TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence. 

Image Source: Pixabay

Income investors looking to buy oil and gas stocks may want to gain exposure to the Permian and Haynesville Basins. Permianville Royalty Trust (PVL) is an oil and gas producer with properties in these two oil and gas producing areas.

Weak oil and gas prices led to Permianville suspending its dividend. And while the company still has not reinstated the dividend, based on recent reports we expect the trust to begin paying again soon. When it does, it will rejoin the ranks of the monthly dividend stocks.

Permianville could be instantly appealing once it reinstates the dividend, based on the monthly dividend payouts and the likelihood that it will have a high yield, which are customary among royalty trusts.

Of course, investors should remember that oil and gas royalty trusts are especially risky, which is why only investors with a high risk tolerance should consider purchasing Permianville.

Business Overview

Permianville Royalty Trust is a statutory trust that was formed in 2011 to own a net profits interest representing the right to receive 80% of the net profits from the sale of oil and natural gas production from properties in Texas, Louisiana, and New Mexico as well as the Permian and Haynesville basins.

The Trust has the right to receive 80% of the net profits from the sale of oil and natural gas production from its properties. Each month, after all obligations and expenses are paid, unitholders receive the remaining proceeds. The Trust is not subject to any preset termination provisions.

However, the Trust could dissolve if at least 75% of outstanding units vote in favor of dissolution, or the annual cash proceeds received by the Trust are less than $2 million for each of any two consecutive years.

The current business environment is extremely challenging for all oil and gas royalty trusts, including Permianville, due to weak commodity prices over the past several years.

The Trust provided a July update in which it notified unitholders that income from the distributable net profits interest would have been approximately $700,000. No distributions were declared for July however, as a result of prior administrative advances to the Trust. These administrative advances now total approximately $100,000, and once this has been repaid the Trust will resume distributions.

Therefore, assuming commodity prices remain supportive, we believe it is likely Permianville will repay the administrative advances soon, perhaps as early as this month.

Growth Prospects

Since 2016 when oil was above $100 per barrel in the United States, oil prices have been on a longstanding downtrend over the past several years. Natural gas prices have been consistently weak as well. As an oil and gas trust, it goes without saying that Permianville’s financial performance results in direct relation to oil and natural gas prices.

Royalty trusts are designed as income vehicles for unitholders. But since these companies operate in the production segment of the energy industry, they are extremely reliant on the price of the underlying commodity.

Therefore, while higher energy prices will lead to higher royalty payments and a rising share price, the opposite occurs when commodity prices decline. Lower energy prices lead to lower dividend payments and a dropping share price for royalty trusts.

Distributions are based on the price of natural gas and crude oil. Permianville is impacted in two ways when the price of either declines.

First, distributable income from royalties is reduced, lowering dividend payments. In addition, plans for exploration and development may be delayed or canceled, which could lead to future dividend cuts.

Dividend Analysis

Permianville has not paid a distribution in 2021. The Trust suspended its distribution in July 2020 due to the coronavirus pandemic, which had an extremely negative impact on demand for oil and gas. Commodity prices plunged in 2020, leading to many oil and gas royalty trusts to suspend their payouts.

Some have returned to paying distributions, such as Permian Basin Royalty Trust and Sabine Royalty Trust among others. However, Permianville remains a holdout.

The extremely weak oil prices of 2019-2020 were a significant challenge for Permianville. Conversely, royalty trusts like Permianville will benefit much more than the larger oil majors if the price of oil rises significantly from its current level. Indeed, the recent increase in oil prices has resulted in Permianville’s unit price more than doubling since the start of 2021.

Of course, it should also be mentioned that even with the year-to-date gain, Permianville units have lost nearly half their value in the past five years.

Therefore, the trust is ideal for those who are confident in higher future oil prices and want to gain exposure to the oil boom in the Permian and Haynesville basins.

In summary, the trust is much more leveraged to the price of oil than the integrated oil companies and hence it has much more upside in the positive scenario (higher oil prices) and much more downside in the event of a downturn in the energy sector.

Assuming that commodity prices remain near or above current levels, we believe Permianville could return to paying distributions soon, perhaps in the next couple of months. The exact payout is still to be determined.

Final Thoughts

Royalty trusts like Permianville have faced a number of challenges in the past few years, including the weak oil price environment and the coronavirus pandemic which suppressed global oil demand. That said, Permianville operates in the most prolific oil-producing area in the U.S., the Permian and Haynesville basins.

As we do not expect another downturn in the energy sector in the near-term, we believe that the trust will resume distributions soon. When distributions are restored, it is possible Permianville will offer a high dividend yield. Nevertheless, due to the non-diversified business model of the trust and its dramatic reliance on the price of oil and gas, investors should not allocate a great portion of their portfolio on this stock.

Moreover, the trust’s short history leaves much to be desired for investors seeking reasonable levels of dividend safety and consistency.