Monthly Dividend Stock In Focus: San Juan Basin Royalty Trust – Sure Dividend

Up to date on September 18th, 2024 by Felix Martinez

San Juan Basin Royalty Belief (SJT) has a dividend yield of greater than 3%, primarily based on its annualized distributions for 2024.

San Juan Basin has a really attractive payout, contemplating the S&P 500 Index has a ~1.3% dividend yield proper now. Which means San Juan Basin gives about 3 times as a lot dividend earnings as the typical inventory within the S&P 500.

San Juan Basin additionally pays its dividend every month, quite than every quarter like most different shares. This offers traders the advantage of extra frequent dividend payouts.

San Juan Basin is one in every of solely 78 month-to-month dividend shares we at the moment monitor. You possibly can obtain our full record of month-to-month dividend shares (together with vital monetary metrics like dividend yields and payout ratios) by clicking on the hyperlink beneath:

Nonetheless, San Juan Basin’s dividend is probably not as engaging because it appears. The payout has been slashed repeatedly lately, and royalty trusts are a extremely dangerous sort of safety.

This text will focus on why traders needs to be skeptical of royalty trusts like San Juan Basin.

Enterprise Overview

San Juan Basin is a royalty belief, established in November 1980. The belief is entitled to a 75% royalty curiosity in numerous oil and gasoline properties throughout over 150,000 gross acres, within the San Juan Basin of northwestern New Mexico.

On July thirty first, 2017, Hilcorp San Juan LP accomplished its buy of San Juan Basin belongings from Burlington Sources Oil & Gasoline Firm LP, a subsidiary of ConocoPhillips (COP).

Greater than 90% of the belief’s manufacturing is comprised of gasoline, with the rest consisting of oil. The belief doesn’t have a specified termination date. It’ll terminate if royalty earnings falls beneath $1,000,000 yearly over a consecutive two-year interval.

The previous 4 years have been tough for San Juan Basin. Not surprisingly, this was as a consequence of decrease oil and gasoline costs. Issues grew to become much more difficult in 2020, because the coronavirus pandemic resulted in a steep decline in oil and gasoline costs.

The typical realized worth of pure gasoline for San Juan Basin decreased from $1.79 in 2019 to $1.51 in 2020. The typical realized worth of oil decreased from $45.11 per barrel in 2019 to $31.47 per barrel in 2020. Consequently, its distributable earnings per unit dipped 9%, from $0.174 in 2019 to $0.159 in 2020. Because of its poor money flows, the belief suspended its distribution for six months in 2019 and one other 4 months in 2020.

Thankfully, San Juan Basin recovered strongly in 2021 and 2022 because of the restoration of the vitality market from the pandemic. Due to the spectacular rally of the worth of pure gasoline, which resulted from pent-up demand after the pandemic and tight provide, distributable earnings per unit almost quintupled, from $0.159 in 2020 to $0.77 in 2021. Final 12 months, in 2022,  the whole distributable earnings was over $1.57.

Even higher, the worth of pure gasoline has rallied to a 13-year excessive this 12 months as a result of sanctions of European international locations on Russia. Europe generates 31% of its electrical energy from pure gasoline supplied by Russia, however it’s now doing its finest to cut back its reliance on Russia. Consequently, there was an enormous enhance in LNG exports from the U.S. to Europe. Consequently, the U.S. pure gasoline market has turn out to be extraordinarily tight and therefore the worth of U.S. pure gasoline has just lately rallied to a 13-year excessive.

Progress Prospects

There are two vital development catalysts for San Juan Basin transferring ahead. The primary is larger commodity costs, which might assist San Juan Basin generate larger money flows. Particularly, larger gasoline costs could be an enormous increase for San Juan Basin, since gasoline accounts for the overwhelming majority of manufacturing.

The opposite main development catalyst for San Juan Basin shall be if the belief’s oil and gasoline properties are produced for longer than anticipated. San Juan Basin just isn’t precisely certain of the lifespan of the belief. It has employed impartial petroleum engineers, who conservatively estimated that the belief is more likely to proceed to supply for a minimum of one other 10-15 years.

