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Oil and Gas Royalty Trusts?
Old 12-13-2010, 08:47 AM   #1
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Oil and Gas Royalty Trusts?

These have been doing well (10% ish dividends) recently. Does anyone use them for income? What are your opinions, I'm a complete neophyte with them
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Old 12-13-2010, 09:11 AM   #2
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These have been doing well (10% ish dividends) recently. Does anyone use them for income? What are your opinions, I'm a complete neophyte with them
It goes without saying that they fluctuate with oil prices.

Keep an eye on the quality/integrity of the management.

Also those dividends are often a return of your capital. The underlying oil field has a life expectancy of maybe 10-20 years. So for example an oil field with a ten year lifespan should pay back your money at a 10% rate. With a 20 year field it's 5 percent rate. Also keep in mind the time value of money.

It gets more complicated as oil fields can undergo secondary and tertiary recovery to extend oilfield lifetimes. In that case someone needs to put up more money for equipment and operating expenses. Once that is done there should be some additional years of payout. The trick is knowing how additional oilfield investments will pay off over some number of years. Since we don't know the price that oil will fetch some years out one must rely on projections. So depending on oil prices the investments could do well or not as well.
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Old 12-13-2010, 12:34 PM   #3
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Nun, if your talking about Canadian Oil & Gas Trusts, you should research if they plan on converting to a Canadian corp soon as required by Canadian law, or are they exempt. Converting requires they pay Canadian corp tax, reducing the unit/stockholder payout. Many of the converting trusts have dropped their payout dramatically. One other point. If they are Canadian corps or trusts, payment is additionally subject to a 15% Canadian tax. So you'll get only 85% of the payout. You'll have to file a fed 1116 form for each corp/trust to apply to recover that 15%. If held in an IRA, you cannot file a 1116. Only if you hold them in a taxable account.

If you plan to buy any, consider which market will you purchase them on. Many brokers charge $75/transaction for foreign stock on the OTC. And the stocks will not qualify for margin account, only a cash account. So you'll have to have the purchase cash collected funds at the broker. For a local purchase you'll have to use a Canadian brokerage account. I don't know what their restrictions are.

Better do more research before you jump in.
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Old 12-13-2010, 12:39 PM   #4
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Nun, if your talking about Canadian Oil & Gas Trusts, you should research if they plan on converting to a Canadian corp soon as required by Canadian law, or are they exempt. Converting requires they pay Canadian corp tax, reducing the unit/stockholder payout. Many of the converting trusts have dropped their payout dramatically. One other point. If they are Canadian corps or trusts, payment is additionally subject to a 15% Canadian tax. So you'll get only 85% of the payout. You'll have to file a fed 1116 form for each corp/trust to apply to recover that 15%. If held in an IRA, you cannot file a 1116. Only if you hold them in a taxable account.

If you plan to buy any, consider which market will you purchase them on. Many brokers charge $75/transaction for foreign stock on the OTC. And the stocks will not qualify for margin account, only a cash account. So you'll have to have the purchase cash collected funds at the broker. For a local purchase you'll have to use a Canadian brokerage account. I don't know what their restrictions are.

Better do more research before you jump in.
I'm not considering buying, I was just interested in them as I don't know anything about them. I saw the returns and thought.....must be return of capital like with many closed end funds. I'm a committed Boglehead, but I like to know what's out there. I have friends who own
managed and closed end funds with high expenses who look with derision at my passive approach, but I like to understand the other side of the investing fence too so I can give as good as I get in the "discussions"
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Old 12-13-2010, 05:23 PM   #5
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Quote:
Originally Posted by nun View Post
I'm not considering buying, I was just interested in them as I don't know anything about them. I saw the returns and thought.....must be return of capital like with many closed end funds. I'm a committed Boglehead, but I like to know what's out there. I have friends who own
managed and closed end funds with high expenses who look with derision at my passive approach, but I like to understand the other side of the investing fence too so I can give as good as I get in the "discussions"
In that case a short answer should suffice. It is complex; and IMO a very inefficient area. Most buyers are individual investors who know close to nothing about an oil or gas well, depletion curves, tertiary recovery, etc. Right now, although there may be some reasonsable buys, royalty trusts are favorites of the yield chasers and I would not be interested. But over the years I have made a fair amount of money from payouts and from capital gains. Far more and far more regularly than indexing.

PS: I would appreciate it if when someone is just tirekicking he would state that in the OP. Some posters who know something and would be happy to share it if it matters, might not be as happy to do so to prop up someone's debating ammo.

Ha
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Old 12-13-2010, 05:43 PM   #6
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I've invested in Canadian Oil and Gas Royalty Trusts (CANROYS) for years and spent a lot of time researching them. They were excellent investments prior to being forced into corporation status, and some still are despite these changes. You do have to do the research and stay on top of them.

Personally I view them as a sort of hybrid investment, with the volatility of a stock but yields that have historically far exceeded that of most bonds. I don't invest in them any longer due to simplifying my portfolio, but they may have a place if you have the time to stay on top of them.

This web site is the best resource I know of on these trusts. Learn the logic of the "McDep Ratio," read back issues and keep up with it if you decide to invest in these, and of course diversify across at least 3 trusts:

McDep Oil and Gas Investment Research
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