SandRidge: 2 high-yielding energy trusts

They should continue paying double-digit returns even if energy prices keep falling.

By TheStockAdvisors Jun 19, 2012 9:43AM
By Paul Tracy, Top 10 Stocks

I receive more questions about SandRidge Mississippian Trust (SDT) and SandRidge Permian Trust (PER) than any other of my portfolio holdings. And for good reason. Their high yields attract investors. So does the idea of essentially owning your own oil derrick, which royalty trusts allow you to do.

However, the trusts are volatile. And with oil prices falling 20% in about a month, many trusts have seen a pullback, including SDT and PER. I think these pullbacks represent a great entry point for new investors.

Both trusts have the support of subordinated shares backing up their yields. Remember that if the trust's distributions fall below their targeted levels, these subordinated shares forgo their share of distributions to make up the difference to common shareholders.

This safeguard should keep distributions stable in the coming quarters, even if oil and gas prices continue to head lower.

Meanwhile, both trusts have hedges in place to help smooth out volatility from energy prices and ensure there is plenty of cash for distributions.

For instance, about 60% of SDT's projected oil production this year is hedged at an average price of $104 per barrel. PER has about 85% of its oil production hedged at $102 per barrel.

In other words, I see little reason why the two trusts can't keep paying their high yields -- which are both above 11% at this point -- and see their shares eventually rebound.

Investors will want to keep in mind that the two trusts have very different production profiles. In the most recent quarter, SandRidge Mississippian Trust saw production of approximately 40% oil and 60% natural gas.

SandRidge Permian Trust's production, however, was 96% oil. As such, SDT's share price is going to be more sensitive to natural gas price movements. Meanwhile, PER will fluctuate up and down based on changes in oil prices.

Action to take: The recent downturn hasn't changed my bullish opinion of SDT or PER. With the units of both trusts yielding over 11% thanks to the selloff, both are much more attractive now than they were just a few weeks ago.

More from TheStockAdvisors
Tags: SDT
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
265
265 rated 2
429
429 rated 3
612
612 rated 4
499
499 rated 5
525
525 rated 6
701
701 rated 7
533
533 rated 8
337
337 rated 9
131
131 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
COPCONOCOPHILLIPS9
TAT&T Inc9
DVNDEVON ENERGY CORPORATION9
EOGEOG RESOURCES Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.