Monthly Dividend Stock In Focus: Sabine Royalty Trust

Updated on September 24th, 2024 by Felix Martinez

Sabine Royalty Trust (SBR) has a high dividend yield of 8.4% based on annualized distributions over the nine months of 2024. This places Sabine on the high dividend stocks list. You can see all 200+ 5%+ yielding stocks here.

Sabine also pays dividends on a monthly schedule, which means investors receive their dividends more frequently than the traditional quarterly schedule.

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Royalty trusts have unique characteristics and risk factors that investors should consider before investing. However, thanks to their high yields, they could be appealing to income investors. Investors looking for exposure to the oil and gas industry may also find them attractive.

This article will discuss Sabine’s business model, and why investors anticipating higher oil and gas prices may want to give this royalty trust a closer look.

Business Overview

Sabine Royalty Trust was established on December 31st, 1982. Its business model is based on income received from its royalty and mineral interests in various oil and gas properties. Sabine is a small-cap stock, with a market capitalization of $900 million.

Its oil and gas producing properties are located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The trust has had a long and successful history. When the trust was formed in 1982, reserves were estimated at 9 million barrels of oil and 62 million cubic feet of gas.

At inception, the lifespan of the trust was pegged at 9 to 10 years. The trust was expected to be fully depleted by 1993. 40 years later, Sabine Royalty Trust is still kicking. In that time, the trust has produced approximately 22 million barrels of oil and 275 million cubic feet of gas.

Sabine Royalty Trust distributes monthly excess royalty income to unit holders after covering operating expenses. The royalty income is temporarily invested in short-term assets before being distributed. According to the Trust Agreement, the Trust holds royalty interests in oil and gas properties as its long-term assets. Although borrowing is permitted, it is not expected in the near future. In the second quarter of 2024, distributable income was $22.08 million, with $1.51 earned per unit. Royalty income reached $22.61 million, while general and administrative expenses amounted to $703,464.

During the second quarter of 2024, royalty income increased by 30% compared to the same quarter in 2023, driven by higher oil and gas production despite a decrease in natural gas prices. Compared to the first quarter of 2024, royalty income rose by 9% due to increased oil production, partially offset by lower oil and natural gas prices. Over the first half of 2024, royalty income dropped 3% compared to the same period in 2023, largely due to falling natural gas prices, although increased oil and gas production helped mitigate the decline.

Interest income increased in the second quarter of 2024 compared to the same quarter in 2023 and the previous quarter. However, interest income decreased year-over-year in the first half of 2024 due to varying interest rates. General and administrative expenses declined in the second quarter of 2024, primarily due to reduced trustee fees, unitholder services, and professional services, continuing a trend of lower costs seen throughout the year’s first half.

Growth Prospects

The biggest growth catalyst for Sabine is rising oil and gas prices. Supportive commodity prices are critical for the trust’s ability to generate higher royalty income, which yields higher distribution payouts. As oil and gas prices both rallied to multi-year highs in 2022, SBR achieved blowout results that year.

Sabine is a pass–through vehicle for royalty payments –essentially all the royalty income (cash) it receives is passed through to unit holders. About 5%–8% of royalty income is consumed in administrative expenses. The trust has generated an average annual distributable cash flow of $5.06 per unit over the last year. This corresponds to an 8.4% yield at the current stock price.

However, the cash flows of Sabine are highly cyclical due to the dramatic swings of the prices of oil and gas, which have resulted in a markedly volatile performance record. Given the high comparison base formed by the 10-year high distributable cash flow per unit of $5.64 in 2024, we expect a 7% average annual decline of distributable cash flow per unit over the next five years.

Dividend Analysis

Sabine Royalty Trust pays a monthly distribution. The record date each month is usually the 15th day.
Distributions are paid no later than 10 business days after the monthly record date.

The distribution of Sabine fluctuates depending on the direction of oil and gas prices. During favorable periods, the trust has distributed $3-$4 per unit annually. Thanks to blowout commodity prices, the trust exceeded this level by an impressive margin last year.

Sabine’s distribution history over the past 10 years is as follows:

2013 distributions of $3.92 per unit
2014 distributions of $4.10 per unit
2015 distributions of $3.11 per unit
2016 distributions of $1.93 per unit
2017 distributions of $2.23 per unit
2018 distributions of $3.35 per unit
2019 distributions of $3.02 per unit
2020 distributions of $2.40 per unit
2021 distributions of $3.97 per unit
2022 distributions of $8.65 per unit
2023 distributions of $6.38 per unit
2024 distributions of $5.64 per unit

Sabine distributed approximately $8.65 per unit to investors in 2022, more than double the distribution in 2021, thanks to the tailwind from the Ukrainian crisis and the resultant rally in oil and gas prices.

Sabine has distributed $4.19 per unit in the 9 months of 2024. On an annualized basis, this represents a full-year payout of roughly $5.64 per unit. This equates to a distribution yield of 8.4%. Of course, the company could distribute more or less than this, depending on where oil and gas prices are headed over the remainder of the year.

On the bright side for the trust, the ongoing war between Russia and Ukraine has no end in sight and hence the price of oil may remain elevated in the upcoming months. On the other hand, whenever this war comes to an end, it will probably cause a sharp correction in the price of oil.

It is also important to note that most countries have been severely hurt by the exceptionally high prices of oil and gas in the last 24 months. As a result, they are doing their best to diversify away from fossil fuels, and thus, they are currently investing in renewable energy projects at a record pace. When all these clean energy projects begin to come online, in 2 to 4 years, they will take their toll on global oil and gas consumption.

In fact, as the market is always a forward-looking mechanism, whenever the market focuses on the potential impact of these projects on the energy market, the price of oil will probably plunge from its current level.

Final Thoughts

Royalty trusts like Sabine are essentially a bet on commodity prices. From an operational standpoint, the fundamentals of the trust look strong. Sabine has high-quality oil and gas properties that have kept the trust going for four decades, which is much longer than originally expected.

If oil and gas prices remain around their current levels for years, the assets of the trust could potentially be undervalued. However, we believe that oil and gas prices will enter another downcycle at some point in the future, just like they always have. Whenever the next downturn of the energy sector shows up, Sabine will have significant downside risk while it will also reduce its distributions. Overall, investors should carefully review the risks and unique considerations that go along with investing in volatile royalty trusts.

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