I’m Selling Sandridge Mississippian Trust II

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Oscar Wilde once said that experience is the name we give to our mistakes. My investment in Sandridge Mississippian Trust II (NYSE: SDR  ) has been the greatest experience of my Special Situations portfolio. But in investing, as in life, to be successful you must make the next right decision, rather than foolishly holding to a past commitment that has been proven wrong. So I've decided to sell my shares in this troubled royalty trust and move on to find a good investment. (I've got a good one here.)

Ouch, that hurts
This investment has been painful, mitigated only by the relatively small stake I took and the ongoing stream of distributions. I purchased shortly after the IPO at $22.20 per share. It was all downhill from there.

After Thursday's close, the stock is down to $7.34, or about 67%. The only salve is the cash distributions totaling $4.25. The overall return comes to -48%. Bad work if you can get it.

It's the second year in a row that the trust has recorded a significant downward revision in reserves. Increasingly the trust is relying on selling natural gas and liquids, as opposed to oil, as previously indicated in the prospectus. That is lowering royalties, which hurts cash distributions over time.

Foolish takeaway
With little reason to expect things to change now, I'm selling Sandridge Mississippian Trust II and will move the proceeds into other stocks that have a good shot at outperformance.

Interested in Sandridge Mississippian Trust II or have another stock to share? Check out my discussion board or follow me on Twitter @TMFRoyal.

Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On March 21, 2014, at 4:11 PM, j18a21g wrote:

    How can he sell his shares if he has no position in this trust?

  • Report this Comment On March 22, 2014, at 3:10 PM, THISISME wrote:

    Investing in a new MLP at or near it's high has almost never proven to be a good investment. However I have read all the current negative reports on SDR and decided to buy at it's current lows.

    With respect to those doing the negative reports they have no idea how to value energy MLP's.

    Proven reserves are not established every year. They are only done a few times in the life of an MLP. From those starting points the MLP's production is subtracted from the proven reserves until such time as a new study is completed to establish proven reserves all over again.

    Also, wells all tend to lose roughly 8% of production per year give or take a little. This is not news to anyone who bothers to read about the industry they are investing in. Neither is it news to anyone who bothered to read that the companies subordinate shares will become common shares after the drilling of all the wells has been completed. Anyone who bothered to read the prospectus has known about this before they every invested. When the subordinate shares convert to common shares they will receive an equal share of distributions as those of us with common shares.

    Much of this however will be offset by the fact that the operating expenses will be drastically cut at the same time. No more expenses for road building and pipelines or drilling. Anyone who reads the quarterly reports knows that those expenses are very substantial and will offset most if not all of the distributions to the subordinate unit holders.

    Not to mention there is good reason to believe both natural gas and oil will be going up from current levels. For oil the new southern pipeline carrying WTI to the refineries in Texas has been steadily drawing down the stocks at Cushing. Come June Kinder Morgan's splitter plants will begin splitting WTI into it's components be able to legally start selling it on the world markets which will also draw down our stocks of WTI driving up it's price.

    Demand for natural gas is going up as it is seen as a good alternative to coal for power production. Not to mention that the heat in new homes are almost always run on natural gas and we are at the start of a building boom. Or that more and more major companies are converting their fleets of trucks to run on natural gas.

    In the past SDR was priced too high but it's dividend is still high and may very well increase later this year. At this price it's paying out over 30% and to me is a strong buy. I understand that those who paid $ 15.00-$ 22.50 per share have good reason to feel very differently. But nothing I have read about SDR should be a surprise. However so many people don't read up on a company or and industry before they invest and each of them have been shocked at the current string of reviews.

    As a result people have been selling in droves driving down the unit price to levels many would not have previously believed possible. It's times like this that create incredible buying opportunities. And this is an opportunity I am not going to miss.

  • Report this Comment On March 23, 2014, at 12:39 PM, THISISME wrote:

    j18a21g he does own units of SDR. He has 46 units of SDR. I currently own 7,000 units and have owned as many as 12,000 and have traded many more. My last two purchases were at $ 7.20 and $ 7.28 per unit. At this price I will likely buy more before the next ex-dividend date. At the current unit price I plan on holding those 7,000 units for a long time and dripping the disbursements into WHZ, ARP.

    SDR will cease to be a viable entity in 2031. However it should disperse many multiples of its current unit price between now and then. Some MLP's leave their unit holders with nothing when the trust expires. WHX is a prime example of this. SDR however provides for a lump sum payment to unit holders when the MLP expires. If memory serves it's supposed to be roughly equal to two years of disbursements.

  • Report this Comment On March 23, 2014, at 7:14 PM, thisismenotyou wrote:

    to Thisisme: you post:

    "Investing in a new MLP at or near it's high has almost never proven to be a good investment."(Not true, there are many new MLPs trading at highs when/as investors get in and have made and continue to make lots of money). "However I have read all the current negative reports on SDR and decided to buy at it's current lows." (Current lows are a moment in time for SDR, more to come below your entry point). "No more expenses for road building and pipelines or drilling."

    (They will have to maintain their roads in order to service their wells and pipelines and tanks, and saltwater disposal wells and so on and so forth, the infrastructure. And as far as drilling, there will be lots of that on their 1,000s of existing wells, called workovers to maintain at least so oil flow from the wells). YOU ARE AN IDIOT FOR SUGGESTING THAT SOMEONE INVEST IN THIS COMPANY.

  • Report this Comment On March 23, 2014, at 7:57 PM, THISISME wrote:

    To: thisismenotyou

    Show me where SDR's distributions have dropped in a more drastic way than any of it's peers. Or show me where their distributions have dropped at all in any drastic way that would justify the drop in unit price. All wells deplete over time. Most within 8%-15% per annum range. How is this a surprise?

    It's am MLP so the oil and NLG taken out of the ground reduces known reserves for tax purposes on paper. No surprise there.

    The fact that you think maintaining the infrastructure will cost anything near what it cost to build is quite telling. Of course all of it will be a tax write off so we will be able to use the write off to defer taxes on our distributions. So on paper the write off will be substantial. However the actual cost will be drastically lower to maintain everything than the initial cost of building everything.

    I wish people would think more clearly and rationally rather than saying things off the cuff that don't ring true or reverting to petty name calling.

  • Report this Comment On March 23, 2014, at 8:13 PM, THISISME wrote:

    By the way thisismenotyou

    As of Friday two of the top ratings companies moved SDR to the top of their buy lists. So I guess I am in good company.

    One of them starts with a "Z" and the other one specializes in energy MLP's and sends me regular emails.

  • Report this Comment On March 23, 2014, at 9:25 PM, THISISME wrote:


    Show me these companies that are paying out a higher dividend per price point than SDR whose distribution have not gone down. (Since SDR's distribution has not gone down). Show me how they compare to SDR's distributions. Show me that this is not just investors panicking and show me that you are an adult by doing so without name calling.

  • Report this Comment On March 25, 2014, at 5:21 PM, TMFKris wrote:

    @j18a21q. You wrote: "How can he sell his shares if he has no position in this trust?"

    Jim's disclosure at the bottom of the article indicates he personally does not have a position. His Special Situations portfolio is a real-money Motley Fool portfolio; it's The Motley Fool that owned the shares (and sold them when Jim made that call). Hope that helps.

    Kris - a Motley Fool editor

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Jim Royal

Jim is a special-situations investor focusing on transactional events (such as spinoffs, recapitalizations, or reorganizations, among others) that create advantageous stock mispricings.

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