“It’s going down. I’m yelling timber.” – Kesha
This week, I’m taking a question from longtime reader, first-time stock submitter Martin, who wants to know about the dividend safety of SandRidge Mississippian Trust I (NYSE: SDT).
It pays a sky-high yield of 26%. In January, shareholders received $0.50 per share. The stock currently trades below $8.
SandRidge Mississippian Trust I is a royalty trust based on oil and gas wells in Oklahoma.[ad#Google Adsense 336×280-IA]The more oil and gas that is produced, the more shareholders get paid.
Unlike a common stock, shareholders generally receive all of the revenue produced by the wells, minus expenses.
That is why royalty trusts typically have high yields.
The problem with these types of investments – and SandRidge Mississippian in particular – is that as the wells’ production eventually declines, so does the payout and the stock price.
In 2013, the company revised both its oil and natural gas reserves estimates lower by 22%. In other words, there is 22% less oil and gas in those wells than previously thought.
To make matters worse, last year it slashed its oil reserves estimate by 52% and natural gas by 10%. In the fourth quarter of last year, oil production was down 21%.
In SandRidge’s press release announcing the dividend in January, the company said that the trust’s “production is expected to decline each quarter during the remainder of its life.”
That means investors will likely receive less income each quarter and the stock price will likely decline as well.
As you would expect, the dividend has consistently declined almost every quarter of its existence.
It’s not unusual in the later stages of a royalty trust’s life to decrease the dividend as production wanes.
But the frequent downward revisions in reserves makes me believe that the wells’ lives are going to be shorter than previously expected.
That’s not a good combination. It means the wells will run dry, as will investors’ dividend checks, faster than projected.
A 26% yield might sound very enticing, but you can count on that number to fall.
A spike in oil prices could help as the company will be able to sell what it does produce at higher prices.
But that’s a big chance to take.
It’s almost a certainty that SandRidge Mississippian Trust I’s dividend will fall in the near future.
Dividend Safety Rating: F
— Marc Lichtenfeld[ad#DTA-10%]
Source: Wealthy Retirement