Monthly Dividend Stock In Focus: Permianville Royalty Trust - Sure Dividend

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Monthly Dividend Stock In Focus: Permianville Royalty Trust


Updated on April 24th, 2022 by Aristofanis Papadatos

Income investors looking to buy oil and gas stocks may want to gain exposure to the Permian and Haynesville Basins. Permianville Royalty Trust (PVL) is an oil and gas producer with properties in these two oil and gas producing areas.

Permianville was severely hurt by the coronavirus crisis. Due to the collapse in the price of oil caused by the pandemic in 2020, Permianville suspended its dividend for 13 consecutive months, from mid-2020 to mid-2021.

Fortunately for the trust, the prices of oil and gas recovered strongly from the pandemic in 2021 thanks to the massive distribution of vaccines and the immense fiscal stimulus packages offered by most governments. As a result, Permianville reinstated its dividend in August-2021 and thus returned to the group of monthly dividend stocks.

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Based on its dividend payments in the last 12 months, Permianville is offering a 6.8% dividend yield. It could thus be appealing to income-oriented investors.

However, investors should remember that oil and gas royalty trusts are especially risky, which is why only investors with a high risk tolerance should consider purchasing Permianville.

Business Overview

Permianville Royalty Trust is a statutory trust that was formed in 2011 to own a net profits interest representing the right to receive 80% of the net profits from the sale of oil and natural gas production from properties in Texas, Louisiana, and New Mexico as well as the Permian and Haynesville basins.

The Trust has the right to receive 80% of the net profits from the sale of oil and natural gas production from its properties. Each month, after all obligations and expenses are paid, unitholders receive the remaining proceeds. The Trust is not subject to any preset termination provisions.

However, the Trust could dissolve if at least 75% of outstanding units vote in favor of dissolution, or the annual cash proceeds received by the Trust are less than $2 million for each of any two consecutive years.

Permianville came under great pressure in 2020 due to the coronavirus crisis. Fortunately, the trust recovered strongly from the pandemic last year, along with the broader energy market. Its average realized prices of oil and gas grew 24% and 64%, respectively. In addition, thanks to the favorable price environment, the trust nearly doubled its oil production and more than doubled its gas production. As a result, it nearly doubled its gross profit, from $23.4 million in 2020 to $43.5 million in 2021.

However, operating expenses more than doubled. Consequently, distributable income decreased 38%, from $5.0 million to $3.1 million. The performance of Permianville was certainly disappointing amid a steep recovery of the energy market, particularly when compared to the performance of most royalty trusts.

On the bright side, oil and gas prices have rallied to 13-year highs this year. The rally of both prices has resulted from the sanctions of western countries on Russia due to the invasion of the latter in Ukraine. As Russia is a major exporter of oil and gas, the sanctions have rendered both markets remarkably tight. The multi-year high prices of oil and gas are likely to provide a strong tailwind to the results of Permianville in the upcoming months.

Growth Prospects

Royalty trusts are designed as income vehicles for unitholders. But since these companies operate in the production segment of the energy industry, they are extremely reliant on the price of the underlying commodity.

Therefore, while higher energy prices will lead to higher royalty payments and a rising share price, the opposite occurs when commodity prices decline. Lower energy prices lead to lower dividend payments and a dropping share price for royalty trusts.

Distributions are based on the price of natural gas and crude oil. Permianville is impacted in two ways when the price of either declines.

First, distributable income from royalties is reduced, lowering dividend payments. In addition, plans for exploration and development may be delayed or canceled, which could lead to future dividend cuts.

Since 2014, when oil was above $100 per barrel, oil prices have been on a longstanding downtrend over the past several years. Natural gas prices have been consistently weak as well. As an oil and gas trust, Permianville is extremely sensitive to the swings of oil and gas prices. It has thus suffered from low oil and gas prices in the last seven years.

On the bright side, Permianville currently enjoys an ideal business environment thanks to the rally of oil and gas prices to 13-year highs. As long as the sanctions of western countries on Russia remain in place, oil and gas prices are likely to remain elevated and Permianville will keep thriving.

However, it is prudent to expect oil and gas prices, which are infamous for their dramatic cycles, to deflate in the long run. When the next downcycle shows up, Permianville will have significant downside risk.

Dividend Analysis

Permianville suspended its distribution in July 2020 due to the coronavirus pandemic, which had an extremely negative impact on the prices of oil and gas. Commodity prices plunged in 2020, leading many oil and gas royalty trusts to suspend their payouts.

Most royalty trusts, such as Permian Basin Royalty Trust and Sabine Royalty Trust, resumed paying dividends after a few months. However, Permianville suspended its dividend for 13 consecutive months. That marked the longest absence of dividend payments among the well-known oil and gas trusts.

On the bright side, thanks to the 13-year high oil and gas prices prevailing right now, Permianville is currently offering a high dividend yield. Based on its dividends in the last 12 months, the stock is offering a 6.8% dividend yield.

Even better, as it takes some months for the realized prices of the trust to match the benchmark prices of oil and gas, its dividends are likely to increase significantly in the upcoming months. This means that the forward yield of Permianville will probably be much higher than 6.8%.

Overall, the trust is ideal for those who are confident in higher future oil prices and want to gain exposure to the oil boom in the Permian and Haynesville basins. The trust is much more leveraged to the price of oil than the integrated oil companies and hence it has much more upside in the positive scenario (higher oil and gas prices) and much more downside in the event of a downturn in the energy sector.

On the other hand, just like the other oil and gas royalty trusts, Permianville will have excessive downside risk whenever the prices of oil and gas enter their next downcycle. The trust will reduce its dividends while its stock price will come under great pressure. It is thus suitable only for risk-loving investors who are confident in excessive oil and gas prices in the future.

Final Thoughts

Royalty trusts like Permianville have faced a number of challenges in the past few years, including the weak oil price environment and the coronavirus pandemic, which suppressed global oil demand. With that said, Permianville operates in the most prolific oil producing area in the U.S., the Permian and Haynesville basins. It also thrives right now thanks to the rally of oil and gas prices, which has resulted from the sanctions of western countries on Russia.

As we do not expect another downturn in the energy sector in the near-term, we believe that the trust will keep offering a high dividend yield for the foreseeable future. Nevertheless, due to the non-diversified business model of the trust and its dramatic reliance on the price of oil and gas, investors should not allocate a great portion of their portfolio on this stock.

Moreover, the trust’s short history leaves much to be desired for investors seeking reasonable levels of dividend safety and consistency.

If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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