HGT Review & Mini Model

Hugoton Royalty Trust Thoughts:

• I went back and looked at the production, operating costs, capital spending, and distribution pattern from January 2008 to the most recent distribution in April 2009. Basically this one will trade with natural gas as 95% of their production comes from long-lived reserves in Wyoming, Oklahoma and Kansas.
  

• Forget the current yield shown on your quote line as that is bases on monthly historic distributions. When natural gas was selling for as much as $14 last summary these guys were seeing realized prices around $10 and $11 and the distribution hit a high in September 2008 of $0.40 per unit when they were realizing gas prices of just over $11. In April, they saw a realized price of $3.28 and their  distribution was just over 3 cents.
  

• Production which has held flat for quite some time due to the low maintenance level of spending needed to simply hold it flat appears to be rolling over as they move from a a drilling program that saw near a dozen wells drilling at once to one or two. I see no mention of hedging and looking at their realizations I’d say they either don’t hedge or they hedge to an insignificant degree. When prices rise and the operator (XTO) decides to spend more capital they can ratchet production back up, but its good to know that for now at low prices, production from these properties is being forced lower by inadequate capital spending (which itself is a function of price).

If you want to build your own model here to calculate your distribution the math is not difficult

• Revenues will be gas prices X volumes which you can guesstimate will be in the low 70 to high 60 MMcfgpd range until prices rise and they put more capital towards shoring up volumes. Add to that a little piece for oil production (see example below).
• From revenues subtract:
  
  • Operating Costs:
    • Lease operating expense of about $0.79 per Mcfe in the last quarter which isn’t bad,
    • Production taxes have been running about $0.55 per Mcfe, and 
    • Overhead (G&A) of $0.37 per Mcfe … again not bad.
  • Capital Costs:
    • had been running $3.75 mm to $4.0 mm per month, now cut back to $2 mm per month
    • again, this is probably not going to be enough to stave off declines.
• That math will yield your Net Proceeds.
  • Multiple that by 80% and you have your Net Profits Interest.
  • Divide that by 40 mm units and you have your distribution or something pretty close to it.
  • Or you can just use the model below and tweak it to your liking.