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. Meaning San Juan Basin gives about thrice as a lot dividend earnings as the common inventory within the S&P 500.

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

San Juan Basin is considered one of solely 78 month-to-month dividend shares we at present monitor. You may obtain our full listing of month-to-month dividend shares (together with vital monetary metrics like dividend yields and payout ratios) by clicking on the hyperlink under:

Nevertheless, San Juan Basin’s dividend might not be as enticing because it appears. The payout has been slashed repeatedly in recent times, 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 varied 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 Assets Oil & Fuel 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 is going to terminate if royalty earnings falls under $1,000,000 yearly over a consecutive two-year interval.

The previous 4 years have been troublesome 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. Attributable to its poor money flows, the belief suspended its distribution for six months in 2019 and one other 4 months in 2020.

Fortuitously, San Juan Basin recovered strongly in 2021 and 2022 due to the restoration of the power market from the pandemic. Because of 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 yr, in 2022,  the overall distributable earnings was over $1.57.

Even higher, the worth of pure gasoline has rallied to a 13-year excessive this yr because of the 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 scale back its reliance on Russia. Consequently, there was an enormous improve in LNG exports from the U.S. to Europe. Consequently, the U.S. pure gasoline market has grow to be extraordinarily tight and therefore the worth of U.S. pure gasoline has lately rallied to a 13-year excessive.

Development Prospects

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

The opposite main development catalyst for San Juan Basin might be if the belief’s oil and gasoline properties are produced for longer than anticipated. San Juan Basin isn’t precisely positive of the lifespan of the belief. It has employed impartial petroleum engineers, who conservatively estimated that the belief is prone to proceed to supply for no less than one other 10-15 years.

These two elements will decide whether or not San Juan Basin is an effective funding. The belief isn’t permitted to interact 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 increased capital expenditures, which elevated to $829,872 as Hilcorp applied its 2024 capital challenge plan. These expenditures had been centered on drilling and completions throughout the Mancos and Mesaverde formations. Moreover, lease working bills and property taxes contributed to the upper general manufacturing prices.

Attributable to increased bills and decrease revenues, internet earnings for the quarter decreased sharply. The Belief reported internet royalty earnings of solely $818,175 in Q2 2024, in comparison with $11.36 million in Q2 2023. These figures underscore the risky nature of pure gasoline markets and the numerous influence 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 fee. Since gasoline costs are so vital to royalty trusts’ money circulation, 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 for the reason that earlier oil and gasoline trade 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 triggered San Juan Basin’s fundamentals to deteriorate steadily since 2014. This, in flip, led to decrease distribution funds.

On the brilliant aspect, San Juan Basin recovered strongly from the pandemic yr and final yr. Nevertheless, within the final three months of this yr, it has supplied distributions per unit of $0.11. San Juan Basin would pay roughly $0.11 per unit for the total yr at this fee. This payout degree would characterize a yield of three.0% primarily based on the present unit worth of $3.57.

If oil and gasoline costs can preserve present ranges or improve additional, San Juan Basin’s distributions might improve to a degree that makes the inventory enticing. 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 isn’t any 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 power sector.

Remaining Ideas

Investing in San Juan Basin proper now’s basically 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 due to their excessive yields. However traders want to verify 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 with a purpose to make the inventory a great funding.

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

Don’t miss the sources under for extra month-to-month dividend inventory investing analysis.

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