Description

LL and E Royalty Trust, symbol LRT (short sale recommended at $2 with a price target of $1 by April)

Owning units in this trust gives the owner rights to profits from production of oil and natural gas from three properties located in Louisiana, and other states along the Gulf of Mexico. The profits are paid monthly in the form of a distribution that is calculated for the production from 3 months prior to the distribution. For instance, January’s distribution will be based on production during October, 2001. The trust will continue as long as the properties continue to have aggregate production above a threshold level. It is likely that this threshold will be met for 10 years or more. When the oil companies working on a property spend money to keep wells producing or to drill new wells, all costs must be recovered before any money is available for distribution to unitholders from that property. The properties are Offshore Louisiana (OL), South Pass 89 (SP), and Jay Field (JF). In the latest month reported (September production, December distribution) OL and SP generated revenue of $300,000 while JF generated revenue of $1,900,000. None of the $133,000 distributed to unitholders in Dec. came from OL and only $20,000 from SP. OL has $1,000,000 of excess production costs to be paid before contributing any to future distributions. JF is obviously the biggest producing property, but it has relatively high cost of production (over $15 per barrel and increasing) so that it is not likely to contribute much to distributions until oil prices are higher.

Catalyst

The properties are producing less oil and gas each year, while costs of production trend upward. Since 1994 oil production has decreased on the properties at about 8% per year, and gas production has decreased at 24% per year. During the last 5 years the rates of decrease are 10% and 35% annually for oil and gas. This higher rate during the last 5 years is due to the decreased drilling activity as the oil and gas reserves are depleting. This decrease continued through the recent (years 2000 and 2001) spike in oil and gas prices to over $35 a barrel and to $10 per mcf (1000 cubic feet) of gas. Distributions to unitholders were high during 2000 and 2001 averaging about 5 cents per month. The last distribution of 2001 was less than one cent per unit. The distributions for January, February and March will be based on oil and gas prices from the 4th quarter of 2001, which have been very low. As a result the distributions will likely continue to be one cent per month or less through March 2002, and possibly longer if prices for oil and gas don’t increase much. Although every unitholder should know this, many do not or do not act on this knowledge. This gives an excellent opportunity for a short seller because these units historically have traded so that the distributions are about 12% of the price, indicating a likely price of one dollar for the units by April 2002.