Two Percent a Month. Natural Gas Royalty Trusts A Weekly Analysis May 22, Summary and Recommendation

Transcription

1 Two Percent a Month Summary and Recommendation Our title looks like interest charges on a credit card, yet San Juan Basin Royalty Trust (SJT) and Hugoton Royalty Trust (HGT) will pay almost that much to owners in the next monthly distribution declared at $0.26 and $0.29 a unit respectively. Lagging industry conditions by another month, Cross Timbers Royalty Trust (CRT) is likely to declare an unusually high distribution next time. Estimated next twelve-month distributions consistent with current one-year futures price for natural gas are a median 13% on recent stock price. Estimated long-term return taking account of six-year futures and eventual volume depletion is about 7% per year for recommended SJT. That is the discount rate that would make the attached present value calculation match current stock price. In the end our continued confidence is rooted in the conviction that natural gas remains an undervalued resource. SJT Distribution Reflects Index Daily price levels in the San Juan Basin fluctuate. Not being an actively managed company, the trust apparently is paid for its gas related to indexes set at the beginning of a month that essentially fix the price for the month. In a rising market, index prices tend to lag daily prices and vice versa. The index price for March, which influences the May declaration, caught up. Moreover the difference between natural gas price in the San Juan Basin and the industry reference at the Henry Hub in Louisiana seems unusually wide. In a world of efficient transportation networks and efficient markets, there should be little difference. As a result of daily fluctuations and regional fluctuations there will be months in the future when SJT s distribution may seem disappointing just as the latest distribution is encouraging. HGT Distribution Masks Lower HGT declared a slightly higher distribution than SJT just as it did at a previous temporary peak in While HGT has rewarded investors nicely, the results have been achieved with less volume than anticipated in our projections. Because of lower volume we have taken our present value estimate down some. Eventually we look for favorable volume surprise from HGT s Rocky Mountain reserves. This week we add a table with an estimate for HGT monthly distribution that may help sharpen our analysis. Kurt H. Wulff, CFA Neither he nor his spouse act contrary to a buy or sell rating. 1

2 Natural Gas and Oil Futures May 21, 2003 Six Year Natural Gas ($/mmbtu) Year ending May Light Sweet Crude Oil ($/bbl) Year ending May Natural Gas/Oil (6:1 = 1.0) Year ending May Source: Nymex, FutureSource, wsj.com, McDep Associates Rank by McDep Ratio: Market Cap and Debt to Present Value Net ($/sh) Market Present Debt/ Symbol/ 21-May Shares Cap Value Present McDep Rating 2003 (mm) ($mm) ($/sh) Value Ratio Cross Timbers Royalty Trust CRT Hugoton RoyaltyTrust (46%) HGT San Juan Basin Royalty Trust SJT B Buy/Sell rating after symbol: B - Buy, N - Neutral, S - Sell McDep Ratio = Market cap and Debt to present value of oil and gas and other businesses Rank by EV/Ebitda: Enterprise Value to Earnings Before Interest, Tax, Deprec. Dividend or ($/sh) EV/ EV/ Distribution PV/ Symbol/ 21-May Sales Ebitda P/E NTM Ebitda Rating 2003 NTM NTM NTM (%) NTM Cross Timbers Royalty Trust CRT Hugoton RoyaltyTrust (46%) HGT San Juan Basin Royalty Trust SJT B EV = Enterprise Value = Market Cap and Debt; Ebitda = Earnings before interest, tax, depreciation and amortization; NTM = Next Twelve Months Ended June 30, 2004; P/E = Stock to Earnings; PV = Present Value of oil and gas and other businesses Neither he nor his spouse act contrary to a buy or sell rating. 2

3 Table CRT-1 Cross Timbers Royalty Trust Present Value Decline (%/yr): 10 Escalation post 2009 (%/yr): 2.5 Enhancement (%/yr): 10 Discount Rate (%/yr): 4.8 Variable Cost (%): 16 U.S. TIPS Inflation (%/yr): 1.7 U.S. 10 Year Yield (%/yr): 3.4 PV/ ($/mcf): 3.09 PV/EBITDA 2004: 8.9 Natural Gas Oil Present Basic Enhanced Total Revenue Cost Net Distribution Disc Value Year (bcf) (bcf) (bcf) ($/mcf) ($mm) ($mm) ($mm) ($mm) ($/unit) Factor ($/unit) Total 2004 through 2030; years ending on 6/ Neither he nor his spouse act contrary to a buy or sell rating. 3

