A New Royalty Trust From SandRidge Energy

After the successful 2011 debuts of SandRidge Energy's (NYSE: SD  ) two oil and gas royalty trusts, SandRidge Mississippian Trust I (NYSE: SDT  ) and SandRidge Permian Trust (NYSE: PER  ) , the Oklahoma-based company is at it again.

If it ain't broke
Moving to exploit the same region that made the Mississippian Trust I a success, the parent company has filed the initial IPO paperwork with the SEC to give birth to SandRidge Mississippian Trust II, with the proposed ticker symbol "SDR."

I'm a big fan of SDT and the Mississippi Lime region. The play has a significant upside to many of the unconventional plays being developed right now. For example, the region is believed to contain 52%-55% oil, versus other plays that contain a higher percentage of not-so-lucrative dry gas. From a production standpoint, the play has great economics: Limestone's porosity and natural fractures can reduce drilling expenses by half.

The stats
Now that we have three SandRidge trusts to think about, let's run a side-by-side comparison of the whole family.

 

Mississippian Trust I

Mississippian Trust II

Permian

Royalty % -- Initial Wells 90% 80% 80%
Royalty % -- Development Wells 50% 70% 70%
No. of Initial Wells 37 67 509
No. of Expected Development Wells 123 206 888
Reserves Attributable to Trust 19.3 MMBoe 26.1 MMBoe 21.8 MMBoe

Source: Company filings.

The new trust has both a higher royalty stake in developing wells and a larger estimated reserve base compared to its Mississippian sister. In the end, though, the only thing that matters is the trusts' production numbers.

Show me the money
SandRidge expects target distributions for the Trust to increase through the second quarter of 2016; the Trust itself is set to expire at the end of 2031. Let's take a look at the more immediate distribution schedule.

2012

Target Distribution

Q1

$0.40

Q2

$0.58

Q3

$0.59

Q4

$0.61

Total

$2.18

Source: Company filings.

It should be noted that the first-quarter payment is lower because of administrative costs associated with the formation of the trust. The expected total payout for 2013 is $2.74.

Foolish takeaway
It will likely be a few months before SandRidge Mississippian Trust II is officially on the books, as paperwork takes time. Interested investors can monitor the Trust's progress by adding SandRidge Energy to My Watchlist.

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Fool contributor Aimee Duffy would buy shares of SandRidge Mississippian Trust I if she could just stop writing about it. She holds no positions in the other companies mentioned. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.

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  • Report this Comment On January 11, 2012, at 9:54 AM, ajstudebaker wrote:

    What are the reserves per unit for each of the trusts?

    Is there any indication of the IPO price range for the new trust?

    Thanks for keeping up to date on the Sand Ridge story.

    JS

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