Top picks 2012: SandRidge Mississippian Trust

This high-yielding oil and gas royalty trust is still a buy after its recent run-up.

By TheStockAdvisors Jan 16, 2012 11:50AM
Image: Oil Well Pumpjack © Roger Milley/Vetta/Getty ImagesThis post is one in a series in which more than 50 newsletter advisers share their Top Picks for 2012.

By Paul Tracy, Top 10 Stocks

As a royalty trust, SandRidge Mississippian Trust (SDT) owns a stake in dozens of wells run by its parent company SandRidge Energy (SD).

This stock has only one mission -- take in royalties and pay them out to investors. SandRidge Energy takes care of the drilling, production, marketing, and selling of the oil and gas produced. Production is split roughly 50/50 between oil and gas.

The royalty trust -- SDT -- is passive in the relationship. It doesn't have to do a thing. In return for the initial investment when it went public, its investors get a cut of all the oil and natural gas sold from the wells.

For the Mississippian Trust, SandRidge Energy packaged a 90% interest in 37 of its oil and natural gas wells in Oklahoma.

In other words, for every dollar in oil or gas pumped by these more than three dozen wells, owners of the royalty trust are now entitled to 90 cents in royalties. But that's just the start...

That's because the trust gets a bonus in addition to the 37 wells it owned at its inception in December 2010. Between that date and December 2015, parent SandRidge must drill an additional 123 wells, in which SDT will own a 50% stake.

In other words, over the next several years each unit of this trust will have a stake in an increasing number of wells. And there is a powerful incentive in place for the parent company to get those wells drilled... and increase distributions... sooner rather than later.

As is common practice, SandRidge Energy retained ownership of over 10 million of the 28 million outstanding units of SDT. But most of those (7 million units) are subordinated shares.

Unlike the shares we're investing in, those subordinated shares don't receive dividends unless regular common unitholders get a predetermined minimum payment each quarter.

If the distribution falls below that threshold, the payments to the subordinated shares will be reduced to make up the difference to the regular units.

That means these shares have a built-in buffer to ensure we see strong distributions going forward.

In the latest quarter, SDT paid a distribution of 82 cents per unit, giving a forward yield of 10.38% at Friday's price.

Shares of SDT have run up in the past few weeks, but I think the high yield is still attractive at these levels. But if you're a more conservative investor, waiting for a pullback before buying isn't a bad idea.
See all 50+ stocks in our Top Picks Report 2012.

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Tags: SDT


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