Getting a routine dividend check to help pay the bills is one of the best aspects of owning stocks, but its even better when those checks come on a monthly basis rather than needing to wait every quarter. For those looking for monthly income, royalty trusts such as the Permian Basin Royalty Trust (NYSE:PBT) really jump out. It has a greater than 8% yield and has done fantastic for unitholders over the past 15 years on a total return basis.
Before you simply jump into shares of Permian Basin Royalty Trust, though, there are a few important things that you should consider. Let's take a look at the Permian Basin Royalty Trust to see if it can help pad your monthly income.
Royalty Trust? That's a stock, right?
First things first. As the name suggests, Permian Basin Royalty Trust is not a company or a traditional stock: it is ownership of a trust. What this means is that you, the investor, are an equity owner in an oil and gas producing property and are entitled to a certain percentage of the revenue from the producing assets on that property.
This unique position has its benefits and drawbacks. One advantage is that these trusts are exempt from corporate taxes because they are pass-through entities, much like master limited partnerships. But unlike an MLP, where you pay income taxes on distributions -- the name for dividends from MLPs and royalty trusts -- royalty trust distributions are capital gains and not income. You also get the benefits of depreciating those assets to lower your cost basis to delay taxes.
The disadvantage to this position, though, is that you are completely exposed to the price of oil and gas. Unlike a company that can use futures contracts to protect the price of oil it sells down the road, royalty trusts such as the Permian Basin Royalty Trust sells all of its oil and gas on the open market, so the wild swing of oil and gas prices can mean those royalty check payments can fluctuate pretty wildly from month to month. Also, unlike a company, a royalty trust has a finite shelf life. Once a royalty trust meets its termination conditions -- usually a set date in the future or a minimum royalty amount -- it is liquidated and the sale value is distributed to the unitholders in the trust.
The Permian Basin Royalty Trust, specifically
While pretty much every royalty trust follows the mold above, there are a few small details that you should know about each individual trust such as its production mix, its payback period, and the remaining life of the trust.
The Permian Basin Royalty Trust has royalty rights to just over 75,000 acres of land in the Permian Basin. Conocophillips (NYSE:COP) is the designated operator of the field and is responsible for any drilling or development on the properties. As of last quarter, the trust's fields produced about 66% oil and 33% natural gas.
The property that this trust holds is considered a very mature field; more than 90% of the acreage has proved and developed reserves, and pretty much all of it is using what is known as secondary extraction techniques, such as water-flooding, to push the remaining oil out of the ground. However, based on the current production rates, the amount of proved reserves on the books, and the termination conditions for the trust, these fields have a reserve to production ratio of about 17.4 years. So there is plenty of juice left to squeeze out of this field.
Finally, there is the payback period to consider. The payback period is the amount of time that it takes for cash distributions to cover the original price you paid. At today's prices, a single unit of the Permian Basin Royalty Trust has a distribution yield of 8.7%, which means that if the current distribution payment were to remain at its current levels, it would take about 11.5 years of distribution payments to cover the cost of a purchase today. Keep in mind, though, that is based on constant distribution payments, and the chances of that are slim to none.
What a Fool believes
Investing in royalty trusts can be a tricky thing because it is a pure bet on the price of oil and gas. And let's face it, nobody is capable of predicting the price of oil and gas over a long period of time. If you are looking for a stable monthly income check, a royalty trust just simply isn't the best way to go because of the fluctuating distributions. For someone who has the luxury of investing in a trust and simply buying back more shares with the distribution for several years, though, a royalty trust makes a much more compelling case. With a pretty long shelf life left and a good production mix, the Permian Basin Royalty Trust might be worth a look as the price of oil slips and you can pick up shares at a slight discount.
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