4 Table CRT-2 Cross Timbers Royalty Trust Distributable Income Next Twelve Q4 Year Q1 Q2E Q3E Q4E Year Q1E Q2E Months 12/31/ /31/03 6/30/03 9/30/03 12/31/ E 3/31/04 6/30/04 6/30/04 Highlights Distributable Income ($mm) Per unit Units (millions) Natural Gas (bcf) Natural Gas (mmcfd) Days Oil (mb) Oil (mbd) Days Total (bcf) Natural Gas (HH lagged three months) Henry Hub ($/mmbtu) Differential ($/mmbtu) CRT ($/mcf) Oil ($/bbl) (WTI lagged two months) WTI Cushing CRT Total ($/mcf) Natural Gas Oil Total Cost ($mm) Tax, transport & other Production Total Cash flow ($mm) Development Excess or other (0.02) (0.02) - Net proceeds ($mm) Royalty income ($mm) Royalty/Net proceeds 86% 88% 87% 89% 89% 87% 88% 87% 87% 87% Administration Distributable income ($mm) Tax and other/revenue Distributable Inc/Rev (%) Neither he nor his spouse act contrary to a buy or sell rating. 4

5 Table CRT-3 Cross Timbers Royalty Trust Monthly Distributions Mar-03 Apr-03 May-03 Jun-03 Distribution ($/unit) Declared Projected 0.25 Natural Gas (bcf) Natural Gas (mmcfd) Days Oil (mb) Oil (mbd) Days Total (bcf) Natural gas industry quotes lagged three months ($/mmbtu) Henry Hub Daily/Futures San Juan Monthly Index CRT/Henry Hub CRT/San Juan Index CRT ($/mcf) Oil ($/bbl) WTI Cushing (lagged two months) CRT/WTI Cushing CRT Total ($/mcf) Natural Gas Oil Total Distributable income ($mm) Distributable Income/Revenue (%) Natural Gas Oil Total Neither he nor his spouse act contrary to a buy or sell rating. 5

6 Table HGT-1 Hugoton Royalty Trust Present Value Decline (%/yr): 11 Escalation Post 2008 (%/yr): 2.5 Enhancement (%/yr): 8 Discount rate (%/yr): 5.4 Capex/Cash Flow (%): 30 U.S. TIPS Inflation (%/yr): 1.7 Variable Cost (%): 17 U.S. 10 Year Yield (%/yr): 3.4 PV/ ($/mcf): 1.83 PV/EBITDA 2004: 6.4 Fixed Var Cap Present Basic Enhanced Total Revenue Cost Cost Ex Distribution Disc Value Year (bcf) (bcf) (bcf) ($/mcf) ($mm) ($mm) ($mm) ($mm) ($mm) ($/unit) Factor ($/unit) Total 2004 through 2030; years ending on 6/ Neither he nor his spouse act contrary to a buy or sell rating. 6

7 Table HGT-2 Hugoton Royalty Trust Distributable Income Next Twelve Q3 Q4 Year Q1 Q2E Q3E Q4E Year Q1E Q2E Months 9/30/02 12/ /31/03 6/30/03 9/30/03 12/ E 3/31/04 6/30/04 6/30/04 Highlights (80%) Cash flow ($mm) (80%) Per unit Distributable Income ($mm) Per unit Units (millions) Natural Gas (bcf) Natural Gas (mmcfd) Days Oil (mb) Oil (mbd) Days Total (bcf) Natural Gas (HH lagged two months) Henry Hub ($/mmbtu) Differential (%) HGT ($/mcf) Oil ($/bbl) (WTI Cushing lagged two months) WTI Cushing HGT Total ($/mcf) Natural Gas Oil Total Cost ($mm) Tax, transport & other Production Overhead Total Cash flow ($mm) Development Net proceeds ($mm) Royalty income ($mm) Royalty/Net proceeds 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% 80% Administration (0.7) (0.5) Distributable income ($mm) Tax and other/revenue 9% 11% 9% 10% 10% 10% 10% 10% 10% 10% 10% Production cost ($/mcf) Overhead cost ($/mcf) Development/Cash flow Neither he nor his spouse act contrary to a buy or sell rating. 7

