Industry Idea Analysis of Oil and Gas Stocks September 25, 2017

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1 Cash, Fracking and Inflation CRT, DMLP, PBT, SBR, SJT Price Oil Dist. (US$/sh) Market Enterprise EV/ EV/ PV/ Prod'n/ Yield McDep Symbol/Rating 22-Sep Cap Value Market Ebitda Ebitda PV NTM Ratio 2017 (US$mm) ($mm) Cap NTM NTM (%) (%) (EV/PV) San Juan Basin Royalty Trust SJT Permian Basin RT PBT Sabine Royalty Trust SBR Dorchester Minerals, L.P. DMLP B Cross Timbers Royalty Trust CRT B Total or Median 1,900 1, Summary and Recommendation High cash distributions, upside volume in fracking and inflation protection of natural resources are top attractions of McDep Income Payers including Buy recommendations Dorchester Minerals, L.P. (DMLP) and Cross Timbers Royalty Trust (CRT). The five issues in our coverage would pay a median 6.6% in tax advantaged cash distributions over the next twelve months, we estimate. Top Line distributions would range from 73% to 82% of oil and gas revenue while Bottom Line distributions would range from 0 to 37% (see table Distribution % of Revenue on page 2). Top Line royalty arrangements are the most valuable for four of the five payers (see table Royalty Structure on page 2). Quarterly models detail distribution estimates (see tables Operating and Financial Estimates for five stocks on pages 3-7). Additional models capitalize cash flow presuming a moderately higher oil and gas price (see tables Present Value on pages 8-9). Recent developments call attention to fracking upside in San Juan Basin Royalty Trust (SJT). SJT s new partner, private company Hilcorp, has ambitious plans for speeding development. BP is completing new wells that are more productive and economical than traditional San Juan drilling. Also boosting SJT stock was the announcement on September 19 of a one-time boost of $0.16 a unit to the monthly distribution as a result of the settlement of a legal dispute. Coincidentally, most of the Top Line value in CRT is San Juan Basin natural gas. While SJT has been advancing, CRT stock has been lagging. Sabine Royalty Trust (SBR) is exposed to fracking upside in oil in West Texas in the Permian Basin and in natural gas in East Texas in the Cotton Valley formation. DMLP has the fastest growth in Permian fracking. Drilling has slowed on Permian Basin Royalty Trust (PBT) properties while a low McDep Ratio signals valuable resources. Meanwhile, there are signs that the inflation protection offered by pure play oil and gas investment may become more important again. The U.S. dollar is down sharply. Government deficits may accelerate with increased spending for health care and defense. Central banks are printing money. Inflation tends to build late in the economic cycle. In any case, a diversified portfolio should include inflation protection, we believe. Income payers and other oil and gas stocks can furnish some of that protection along with growing investment value and, in many cases, low financial risk (see Tables 1-4 on pages 10-13). Kurt H. Wulff, CFA Please see disclosures on the final page. Page 1

2 McDep Income Payers Distribution % of Revenue, Twelve Months Ended September 30, 2018 Top Line CRT DMLP PBT SBR SJT Revenue Tax Royalty Interest Owner 0.7 Administration Distribution Distribution % of Revenue 73% 88% 79% 82% Bottom Line Revenue Operating and tax Capital Working Interest Owner Administration Distribution Distribution % of Revenue 0% 25% 34% 37% Income Payer Royalty Structure Percent of Net Present Value Top Line Bottom Line Nat Gas Oil Nat Gas Oil Sabine Royalty Trust SBR 41% 59% Dorchester Minerals, L.P. DMLP 24% 67% 4% 5% Cross Timbers RT CRT 72% 17% 10% Permian Basin RT PBT 6% 41% 16% 37% San Juan Basin RT SJT 100% Please see disclosures on the final page. Page 2

