With an average yield of more than 13 percent, US-listed oil and gas royalty trusts can prove irresistible to income-starved investors.
But investors should resist the urge to chase the highest-yielding names; selectivity and a thorough understanding of the trust’s structure and underlying assets are critical to uncovering the best values–and avoiding the riskiest names.
The Yorkville Royalty Trust Universe Index–a capitalization-weighted basket of 28 royalty trusts–has returned 2.4 percent over the past 12 months, lagging the 12.1 percent gain posted by the S&P 500 Energy Index.
Source: Bloomberg, Energy & Income Advisor
Trust-specific factors, not macroeconomic forces, have driven this performance; the top performer in the Yorkville Royalty Trust Universe Index delivered a 57 percent return last year, while the biggest laggard gave up more than 68 percent of its value.
Although income-seeking investors often gravitate toward a buy-and-hold strategy, a valuation-focused approach that seeks take advantage of market dislocations is essential to outperforming.
Investors must look beyond yield and understand the various drivers for each security, from the duration of hedge books and the sponsor’s drilling obligations to the production mix and regional outlook for hydrocarbon prices.
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In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Feb. 25, 2021
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