CAPScall of the Week: Enduro Royalty Trust
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. congressional districts and its 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.
What Enduro Royalty Trust does
Enduro Royalty Trust was founded last year as a subsidiary to Enduro Resource Partners; it acquires net profit interests (80% stakes) in oil and natural gas properties located in New Mexico, Texas, and Louisiana.
As a monthly distributor of dividends, Enduro also reports its oil and natural gas sales on a monthly basis. The most recent results, which detail oil sales in June and natural gas sales through July, show that Enduro sold 77,410 barrels of oil and 1,336,036 Mcf of natural gas. Oil barrel production dipped 7% while natural gas production jumped by 75% from the previous month.
Whom it competes against
Master limited partnerships, or MLPs, don't truly compete against one another save for jockeying for investors' dollars.
One of the biggest knocks against Enduro when it went public in November was that it simply didn't have the backing of a well-known partner in Enduro Resource Partners. Compare that to MLP darlings like BP Prudhoe Bay Royalty Trust (NYSE: BPT) which is partnered with BP, and Chesapeake Granite Wash Trust (NYSE: CHKR) which is partnered with Chesapeake Energy, which both offer similarly large dividends and better name visibility.
Also working against Enduro are multiple attacks from investing commentators that claim the present value of some of the listed MLPs far exceeds the value left in their dividends. Both Hugoton Royalty Trust (NYSE: HGT) and San Juan Basin Royalty Trust (NYSE: SJT) took it on the chin after claims were made that the values of their future payouts were far below the then-current share price of the MLP. BP Prudhoe Bay suffered through something similar recently. With Enduro being a recent issue, reserves aren't much of a worry, but investor sentiment relative to the sector can be.
After carefully reviewing the prospects of Enduro Royalty Trust, I've decided -- for a second week in a row, may I add -- to perpetuate a streak only of outperforms, and make a CAPScall of outperform.
One of the main reasons why Enduro makes sense is its valuation. Under normal circumstances I tend not to look at direct P/E ratios and price/book values when it comes to MLPs, but at just 88% of book value and 10 times forward earnings, there's something to be said about Enduro's perceived undervaluation.
Also, there's not much I love more than a monthly dividend. Enduro's dividend has been steady and the company is on pace to deliver a projected yield of 9.4%. I also like the fact that even after a doubling of natural gas production in its most recently reported month, that oil profits are nearly twice as high as natural gas profits. Oil is in higher demand and prices are far less volatile than those of natural gas, which should yield to better dividend stability in Enduro than many of its peers of similar size offer. If your dividends are reinvested, you're looking at a complete payback in about eight years! Sounds good to me!
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