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Sleeper IPO: Chesapeake Granite Wash

NEW YORK ( TheStreet -- Oil trusts pull in new investors with the lure of high yields.

The deals generally involve an investment in aging oil or gas fields where the trust essentially buys the rights to royalties on the production or sale of the oil and then passes on the profits to the shareholders. Enduro Royalty Trust (NDRO) recently went public, but the company has dropped 2% in the after-market. Chesapeake Energy (CHK - Get Report) is next up, sponsoring the Chesapeake Granite Wash Trust, which is seeking to raise around $468 million through the sale of 23.4 million shares in a range of $19 to $21 each. The stock is expected to trade on the Nasdaq under the symbol "CHKR."

Chesapeake is expected to perform better than Enduro for several reasons. The first and most obvious is the involvement of Chesapeake, which is a $19 billion company with a fairly good reputation. The trust focuses on a specific geographic area known as the Colony Granite Wash in Washita County, Oklahoma and the royalties will come from 60 producing horizontal wells and 122 development wells. Trusts from established drillers have delivered the promised high yields, whereas the trusts from independents are viewed as riskier.

Chesapeake expects to pay a 13% yield on the trust. Similar deals from Sandridge Energy (SD - Get Report) have paid off in the IPO market. SandRidge Permian Trust (PER)and Sandridge Mississippian Trust (SDT) are both set for 12% payouts in 2012.

SDT is already up 15% year-to-date and while Permian is down 36% in 2011, though it has jumped 12% in the last month. SandRidge shares are up 5.8% year to date. The trusts will eventually decline in output as well as revenue and the Chesapeake trust is set to terminate in 20 years.

"It's a cheaper source for revenue for them, that way they don't have to go back to the regular shareholders. It's a really limited deal, though, just based on the one geological formation," says IPO Desktop President Francis Gaskins. "I think it's the sleeper. If you look at the other two royalty trusts put out by SandRidge; they've both beaten their targeted estimates. This one pays 13% for next year."

LRR Energy (LRE) is another oil trust going public. It is a private equity deal controlled by Lime Rock Management with the intention to raise $190 million, pricing 9.4 million shares in a range of $19 to $21 each. The issue will trade under the symbol "LRR."

Lime Rock was founded in 1998 and manages roughly $3.9 billion of private capital for energy investments. Gaskins is concerned that while the parent has said it plans to make cash available for acquisitions, it hasn't set the terms, so it could be expensive.

"LRR Energy is another private equity deal with a poor sponsor and no growth," says Gaskins. "They can buy things, but it's not clear what the cost of that money will be to partnership."

The company is projecting a yield of 9.5%. When the yield gets to 11%, incentive distributions kick in for the general partner.

As for the use of proceeds, Gaskins says it goes to pay debt and pay themselves.

"That looks to me like it's a private equity bailout," he says.

-- Written by Debra Borchardt in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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LRE $0.00 0.00%
SD $0.15 -11.76%
CHKR $2.82 0.00%
CHK $1.59 0.00%
PER $2.40 0.00%


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