Oil And Gas Royalty Trusts Notch Price Gains, But Buyers Beware

Oil and gas royalty trusts PermRock NYSE: PRT and Texas Pacific Land Corp. NYSE: TPL have been on a tear, advancing 52.24% and 39.11%, respectively, over the past three months. 

Those are impressive performances, but does it mean you should buy these stocks, or any other oil and gas royalty trust? 

The concept of an oil driller or pipeline operator is pretty familiar to most investors. But that’s not the case with oil and gas royalty trusts, which comprise a highly specialized niche within the energy industry. 

Typically, these are entities that own stakes in energy-producing properties, such as oil wells or gas deposits. These trusts are financing entities, and have no operational role. As you might imagine, drilling and other forms of energy production are capital intensive. 

A producer, in need of funding for operations, may sell a trust the rights to royalties from its properties. The trust then distributes the royalty cash flow to its shareholders, or unit holders, as they are known. 

Royalty trusts have some attractive characteristics. For example, if they distribute a predetermined high percentage of profit to unit holders, the trust avoids corporate taxes. 

In addition, these trusts have low operating expenses, as they don’t require a large staff or pricey equipment. 

Often the trusts will own the land where oil and gas is produced. However, production operations are still handled by other firms. 

However, a potential downside is the erratic nature of the cash flow, which is completely linked to oil and gas prices, which, as we all know, can gyrate wildly. You could think of it like Coinbase NASDAQ: COIN, whose revenue is tied to crypto prices, which can also make your head spin.

PermRock, as the name implies, focuses on oil and gas properties in the Permian Basin, in southwest Texas and the southeast corner of New Mexico. 

PermRock’s next dividend record date is May 28. This means it goes ex-dividend on May 27. That means investors have to purchase shares prior to May 27 if they want to receive this quarter’s payout. 

One possible concern for investors: The quarterly dividend is $0.0558 per share, a 10.2% yield. Meanwhile, PermRock’s most recent quarterly earnings came in at $0.09 per share, down 10% from the year-ago quarter. 

Quarterly earnings have been declining for quite some time, as has revenue, which should give would-be investors pause. 

Wall Street expects earnings per share to reach $0.66 per share this year, which would mark a 313% increase. That’s not too shabby, and the stock is forming a potentially constructive consolidation, but given the unreliable nature of the cash flow, you might consider looking elsewhere for a return.

What about Texas Pacific Land Corp., which also sports a solid return lately? 

The trust also focuses on the Permian Basin and is a large landowner in the state of Texas. It runs two business units, land and water. The latter, established in 2017, provides water services to energy operations in the Permian Basin. 

Texas Pacific’s earnings and revenue have been declining for the past five quarters. 

Texas Pacific’s dividend record date is June 8, meaning the ex-dividend date is June 7. The upcoming quarterly payout will be $2.75, for a yield of 0.63%. Earnings per share in the most recent quarter were $6.45, down 13% from a year ago.

Analysts expect full-year earnings of $31.33, a year-over-year gain of 38%. 

This stock, too, is forming a consolidation now. It’s true that both Texas Pacific and PermRock look good when it comes to price appreciation and potential earnings growth. However, as noted above, there are many other opportunities for investors to get yield or price growth. It’s best to focus your attention on companies whose fortunes aren’t tied to a volatile commodity.