Hi - I've been enjoying your writeups. A question re: the royalty companies. If the royalty is a Net Overriding Royalty where the trust only receives a portion of the profits, doesn't that negate the benefits of being asset light? Meaning any inflated costs in withdrawing the commodity from the ground are passed through to the trust because the operator will have smaller net profits and therefore will pay less to the trust. (as compared to TPL that takes their royalty off the top). Interested in your thoughts. Thanks, Eric
Thanks for your support of the show and for the great question. You are correct that TPL and PBT have a different royalty structures and that each has advantages and disadvantages. We believe PBT is still protected from inflationary cost pressures because it doesn’t pay the increased cost directly.
I like to compare investments back to my rental property because it makes the concepts easier to understand and here is how I would view PBT in that light. My worst month as a property owner is not when I don’t get a rent check in the mail but rather when I don’t get a rent check and instead get a large bill for some capital expense like a new AC unit. If my rental worked like PBT then my worst month would be the month where I didn’t receive a check but at least the operator of the property would be the one replacing the carpets and painting the walls. Additionally, because the operator themselves want to operate profitably their incentives are aligned with yours and you will usually make some profit all without the worry of a surprises bill in the mail.
That’s a short response but I hope it helps clarify our thinking. Ultimately, we’re looking to build up a fairly concentrated collection of outstanding business but not so concentrated that we bet everything on TPL or any other single business, even though TPL is a rare gem that we’re happy to hold.
Very valid point, I just read their filings. You share in the profits of hillcorp at this site. If there’s cost over run then it will be deducted from future profit before profit is distributed.
what is current opinion about it? Is there any special tax treatment for non US investors, as in case of partnerships, where one has to pay 10 percent tax on the whole sale proceeds amount (not on the potential profit)?
Withholding on Publicly Traded Partnerships (“PTPs”) Effective Jan 2023
Background:
As a result of U.S. Internal Revenue Regulations taking effect 1 January 2023, new withholding charges will be applied to sales proceeds from certain Publicly Traded Partnerships ("PTPs”) held by investors who are not U.S. taxpayers. The IRS withholding charges are substantial, therefore, Interactive Brokers has taken steps to limit access to these products for investors who might be unaware of the risks of investing in these PTP products.
Instructions on How to Access PTP Products are available below in this document.
What you need to know:
Amount of Withholding: 10% of sale or distribution proceeds. This means 10% of the amount of funds that would settle resulting from any transaction or distribution, not just 10% on any calculated profit.
Hi - I've been enjoying your writeups. A question re: the royalty companies. If the royalty is a Net Overriding Royalty where the trust only receives a portion of the profits, doesn't that negate the benefits of being asset light? Meaning any inflated costs in withdrawing the commodity from the ground are passed through to the trust because the operator will have smaller net profits and therefore will pay less to the trust. (as compared to TPL that takes their royalty off the top). Interested in your thoughts. Thanks, Eric
Hi Eric!
Thanks for your support of the show and for the great question. You are correct that TPL and PBT have a different royalty structures and that each has advantages and disadvantages. We believe PBT is still protected from inflationary cost pressures because it doesn’t pay the increased cost directly.
I like to compare investments back to my rental property because it makes the concepts easier to understand and here is how I would view PBT in that light. My worst month as a property owner is not when I don’t get a rent check in the mail but rather when I don’t get a rent check and instead get a large bill for some capital expense like a new AC unit. If my rental worked like PBT then my worst month would be the month where I didn’t receive a check but at least the operator of the property would be the one replacing the carpets and painting the walls. Additionally, because the operator themselves want to operate profitably their incentives are aligned with yours and you will usually make some profit all without the worry of a surprises bill in the mail.
That’s a short response but I hope it helps clarify our thinking. Ultimately, we’re looking to build up a fairly concentrated collection of outstanding business but not so concentrated that we bet everything on TPL or any other single business, even though TPL is a rare gem that we’re happy to hold.
Very valid point, I just read their filings. You share in the profits of hillcorp at this site. If there’s cost over run then it will be deducted from future profit before profit is distributed.
what is current opinion about it? Is there any special tax treatment for non US investors, as in case of partnerships, where one has to pay 10 percent tax on the whole sale proceeds amount (not on the potential profit)?
Withholding on Publicly Traded Partnerships (“PTPs”) Effective Jan 2023
Background:
As a result of U.S. Internal Revenue Regulations taking effect 1 January 2023, new withholding charges will be applied to sales proceeds from certain Publicly Traded Partnerships ("PTPs”) held by investors who are not U.S. taxpayers. The IRS withholding charges are substantial, therefore, Interactive Brokers has taken steps to limit access to these products for investors who might be unaware of the risks of investing in these PTP products.
Instructions on How to Access PTP Products are available below in this document.
What you need to know:
Amount of Withholding: 10% of sale or distribution proceeds. This means 10% of the amount of funds that would settle resulting from any transaction or distribution, not just 10% on any calculated profit.