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The Best Oil Stock You Never Heard Of

Stocks in this article: SDT

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Paul Tracy

NEW YORK ( StreetAuthority) -- There simply aren't many opportunities like this one. It's an energy investment, but it's a far cry from the oil majors such as ExxonMobil (XOM) or Chevron (CVX).

In fact, this is one of those investments I'd guess only one in 20 investors know about.

Let me explain . . .

Most energy investments you find on the New York Stock Exchange are actually pretty complex. They are companies that own land, wells, derricks and trucks. They have employees. They have to deal with spills, lawsuits and cleanups. That's a lot to handle and still pump out a profit.

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Take Chevron, for example. In a recent quarter, it generated $64 billion in revenue . . . but $52 billion of that went toward employee salaries, marketing campaigns, administrative overhead and other operating expenses.

And then Uncle Sam took $5.5 billion in corporate taxes. That still left a respectable $7.7 billion in pure profit. But Chevron pumped the vast majority of that right back into the business to find and develop new sources of oil.

Chevron is a complex oil giant, but the company I'm going to tell you about is the exact opposite. It couldn't be any simpler . . . or more lucrative.

This stock -- SandRidge Mississippian Trust (SDT) -- simply takes in royalties and then pays them out to investors.

As a royalty trust, SDT owns a stake in dozens of wells run by its parent company, SandRidge Energy (SD). SandRidge Energy takes care of the drilling, production, marketing and selling of the oil and gas produced.

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 between now and when the trust is scheduled to dissolve in December 2030.

To create SDT, SandRidge Energy packaged a 90% interest in 37 of its oil and natural gas wells in Oklahoma. In other words, for every $1 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.

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