There simply aren't many opportunities like this one. It's an
energy investment, but it's a far cry from the oil "majors" such as
In fact, this is one of those investments I'd guess only one in 20
investors know about.
Let me explain...
Most energy investments you find on the New York Stock Exchange are
actually pretty complex. They are companies that own land, wells,
derricks and trucks. They have employees. They have to deal with
spills, lawsuits and cleanups. That's a lot to handle and still
pump out a
Take Chevron, for example.
In a recent quarter, it generated $64 billion in revenue... but $52
billion of that went toward employee salaries, marketing campaigns,
And then Uncle Sam took $5.5 billion in corporate taxes.
That still left a respectable $7.7 billion in pure profit. But
Chevron pumped the vast majority of that right back into the
business to find and develop new sources of oil.
Chevron is a complex oil giant, but the company I'm going to tell
you about is the exact opposite. It couldn't be any simpler... or
This stock --
SandRidge Mississippian Trust (NYSE:
-- simply takes in royalties and then pays them out to investors.
, SDT owns a stake in dozens of wells run by its
SandRidge Energy (NYSE:
. SandRidge Energy takes care of the drilling, production,
marketing and selling of the oil and gas produced.
The royalty trust -- SDT -- is passive in the relationship. It
doesn't have to do a thing. In return for the initial investment
when it went public, its investors get a cut of all the oil and
natural gas sold from the wells between now and when the trust is
scheduled to dissolve in December 2030.
To create SDT, SandRidge Energy packaged a 90% interest in 37 of
its oil and natural-gas wells in Oklahoma. In other words, for
every $1 in oil or gas pumped by these, more than three dozen
wells, owners of the royalty trust are now entitled to $0.90 in
But that's just the start...
You see, most trusts simply package up some of their reliable
reserves and wells, sell them to the public as a trust and that's
the end of the story. Those interests in the wells pay out steady
dividends and not much changes.
But SDT is a different breed of trust. That's because in addition
to the 37 wells it owned at its inception, the trust also gets a
bonus. Between its inception in December 2010 and December 2015,
parent company SandRidge must drill an additional 123 wells, of
which SDT will own a 50% stake.
In other words, in the next several years each unit of this trust
will have a stake in an increasing number of wells... meaning
increased royalties and distributions.
Because the trust is so new, it has only made two
payments so far -- one of $1.07 per unit (for a longer-than-usual
period of January through May 2011) and another for $0.82 per unit.
But the trust has outlined its projected distributions for the next
four years. If you take the midpoint of these projections, then it
adds up to payments of $2.73... or a 10%
at recent share prices.
But here's the best part -- the trust has significantly topped its
projected distributions so far. In the recent quarter when it paid
$0.82 per unit, it had targeted a distribution of just $0.66.
In other words, the trust topped its targeted distribution by 24%.
This shows management is already underpromising and overdelivering.
As a royalty interest holder in this trust, I like that.
Action to Take -->
But because SDT is a royalty trust, the tax implications can be
complicated. You will probably want to entrust your tax filing to a
. But don't fret too much about Uncle Sam. Although royalty trusts
such as SDT can create some minor tax headaches, the trust's 10%
yield -- and the potential for rising distributions in the future
-- should prove to be well worth the hassle in the long run.
This is also why I have tabbed SandRidge Mississippian Trust as
one of my "
Top 10 Stocks for 2012
." This select group of just 10 ideas are the ones we've marked to
outpace the broader
over the coming year.
You can learn more about what we uncovered -- including some names
and ticker symbols -- by reading
our latest research here
-- Paul Tracy
Disclosure: Paul Tracy and/or StreetAuthority, LLC hold a
position in SDT.