February 24, 2010 - 6:55pm EST by
2010 2011
Price: 20.50 EPS $1.04 $1.10
Shares Out. (in M): 47 P/E 19.0x 17.0x
Market Cap (in $M): 957 P/FCF 11.0x 10.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 955 TEV/EBIT 11.0x 10.0x

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Mulligan lite: I like the units of SJT, but provide two caveats which might delay purchase of the units depending upon your own prognostication for natural gas prices. San Juan Basin Royalty Trust is a public royalty vehicle which has as sole function the receipt and distribution of royalty payments from their well bores. SJT's properties are located in the eponymous basin, covering approximately 120k acres, with exposure to approximately 1,100 wells. The partnership currently yields around 8% paid on a monthly basis. I like this play as an easy way to gain clean exposure to natural gas prices while collecting monthly distributions. There was a recent excellent short sale recommendation on CHK, and a message thread for that idea that is about as good a source on natural gas and in particular shale economics as I have ever seen. I don't disagree with the premise that natural gas prices are heading lower given the dynamics of the shales and recent commodity price behavior. With Dallas looking more akin to Leningrad just two weeks ago, and a record cold winter for many, nat gas has not been able to get out of its own way. Granted, it is well off its lows, but in other cycles this type of weather would have spiked the price much higher. There is simply too much gas. The Street insists upon seeing production growth out of the drillers every quarter regardless of economics, and so they continue to drill and produce at uneconomical prices. Like all things irrational this will someday end, and you will not ever risk personal insolvency in SJT due to the nature of the structure. I am longer term bullish on natural gas prices (late Q3-4), but believe we dip substantially into the spring and summer. That said, I submit this idea now for your radar, and depending upon your own pricing scenarios, introduce caveat one: Wait for a pull back in the price of natural gas, and the expected pull back in the units of at least (your target level)%. If you didn't want to be cute, you could buy the units now, but whether you wait or pull the trigger now, I suggest following the advice of the many on this site, which brings us to the second caveat: short some of the more irrational natural gas drillers such as CHK, HK, GMXR, etc. FWIW, and perhaps this was discussed in the CHK thread somewhere, I believe HK is less on the radar than CHK as a short, and Wilson and company have paid through the nose for acreage and drill and produce at silly levels...the right side of the balance sheet does not give comfort and their cost structure is a mess. I like the the commodity (longer term), I like a monthly check, but I think I think prices drop enough that some of the more highly leveraged players completely blow up. Assets will change hands and wind up being stewarded by rational owners who will operate economically and cut production. I just can't help but be a better buyer of a commodity down approximately 70% from its highs. Also, XOM's recent acquisition demands a modicum of respect. Further price catalysts also exist. At some point a administration (not necessarily this one) will recognize the attributes of gas relative to coal, and incentivize industry to switch. Gas is cleaner, and very cheap compared to oil. Nat gas is becoming more global, and other growing economies will sit up at some point and recognize the cheapness and relative attributes of gas to oil and coal. This is not a home run play (unless you get lucky with leverage on the short side), but a play I think will make you money and provide some mail box money in the years to come. 


Rationality returns to the business through destruction of irrational producers.

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