Updated on May 25th, 2021 by Bob Ciura
Income investors looking to buy oil and gas stocks may want to gain exposure to the booming Permian Basin. PermRock Royalty Trust (PRT) is an oil and gas producer with all of its properties in the Permian Basin, and the stock currently yields nearly 10%.
Beyond its high dividend yield, PermRock also pays monthly dividends, instead of the traditional quarterly distribution schedule. Monthly dividend payments are highly superior for investors that need to budget around their dividend payments (such as retirees).
There are over 50 monthly dividend stocks. You can see the full list of monthly dividend stocks (plus important financial metrics such as payout ratios and dividend yields) by clicking on the link below:
PermRock is instantly appealing based on its nearly double-digit dividend yield. But as always, investors need to understand the underlying business to make sure the dividend payout is also sustainable.
This is where oil and gas royalty trusts become especially risky, which is why only investors with a high risk tolerance should consider purchasing PermRock.
Business Overview
PermRock Royalty Trust is a trust formed in November 2017 by Boaz Energy, a company whose expertise is on the acquisition, development and operation of oil and natural gas properties in the Permian Basin.
The trust owns properties in the Permian Basin. It receives 80% of the net profits from the sale of oil and natural gas produced in its properties and distributes all those net profits in dividends every month.
According to the EIA, Permian Basin is the most prolific oil producing area in the U.S. This area extends over 75,000 square miles in West Texas and Southeastern New Mexico. Since its discovery in 1921, it has produced more than 30 billion barrels of oil and more than 75 Tcf of natural gas.
Source: Investor Relations
The properties of the trust have distinct advantages. They consist of long-life reserves in mature, conventional oil fields, with a reliable production profile.
Thanks to the mature nature of these oil fields, production and reserve estimates are highly reliable. This is in sharp contrast to the estimates of unconventional fields, which are characterized by a higher degree of uncertainty.
Those reserves are sufficient for approximately 10 years of production at the current production rate. However, the trust can enhance its output via water-flooding techniques while it will also discover new reserves in the area. As a result, management expects the trust to produce oil and natural gas economically for at least 75 years. Such a long reserve life should be sufficient to satisfy even the most demanding investors.
It is also worth noting that the properties of the trust are characterized by remarkably high operating margins. As the future path of the price of oil is highly unpredictable, oil producers need to grow their production consistently year after year in order to grow their earnings in the long run.
Growth Prospects
The trust released annual results for the period ending December 31st. Net profits income received by the trust was $3.2 million for the full year, compared to $10.4 million in 2019. The reasons for this significant profit decline were decreased oil and natural gas prices, and increased development costs.
The average realized sale price of oil per barrel in 2020 was $40.56, compared to a favorable price of $51.06 in the previous year. Distributable income for the trust came to $1.9 million, down significantly from the $8.8 million earned in 2019.
Distributable income per unit of $0.16 fell 78% from $0.73 in 2019. The trust paid out all distributable income to shareholders as distributions, for a payout ratio of 100%. Total cash reserves as of December 30th, 2020 were $1 million compared to $600,000 on December 30th, 2019.
PermRock had previously guided for production growth of around 4.0% annually, however oil and natural gas sales volumes actually declined in 2020 due to lower sales and prices, partially due to the COVID–19 pandemic.
The trust has not missed a distribution payment thus far in 2021, although it went several months last year without paying a distribution. The lack of dividend predictability is a negative for potential investors.
Dividend Analysis
As mentioned above, PermRock Royalty Trust pays a variable dividend every month, depending on its underlying net profits. In 2020, the trust paid a total of $0.157014 per share in dividends. Based on this, the stock would have a high dividend yield of nearly 10%.
The trust has had a better start to 2021, having declared distributions of $0.186615 per share through May. This means the company has already declared a higher dividend through the first 5 months of 2021 than it did in all of 2020.
Overall, PermRock Royalty Trust offers an exceptionally high dividend yield, though investors should keep in mind that dividends may greatly vary from month to month, depending on the underlying oil prices. The extremely weak oil prices of 2019-2020 were a significant challenge for PermRock.
Conversely, PermRock Royalty Trust will benefit much more than the larger oil majors if the price of oil rises significantly from its current level. Indeed, the recent increase in oil prices has allowed PermRock to resume growing its dividend in 2021.
Therefore, 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 Basin.
In summary, 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 prices) and much more downside in the event of a downturn in the energy sector.
Assuming that the price of oil will remain around its current reasonable levels in the upcoming years, one can expect PermRock Royalty Trust to grow its earnings per share by approximately 5% per year on average thanks to a mix of production growth and higher oil prices.
PermRock’s properties are in the Permian Basin, the most prolific oil producing area in the U.S. However, an oil royalty trust is a poor way to gain exposure to the booming production in this area. We believe investors would be much better off in a traditional oil and gas producer, or midstream company.
Suspending the dividend for a few months in 2020 was a cautious move, and although it has been reinstated, we expect the dividend will likely not return to its previous high in the future.
Final Thoughts
PermRock Royalty Trust has had a number of challenges in the past few years, including the weak oil price environment and the coronavirus pandemic which suppressed global oil demand. The trust offers an exceptionally high dividend yield and operates in the most prolific oil producing area in the U.S., with promising growth prospects.
As we do not expect another downturn in the energy sector in the near-term, we believe that the trust will offer a consistently high dividend yield. Nevertheless, due to the non-diversified business model of the trust and its dramatic reliance on the price of oil, 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.