A 13.7% Yield Safe Enough For An 89-Year-Old Mother

I don't often follow pure income vehicles, but this is as good an opportunity as I've come across. In fact, it's "safe" enough for an 89-year-old mom. And it's IRA-friendly -- you can hold it in a retirement account. I think it will prove a great way to put some capital to work in our current ultra-low interest rate environment.

VOC Energy Trust ( VOC ) went public in May 2011 at $21 per share. It has an interest in 881 producing wells in Texas and Kansas. VOC pays the costs of operating and drilling wells. VOC Partners, the sponsoring company, gets 20% of the net income from the wells. The remaining 80% goes to the trust, which pays it out to shareholders. (Come tax time, shareholders receive a 1099 -- not a K-1, thankfully. This makes VOC a good holding for a retirement account.)

For a while, things went swimmingly and VOC paid handsome distributions. Then in October 2012, VOC announced it had drilled a bad well. The stock crashed. The well cost VOC $2.6 million. With no offsetting revenues, the distribution also fell.

So instead of getting 56 cents and 44 cents per share, as shareholders did in the prior two quarters of 2011, they got 46 cents and 26 cents per share.

With the bad well behind it and the costs absorbed, the distribution rebounded. On May 15, VOC paid out 48 cents per share, up from 26 cents in the previous quarter. The stock rallied to $14.40 but quickly settled back down.

Recent weeks have seen the price hover around $13 and change. Your window to act is brief, as it's been going on up again...

Even if the distribution stayed at 48 cents per share, that would mean $1.92 per share for this year. At $14 per share, that's a yield of 13.7%. Such a yield in this market will not last long. To yield 10%, the stock would have to get to $19.20 per share -- or a 30% increase from today's price. So you have room for capital appreciation as well as distributions.

The trust terminates in 2030 or when the trust has received payment for 8.5 million barrels of oil. Through 2012, it has received payment on only 1.2 million barrels. Either way, there is a long time to go yet.

The trust also produces some natural gas, but oil is the key driver.

Expenses run about $23 per barrel of oil produced. This is on the high side of trusts ($10 to $12 being more typical), but plenty low enough such that even if oil declines somewhat, it should not be a disaster.

There are two main risks.

First, there is the risk of drilling another bad well. Such an event would again entail costs incurred with no revenue. And it would certainly lead to another (temporary) cut as the trust absorbs the costs. There is no way to know this ahead of time and it is a risk you would have to accept.

The sponsor, VOC Partners, owns 25% of the stock and has a 20% interest in the profits. So it has plenty of incentive to do well by the trust. It is an experienced outfit that has been around for 30 years.

The bigger risk is simply the price of oil . If oil prices crater, then this won't work out. It should not be a disaster because the trust will still produce cash and yield even at lower oil prices. The trust also hedged 45% of its production through June 2014 at $100 per barrel. That provides some protection against lower oil prices and brings stability to cash flow.

Conversely, the oil price might be an upside kicker. If oil prices climb then so will the distribution. As with the chance of drilling another bad well, I have no idea where the price of oil might go. It is another risk you would have to accept in the deal.

I got turned on to VOC Energy Trust by a money manager friend at a respected value-investor shop. He has spent a lot of time around oil and gas companies. And he bought VOC Energy Trust for his 89-year-old mom. That's a pretty good endorsement.

If you choose to buy it, use a limit order. I'd pay no more than $14.75 per share to give yourself a 13% yield and plenty of room for upside.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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