Reading this article and thinking back on the one you wrote on NRP a few weeks ago, the main question I find asking myself is why as an investor I should prefer PBT over NRP.
Consider:
1. Assuming NRP's warrants are retired, NRP trades at about 3 times LTM earnings (and 3 times FCF), compared to 7 times earnings in the scenario you present for PBT.
2. There is an optionality in NRP's CO2 sequestration business that is hard to evaluate but potentially massive.
3. If production costs continue to increase, PBT's earnings will suffer due to the net overriding royalty scheme (thanks for the explanation!), but NRP's won't.
I understand that an investor bullish on oil & gas but bearish on met and thermal coal would prefer PBT, but I don't see many other reasons.
Great writeup! Very interesting situation. Just one question: why did $PBT decline so much in Jul/Aug? Was it due to bad 2Q23 results or something else? Thanks
How would you compare between PBT and TPL (Texas Pacific Land)? Same play or one's better than the other? (TPL's current corporate governance fiasco, which is likely temporary, aside)
I start getting interested to PBT few months ago and after some digging I make up my mind about the stock and decided to buy it now that is worth-ed about $14/share. With respect this analysis that you have done I would like you to consider two additional points:
(i) First and foremost Waddell Ranch is a very mature field. I have looked up and, at the current extraction rate, only 12 years remain for exploitation. If someone want to be conservative, I believe that only other 7 years can sustain current production with, necessary, a decrease after that point. This means that the return on the price you pay should be recovered in no less than 7 years, which imply a required an annualised net divided yield of at least 14%. When the price hit ~ 15$ per share this was the case.
(ii) you considered the capex but not the leasing operating expenses which increased dramatically in the past years, most likely due the amount of new infrastructure to maintain in the field. While the capex will surely drop dramatically, the leasing operating expenses will not (at least not at the same rate). It implies that still ~6 millions every month will be used as operating expenses. At a modest price of oil and gas ($70 and $1 mcf) I have estimated a net 7.7 millions on royalties every month, once the capex is decreased which is about 15% annualised yield.
To conclude, your analysis was very good but the limited life span of the trust imply that the ROI for the following years must be enormous to cover the depreciation of the royalties. As such, I would not pay anything more that 15-16$ for PBT at the current oil and gas prices. Clearly, if Brent goes at 100$ new consideration has to be made.
I love your coverage of resource companies SB!
Reading this article and thinking back on the one you wrote on NRP a few weeks ago, the main question I find asking myself is why as an investor I should prefer PBT over NRP.
Consider:
1. Assuming NRP's warrants are retired, NRP trades at about 3 times LTM earnings (and 3 times FCF), compared to 7 times earnings in the scenario you present for PBT.
2. There is an optionality in NRP's CO2 sequestration business that is hard to evaluate but potentially massive.
3. If production costs continue to increase, PBT's earnings will suffer due to the net overriding royalty scheme (thanks for the explanation!), but NRP's won't.
I understand that an investor bullish on oil & gas but bearish on met and thermal coal would prefer PBT, but I don't see many other reasons.
Great writeup! Very interesting situation. Just one question: why did $PBT decline so much in Jul/Aug? Was it due to bad 2Q23 results or something else? Thanks
Great write-up.
How would you compare between PBT and TPL (Texas Pacific Land)? Same play or one's better than the other? (TPL's current corporate governance fiasco, which is likely temporary, aside)
Dear, sorry for the very late comment.
I start getting interested to PBT few months ago and after some digging I make up my mind about the stock and decided to buy it now that is worth-ed about $14/share. With respect this analysis that you have done I would like you to consider two additional points:
(i) First and foremost Waddell Ranch is a very mature field. I have looked up and, at the current extraction rate, only 12 years remain for exploitation. If someone want to be conservative, I believe that only other 7 years can sustain current production with, necessary, a decrease after that point. This means that the return on the price you pay should be recovered in no less than 7 years, which imply a required an annualised net divided yield of at least 14%. When the price hit ~ 15$ per share this was the case.
(ii) you considered the capex but not the leasing operating expenses which increased dramatically in the past years, most likely due the amount of new infrastructure to maintain in the field. While the capex will surely drop dramatically, the leasing operating expenses will not (at least not at the same rate). It implies that still ~6 millions every month will be used as operating expenses. At a modest price of oil and gas ($70 and $1 mcf) I have estimated a net 7.7 millions on royalties every month, once the capex is decreased which is about 15% annualised yield.
To conclude, your analysis was very good but the limited life span of the trust imply that the ROI for the following years must be enormous to cover the depreciation of the royalties. As such, I would not pay anything more that 15-16$ for PBT at the current oil and gas prices. Clearly, if Brent goes at 100$ new consideration has to be made.