Income investors looking to cash in on rising oil and natural
gas prices may be hard pressed to find traditional companies that
pay a hefty yield.
, for example, yields 2.4% and
Chesapeake Energy (
, the largest producer of natural gas in the United States, yields
That's why I've been researching small-cap energy companies that
pay double-digit yields. One company I found is
Whiting USA Trust I (
. WHX is a royalty trust spun off by
Whiting Petroleum Corp (
to receive royalties on revenue from oil and natural gas producing
properties. The company yields 13.2% and has a market cap of $278
The trust receives 90% of revenue derived from the production and
sale of oil and natural gas from its properties located in Rocky
Mountain, Mid-Continent, Permian Basin and Gulf Coast regions.
Reserves are about 56% oil and 44% natural gas.
The trust passes along these royalties as quarterly distributions
to shareholders. The first distribution of 2010 was $0.66 per
share, paid in February. Distributions for the past four quarters
totaled $2.55 for a stratospheric trailing yield of more than 13%.
While the trust only made three distributions in 2008, as its
shares began trading in April, the average quarterly distribution
in for the year was $1.37 compared to an average distribution of
$0.67 in 2009.
For the full year 2009, revenues fell -38% while income (net of
expenses) declined -34% from 2008. Conveyance of the trust's
royalties didn't start until April of 2008, so the 2008 numbers
only include nine months of sales and production. Revenues and
profits were down for one simple reason: commodity prices.
Oil and gas prices plummeted during the financial crisis from
record levels in 2008. Average oil sales prices were $102.04 per
barrel in 2008 and only $48.29 per barrel in 2009. Natural gas
sales prices averaged $8.94 per Mcf (thousand cubic feet) in 2008
and $4.13 in 2009. The trust does hedge its portfolio, and realized
prices net of hedging were $62.50 per barrel for oil and $5.39 per
Mcf of natural gas in 2009.
But, things have been continually improving since the first half of
2009. The daily average NYMEX price per barrel of oil rose
throughout the year from $43.21 per barrel in the first quarter to
$76.17 in the fourth quarter. Today oil is more than $80 per
barrel. NYMEX natural gas prices averaged $3.99 per Mcf in 2009 and
the price is at about $4.30 per Mcf today.
The prognosis for prices going forward is excellent. As economies
throughout the world continue to recover, the International Energy
) expects worldwide oil demand to rise from about 85 million
barrels per day in 2009 to 86.5 million in 2010. Just last month,
Goldman Sachs (
estimated that oil prices will rise to between $85 and $95 per
barrel in 2010, and analysts from both Goldman Sachs and
Morgan Stanley (
estimated that oil will average $100 per barrel in 2011.
The cost of producing oil and natural gas is roughly the same
regardless of prices. Higher prices of oil and gas make higher
profits and distributions and vice versa.
That said, the properties from which the trust earns royalties are
depleting assets. The trust terminates when 9.11 million barrels of
oil equivalent (
) have been produced and sold from the properties. A revised
reserve report estimates (as of December 31st) that the reserve
balance is 6.0 MMBOE, which is expected to be produced through
2017. According to the trust, oil and gas production is estimated
to decline at an average annual rate of -14.6% from 2010 through
But with oil prices on the rise, distributions are likely to
increase. In the near term, the trust is a pure play on rising oil
and gas price in the recovery.
Editor: High-Yield Investing, High-Yield International, Dividend
P.S. If you're looking for both high yields and enormous capital
gains potential, then you need to learn more about our "Income
Security of the Month" for April 2010. This booming oil & gas
firm has returned +196% in the past year alone. The company has
already raised its dividend five times since its 2007 inception,
and today it's cashing in on record levels of production and rising
Just weeks ago company management announced the closure of a $130
million acquisition that could translate into tremendous profits
(and dividend hikes) in the months ahead. Details here...
Disclosure: Carla Pasternak does not own shares of any security
mentioned in this article.