the seeming conundrum, everyone is finding it, no way to ship it....
there would seem to be a pony amid all the manure as veteran Art Cashin might observe.
Again more research is required to see if a succession of lower orders would be justified to perhaps capture a multi year low. The trusts are headquartered in Fort Worth and Dallas, not Nigeria which is reassuring.....
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