These two components will decide whether or not San Juan Basin is an efficient funding. The belief just isn’t permitted to have interaction in any enterprise exercise, which incorporates utilizing any portion of the belief property to accumulate further properties.

Within the second quarter of 2024, the Belief reported royalty earnings of roughly $1.85 million, considerably decrease than the $8.52 million earned throughout the identical interval in 2023. This decline was primarily pushed by a pointy lower in pure gasoline costs and manufacturing revenues from the San Juan Basin. Gross proceeds from pure gasoline gross sales dropped to $10.46 million in Q2 2024, in comparison with $20.72 million in Q2 2023. Oil gross sales remained comparatively secure, contributing $627,839 in income for the quarter.

Manufacturing prices additionally elevated, rising from $9.96 million in Q2 2023 to $10.45 million in Q2 2024. This leap in prices was attributed to larger capital expenditures, which elevated to $829,872 as Hilcorp carried out its 2024 capital mission plan. These expenditures have been centered on drilling and completions throughout the Mancos and Mesaverde formations. Moreover, lease working bills and property taxes contributed to the upper total manufacturing prices.

Because of larger bills and decrease revenues, web income for the quarter decreased sharply. The Belief reported web royalty income of solely $818,175 in Q2 2024, in comparison with $11.36 million in Q2 2023. These figures underscore the unstable nature of pure gasoline markets and the numerous impression of manufacturing prices on the Belief’s monetary efficiency throughout this era.

Dividend Evaluation

As a belief, San Juan Basin’s distributions are labeled as royalty earnings. Distributions are thought-about atypical earnings, and are taxed on the particular person’s marginal tax price. Since gasoline costs are so vital to royalty trusts’ money circulate, it’s no shock that San Juan Basin’s dividends have declined when gasoline costs have declined, akin to from 2014 to 2016 and once more in 2020.

San Juan Basin made the next distributions because the earlier oil and gasoline business downturn:

2014 distributions-per-share of $1.2846
2015 distributions-per-share of $0.3647
2016 distributions-per-share of $0.2989
2017 distributions-per-share of $0.8395
2018 distributions-per-share of $0.3859
2019 distributions-per-share of $0.1737
2020 distributions-per-share of $0.159
2021 distributions-per-share of $0.77
2022 distributions-per-share of $1.57
2023 distributions-per-share of $1.11
2024 distributions-per-share of $0.11

Regardless of an uptick in distributions in 2017, declining commodity costs have brought about San Juan Basin’s fundamentals to deteriorate steadily since 2014. This, in flip, led to decrease distribution funds.

On the intense facet, San Juan Basin recovered strongly from the pandemic 12 months and final 12 months. Nonetheless, within the final three months of this 12 months, it has supplied distributions per unit of $0.11. San Juan Basin would pay roughly $0.11 per unit for the total 12 months at this price. This payout stage would signify a yield of three.0% primarily based on the present unit worth of $3.57.

If oil and gasoline costs can keep present ranges or enhance additional, San Juan Basin’s distributions may enhance to a stage that makes the inventory engaging. For instance, if the belief lasts one other 10 years, traders will need a dividend yield effectively in extra of 10% yearly to make San Juan Basin a profitable funding.

In fact, there is no such thing as a assure of an extended life span nor assure that oil and gasoline costs will stay round their multi-year highs. Consequently, royalty trusts are a very dangerous approach to spend money on the vitality sector.

Ultimate Ideas

Investing in San Juan Basin proper now could be primarily having a bet on two issues—excessive oil and gasoline costs, and a longer-than-expected lifespan of the belief.

Royalty trusts generally is a good supply of dividend earnings because of their excessive yields. However traders want to ensure the belief’s belongings is not going to run out earlier than the preliminary funding is paid again. It seems that San Juan Basin traders will want the extraordinarily excessive costs of pure gasoline and oil to stay in place for years as a way to make the inventory a great funding.

We view this favorable state of affairs as extremely unlikely. As such, traders in search of much less danger from a dividend inventory are inspired to keep away from royalty trusts like San Juan Basin.

Don’t miss the assets beneath for extra month-to-month dividend inventory investing analysis.

And see the assets beneath for extra compelling funding concepts for dividend development shares and/or high-yield funding securities.