Updated on September 20th, 2022 by Aristofanis Papadatos
Sabine Royalty Trust (SBR) has a high dividend yield of 10.1% based on annualized distributions over the first four months of 2022. This places Sabine on the high dividend stocks list. You can see all 200+ 5%+ yielding stocks here.
Sabine also pays dividends on a monthly schedule, which means investors receive their dividends more frequently than the traditional quarterly schedule.
There are 49 monthly dividend stocks. You can see our complete list of monthly dividend stocks, with important financial metrics like dividend yields, price-to-earnings ratios, and payout ratios, by clicking on the link below:
Royalty trusts have unique characteristics and risk factors, which investors should consider before investing. But they could be appealing for income investors due to their high yields. And, investors looking for exposure to the oil and gas industry may find them attractive.
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 $1.1 billion.
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 million 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. 40 years later, Sabine Royalty Trust is still kicking. In that time, the trust has produced approximately 22 million barrels of oil and 275 million cubic feet of gas.
Sabine has paid out more than $1.3 billion in distributions to unitholders over the course of the past 40 years. The most recent forecasts are for remaining reserves of 6.0 million barrels of oil and 42.7 million 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.
In mid-August, SBR reported (8/11/22) financial results for the second quarter of fiscal 2022. Oil Production edged up 2% over the prior year’s quarter while production of gas grew 75%. In addition, the average realized prices of oil and gas grew 76% and 43%, respectively, thanks to the sanctions of western countries on Russia, which led to a rally of oil and gas prices to multi-year highs. As a result, distributable cash flow per unit more than doubled, from $0.78 to $2.05.
Moreover, the sanctions on Russia are not likely to be withdrawn anytime soon. Thanks to the exceptionally favorable prices of oil and gas, SBR is on track to post 10-year high distributable cash flow per unit this year. Based on its distributions in the first nine months of the year, SBR is offering an annualized distribution yield of 10.1%.
The sanctions of western countries on Russia have greatly tightened the oil market, as Russia exports about 5 million barrels of oil per day (~5% of global supply).
Moreover, the price of natural gas has rallied to a 14-year high due to the sanctions of western countries on Russia. Europe generates 31% of its electricity from natural gas provided by Russia but it is now doing its best to diversify away from Russia. As a result, numerous LNG cargos have been exported from the United States to Europe. Consequently, the U.S. natural gas market has become extremely tight and hence the price of U.S. natural gas has rallied to a 14-year high lately.
The rally of oil and gas prices to multi-year highs has formed an ideal environment for SBR, which is on track to post 10-year high distributable cash flow per unit this year. Notably, the distributable cash flow per unit of SBR this year is likely to be approximately double the previous 10-year high of $4.03, which was achieved in 2013 and 2014.
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 yields higher distribution payouts. As oil and gas prices have both rallied to multi-year highs in 2022, SBR is poised to achieve blowout results this year.
Sabine is a pass–through vehicle for royalty payments –essentially all the royalty income (cash) it receives is passed through to unit holders. About 5%–8% of royalty income is consumed in administrative expenses. The trust has generated an average annual distributable cash flow of $3.18 per unit over the last decade. This corresponds to a 4.0% yield at the current stock price.
However, the cash flows of SBR are highly cyclical due to the dramatic swings of the prices of oil and gas, which have resulted in a markedly volatile performance record. Given the high comparison base formed by the 10-year high distributable cash flow per unit of $7.80 we expect this year, we expect a 14.0% average annual decline of distributable cash flow per unit over the next five years.
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.
The distribution of SBR fluctuates depending on the direction of oil and gas prices. During favorable periods, the trust has distributed $3-$4 per unit annually. Thanks to blowout commodity prices, the trust is on track to exceed this level by an impressive margin this year.
Sabine’s distribution history over the past 10 years is as follows:
- 2012 distributions of $3.70 per unit
- 2013 distributions of $3.92 per unit
- 2014 distributions of $4.10 per unit
- 2015 distributions of $3.11 per unit
- 2016 distributions of $1.93 per unit
- 2017 distributions of $2.23 per unit
- 2018 distributions of $3.35 per unit
- 2019 distributions of $3.02 per unit
- 2020 distributions of $2.40 per unit
- 2021 distributions of $3.97 per unit
Sabine distributed approximately $3.97 per unit to investors in 2021. That was 74% higher than the distribution in 2020 thanks to the strong recovery of the energy market from the pandemic and the resultant rally of the prices of oil and gas.
Sabine has distributed $5.99 per unit in the first 9 months of 2022. On an annualized basis, this represents a full-year payout of roughly $7.99 per unit. This equates to a distribution yield of 10.1%. Of course, the company could distribute more or less than this, depending on where oil and gas prices are headed over the remainder of the year.
On the bright side for the trust, the ongoing war between Russia and Ukraine has no end in sight and hence oil and gas prices are likely to remain elevated in the upcoming months. On the other hand, whenever this war comes to an end, it will probably cause a sharp correction in the prices of oil and gas. Given the multi-year high oil and gas prices prevailing right now, investors should expect lower distributions from SBR in the long run.
It is also important to note that most countries have been severely hurt by the exceptionally high prices of oil and gas this year. As a result, they are doing their best to diversify away from fossil fuels and thus they are currently investing in renewable energy projects at a record pace. When all these clean energy projects begin to come online, in 2-4 years, they will take their toll on global consumption of oil and gas.
In fact, as the market is always a forward-looking mechanism, whenever the market focuses on the potential impact of these projects on the energy market, the prices of oil and gas will probably plunge from their current levels.
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 four decades, which is much longer than originally expected.
If oil and gas prices remain around their current levels for years, the assets of the trust could potentially be undervalued. However, we believe that oil and gas prices will enter another downcycle at some point in the future, just like they always have. Whenever the next downturn of the energy sector shows up, SBR will have significant downside risk while it will also reduce its distributions. Overall, investors should carefully review the risks and unique considerations that go along with investing in volatile royalty trusts..
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 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 45 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The 20 Highest Yielding Monthly Dividend Stocks
- The Best DRIP Stocks: The top 15 Dividend Aristocrats with no-fee dividend reinvestment plans.
- The 2022 High ROIC Stocks List: The top 10 stocks with high returns on invested capital.
- The 2022 High Beta Stocks List: The 100 stocks in the S&P 500 Index with the highest beta.
- The 2022 Low Beta Stocks List: The 100 stocks in the S&P 500 Index with the lowest beta.
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: