The name Hugoton Royalty Trust (HGT) may not be familiar to you, but the stock is one that you will want to know.
The Dallas-based company pays dividends on a monthly basis. Similar to a real estate investment trust (REIT) or the more popular Canadian royalty trusts, Hugoton distributes its excess net operating income to investors. The latest 17.4-cent payment, declared on May 19, was the smallest since April 2005. That said, at Tuesday's closing price of $27.34, Hugoton's 7.6% yield is 30 basis points above the industry average.
With that in mind, I'm here to answer readers' questions: Should I do it? Is Hugoton's dividend too good to be true, or should investors fill up on this natural gas stock?
I believe that Hugoton is oversold because of some pressure created by the spinout from majority owner
( XTO). XTO owned about 54% of Hugoton, which it divested May 12. Even so, Hugoton will continue to generate about 80% of its revenue from XTO-operated properties, and under the language of the trust, management can sell only up to 1% of the net profit interests within any calendar year.
In total, Hugoton has 3.3 million barrels of proven oil reserves, in addition to 381.8 billion cubic feet (1 million cubic feet equals 1.027 million Btu) of natural gas. This works out to a reserve life of 14.6 years, while the average trust in this space has an average of only eight years.
This is important because a royalty trust's terminal value is zero. In other words, when it runs out of commodities to pull out of the ground, it has little value.
A.G. Edwards analyst Michael Heim expects a steady dividend payout from Hugoton throughout the remainder of the year, followed by an increase in the winter. This follows along with the current outlook of the natural gas futures ladder pointing toward a rise in the price of the commodity from about $6 per million British thermal units (MBtu) currently to $10 per MBtu by the winter.
Up until the California energy crisis in 2000, natural gas traded in a narrow range for several years, between $2 and $4 per MBtu. While we're a long way removed from the $15.78 per MBtu that natural gas futures reached in December 2005, natural gas prices are historically correlated to the seasonal demand for heating.
It's also worth noting that a group of six insiders have bought more than 190,000 shares on the open market in recent weeks. By pledging approximately $5 million of their own money behind the stock, I wouldn't be surprised if Hugoton has bottomed out for the time being.
So yes, I do believe that Hugoton is attractive to purchase at current levels. Natural gas prices appear to have bottomed around $6 per MBtu, and as Heim noted, the stock is down 34% since the announcement of the XTO distribution, compared with a 5% decline in Hugoton's peer group. With a return toward $30 a share and the proceeds of the dividend, Hugoton can create a double-digit percentage total return over the coming quarters.
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David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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