8 Table HGT-3 Hugoton Royalty Trust Monthly Declarations Mar-03 Apr-03 May-03 Jun-03 Distribution ($/unit) Declared Projected 0.15 Natural Gas (bcf) Natural Gas (mmcfd) Days Natural gas industry quotes lagged two months ($/mmbtu) Henry Hub Daily/Futures HGT/Henry Hub HGT ($/mcf) Natural Gas Other Total Cost ($mm) Production Overhead Total Cash flow ($mm) Development Net proceeds ($mm) Royalty income ($mm) Royalty/Net proceeds 80% 80% 80% 80% Distributable income ($mm) Units (millions) Distribution ($/unit) Latest Twelve Month Average Natural Gas (mmcfd) HGT/Henry Hub Other revenue ($mm) Production ($mm) Overhead ($mm) Neither he nor his spouse act contrary to a buy or sell rating. 8

9 Table SJT-1 San Juan Basin Royalty Trust Present Value Decline (%/yr): 11 Escalation Post 2009 (%/yr): 2.5 Enhancement (%/yr): 10 Discount rate (%/yr): 5.4 Capex/Cash Flow (%): 25 U.S. TIPS Inflation (%/yr): 1.7 Variable Cost (%): 12 U.S. 10 Year Yield (%/yr): 3.4 PV/ ($/mcf): 1.73 PV/EBITDA 2004: 7.4 Fixed Var Cap Present Basic Enhanced Total Revenue Cost Cost Ex Distribution Disc Value Year (bcf) (bcf) (bcf) ($/mcf) ($mm) ($mm) ($mm) ($mm) ($mm) ($/unit) Factor ($/unit) Total 2004 through 2030; years ending on 6/ Neither he nor his spouse act contrary to a buy or sell rating. 9

10 Table SJT-2 San Juan Basin Royalty Trust Distributable Income Next Twelve Q4 Year Q1 Q2E Q3E Q4E Year Q1E Q2E Months 12/31/ /31/03 6/30/03 9/30/03 12/31/ E 3/31/04 6/30/04 6/30/04 Highlights (75%) Cash flow ($mm) (75%) Per unit Tax credit ($mm) Per unit Distributable Income ($mm) Per unit Units (millions) Natural gas (mmbtu) Heat Content(btu/cf) 1,064 1,050 1,084 1,076 1,049 1,049 1,064 1,049 1,049 1,049 Natural gas (bcf) Natural Gas (mmcfd) Days Oil (mb) Oil (mbd) Total gas & oil (bcf) Natural gas ($/mmbtu) (Henry Hub lagged two months) Henry Hub ($/mmbtu) Differential (%) Total Natural gas ($/mcf) Oil ($/bbl) (WTI Cushing lagged two months) WTI Cushing SJT Total gas & oil ($/mcf) Natural Gas Oil Total Cost ($mm) Severance tax Operating Total Cash flow ($mm) Development Net proceeds ($mm) Royalty income ($mm) Royalty/Net proceeds 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% Administration One-time Distributable income ($mm) Severance tax/revenue 11.5% 9.9% 10.2% 10.2% 10.2% 10.0% 10.2% 10.0% 10.0% 10.0% Operating cost ($/mcf) Development/Cash flow 22% 27% 20% 7% 10% 10% 11% 9% 11% 10% Neither he nor his spouse act contrary to a buy or sell rating. 10

11 Table SJT-3 San Juan Basin Royalty Trust Monthly Declarations Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Distribution ($/unit) Declared Projected Natural gas (mmbtu) Heat Content(btu/cf) 1,067 1,107 1,075 1,049 1,049 1,049 1,049 Natural gas (bcf) Natural Gas (mmcfd) Days Natural gas industry quotes lagged two months ($/mmbtu) Henry Hub Daily/Futures San Juan Monthly Index SJT/Henry Hub SJT/San Juan Index SJT ($/mmbtu) SJT ($/mcf) Natural Gas Other (0.1) (0.1) (0.1) (0.1) (0.1) Cost ($mm) Severance tax Operating Total Cash flow ($mm) Development Net proceeds ($mm) Royalty income ($mm) Royalty/Net proceeds 75% 75% 75% 75% 75% 75% 75% One time 0.9 Distributable income ($mm) Units (millions) Distribution ($/unit) Latest Twelve Month Average Heat Content(btu/cf) 1,048 1,051 1,049 Natural Gas (mmcfd) SJT/Henry Hub SJT/San Juan Index Other revenue (0.1) (0.0) (0.1) Operating Development Severance tax/revenue 10.1% 10.2% 10.3% Neither he nor his spouse act contrary to a buy or sell rating. 11