He's not very handsome, until you realize he's worth about $500M.

He’s not very handsome, until you realize he’s worth about $500M.

That’s Steve Forbes, the owner of the Forbes publishing empire, who is unfortunately not my grandfather. He’s pretty active in politics these days, running in the Republican presidential primaries in 1996 and 2000. He lost both times, but not before spending something like 35 million dollars of his own money. Not such a good investment there, huh Stevie?

Recently, while trolling the internet for porn investment ideas, I came across a company called Enduro Royalty Trust. In November 2011, Euduro decided they’d raise some money from some property they had. They created a royalty trust, keeping 60% of the 33M shares issued in the IPO. In exchange for letting them produce on the land, the trust gets 80% of the net profits from any oil or natural gas pulled out of the ground.

The trust has very little in expenses. Over the last year they’ve paid about $1M in expenses compared to $55M in revenue. Oh, if only all businesses could enjoy margins so succulent. That leaves $54M in profit to be paid out to unitholders, which works out to a dividend yield of 9.32% on the $16.52 share price.

The company was paying out 14 or 15 cents a month for a while, but weakness in the natural gas market has dipped the payout to the 12 cent range. They only paid out 7 and 6 cents respectively over February and March, weakness the trust blames on slow payments from the parent company. It’s a little concerning, but whatevs. We’ve got some bigger problems coming up.

But first, let’s see what Steve’s magazine thinks about the trust:

Enduro Royalty Trust NDRO +0.73% (NYSE: NDRO) has been named as a Top 10 dividend paying energy stock, according to Dividend Channel, which published its weekly ”DividendRank” report. The report noted that among energy companies, NDRO shares displayed both attractive valuation metrics and strong profitability metrics. For example, the recent NDRO share price of $15.87 represents a price-to-book ratio of 0.8 and an annual dividend yield of 9.42% — by comparison, the average energy stock in Dividend Channel’s coverage universe yields 4.6% and trades at a price-to-book ratio of 2.7.

Uh, are they really comparing it to the average energy stock? It’s completely different than the average energy stock, since it’s making no efforts to buy new oil supply to replace the stuff they take out of the ground. A royalty trust pays out all of its profits. Most oil companies use a lot of their profits to buy new supply.

The report also cited the strong monthly dividend history at Enduro Royalty Trust, and favorable long-term multi-year growth rates in key fundamental data points.

The strong dividend history? It’s been consistently going down since the latter half of last year, and February and March’s dividends were about half of  January’s. It should recover, like I mentioned above, but the trend of randomly cutting dividends should concern investors. Especially since the trust has been in existence for a year and a half and it’s the first time late payments have delayed the dividend.

The annualized dividend paid by Enduro Royalty Trust is $1.494216/share, currently paid in monthly installments, and its most recent dividend ex-date was on 04/26/2013.

Based on 11 to 12 cents a month going forward, that dividend drops to somewhere between $1.32 and $1.44 per share. The trust needs an improvement in energy prices (mostly natural gas prices) to be able to pay 13 or 14 cents a month. That could happen, but a company like Pengrowth will give you a better gain if nat gas prices improve significantly.

But here’s what this Forbes “article” really missed: the depletion of the assets.

Let’s take a look at the value of the assets of the trust.

  • Q1 2012 – $694.98M
  • Q2 2012 – $677.05M
  • Q3 2012 – $660.66M
  • Q4 2012 – $637.65M
  • Q1 2013 – $618.30M

Over the past year, the trust has depleted $76.68M worth of reserves. That’s a hair over 11%.

But wait. The company only paid out a 9.32% dividend last year, and that was all their net profits. Oh, and that depletion percentage is going to go up over subsequent years, assuming they continue to deplete assets at the current rate.

I’m assuming the strategy of the trust is to deplete assets faster during times when prices are lower, trying their hardest to maintain the distribution. Once prices go up they’ll make more money and they can slow production somewhat. Still, we’re looking at a maximum of 10 years of reserve life left, and a dividend yield of under 9.5%. Hmm.

This trust boils down to being paid to wait for an increase in natural gas prices. You’ll do a lot better if you invest in a Pengrowth Energy or a Penn West. Both those companies pay equivalent dividends, and you’ve got the potential for greater capital gains when commodity prices bump up.

And assuming you’ve made it this far, this is yet another lesson on the importance of doing research. That Forbes article was a special kind of useless because all it did was take some numbers off a stock screener and present them as information. Screeners can be helpful, but only as preliminary research. You’ve got to do your own heavy lifting.

Tell everyone, yo!