My question for the day is: Is Enduro Royalty Trust (NYSE: NDRO ) a worthy investment? First, the background to uncover the facts.
The Enduro Royalty Trust makes its money by pumping oil and natural gas out of the ground and selling it. The two factors that determine the profitability of the trust is the amount it can pump out, and the price it gets.
Enduro Resource Partners LLC (the parent company) estimated in the prospectus when they created Enduro Royalty Trust in 2011 they had 25.6 mboe of oil and 50,859 MMcf of natural gas in the holdings. As of December 31, 2012, the underlying properties had proved reserves of 21.4 million barrels of oil equivalent. The number of wells will continue to rise over the next few years and production numbers will increase. As the earlier wells begin to reduce their production over the years the follow on wells will produce. The top producing years are expected to be from 2013 through 2018. The lack of clarity into the future to estimate longevity of production and account for any new developments in the extraction process that could increase the amount of oil and gas extracted over time is unknown, but there will be a drop in production as the reserves are pumped out.
The price for the oil and gas are determined by the market and there is no method to measure what futures prices will be. One unique effect during the current year of 2013 is the fact that there has not been a hurricane that has threatened the U.S. and forced the closure of pumping wells or the refineries. Due to this fact, there is a surplus of oil and gas products on the market that is depressing prices at this time. The market today has WTI at $93.04 and Brent at $105.81. Natural gas opened at $2.43, and is up over a dollar in Wednesday's trading. With the depressed prices, the revenue will be down and distribution will be lower during the 4Q 2013.
Enduro Royalty Trust is characterized as a perpetual trust. A perpetual trust has the benefit of no limits on production and no end date. This puts investors of Enduro Royalty Trust in a position to profit for the long term. However. Enduro has stated in their prospectus that the trust will dissolve upon the earliest to occur of the following: 1) the approval of the holders of at least 75% of the outstanding trust units, and sells the Net Profits Interest, (2) the annual cash available for distribution to the trust is less than $2 million for each of any two consecutive years, (3) the holders of at least 75% of the outstanding trust units vote in favor of dissolution or (4) the trust is judicially dissolved. So, although Enduro is classified a perpetual trust, there is definitely the potential for an end to the trust.
On November 8, 2011, Enduro Resource Partners LLC, conveyed to the Trust, through the merger of a wholly owned subsidiary of Enduro with the Trust, the Net Profits Interest in exchange for 33,000,000 units of beneficial interest in the Trust (the "Trust Units"). Immediately following the conveyance, Enduro completed an initial public offering of 13,200,000 Trust Units. After the completion of the initial public offering and as of September 30, 2013 and December 31, 2012, Enduro owned 19,800,000 Trust Units, or 60% of the issued and outstanding Trust Units. On October 2, 2013, Enduro
completed a secondary offering of 11,200,000 Trust Units at a price of $13.85 per unit to the public. After the completion of the secondary offering, Enduro now owns 8,600,000 Trust Units, or 26% of the issued and outstanding Trust Units. The trust used the proceeds from the 11.2 million units to reduce their debt to pay down a portion of the outstanding borrowings under its senior secured credit facility. This sale did not affect the total number of units and will not affect the distribution to unit holders.
Enduro Resource Partners LLC, was the largest hold of units and now investors own 74% of the Trust. There is no controlling interest, but the total of all investors do not reach 75% required for action to terminate the Trust. The sale was more beneficial to the company to pay off debt for the long term quality of the trust and the unit holders. The cost of the debt would have been at a higher cost later, and the company now allows more unit holders to reap the profits of the trust.
The 3Q 2013 financial statement reports $19.6 million in oil sales and $7.6 million in natural gas sales for a total of $27.2 million in total sales. Minus operating expenses of $11 million leaves plus $1.5 million for contract settlements leaves $17.7 million net profit. 80% distribution is $14 million for 33 million unit holders provides about $0.15 per unit, per month. This is sustainable.
Now for the math - Is Enduro a good investment? With a stock price of 12.26 (during trading hours on November 13, 2013) and the estimated dividend $0.12 per month ($1.44 per year) that is a yield of 11.7%. The current price is depressed, so lower revenues could be seen for 4Q 2013. As prices rebound and average out over the next 5 years, the return should be strong and continue the double digit return. The stock price should not drop soon (project over the next 5 years while production remains high), but over time with the reserves diminishing, we expect to see the value decrease. There is opportunity for undiscovered reserves from the wells to increase the value and length of time the wells can pump. Time is also a positive for developments and new techniques to recover more oil from wells. One additional advantage with Enduro Royalty Trust, there is no production limit or end date, and if the trust is terminated, the unit holders will likely be eligible to receive compensation for the remaining assets.
My assessment is Enduro Royalty Trust is a good investment that will provide a double-digit returns over the next 5 years without a significant drop in original principle. Investing in this trust the investor must carefully track the remaining reserves and decide if and when is the appropriate time for them to enter or exit this investment.
Disclosure: I am long NDRO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Continue to research the company and watch the amount of reserves the company reports in each quarterly report with the SEC on the company web page. There are many sites to review that cover high paying dividends and distributions.
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