Due to the deep production cuts of OPEC as well as the ongoing war in Ukraine, the price of oil has rallied to $80 per barrel in the U.S. Investors looking for exposure to the oil sector could consider royalty trusts. 

Given the high dividend yields and monthly dividend payouts of Sabine Royalty Trust (SBR), Permian Basin Royalty Trust (PBT) and PermRock Royalty Trust (PRT), it is only natural to wonder whether it is the right time to purchase these stocks. 

Sabine Royalty Trust (SBR)

Sabine Royalty Trust is an oil and gas trust set up in 1983 by Sabine Corporation. At initiation, the trust had an expected reserve life of 9 to 10 years; the current estimated life of the trust is 8 to 10 years. The trust consists of royalty and mineral interests in producing properties and proved oil and gas properties in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas.

It is roughly 2/3 oil and 1/3 gas in terms of revenues. The trust’s assets are static in that no further properties can be added. The trust has no operations but is merely a pass-through vehicle for royalties. 

In late February, SBR reported (2/29/24) financial results for the full fiscal 2023. Sales of oil increased 24% but sales of gas declined -16% over the prior year, mostly due to the timing of cash receipts. In addition, the average realized prices of oil and gas moderated off blowout levels in the prior year’s period amid the depths of the Ukrainian crisis. As a result, distributable cash flow per unit decreased -26%, from an all-time high level of $8.65 to $6.38.

The trust has generated an average annual distributable cash flow of $3.92 per unit over the last decade. However, the cash flows of SBR are extremely sensitive to the gyrations of the prices of oil and gas and hence they have resulted in a markedly volatile performance record. 

Given the above average price of oil, which has formed an exceptionally high comparison base, we expect a -7.0% average annual decline in distributable cash flow per unit over the next five years. Notably, it is the first time that oil producers are somewhat reluctant to invest in new growth projects due to the secular shift from fossil fuels to clean energy sources.

Permian Basin Royalty Trust (PBT)

Permian Basin Royalty Trust is a medium sized oil and gas trust, with approximately 70% oil production and 30% gas production. It is also a combination trust: unit holders have a 75% net overriding royalty interest in Waddell Ranch Properties in Texas, which includes 332 net productive oil wells, 106 net productive gas wells and 120 net injection wells; and a 95% net overriding royalty interest in the Texas Royalty Properties, which includes various oil wells. 

In late February, PBT reported (2/29/24) financial results for the full fiscal 2023. Its average realized prices of oil and gas decreased -19% and -57%, respectively, off blowout levels in the prior year amid the early phases of the war in Ukraine. In addition, there was no profit from Waddell Ranch in the third quarter due to an excess in working interest costs. 

As a result, distributable income per unit slumped -48%, from $1.15 to $0.60. After some months of disappointing distributions, which resulted from high operating expenses on the Waddell Ranch properties, PBT boosted its distributions in the last two months of 2023. 

However, it has reduced them again this year due to high operating expenses on the Waddell Ranch properties and low gas prices amid unfavorable weather. In the first two months of this year, it has offered total distributions of $0.0765 per unit, which correspond to a 3.8% annualized yield.

The trust has generated an average distributable and distributed cash flow of $0.57/unit annually for the past 10 years, though with a noticeable decrease in 2015-2021. Given the natural decline of the production of oil wells and gas wells, the long-term downtrend in cash flows should be expected. 

PermRock Royalty Trust (PRT)

PermRock Royalty Trust is focused on the acquisition, development and operation of oil and natural gas properties in the Permian Basin. It produces oil and gas at an 83/17 ratio.

The Permian Basin is the most prolific oil producing area in the U.S. The properties of PermRock consist of long-life reserves in mature, conventional oil fields, with shallow, predictable decline rates. 

PermRock Royalty Trust was formed in November 2017 by Boaz Energy, a company that is focused on the acquisition, development and operation of oil and natural gas properties in the Permian Basin. The Trust derives all its cash flows from profits from the sale of oil and natural gas production from these properties and distributes dividends monthly. 

The Permian Basin is the most prolific oil producing area in the U.S. The properties of PermRock consist of long-life reserves in mature, conventional oil fields, with shallow, predictable decline rates. The trust can pump additional oil via water-flooding techniques, while it can also identify new reserves in the area in the upcoming years.