2 Trustworthy Income Streams
06/18/2012 7:45 am EST
These two trusts have been losing ground in recent weeks, but now is not the time back away...back up the truck and buy, says Paul Tracy of Top 10 Stocks.
I receive more questions about SandRidge Mississippian Trust (SDT) and SandRidge Permian Trust (PER) than any other of my portfolio holdings. And for good reason. Their high yields attract investors. So does the idea of essentially owning your own oil derrick, which royalty trusts allow you to do.
However, the trusts are volatile. They usually trade up and down with changes in energy prices. But since they are thinly-traded, the shares can see large daily swings.
With oil prices falling 20% in about a month, many trusts have seen a pullback, including SDT and PER. I think these pullbacks represent a great entry point for new investors.
Both of these trusts have the support of subordinated shares backing up their yields. Remember that if the trust's distributions fall below their targeted levels, these subordinated shares forego their share of distributions to make up the difference to common shareholders.
This safeguard should keep distributions stable in the coming quarters, even if oil and gas prices continue to head lower.
Meanwhile, both trusts have hedges in place to help smooth out volatility from energy prices and ensure there is plenty of cash for distributions. For instance, about 60% of SDT's projected oil production this year is hedged at an average price of $104 per barrel. PER has about 85% of its oil production hedged at $102 per barrel.
In other words, I see little reason why the two trusts can't keep paying their high yields-which are both above 11% at this point-and see their shares eventually rebound.
Investors will want to keep in mind that the two trusts have very different production profiles. In the most recent quarter, SandRidge Mississippian Trust saw production of approximately 40% oil and 60% natural gas. SandRidge Permian Trust's production, however, was 96% oil. As such, SDT's share price is going to be more sensitive to natural gas price movements. Meanwhile, PER will fluctuate up and down based on changes in oil prices.
Action to Take
The recent downturn hasn't changed my opinion of SDT or PER. With the units of both trusts yielding over 11% thanks to the sell-off, both are much more attractive now than they were just a few weeks ago.