3 Cross Timbers Royalty Trust Next Twelve Months Operating and Financial Performance Next Twelve Q3 Year Q2 Q3E Q4E Year Q1E Q2E Q3E Months 9/30/ /30/17 9/30/17 12/31/ /31/18 6/30/18 9/30/18 9/30/18 Volume Natural Gas (bcf) Natural Gas (mmcfd) Days Oil (mb) Oil (mbd) Days Total (bcf) Price Natural Gas (HH lagged three months) Henry Hub ($/mmbtu) Differential (%) (72) (55) (30) (31) (30) (31) (30) (30) (30) (30) CRT ($/mcf) Oil ($/bbl) (WTI lagged two months) WTI Cushing CRT Total ($/mcf) Revenue ($mm) Natural Gas Oil Total Cost ($mm) Tax, transport & other Production Total Cash flow ($mm) Development Excess or other 0.29 (0.38) Net proceeds ($mm) Royalty income ($mm) Royalty/Net proceeds 91% 90% 91% 91% 89% 90% 89% 89% 89% 89% Administration & reserve Distributable income ($mm) Units (millions) Royalty income ($/unit) Natural Gas TL TX TL OK TL NM BL TX BL OK Oil TL TX TL OK TL NM BL TX BL OK Administration Reserve and other (0.00) Distribution ($/unit) Please see disclosures on the final page. Page 3

4 Dorchester Minerals, L.P. Operating and Financial Performance Next Twelve Q3 Year Q2 Q3E Q4E Year Q1E Q2E Q3E Months 9/30/ /30/17 9/30/17 12/13/ /31/18 6/30/18 9/30/18 9/30/18 TOP LINE Volume Natural Gas (mmcfd) Oil (mbd) Price Henry Hub ($/mmbtu) WTI Cushing ($/bbl) Natural Gas ($/mcf) Oil ($/bbl) Revenue ($mm) Natural Gas Oil Total Revenue Expense (allocated) Ebitda BOTTOM LINE Volume Natural Gas (mmcfd) Oil (mbd) Price Natural Gas ($/mcf) Oil ($/bbl) Revenue ($mm) Natural Gas Oil Total Revenue Expense (allocated) Partnership Net Profits Interests Total Expense Ebitda Development (estimated) NET INCOME Top Line Bottom Line Lease Bonus and residual (0.9) (3.0) (0.3) (0.9) - Deprec., Deplet., & Amort Total Net Income Units (mm) Net Income Per Unit ($) DISTRIBUTION Top Line Revenue Bottom Line Net Revenue Lease Bonus and Other Cash Expense (1.6) (7.1) (2.2) (2.0) (2.0) (8.0) (2.0) (2.0) (2.0) (8.0) Distribution Distribution Per Unit ($) Please see disclosures on the final page. Page 4

5 Permian Basin Royalty Trust Next Twelve Months Operating and Financial Estimates Next Twelve Q3 Year Q2 Q3 Q4E Year Q1E Q2E Q3E Months 9/30/ /30/17 9/30/17 12/31/ /31/18 6/30/18 9/30/18 9/30/18 TOP LINE Volume Natural Gas (mmcfd) Oil (mbd) Price (cash lagged two months) Natural Gas ($/mcf) Oil ($/bbl) Revenue ($mm) Natural Gas Oil Total Revenue Expense Operating - - Production & Property taxes Total Expense Ebitda Ebitda times 95% BOTTOM LINE 2.7 Volume Natural Gas (mmcfd) Oil (mbd) Price (cash lagged two months) Natural Gas ($/mcf) Oil ($/bbl) Revenue ($mm) Natural Gas Oil Total Revenue Expense Operating Production taxes Total Expense Ebitda Development (Ebitda-Dvlpmnt) times 75% Excess Costs CASH DISTRIBUTION Royalty Income ($mm) Top Line Bottom Line Administration Distributable Income ($mm) Units (millions) Distribution ($/unit) Please see disclosures on the final page. Page 5

6 Sabine Royalty Trust Next Twelve Months Operating and Financial Performance Next Twelve Q3 Year Q2 Q3E Q4E Year Q1E Q2E Q3E Months 9/30/ /30/17 9/30/17 12/31/ /31/18 6/30/18 9/30/18 9/30/18 Volume Natural Gas (bcf) Natural Gas (mmcfd) Days Oil (mmb) Oil (mbd) Days Total (bcfe) Total (mmcfd) Price (Henry Hub natural gas lagged three months; WTI Cushing oil, two months) Henry Hub ($/mmbtu) Differential (%) (5) (2) Trust ($/mcf) WTI Cushing ($/bbl) Differential Trust ($/bbl) Total ($/bcfe) Revenue ($mm) Natural Gas Oil Total Expense Tax and other General and administrative Total Ebitda Ebit Ebt Distributable Income ($mm) Units (millions) Distributable Income/Unit ($) Please see disclosures on the final page. Page 6

