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At Another New Low, Is Hugoton Royalty Trust Worth Buying?

http://www.fool.com/investing/general/2012/05/31/at-another-new-low-is-hugoton-royalty-trust-worth.aspx

Sean Williams
May 31, 2012

Shares of Hugoton Royalty Trust (NYSE: HGT  ) hit a 52-week low again on Wednesday. Let's take a look at how it got there and see whether cloudy skies are still in the forecast.

How it got here
Hugoton Royalty Trust, which owns an 80% net-profit interest in oil and natural gas wells located in Wyoming, Kansas, and Oklahoma, and is operated by XTO Energy -- which was itself purchased by ExxonMobil (NYSE: XOM  ) -- has faced a triple-domino effect that has crushed its stock.

First, natural gas prices are slumping, which is bad news for Hugoton. XTO Energy's wells are heavily reliant on natural gas production and, with prices slumping, the possibility that Hugoton's pristine dividend could begin to contract is seeming very real.

Second, a recent article from Seeking Alpha deems that the Trust is overvalued based on its fixed amount of reserves in the ground and the shrinking selling price of natural gas. The author's contention is that without any additional wells being added to the Trust, and natural gas prices remaining weak, the stock (at the time of the article) was 40% overvalued. Since then it has fallen nearly 50%.

Finally, Hugoton is dealing with lawsuits and litigation related to a settlement from XTO Energy that will require it to pay 80% (its net interest) of the costs, or nearly $30 million. Hugoton has stated that the settlement costs will outweigh its net profits from its Oklahoma and Kansas properties for the next 18 months!

Other trusts are also finding themselves in the hot seat, including San Juan Basin Royalty Trust (NYSE: SJT  ) , which has been hit with lawsuits and separate allegations from Seeking Alpha that it too is grossly overvalued.

How it stacks up
Let's see how the Hugoton Royalty Trust stacks up next to its peers.

HGT Chart

HGT data by YCharts

None of the natural-gas-heavy trusts have done particularly well, but San Juan and Hugoton, which are both facing legal woes, have suffered much worse.

Company

Price/Book

Trailing P/E (TTM)

Dividend Yield

Hugoton Royalty Trust 2.4 5.1 9.3%
San Juan Basin Royalty Trust 49.7 9.5 5.2%
SandRidge Mississippian Trust I (NYSE: SDT  ) 2.7 14.2 11.8%
Chesapeake Granite Wash Trust (NYSE: CHKR  ) 2.1 38.5 13.7%

Sources: Morningstar, Yahoo! Finance. TTMĀ  = trailing 12 months. All yields are projected.

Trying to compare the underlying fundamentals of royalty trusts can sometimes be almost as pointless as trying to compare clinical-stage biotechnology company metrics against one another -- but nonetheless, we'll dig a bit deeper.

Both SandRidge Mississippian Trust I and Chesapeake Granite Wash Trust, which hold interests in SandRidge's and Chesapeake Energy's wells, respectively, have both taken to upping their reliance on oil production and are moving at least partly away from their reliance on natural gas production. For SandRidge, it's contending with high debt levels that could compromise its trusts' dividends down the road, while Chesapeake is dealing with the PR gaffe of