Tuesday, November 11, 2014

Why I sold Whiting USA Trust II (WHZ)

Yesterday I sold my royalty land trust, Whiting USA Trust II (WHZ). The price was $11.59 and when you add in distributions for total return, I broke even.

Royalty land trusts are companies that give you access to the sale of a natural resource but only for a limited duration of time. Then they expire and your units that you hold in the trust go to $0. You do not own the land the trust operates on; you only get access to the oil, natural gas, iron, timber, or whatever resource is on or under the land.

Knowing that an asset will go to $0 and expire makes a royalty land trust a lot like musical chairs. Its great while the music is playing and you can easily get 10%, 15% or 20% yields. But when the music stops, it REALLY stops. The trick is to take a few turns around the room but walk away before you are left without a chair.

Trusts have a termination clause that states when they will end so for the observant, there is no surprise. Its in their quarterly reports. But lets be honest here. How many investors know about quarterly reports let alone read them? Trust investors most often have no idea what they are invested in.

Case in point is Great Northern Iron Ore Properties (GNI). They terminate in a few years and the price will go to $0. The only value out of it is the quarterly distribution. Its quite simple actually, you add up all the remaining payments and that is the fair value of trust. Take a look at January 2014. When it was in the $70s. Clear example of trust investors having no clue what they hold.
I and many others warned them that fair value was in the $20s and sooner or later the music will stop. "But it has a 10% yield its too good to pass up!" Those investors lost the equivalent of 5 years of distributions on an asset that ends in about 2. They will never get their money back.

Back to WHZ and why I sold yesterday. I had expected it to hold its share price steady like most trusts do and collect a 20% yield for a few years then move on. The market though has kept it pretty close to its estimated fair value and it always drifted lower after each distribution. Obviously oil prices will rise and fall and the remaining payments will only be estimates so fair value is also an estimate. We've recently seen oil fall from the $110s down to the $80s. That's going to cut into future distribution payments from WHZ. In fact the most recent distribution is lower and I expect it to drop more next quarter.

However the share price however has not yet adjusted down like so many other oil companies. I'm expecting WHZ share price to fall sharply in the next 1-2 weeks. WHZ has a history of dropping when the distribution is paid and then recovers. This time I am not so sure it will recover.

It certainly might. I am not making prediction. I'm just saying I'm stepping away while the music is still playing...

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

1 comment:

  1. Thanks for sharing Pulley. People are funny aren't they?! My guess is these "investors" who can't pass up the dividend, are the same ones that think they got a great deal on their import car because the monthly payment is "only $500". Neglecting the fact that the loan term is for 8 years.

    I have an older friend that played the oil trust game, but he always held on too long and lost a ton of money. I can see getting burned once because you're ignorant, but there is no excuse for getting burned repeatedly. Clearly this is a case of buyer beware!