7 San Juan Basin Royalty Trust Next Twelve Months Operating and Financial Estimates Next Twelve Q3 Year Q2 Q3E Q4E Year Q1E Q2E Q3E Months 9/30/ /30/17 9/30/17 12/31/ /31/18 6/30/18 9/30/18 9/30/18 Volume Natural gas (mmbtu) Heat Content(btu/cf) 1,114 1,109 1,122 1,120 1,120 1,120 1,120 1,120 1,120 1,120 Natural gas (bcf) Natural Gas (mmcfd) Days Oil (mb) Oil (mbd) Total gas & oil (bcf) Price Natural gas ($/mmbtu) (Henry Hub lagged two months) Henry Hub ($/mmbtu) Differential (%) Net to SJT ($/mmbtu) Natural gas ($/mcf) Oil ($/bbl) (WTI Cushing lagged two months) WTI Cushing SJT Total gas & oil ($/mcf) Revenue ($mm) Natural Gas Oil Total Cost ($mm) Severance tax Operating Total Cash flow ($mm) Development (0.6) 0.1 (0.3) Net proceeds ($mm) Royalty income ($mm) Royalty/Net proceeds 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% Administration One-time - (7.5) (7.5) - Distributable income ($mm) Units (millions) Per unit Please see disclosures on the final page. Page 7

8 Cross Timbers Royalty Trust Functional Cash Flow and Present Value Present NTM Ebitda Adjusted PV/ Value (US$mm) R/P Ebitda (US$mm) Top Line Natural Gas % Top Line Oil % Bottom Line Oil % % Debt (US$mm) - Net Present Value (US$mm) 174 Shares (mm) 6 Net Present Value (US$/sh) 29 NPV Approximation by Cash Flow Multiple Depending on Reserve Life (US$/sh) 26 Top Line Approximation at 1.5 times Cash Flow Multiple Depending on Reserve Life Dorchester Minerals, L.P. Functional Cash Flow and Present Value Present NTM Ebitda Adjusted PV/ Value (US$mm) R/P Ebitda (US$mm) Top Line - Royalty Interests North American Natural Gas % Oil % Bottom Line - Net Profits Interests North American Natural Gas % Oil % Total Top and Bottom North American Natural Gas % Oil % % Debt (US$mm) - Net Present Value (US$mm) 780 Shares (mm) 32 Net Present Value - Standard Estimate (US$/sh) 24 NPV Approximation by Cash Flow Multiple Depending on Reserve Life (US$/sh) 25 Top Line Approximation at 1.8 times Cash Flow Multiple Depending on Reserve Life Please see disclosures on the final page. Page 8

9 Permian Basin Royalty Trust Functional Cash Flow and Present Value Present NTM Ebitda Adjusted PV/ Value (US$mm) R/P Ebitda (US$mm) Top Line - Royalty Interests (95% Underlying) North American Natural Gas % Oil % % Bottom Line - Working Interests (75% Underlying) North American Natural Gas % Oil % % Total Top and Bottom North American Natural Gas % Oil % % Debt (US$mm) - Net Present Value (US$mm) 510 Shares (mm) 46.6 Net Present Value (US$/sh) 11 NPV Approximation by Cash Flow Multiple Depending on Reserve Life (US$/sh) 9 Top Line Approximation at 1.5 times Cash Flow Multiple Depending on Reserve Life Sabine Royalty Trust Net Present Value Present NTM Ebitda Adjusted PV/ Value (US$mm) R/P Ebitda (US$mm) North American Natural Gas % Oil % % Debt (US$mm) - Net Present Value (US$mm) 870 Shares (mm) 14.6 Net Present Value (US$/sh) 60 Top Line Approximation at 1.5 times Cash Flow Multiple Depending on Reserve Life 48 San Juan Basin Royalty Trust Functional Cash Flow and Present Value Present NTM Ebitda Adjusted PV/ Value (US$mm) R/P Ebitda (US$mm) North American Natural Gas % % Debt (US$mm) - Net Present Value (US$mm) 370 Shares (mm) 47 Net Present Value - Standard Estimate (US$/sh) 8 NPV Approximation by Cash Flow Multiple Depending on Reserve Life (US$/sh) 7 Please see disclosures on the final page. Page 9

