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Oil And Gas Trust Value Ranking, September 2016


The return on investment varies significantly from one oil and gas trust to another.

Oil trusts have largely priced in recent oil price gains; the best values all have blemishes.

Gas trusts have rallied with gas prices.

The bleeding for SDR and SDT may finally be over.

As those familiar with my articles know, I forecast the value and future distributions of various oil and gas trusts. This article presents a comparison of thirteen trusts, given forecasts of their future performances.

Taking What the Market Gives

This summer, like most, has been a good one for the insightful trust trader. Oil went for a ride, but has ended up largely where it started. Along the way, longs in BP Prudhoe Bay Royalty Trust (NYSE:BPT) and Pacific Coast Oil Trust (NYSE:ROYT) made for handsome paydays. SandRidge Mississippian Trust I (NYSE:SDT) also paid off nicely, but this time as an opportunistic short. SDT's terrible wells have finally brought the trust to rock bottom.

Gas went on a different ride. Starting the quarter in the doldrums, prices rallied. Early on, ECA Marcellus Trust I (NYSE:ECT) presented a good long case, though, I watched this rally from the sidelines. I thought the rally was too early, speculative, or both. Even Hugoton Royalty Trust's (NYSE:HGT) share price rose with the tide and showed a good quarter. But past performance doesn't guarantee future success; adjusting for gas prices, I expect ECT to beat HGT over the next five years.

Looking into the fall and beyond, NYMEX oil and gas futures suggest that prices will hold flat through 2017, showing just seasonal variability. I sincerely doubt that the future will be so stable, but bets on trusts at this point would be highly speculative. Why risk when you can pillage? I've moved most of my holdings to USD and will wait for the next opportunity. There's nothing great on my list right now, but plays that could open up include BPT, ECT, MV Oil Trust (NYSE:MVO), VOC Energy Trust (NYSE:VOC) and SandRidge Mississippian Trust II (NYSE:SDR).

Two Ways to Forecast Value

I compute two different estimates of value for each trust. The first is a fundamental valuation that uses an engineering-style model and discounted cash flow (DCF) analysis. The second is an adjusted NPV-10 based on previously published reserve reports.

Model/DCF Method

The model/DCF method estimates future distributions by developing bottom-up forecasts for each revenue and cost component of a trust's distributable income statement.

  • Production is forecast based upon historical well depletion rates and expected future well completions and workovers; published reserves are ignored
  • Sales prices are forecast as NYMEX Henry Hub (HH) and West Texas Intermediate (WTI) futures, adjusted for historical spreads
  • Costs are forecast individually based on prior costs, revenues, production and inflation
  • Termination dates, terminal value, share subordination and unique passive income streams are explicitly considered

Reserve Report Method

The reserve report method adjusts the estimate of NPV-10 in each trust's reserve reports for updated price and...