Updated on June 30th, 2021 by Bob Ciura
Sabine Royalty Trust (SBR) has a high dividend yield of 6.5% based on annualized distributions over the past 6 months. 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.
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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 ~$570 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. 39 years later, Sabine Royalty Trust is still kicking. In that time, the trust has produced nearly 22 million barrels of oil, and 275 billion cubic feet of gas.
Sabine has paid out more than $1.3 billion in distributions to unitholders over the course of the past 39 years. The most recent forecasts are for remaining reserves of 7.1 million barrels of oil, and 35.4 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. In mid–May, SBR reported (5/14/21) financial results for the first quarter of fiscal 2021. The average realized price of gas rose 16% but the average realized price of oil decreased–24% over last year’s quarter.
Production of gas remained flat, but production of oil dipped –3% and thus distributable cash flow per unit declined–14%, from $0.71 to $0.61. The price of oil has rallied to pre–COVID levels this year thanks to the ongoing vaccination program and the unprecedented production cuts implemented by OPEC and Russia.
The cash flow of SBR, which lags the trends in oil prices, has finally caught up with the uptrend. We expect annual distributable cash flow per unit of approximately$2.40 in 2021.
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. As oil and gas prices have risen over the first several months of 2021, this bodes well for Sabine over the remainder of the 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 $3.18per unit over the last decade.
However, the cash flows of SBR are extremely sensitive to the gyrations of the prices of oil and gas and as a result, have resulted in a markedly volatile performance record. Given the suppressed cash flows due to the pandemic this year and our expectations for higher realized oil prices in the upcoming years, we expect 6.0% average annual growth 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.
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 annually.
However, distributions began to dry up last year as falling commodity prices took their toll. Sabine’s distribution history over the past 10 years is as follows:
- 2011 distributions of $3.96617 per unit
- 2012 distributions of $3.70090 per unit
- 2013 distributions of $3.91645 per unit
- 2014 distributions of $4.09779 per unit
- 2015 distributions of $3.10520 per unit
- 2016 distributions of $1.93403 per unit
- 2017 distributions of $2.22923 per unit
- 2018 distributions of $3.34906 per unit
- 2019 distributions of $3.01979 per unit
- 2020 distributions of $2.39665 per unit
Sabine distributed approximately $2.40 per unit to investors in 2020. While this represented a notable reduction from the prior year, all things considered it is impressive the trust was able to distribute as much as it did. The coronavirus pandemic had a significant impact on the demand for oil and gas, which resulted in a large decline in commodity prices last year.
Sabine distributed $1.31681 over the first 6 months of 2021. On an annualized basis, this represents a full-year payout of roughly $2.63 per share. This equates to a dividend yield of 6.5%. Of course, the company could distribute more or less than this, depending on where oil and gas prices go over the remainder of the year.
If oil prices were ever to get back to $100 per barrel, there could be considerable dividend growth potential. The same goes for an increase in the price of natural gas. 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 and gas 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.
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 almost four decades, 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 2019 levels, if commodity prices cooperate. That said, investors should carefully review the risks and unique considerations that go along with investing in volatile royalty trusts.