10 Table 1 McDep Energy Stocks Ranked by McDep Ratio Price Oil Dist. (US$/sh) Market Enterprise EV/ EV/ PV/ Prod'n/ Yield McDep Symbol/Rating 22-Sep Cap Value Market Ebitda Ebitda PV NTM Ratio 2017 (US$mm) ($mm) Cap NTM NTM (%) (%) (EV/PV) Global Integrated Chevron Corporation CVX , , Exxon Mobil Corporation XOM , , Royal Dutch Shell RDS-A B , , Total S.A. TOT B , , Total or Median 950,000 1,292, Large Independent EOG Resources, Inc. EOG ,700 62, Pioneer Natural Resources PXD ,500 26, Occidental Petroleum Corp. OXY ,200 61, Devon Energy Corporation DVN ,900 26, ConocoPhillips COP B ,000 85, Marathon Oil Corporation MRO B ,870 18, Total or Median 218, , Small Independent Cimarex Energy Company XEC ,600 12, California Resources CRC , Continental Resources (32%) CLR B ,500 6, Whiting Petroleum Corporation WLL ,900 5, Range Resources RRC B ,600 9, Total or Median 22,000 39, Income San Juan Basin Royalty Trust SJT Permian Basin RT PBT Sabine Royalty Trust SBR Dorchester Minerals, L.P. DMLP B Cross Timbers Royalty Trust CRT B Total or Median 1,900 1, Canada EnCana Corporation ECA ,900 17, Imperial Oil Limited (30%) IMO ,100 10, Suncor Energy SU B ,800 75, Cenovus Energy Inc. CVE ,600 23, Birchcliff Energy Ltd. BIREF B ,300 1, Total or Median 90, , EV = Enterprise Value = Market Cap and Debt; Ebitda = Earnings before interest, tax, depreciation, amort. Estimated Ebitda (cash flow) tied to NTM futures prices for oil and natural gas. NTM = Next Twelve Months ending 9/30/18. Estimated Present Value (PV) presumes a long-term price for oil of US$70 a barrel and natural gas, $4.00 a million btu. McDep Ratio = Market cap and Debt to present value of oil and gas and other businesses. For historical research see Please see disclosures on the final page. Page 10

11 Price Oil Operating (US$/sh) Equiv. Expense Ebitda Ebitda Oper Lev Symbol/Rating 22-Sep Volume Price Fixed Var. NTM NTM Ebitda chg/ McDep B = Buy 2017 (mmboe) ($/boe) ($/boe) (%) ($/boe) ($mm) Price chg Ratio Global Integrated (excl. Downstream) Chevron Corporation CVX , Exxon Mobil Corporation XOM , , Royal Dutch Shell RDS-A B , , Total S.A. TOT B , Total or Median Large Independent (excl. Downstream) EOG Resources, Inc. EOG , Pioneer Natural Resources PXD , Occidental Petroleum Corp. OXY , Devon Energy Corporation DVN , ConocoPhillips COP B , Marathon Oil Corporation MRO B , Total or Median Small Independent Cimarex Energy Company XEC , California Resources CRC Continental Resources (32%) CLR B Whiting Petroleum Corporation WLL Range Resources RRC B , Total or Median Income San Juan Basin Royalty Trust SJT Permian Basin RT PBT Sabine Royalty Trust SBR Dorchester Minerals, L.P. DMLP B Cross Timbers Royalty Trust CRT B Total or Median Canada (excl. Downstream) EnCana Corporation ECA , Imperial Oil Limited (30%) IMO , Suncor Energy SU B , Cenovus Energy Inc. CVE , Birchcliff Energy Ltd. BIREF B Total or Median For historical research see Table 2 McDep Energy Stocks Production Operating Leverage Ranked by McDep Ratio Please see disclosures on the final page. Page 11

