An Ultra-High-Yield Energy Play

02/25/2010 1:00 pm EST


Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of Cash Machine, finds a US-based energy trust that serves up a fat yield and offers the prospect of capital appreciation.

Given ultimately higher oil and gas prices from the higher usage of fossil fuels, investing in US-based ultra-high-yield energy properties is an appealing investment theme.

This is especially true when you consider that American-based high-income energy assets also provide investors the perfect inflation hedge, the perfect currency hedge, the perfect foreign risk hedge, and the almost perfect income stream of 16%.

Whiting USA Trust (NYSE: WHX) was formed by Whiting Petroleum (NYSE: WLL) as a way for the company to acquire and hold a term net profits interest (NPI), [which] entitles the trust to receive 90% of net proceeds from the sale of production from the company's underlying properties in the Rocky Mountains, Mid-Continent, Permian Basin and Gulf Coast regions. In 2008, the production from these properties totaled about 56% oil and 44% natural gas.

Now, Whiting USA Trust's NPI is actually terminated if 9.11 million barrels of oil equivalent (MMBOE) are produced and then sold from the company's properties. But based on a reserve report for 2009, the trust isn't expected to produce the remaining balance of 6.3 MMBOE until August 2018.

So, Whiting USA Trust still has about eight years of proven reserve life left, with a third of unproven properties still being developed. But with natural gas prices beginning to firm up in the mid-$5.00 per mcf (thousand cubic feet) range, WHX units are likely to maintain and even raise the current payout to unit holders.

Currently, WHX pays a quarterly distribution of just over 66 cents per unit, or $2.64 annually. That gives unit holders a nearly 16% current yield on shares of WHX at its current price [of around $17].

That's because oil and gas prices are only going higher over the long term. In fact, the International Energy Agency bumped up its forecasts for world oil demand this year due to growing economic activity in developing countries in Asia. IEA predicted that oil demand will average 86.5 million barrels a day this year—or 1.6 million barrels a day more than in 2009.

So, it's very likely that oil and gas prices will shoot higher, which will push shares of WHX from their current price back up to $24. And then the annual payout would climb to more than $3.00 per unit.

[Let the stock price] come to you and establish a great entry point, preferably in the high-$16 to low-$17 range where your effective yield will be closer to 16%—a prime candidate for the High-Yield Aggressive Portfolio. Buy WHX under $18.

My goal is to hold it for about a year and see if it spikes on a rally in energy prices. I think it will, providing us with a big profit and a juicy dividend. Energy income investing is gaining momentum, and WHX is right in the zone.

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