Updated on April 5th, 2019 by Nate Parsh
Sabine Royalty Trust (SBR) has a high dividend yield of more than 7% based on annualized distributions over the past 3 months.
This places Sabine on the high dividend stocks list. You can see all 390 5%+ yielding stocks here.
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 ~40 monthly dividend stocks, which you can download from our database here:
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.
Business Overview
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 $685 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.
37 years later, Sabine Royalty Trust is still kicking. In that time, the trust has produced more than 21 million barrels of oil, and over a billion cubic feet of gas.
Sabine has paid out more than $1.3 billion in distributions to unitholder over the course of the past 37 years.
The most recent forecasts are for remaining reserves of 6.7 million barrels of oil, and 36.6 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.
Through the first three quarters of 2018 (the trust has not released its annual report for 2018), Sabine has shown improvements in royalty income, distributable income and distributable-income-per-share.
In the first nine months of 2018, Sabine has seen royalty income increase 27% and distributable income grew 29% from 2017. Distributable-income-per-share has increased 50%.
Looking back, 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.
In the following years, royalty income and distributions fell steadily. The trust’s 2016 distributed income marked a five-year low.
Over the the last two years, the trust has seen an increase in royalty income and distributions.
Higher oil prices has been the primary driver of growth for the trust.
Growth Prospects
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 $62 per barrel in the U.S.
Sabine had an average realized oil price of $58.76 per barrel for the first three quarters of 2018, a 25% increase from 2017. In addition, oil production increased by 10.6% in 2018 to 443,283 barrels.
On the other hand, the price of gas fell 7.7% to $2.77 during this time. This decline in price has been offset by a 16.2% increase in gas production.
The $7.6 million increase in royalty income for the first nine months of 2018 was due to oil and natural gas production ($4.5 million) and increase in the price of oil ($4.8 million).
These increases were offset by lower natural gas prices ($1 million) and higher taxes and operating expenses ($0.7) million.
The results from the three quarters underscores how much royalty trusts like Sabine benefit from higher commodity prices. That said, they also suffer mightily when commodity prices decline, as occurred during 2014 to 2016.
If oil and gas prices head higher still, Sabine’s distributions could grow in 2019 and beyond.
Dividend Analysis
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 nine years is as follows:
- 2010 distributions of $3.70449 per unit
- 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 $2.229233 per unit
- 2018 distributions of $3.35201 per unit
Sabine distributed approximately $3.35 per unit to investors in 2018. Based on its recent unit price of $47, this represents a yield of 7.1%.
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.
Final Thoughts
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 37 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 2018 levels, if commodity prices cooperate.
That said, investors should carefully review the risks and unique considerations that go along with investing in royalty trusts.
