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Ben Reynolds
Ben Reynolds
Articles (802)  | Author's Website |

Quality Assets Fuel 5% Dividend Yield With Potential for Growth

Sabine Royalty Trust's investment prospects depend on oil prices

June 02, 2017 | About:

(Published by Bob Ciura on June 2)

Sabine Royalty Trust (NYSE:SBR) fared relatively well in 2016. It suffered right along with the other royalty trusts, but Sabine maintained a high dividend payout thanks to the resilience of its quality assets.

Sabine is on the high dividend stocks list thanks to its substantial dividend yield.

You can see the full list of established 5%-plus yielding stocks by clicking here.

Sabine pays dividends on a monthly schedule, which gives investors the ability to compound their dividends more frequently than the traditional quarterly schedule.

There are only 21 stocks that pay monthly dividends.

You can see the entire list of monthly dividend payers here.

This article will discuss Sabine’s business model and why investors anticipating higher oil and gas prices may want to give this royalty trust a closer look.

Business model

Sabine Royalty Trust was established on Dec. 31, 1982. Its business model is based on income received from its royalty and mineral interests in various oil and gas properties.

Sabine is a small-cap stock with a market capitalization of $557 million.

Its oil and gas producing properties are located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas.

The trust has had a long and successful history. When the trust was formed in 1982, reserves were estimated at 9 million barrels of oil and 62 billion cubic feet of gas.

At inception, the life span of the trust was pegged at nine to 10 years. The trust was expected to be fully depleted by 1993.

Thirty-five years later, Sabine Royalty Trust is still kicking. In that time, the trust has produced more than 20 million barrels of oil and over a billion cubic feet of gas.

Sabine has paid out approximately $1.279 billion in distributions to unitholders over the course of the past 35 years.

The most recent forecasts are for remaining reserves of 6.0 million barrels of oil and 35.6 billion cubic feet of gas. If these projections are accurate, the trust would have a remaining life span of roughly eight to 10 years.

The trust does not have a specified end date, but it would terminate if revenue from the royalty properties falls below $2 million per year in any consecutive two-year period.

2016 was a rough year for Sabine. Distributable income per unit declined by 40% from 2015 to $1.88.

SBR Financial

Source: 2016 Annual Report, page 2

The spike in oil and gas prices took Sabine’s distributable income per unit to $4.03 in 2014, which allowed the trust to distribute $4.10 per unit that year, but royalty income and distributions have fallen steadily since. The trust’s 2016 distributable income marked a five-year low.

The good news is that Sabine at least generated positive distributable income, even in 2016. This resilience allowed it to continue making distributions, albeit at a much lower rate.

Not surprisingly, the major culprit for the declines is lower oil and gas prices.

Sabine had an average realized oil price of $37.89 per barrel for 2016, down from $46.84 in 2015. In addition, oil production fell by 7.7% in 2016 to 392,787 barrels, reflecting natural field declines.

In addition, gas production decreased by 18.5% in 2016, and average realized gas prices fell from $2.67 in 2015 to $2.12 in 2016.

Growth prospects

The biggest growth catalyst for Sabine is rising oil and gas prices. Supportive commodity prices are critical for the trust’s ability to generate higher royalty income, which yields higher distribution payouts.

Since bottoming out in early 2016 at $27 per barrel, oil prices have recovered to nearly $50 per barrel in the U.S.

As a result, conditions improved considerably for Sabine in the first quarter. Royalty income rose by $3.5 million, a 50% increase compared with the ï¬rst quarter of 2016.

Growth was due primarily to higher oil and gas prices, which accounted for $2.3 million of the growth in royalty income last quarter. In addition, higher production added $1.4 million of royalty income growth.

This growth more than offset a $200,000 increase in operating expenses and taxes for the quarter.

The results from the first quarter underscore how much royalty trusts like Sabine benefit from higher commodity prices.

Sabine’s average realized gas price increased to $2.80 per thousand cubic feet last quarter, up from $2.18 in the same quarter last year.

Meanwhile, the trust’s average oil price spiked 30.5% in the first quarter from the first quarter of 2016.

Oil and gas production rose 22% and 3.5% last quarter.

If oil and gas prices head higher still, Sabine’s distributions could grow in 2017 and beyond.

Dividend analysis

Sabine Royalty Trust pays a monthly distribution. The record date each month is usually the 15th day. Distributions are paid no later than 10 business days after the monthly record date.

Sabine’s dividend fluctuates depending on the direction of oil and gas prices. When times are good, the trust has distributed $3 to $4 per unit.

Distributions dried up last year as falling commodity prices took their toll. Sabine’s distribution history over the past seven years is as follows:

  • 2016 distributions of $1.93403 per unit.
  • 2015 distributions of $3.10520 per unit.
  • 2014 distributions of $4.09779 per unit.
  • 2013 distributions of $3.91645 per unit.
  • 2012 distributions of $3.70090 per unit.
  • 2011 distributions of $3.96617 per unit.
  • 2010 distributions of $3.70449 per unit.

Sabine distributed an estimated $1.93 per unit to investors in 2016. Based on its recent unit price, this represents a yield of 5.1%.

If oil prices were ever to get back to $100 per barrel, there could be considerable dividend growth potential. Of course, this is a big "if."

Rising oil and gas production, particularly by shale drillers in the U.S., coupled with sluggish global demand growth, could keep a lid on oil prices for the foreseeable future.

The opposite scenario could also be true – if oil prices collapse to their 2016 low, Sabine’s dividends could continue to fall.

The good news is the commodity price recovery over the past year has led to higher distributions from the trust.

Final thoughts

Royalty trusts like Sabine are essentially a bet on commodity prices. From an operational standpoint, the fundamentals of the trust look strong.

Sabine has high-quality oil and gas properties that have kept the trust going for 35 years, which was much longer than originally expected.

If oil and gas prices increase, the assets of the trust could potentially be undervalued. And, distributions could grow from 2016 levels if commodity prices cooperate.

That said investors should carefully review the risks and unique considerations that go along with investing in royalty trusts.

Disclosure: I am not long any of the stocks mentioned in this article.

About the author:

Ben Reynolds
I run Sure Dividend, a website that finds high quality dividend stocks for long term investors using the 8 Rules of Dividend Investing.

Visit Ben Reynolds's Website


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