This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

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 - Get Report) 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.

Readers Also Like:


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

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
CHKR $6.53 0.00%
CHK $16.68 0.00%
LRE $8.19 0.00%
PER $7.35 0.00%
SD $1.77 0.00%

Markets

DOW 18,132.70 -81.72 -0.45%
S&P 500 2,104.50 -6.24 -0.30%
NASDAQ 4,963.5270 -24.3630 -0.49%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs