Published by Bob Ciura on June 2nd, 2017
Sabine Royalty Trust (SBR) fared relatively well in 2016. It suffered right alongside the other royalty trusts, but Sabine maintained a high dividend payout thanks to the resilience of its quality assets.
Sabine is on the high dividend stocks list thanks to its substantial dividend yield.
Sabine pays dividends on a monthly schedule, which gives investors the ability to compound their dividends more frequently than the traditional quarterly schedule.
There are only 21 stocks that pay monthly dividends.
This article will discuss Sabine’s business model, and why investors anticipating higher oil and gas prices may want to give this royalty trust a closer look.
Sabine Royalty Trust was established on December 31, 1982. Its business model is based on income received from its royalty and mineral interests in various oil and gas properties.
Sabine is a small-cap stock, with a market capitalization of $557 million.
Its oil and gas producing properties are located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas.
The trust has had a long and successful history. When the trust was formed in 1982, reserves were estimated at 9 million barrels of oil and 62 billion cubic feet of gas.
At inception, the lifespan of the trust was pegged at 9-10 years. The trust was expected to be fully depleted by 1993.
35 years later, Sabine Royalty Trust is still kicking. In that time, the trust has produced more than 20 million barrels of oil, and over a billion cubic feet of gas.
Sabine has paid out approximately $1.279 billion in distributions to unitholder over the course of the past 35 years.
The most recent forecasts are for remaining reserves of 6.0 million barrels of oil, and 35.6 billion cubic feet of gas. If these projections are accurate, the trust would have a remaining lifespan of roughly 8-10 years.
The trust does not have a specified end date, but it would terminate if revenue from the royalty properties falls below $2 million per year, in any consecutive two-year period.
2016 was a rough year for Sabine. Distributable-income-per-unit declined by 40% from 2015, to $1.88.
Source: 2016 Annual Report, page 2
The spike in oil and gas prices took Sabine’s distributable-income-per-unit to $4.03 in 2014, which allowed the trust to distribute $4.10 per unit that year.
However, royalty income and distributions have steadily fallen since. The trust’s 2016 distributable income marked a five-year low.
The good news, is that Sabine at least generated positive distributable income, even in 2016. This resilience allowed it to continue making distributions, albeit at a much lower rate.
Not surprisingly, the major culprit for the declines is lower oil and gas prices.
Sabine had an average realized oil price of $37.89 per barrel for 2016, down from $46.84 in 2015. In addition, oil production fell by 7.7% in 2016, to 392,787 barrels, reflecting natural field declines.
In addition, gas production decreased by 18.5% in 2016, and average realized gas prices fell from $2.67 in 2015, to $2.12 in 2016.
The biggest growth catalyst for Sabine is rising oil and gas prices. Supportive commodity prices are critical for the trust’s ability to generate higher royalty income, which yield higher distribution payouts.
Since bottoming out in early 2016 at $27 per barrel, oil prices have recovered to nearly $50 per barrel in the U.S.
As a result, conditions improved considerably for Sabine in the first quarter. Royalty income rose by $3.5 million, a 50% increase compared with the ﬁrst quarter of 2016.
Growth was due primarily to higher oil and gas prices, which accounted for $2.3 million of the growth in royalty income last quarter. In addition, higher production added $1.4 million of royalty income growth.
This growth more than offset a $0.2 million increase in operating expenses and taxes for the quarter.
The results from the first quarter underscores how much royalty trusts like Sabine benefit from higher commodity prices.
Sabine’s average realized gas price increased to $2.80 per thousand cubic feet last quarter, up from $2.18 in the same quarter last year.
Meanwhile, the trust’s average oil price spiked 30.5% in the first quarter, from the first quarter of 2016.
Oil and gas production rose 22% and 3.5%, respectively, last quarter.
If oil and gas prices head higher still, Sabine’s distributions could grow in 2017 and beyond.
Sabine Royalty Trust pays a monthly distribution. The record date each month is usually the 15th day. Distributions are paid no later than 10 business days after the monthly record date.
Sabine’s dividend fluctuates depending on the direction of oil and gas prices. When times are good, the trust has distributed $3-$4 per unit.
However, distributions dried up last year as falling commodity prices took their toll. Sabine’s distribution history over the past seven years is as follows:
- 2016 distributions of $1.93403 per unit
- 2015 distributions of $3.10520 per unit
- 2014 distributions of $4.09779 per unit
- 2013 distributions of $3.91645 per unit
- 2012 distributions of $3.70090 per unit
- 2011 distributions of $3.96617 per unit
- 2010 distributions of $3.70449 per unit
Sabine distributed approximately $1.93 per unit to investors in 2016. Based on its recent unit price, this represents a yield of 5.1%.
If oil prices were ever to get back to $100 per barrel, there could be considerable dividend growth potential. Of course, this is a big ‘if’.
Rising oil and gas production, particularly by shale drillers in the U.S., coupled with sluggish global demand growth, could keep a lid on oil prices for the foreseeable future.
The opposite scenario could also be true—if oil prices collapsed back to their 2016 low, Sabine’s dividends could continue to fall.
The good news is, the commodity price recovery over the past year has led to higher distributions from the trust.
Royalty trusts like Sabine are essentially a bet on commodity prices. From an operational standpoint, the fundamentals of the trust look strong.
Sabine has high-quality oil and gas properties that have kept the trust going for 35 years, which was much longer than originally expected.
If oil and gas prices increase, the assets of the trust could potentially be undervalued. And, distributions could grow from 2016 levels, if commodity prices cooperate.
That said, investors should carefully review the risks and unique considerations that go along with investing in royalty trusts.
- For another high-yield express royalty trust with a 6%+ dividend yield, click here.