12 Table 3 McDep Energy Stocks Net Present Value Per Share Ranked by Reserve Life (Adjustd Resrvs/Prod NTM) Price Down- Proven Adjustd Net (US$/sh) Dividend stream/ Undev. Resrvs/ Present Symbol/Rating 22-Sep Shares Debt NTM P/E PV Resrvs Prod Value B = Buy 2017 (mm) ($mm) ($/sh) NTM (%) (%) NTM (US$/sh) Global Integrated Exxon Mobil Corporation XOM ,271 91, Total S.A. TOT B ,583 57, Chevron Corporation CVX ,893 66, Royal Dutch Shell RDS-A B , , Median 8.9 Large Independent ConocoPhillips COP B ,237 24, Occidental Petroleum Corp. OXY , Devon Energy Corporation DVN , Marathon Oil Corporation MRO B , EOG Resources, Inc. EOG , Pioneer Natural Resources PXD , Median 8.7 Small Independent Range Resources RRC B , Whiting Petroleum CorporationWLL , Continental Resources (32%) CLR B , California Resources CRC , Cimarex Energy Company XEC , Median 11.4 Income Sabine Royalty Trust SBR San Juan Basin Royalty Trust SJT Permian Basin RT PBT Cross Timbers Royalty Trust CRT B Dorchester Minerals, L.P. DMLP B Median 9.4 Canada Suncor Energy SU B ,665 18, Cenovus Energy Inc. CVE ,229 10, Birchcliff Energy Ltd. BIREF B Imperial Oil Limited (30%) IMO , EnCana Corporation ECA , Median 12.4 P/E = Stock Price to Earnings. For historical research see Please see disclosures on the final page. Page 12

13 Table 4 McDep Energy Stocks Total Return Year-to-Date 2017 Ranked by Unlevered Total Return Price Price Equity Unlevered ($/sh) ($/sh) Price Cash Total Total Symbol/Rat 22-Sep 30-Dec Change Distrib. Return Debt Return McDep (%) (%) (%) ($/sh) (%) Ratio Global Integrated Royal Dutch Shell RDS-A B Total S.A. TOT B Chevron Corporation CVX (0) Exxon Mobil Corporation XOM (11) 2 (9) 21 (7) 0.83 Median Large Independent ConocoPhillips COP B (2) 2 (1) 20 (0) 0.78 EOG Resources, Inc. EOG (6) 0 (6) 13 (5) 1.10 Occidental Petroleum Corp. OXY (12) 2 (10) 17 (8) 0.87 Devon Energy Corporation DVN (22) 0 (21) 15 (16) 0.85 Marathon Oil Corporation MRO B (26) 1 (25) 8 (17) 0.77 Pioneer Natural Resources PXD (20) 0 (20) 10 (19) 0.96 Median (16) (15) (12) 0.86 Small Independent California Resources CRC (52) - (52) 142 (7) 0.79 Cimarex Energy Company XEC (18) 0 (18) 15 (16) 0.93 Continental Resources (32%) CLR B (27) - (27) 18 (20) 0.75 Range Resources RRC B (45) 0 (45) 18 (29) 0.50 Whiting Petroleum Corporation WLL (58) - (58) 10 (32) 0.54 Median (45) (45) (20) 0.75 Income San Juan Basin Royalty Trust SJT Sabine Royalty Trust SBR Permian Basin RT PBT Dorchester Minerals, L.P. DMLP B (16) 5 (11) - (11) 0.61 Cross Timbers Royalty Trust CRT B (18) 4 (14) - (14) 0.51 Median Canada Suncor Energy SU B EnCana Corporation ECA (4) 0 (4) 7 (3) 0.96 Imperial Oil Limited (30%) IMO (9) 1 (8) 8 (7) 0.86 Cenovus Energy Inc. CVE (32) 1 (32) 8 (20) 0.61 Birchcliff Energy Ltd. BIREF B (31) 1 (30) 2 (23) 0.58 Median (9) (8) (7) 0.82 Grand Median (12) (10) (7) 0.79 Natural Gas ($/mmbtu) (21) Oil -West Texas Intermediate ($/bbl) (6) Total Stock Market - U.S. VTI Developed Markets - ex US VEA Emerging Markets VWO Source: McDep LLC, Yahoo, CME Group, Bloomberg For historical research see Please see disclosures on the final page. Page 13

14 Disclaimer: This analysis was prepared by Kurt Wulff, Manager of McDep LLC. The firm used sources and data believed to be reliable, but makes no representation as to their accuracy or completeness. This analysis is intended for informational purposes and is not a solicitation to buy or sell a security. Past performance is no guarantee of future results. McDep or its employees may take positions in stocks the firm covers for research purposes. No trades in a subject stock shall be made within a week before or after a change in recommendation. Certification: I, Kurt H. Wulff, certify that the views expressed in this research analysis accurately reflect my personal views about the subject securities and issuers. No part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research analysis. Please see disclosures on the final page. Page 14