Marc Lichtenfeld has updated his pitch about his favorite oil and gas royalty stock. He believes that it is a great way to benefit from higher oil and gas prices that he expects to occur in 2023. This is an update to a pitch he made in March to see if there have been any changes in the last six months. If his prediction comes true and oil and gas prices reach the highs of 2022, the stock, PBT, will likely perform well.
However, a year after this recommendation was made, the stock is not performing as well as expected. Despite this, the Oxford Club keeps recycling the recommendation.
Permian Basin Trust’s primary royalty interest is, in fact, a net profit interest (NPI). However, this interest is being negatively affected by high capital expenditure (CapEx) spending, which has caused a significant drop in their monthly distribution. The distribution has fallen from its peak of 20 cents in 2022 to an average of around five cents per month over the past year. This issue can affect many oil and gas royalty partnerships and trusts, but it seems especially problematic for this trust due to their reliance on the NPI on Waddell Ranch. The NPI means they effectively share in profits, not revenues. The real appeal of royalties is when they are a royalty on the top line, not the bottom line. Being a passive partner is not ideal when you still have to pay the same drilling expenses as the active partner, particularly when you don’t get a vote on what those expenses will be.
The Permian Basin has been a productive area for oil and gas production. This trend is likely to continue with the exploration of deeper layers. However, I fail to understand why someone would prefer PBT over other diversified competitors. The competitors receive more top-line royalties, have less reliance on NPI, and offer higher dividend yields. If you are interested, you can research other companies such as Dorchester Minerals (DMLP), Freehold Royalties (FRU.TO, FRHFH), and Black Stone Minerals (BSM). I recently bought BSM, and I find their valuation and potential yield attractive. There are many other companies that you can explore as well.
PBT, an oil and gas royalty trust, is heavily reliant on their Waddell Ranch property, which is operated by Blackbeard. Blackbeard has been investing a lot of money in drilling, which is reducing the potential royalty income for PBT. However, this situation might turn around as it did a few years ago in a similar case. Unfortunately, Blackbeard is a private operator, so we don’t know much about their plans. In December, PBT sued Blackbeard, claiming that their capital expenditure (CapEx) numbers are too high and depressing the royalty income. Blackbeard is planning to spend around $90 million in CapEx this year, which is similar to last year’s spending. The dividend finally increased to 10-15 cents per month in November and December, meeting Lichtenfeld’s expectations. However, it quickly fell back to four cents, resulting in a total trailing dividend of 60 cents for the past 12 months.
That’s probably the best estimate for what the 2024 dividend will be, but it depends on Capital Expenditure spending and oil and gas prices. I believe investors are more optimistic about oil prices with PBT than with most similar investments. The mention of a “10,000% dividend” is just a backward-looking daydream. This is roughly what Charlie Munger received eventually from an oil royalty he bought for $1,000 several decades ago and that paid him $100,000 per year in some years. So, it is possible to get extreme returns from a royalty on a long-producing energy asset, especially if prices go up and production is better than expected. However, I would say that such returns are not very likely for mature and publicly traded royalty portfolios, at least not in the “next few decades” timeframe. Especially if you’re not even getting a top-line royalty but have to absorb production costs too.
Black Stone Minerals (BSM) is currently the energy royalty company that I am considering buying, as it is well-diversified across many different oil and gas fields. However, one negative aspect is that it is somewhat reliant on natural gas, which has experienced a significant drop in price due to the LNG export permit “pause” earlier this year. If you are interested in exposure to primarily the Permian region, and with a focus on oil, I recommend Viper Energy (VNOM), which I do not own personally. Although it faces similar challenges to Permian Basin Trust (PBT), it offers a better yield and a more transparent operator in Diamondback Energy (FANG). Freehold (FRHLF) and Dorchester (DMLP) are also more appealing to me than PBT.
