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SandRidge Mississippian Trust II

SandRidge Energy (SD) has formed a second royalty trust to help finance its drilling in the Mississippian formation.  In April of 2011, SandRidge offered SandRidge Mississippian Trust I (SDT).  This trust has performed well since its IPO, paying unit holders at over 120% of the target distributions for the past 2 periods which has caused the stock price to trade at over 40% above its IPO price.  Now the shares of SandRidge Mississippian Trust II (SDR) began trading on April 18th, offered at $21 per unit.

If you have not invested in a royalty trust before you should be aware that these are vehicles used to help finance the drilling operations.  The trust has a finite life.  The wells will be drilled, the oil and gas extracted and sold and over time the output from the wells will diminish as will the distributions from the trust.  The trust will liquidate after December 31, 2031.  If there is any value left in the output of the wells at that time, a perpetual royalty interest will be sold and any proceeds will be distributed to the unit holder.  Also, be aware that this is a publicly traded partnership so you will receive a Schedule K-1 at tax time. Read more…

SandRidge Mississippian Trust I Paying Above Targets

SandRidge Mississippian Trust I (SDT) is a royalty trust with interests in oil and gas properties in the Mississippian formation in Oklahoma.  This type of trust is very simple to understand.  As a unit holder, you are entitled to a portion of the revenue stream from the sale of oil and natural gas extracted from wells drilled on this property by SandRidge Energy (SD).  The only function of the trust is to collect royalty payments and distribute them to unit holders.  An investment in units of the trust is subject to certain risks.  Among them:

  • The EPA could suspend or forbid hydraulic fracturing.
  • Prices for oil and gas are volatile.
  • SandRidge might not complete its drilling obligations.

As for the first item, I don’t know how to counter this risk except to not own any stock participating in this market.  As for oil and gas price volatility, a little more than half of the expected revenues upon which the target distributions are based through December 31, 2015 are hedged in order to minimize the impact of this volatility.  Now let’s look at the third potential risk.

See the full article on Seeking Alpha.

4 AAA Rated Dividend Payers

US financial markets are off to a rousing start in 2012 with the Dow up 5.5%, the S&P 500 up 7.1% and the Nasdaq notching a YTD gain 11.5% (as of Feb 3, 2012).  What’s behind these gains?  Investors are starting to believe that a recovery is underway in the domestic economy, forward looking statements from big cyclical companies like Caterpillar (CAT) suggest that the emerging economies are back in growth mode and lately, the blowout quarter from Apple (APPL) and prospects for the Facebook IPO have ignited the tech sector powering the Nasdaq average higher.

Perhaps you’re not quite convinced that it’s OK to hoist the all clear flag.  Maybe you think that before the history is written for 2012 we will suffer a setback thanks to the Euro crisis.  Yes, the ECB has stepped in to address liquidity concerns for the European banks but you’re not ready to concede that the crisis has been averted and that it won’t affect the US economy.

But you’re a dividend investor and want to be invested.  However, you also want a measure of downside protection.  I would suggest that you could do no better than to look to the only AAA rated companies in the US, Automatic Data Processing (ADP), Exxon (XOM), Johnson & Johnson (JNJ) and Microsoft (MSFT).  Yes, the AAA rating relates to the debt of these companies reflecting the sterling nature of their balance sheets, but it is a noteworthy factor when looking for rock solid businesses.

The full article can be viewed on Seeking Alpha.

Pay Zero Tax on Qualified Dividends and LT Capital Gains

One of the advantages of a “self directed” retirement is that you have some flexibility in managing your tax burden. By self directed, I mean one in which your income is primarily derived from your investments rather than a pension. In a previous article I described a Zero Percent Withdrawal Retirement Plan. Someone following a similar approach can exercise some discretion when it comes to taxes by controlling the mix of income and the total amount. Your income may consist of wages, taxable interest, ordinary dividends, Schedule K-1 income and/or capital gains.

If you can live on an income that keeps your taxable income within the 15% bracket (or said differently, below the lower range for the 25% bracket) you will pay 0% tax on qualified dividends and 0% tax on long term capital gains.

Please see the entire article at Seeking Alpha.

Zero Percent Withdrawal Retirement Plan

In 1994, financial planner William P. Bengen analyzed different withdrawal rates and asset allocations to determine the optimum rate which could be sustained over a 30 year retirement period beginning every year from 1926.  Using a portfolio split evenly between stocks and bonds, he determined that an initial withdrawal of 4% adjusted annually for inflation could allow the retiree to continue withdrawals for up to 30 years without exhausting his funds.  In the years since Mr. Bengen published his results, the 4% rule has become the generally accepted “rule of thumb” for retirement planning.

My preference is to look at this from a different perspective.  I retired near the end of 2010.  In the time leading up to that point, I began to construct a retirement budget in order to arrive at an income number I would need.  So rather than focus on attaining the magic number (total retirement assets) this allowed me to plan for a particular income that I would need in order to stop working.  Here I did not use the “income rule of thumb”, ie.  plan for 80% of your pre-retirement income.  I would suggest that you start with a blank page and construct a bottom up budget.  Once I arrived at a workable spending budget, my objective was to extract the income needed to support that spending from my taxable account.

The full article which explains more about how this works can be found on Seeking Alpha.

Does Our Administration Want New Jobs?

How does this sound?

  • A $13 billion construction project that’s ready to begin.
  • 13,000 new construction jobs.
  • 7,000 manufacturing jobs.
  • Increased economic activity along a 1,661 mile route through the central United States.
  • An additional 1.3 million barrels of oil per day from a friendly neighbor, rather than from the not so friendly Middle East.
  • Requires no government “stimulus”.

All of this is possible with the approval of the Keystone Gulf Coast Expansion Project, a 1,661 pipeline project that would deliver Canadian crude oil to Port Arthur, Texas.  This pipeline would be built by TransCanada Corporation. Read more…

SandRidge Mississippian Trust

This article describes the SandRidge Mississippian Trust I, stock symbol SDT.  Royalty trusts typically have a limited lifetime since the wells that are drilled have a finite life and once the oil and gas have been extracted, the income stream will decline.  But they can be very lucrative in the early stages of the trust.

SDT is still early in its life since the IPO took place in April 2011.  However, so far the royalty income has exceeded the initial targets and, as noted in the article, the most recent distribution would imply a forward distribution rate of  10.38%.  As a result the share price has increased over 50% from its IPO price.

Something not mentioned is that SandRidge Energy has announced the formation of a second royalty trust in the Mississippian formation in northern Oklahoma and Kansas, SandRidge Mississippian Trust II.  The royalty interests will entitle the trust to a percentage of the proceeds received by SandRidge from the production of hydrocarbons from currently producing wells and development wells to be drilled by SandRidge on approximately 53,000 net acres in this region.  Currently there is no mention of the expected date for the IPO but you might want to keep alert for the release of the prospectus.