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Trusts, Popular and Unpopular

By Elliott H. Gue on Mar. 26, 2014

SandRidge Permian Trust (NYSE: PER)

Units of SandRidge Permian Trust trade at a premium to their PV-10 value and have given up about 2 percent of their value over the past year if you factor in accumulate distributions.

Among the three royalty trusts sponsored by SandRidge Energy (NYSE: SD), SandRidge Permian Trust is the highest-quality name.

That being said, the pass-through entity’s total reserves last year dropped to 14.29 million barrels of oil equivalent (mmboe) from about 18 mmboe.

Management attributed about 2.19 mmboe of this decline to well performance and lower commodity prices. However, the trust’s price deck changed little between 2012 and 2013, suggesting this revision stemmed primarily from disappointing well results.

SandRidge Permian Trust’s sponsor, SandRidge Energy, should complete its drilling obligations by the end of 2014; after this point, expect the trust’s production volumes and distributions to decline as the underlying wells in which it owns royalty interests mature.

On the plus side, SandRidge Energy owns 13.125 million subordinated units in SandRidge Permian Trust, which receive a reduced distribution if the pass-through entity’s payout falls more than 20 percent short of the targets established in its registration statement.

This subordination period ends one year after SandRidge Energy completes its drilling obligations, providing investors with another layer of protection through late 2015.

In 2014, this stipulation all but guarantees that SandRidge Permian Trust will pay out at least $2.55 per unit, equivalent to a yield of 21.3 percent.

SandRidge Permian Trust looks fairly valued at current levels. 

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