Updated March 5, 2023 by Felix Martinez
San Juan Basin Royalty Trust (SJT) has a strong dividend yield of over 16% based on annual distributions for the first two months of 2023. This is one of over 200 stocks with a dividend yield of 5% or higher. Click here to see a complete list of established 5%+ yielding stocks.
Given that the S&P 500 Index currently yields around 1.3%, the San Juan Basin dividend is very attractive. In other words, the San Juan Basin offers approximately eight times the dividend income of the average S&P 500 stock.
San Juan Basin also pays dividends monthly instead of quarterly like most other stocks. This allows investors to pay dividends more frequently.
San Juan Basin is one of 69 monthly dividend stocks that we currently track. You can download a complete list of monthly dividend stocks (along with key financial metrics such as dividend yield and payout ratio) by clicking the link below.
However, the San Juan Basin dividend may not be as attractive as you might think. With repeated cuts in payments in recent years, loyalty trusts are a very risky kind of security.
This article explains why investors should view royalty trusts like San Juan Basin with a great deal of skepticism.
Business overview
San Juan Basin is a royalty trust established in November 1980. The trust has a 75% royalty interest in various oil and gas assets spread over more than 150,000 acres in the San Juan Basin of northwestern New Mexico.
On July 31, 2017, Hilcorp San Juan LP completed the purchase of San Juan Basin assets from Burlington Resources Oil & Gas Company LP, a subsidiary of ConocoPhillips (COP).
Over 90% of the Trust’s production is made up of gas, with the remainder made up of oil. The trust does not have a specific end date. Terminates if royalty income falls below $1 million annually for two consecutive years.
The last four years have been difficult times for the San Juan Basin. Naturally, this is due to falling oil and gas prices. Things got even tougher in 2020 as oil and gas prices plummeted due to the coronavirus pandemic.
The average realized price of natural gas in the San Juan Basin has decreased from $1.79 in 2019 to $1.51 in 2020. Average realized oil prices have fallen from $45.11 per barrel in 2019 to $31.47 per barrel in 2020. It has fallen 9% from $0.174 in 2019 to $0.159 in 2020. Due to poor cash flow, the trust has suspended distributions for six months in 2019 and another four months in 2020.
Fortunately, the San Juan Basin recovered strongly in 2021 and 2022, thanks to energy market recovery from the pandemic. Distributable revenue per unit nearly quintupled, from $0.159 in 2020 to $0.77 in 2021, thanks to the dramatic rise in natural gas prices resulting from post-pandemic stagnant demand and tight supply. I was. Last year, in 2022, total distributable income exceeded $1.57.
Even better, European sanctions against Russia pushed natural gas prices to a 13-year high this year. Europe generates 31% of its electricity from natural gas supplied by Russia, but is currently doing its best to reduce its dependence on Russia. As a result, her LNG exports from the United States to Europe increased significantly. As a result, the US natural gas market has been extremely tight, with US natural gas prices recently rising to a 13-year high.
This is an ideal development for the San Juan Basin. Based on $0.45 per unit for the last three months of 2022, the trust could offer at least $1.60 per unit this year. Such a performance marks the highest price in seven years for trust.
growth outlook
There are two important catalysts for growth in the San Juan Basin’s advancement. The first is higher commodity prices, which will help the San Juan Basin generate higher cash flows. Specifically, higher gas prices would be a big boost for the San Juan Basin, as gas accounts for the majority of production.
Another major growth catalyst for the San Juan Basin is if the Trust’s oil and gas properties produce longer than expected. The San Juan Basin does not know exactly how long the trust will last. The company employs independent petroleum engineers who conservatively estimate that the trust is likely to continue producing for at least another 10 to 15 years.
These two factors determine whether the San Juan Basin is a suitable investment destination. The trust is not permitted to engage in any business activity, including using a portion of the trust property to acquire additional property.
The San Juan Basin ended 2022 with proven reserves of 234,000 barrels of oil and 84.1 million cubic feet of natural gas.
If the trust lasts 10-15 years, with a distribution rate of $0.18 per unit in 2022, investors would receive approximately $1.59-2.39 per unit in distributions. Again, San Juan Basin hasn’t paid his distribution for 10 months from 2019 to 2020.
The suspension of distributions for several months is a strong reminder that distributions are not guarantees from a trust. Loyalty trusts like the San Juan Basin are essentially betting on commodity prices, which is a major factor in determining whether distribution is sustainable.
As previously mentioned, the San Juan Basin could post its highest level of distributable revenue per unit in seven years this year, at about $1.57, thanks to a 13-year high in natural gas prices. . With European sanctions on Russia unlikely to be lifted anytime soon, the US is likely to continue exporting large amounts of her LNG to Europe, and gas prices are likely to continue rising for the rest of the year. I have.
On the other hand, natural gas is known for its high recyclability. Gas prices are therefore expected to enter another downward cycle at some point in the future, as they have in the past. As such, the San Juan Basin will have to reduce distribution.
Dividend analysis
As a trust, San Juan Basin distributions are classified as royalty income. Dividends are considered ordinary income and are taxed at the personal marginal tax rate. Gas prices are so important to the Royalty Trust’s cash flow that from 2014 to 2016, and he said that when gas prices fell again in 2020, San Juan Basin’s dividend declined. Of course.
The San Juan Basin has made the following distributions since the last oil and gas downturn.
- 2014 dividend of $1.2846 per share
- 2015 dividend of $0.3647 per share
- 2016 dividend of $0.2989 per share
- 2017 dividend of $0.8395 per share
- 2018 dividend of $0.3859 per share
- 2019 dividend of $0.1737 per share
- 2020 dividend of $0.159 per share
- 2021 dividend of $0.77 per share
- 2022 dividend of $1.57 per share
Despite higher distributions in 2017, San Juan Basin fundamentals have steadily deteriorated since 2014 due to falling commodity prices. This has resulted in a decrease in distribution payments.
On the bright side, the San Juan Basin recovered strongly from the pandemic year and last year. Additionally, in his last three months of last year, he has offered distributions of $0.45 per unit. At this rate, the San Juan Basin would pay him about $1.60 per unit per year. This payment level represents a yield of 16.9% based on the current unit price of $10.82.
If oil and gas prices can hold at current levels or rise further, the San Juan Basin distribution could rise to levels that make the stock attractive. For example, if the trust lasts another 10 years, investors will seek a dividend yield of well over 10% per annum for a successful investment in the San Juan Basin.
Of course, there is no guarantee that life will last longer, nor that oil and gas prices will remain near multi-year highs. As a result, royalty trusts are a particularly risky way to invest in the energy sector.
final thoughts
Today, investing in the San Juan Basin is essentially betting on two things: high oil and gas prices and longer-than-expected trust life.
Royalty trusts can be a good source of dividend income due to their high yields. However, investors must ensure that the trust’s assets do not run out before the initial investment is repaid. San Juan Basin investors seem to have to sustain very high prices for natural gas and oil for years to make the stock a good investment.
We believe that this favorable scenario is highly unlikely to materialize. As such, investors looking to reduce risk from dividend stocks are advised to avoid royalty trusts like San Juan Basin.
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