CAPScall of the Week: Chesapeake Granite Wash Trust
May 30th 2012 11:38AM
Updated May 30th 2012 4:10PM
For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.
What Chesapeake Granite Wash Trust does
The Chesapeake Granite Wash Trust was formed by Chesapeake Energy (NYS: CHK) last year and owns certain royalty interests oil, natural gas liquid, and natural gas wells in Washita County, Okla., within the broader Granite Wash formation of the Anadarko Basin.
As you can imagine, elevated oil prices and high demand translated into better-than-expected results for the trust in the latest quarter. However, the trust is heavy in low priced natural gas, which is unhedged, resulting in weaker profits.
Whom it competes against
The advantage of owning a trust is in its usually high-yielding dividends and the fact that its minimal overhead yields strong profits. It also allows for individual investors to own a portfolio of many wells and commodity types, which helps minimize risk. Since the overlying companies do the dirty work, shareholders of trusts usually sit back, relax, and let the dividends flow in from royalty interests in oil and natural gas (i.e., necessity products).
One thing there's not a shortage of, however, is royalty trusts. It's important to note that not all energy trusts are created equally or boast similar dividend potential. Let's take a quick glance at a few royalty trusts that are set up similar to Chesapeake Granite Wash Trust.
P/E Ratio (TTM)
|Chesapeake Granite Wash Trust||2.2||39.4||13.5%|
|SandRidge Mississippian Trust I (NYS: SDT)||2.7||N/A||11.6%*|
|SandRidge Mississippian Trust II||2.4||27.4||5.2%|
|Hugoton Royalty Trust (NYS: HGT)||2.4||5.1||9.2%|
Sources: Yahoo! Finance, Morningstar, TTM = trailing 12 months. *Projected yield.
Hugoton Royalty Trust has been doing its best to break down the notion that royalty trusts offer investors less risk. The company has been the target of pessimists lately, most notably a Seeking Alpha article claiming that its high dependence on natural gas royalties and natural gas price declines could net investors a negative return -- especially against inflation.
Even the popular SandRidge Mississippian Trusts, which are both based on production from parent SandRidge Energy (NYS: SD) , could run into a weaker dividend in the future. Weak natural gas prices have coerced SandRidge to move away from its natural gas dependence and to increase its oil production instead. This should prove to be a smart move, but SandRidge's high levels of debt and shaky transition could eventually take a toll even on Trust I's enormous 11.6% yield.
The problems Chesapeake does have can be traced back to the PR gaffes from Chesapeake Energy CEO, Aubrey McClendon. Beyond questionable management decisions at the top, the royalty's assets look sound as does its group-leading 13.5% yield.
Falling for a high-yielding stock is only worthwhile if the dividend is sustainable, and here I feel it is -- with some yield moderation and hiccups, of course. Chesapeake Energy clearly needs to take steps to address Mr. McClendon's gross mismanagement of company funds, but the assets themselves are worth more than where Chesapeake Energy is currently trading at. It's only a matter of time before natural gas rebounds and the Trust begins to see stronger profits again. I would be very surprised to see this yield fall from the double-digit range, which would net a complete dividend payback in seven or fewer years, assuming you reinvest the proceeds. Those are figures I can wrap my hands around!
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Chesapeake Energy and SandRidge Mississippian Trust II. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always of interest without charging you interest.
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