Tag Archives: opinion & analysis

Kurt Wulff ( McDep Associates ) submits: We raise our estimated 2010 distribution yield for buy-recommended Dorchester Minerals ( DMLP ), Hugoton Royalty Trust ( HGT ) and San Juan Basin Royalty Trust ( SJT ) to 8.9%, 8.2% and 8.1% respectively, because the natural gas price trend has been better for the North American average than for the widely quoted New York Mercantile Exchange near month futures. New capacity has made the continental pipeline transmission grid more efficient. We also raise estimated Net Present Value (NPV) for SJT to $23 a share from $21 because year-end 2009 reserves estimated by the independent engineer, disclosed on March 1, point to a longer life index of more than 15 years compared to 9 years previously. While we never believed the low number, it had a restraining influence on our estimate of NPV and perhaps stock price. Price Differentials Trend Up Regional price differentials are recovering from surprisingly wide discounts compared to the Henry Hub reference point in Louisiana. Each producer is typically active in more than one region and makes different adjustments to price. We can see the overall trend in the history and projections in two of our income groups. Natural gas transmission has some “common carrier” characteristics with “equal access” under government regulation. In a fully developed transportation system with ample capacity, the differences in price from region to region ought to be minimal, similar to commissions on securities transactions when trading is active. Major contributors to the current leveling include the completion of west to east pipeline capacity and new shale gas supply close to the Henry Hub. Raise NPV for SJT on Reserve Life Independent estimates of reserves for royalty trusts, like local government assessments on real estate, have conflicting implications. When estimates are low, tax payments are lower, but the suggested market value is also low. In the case of royalty trusts, investors claim depletion to reduce income taxes. A low ratio of reserves to production, as was the case for SJT a year ago, allows for more depletion and lower income tax payments. That could be an advantage to long-term owners. Yet when a low reserve life for a natural gas property, or a low assessed value for a house influences realized price, the owner who sells at that time may be disadvantaged. Technically, we calculate reserve life for SJT by scaling up the engineer’s estimate of royalty reserves by the ratio of working interest production to royalty interest production and dividing by 2010 working interest production. On the revised estimate, NPV for SJT looks more reasonable in the relationship of cash flow multiple and reserve life. Complete Story