A King's Ransom for This Royalty Trust

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my outperform ratings on various oil and natural gas plays like Kodiak and Samson, as well as my underperform rating on EXCO Resources in the oil, gas and consumable fuels sector, the CAPS supercomputer thought I also might be interested in a different kind of energy stock, SandRidge Mississippian Trust I (NYSE: SDT  ) . It was one of five Stocks of the Day it offered up for my consideration last week.

With the natural gas industry still in a funk for a glut of inventory, let's see what the royalty trust has going for it that might still warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

SandRidge Mississippian Trust I Snapshot

Market Cap $816 million
Revenues, TTM $55.9 million
Return on Capital, TTM 15%
Dividend and Yield $2.91/10.1%
Cash $1.2 million
Long-Term Debt None
Free Cash Flow, TTM (OCF-CapEx) N/A
Recent Price $29.14
CAPS Rating (out of 5) ****

Sources: Motley Fool CAPS; S&P Capital IQ. TTM = trailing 12 months.

Here we go again
After hitting a 10-year low back in April, natural gas prices rebounded 54% through the summer, and Henry Hub spot prices are at $2.95 per million Btus, but some areas are significantly higher than that, with Algonquin Citygate, which is gas delivered to Boston, rising as high as $4.24 MMBtus.

Gas inventories, while being injected into storage at rates below historical levels, remain 13.5% above the five-year average. Considering July was the hottest month on record (though only barely above the previous record hit in 1936), utilities have been using more natural gas to meet demand for electricity, primarily everyone turning up the AC all at once.

Go forth and multiply
The Mississippian Trust held its IPO last year amid one of the worst downturns in the industry, but an excellent opportunity to take advantage of the upturn that was bound to come. Its former parent, SandRidge Energy (NYSE: SD  ) , spawned several such trusts, including the Mississippian Trust II and the Permian Trust (NYSE: PER  ) , which allowed it to generate gobs of cash for its assets without diluting current shareholders with new stock or burdening itself with debt. Chesapeake Energy (NYSE: CHK  ) has also been active birthing royalty trusts, including the Granite Wash Trust (NYSE: CHKR  ) and the Lodging Trust.

As a royalty trust, the Mississippian Trust is designed to pay out all its cash flow as dividends every quarter. As with its brethren, the offspring seem to have more potential than their progenitors. Of course, like all such trusts, they have a specific 20-year lifespan and production totals will likely start to decline long before its end, though with 160 wells to its name, the Mississippian Trust is going to have plenty of assets to exploit. And with yields around 10%, the trusts are paying you well for your patience.

A cold reality
Last winter's mild weather sent natural gas into a tailspin, but that's not likely to be repeated, regardless of how enjoyable the balmy weather was. After building on the exceptionally hot summer we've had, I predict natural gas futures will continue to rise. They might not hit the records of previous years, but they should come out of the doldrums. Rig counts have fallen significantly, according to Baker Hughes, while those pursuing oil and natural gas liquids are on the rise.

While the economics of the industry will become attractive once again, it's the dividend right now that attracts most investors, like CAPS member 2trpop, and I can't argue with that. Chasing otherwise attractive yields such as these trusts offer could be risky, but I've rated the Mississippian Trust I to outperform the broad market averages on CAPS because I see any danger as small.

Let me know in the comments section below if you think these trusts will continue to pay investors handsomely in the future.

Dividends are indeed a healthy addition to your portfolio, but you needn't chase yield: The Dow index is home to solid dividend payers and the Motley Fool has identified three it says has the added benefit of sustainable business models built for the long haul. Get your copy of the free report "The 3 Dow Stocks Dividend Investors Need" today by downloading your copy now!

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Chesapeake Energy and SandRidge Mississippian Trust II. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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