For energy issues, royalty trusts beat direct investment

Dear Mr. Berko:

What do you think of the potential for natural gas stocks in the next couple of years? My broker thinks coal is better and wants me to buy Peabody Energy and Westmoreland Coal, because he believes coal prices are headed higher. But my brother-in-law, who works in the oil and gas industry, tells me that natural gas stocks are a better investment. However, he won't give me any recommendations.

I trust the advice of each but would like to have your recommendation on this issue. I can invest $8,000. What do you say?

HS, Springfield, Ill.

Dear HS:

I prefer your bother-in-law's advice. Coal stocks have already moved to new high prices, while natural gas stocks are floating near the bottom of the tank.

The price of coal - that is, thermal coal burned by utilities to produce electricity - has been on a slow burn for most of last year and this year. The rise in costs, about 35 percent in the last year, is a reflection of freezing weather in the Asia-Pacific region, Europe and South Africa and also a result of the anti-nuclear sentiment inspired by the disaster of Japan's Fukushima nuclear power plant.

Thermal coal, which was selling for $91 per metric ton a year ago, has risen to $125 per metric ton. And thanks to a growing insatiable demand from China, whose factories produce more toxic greenhouse gasses than the rest of the world combined, coal prices have nearly doubled since 2006. And short of a major global economic slump, those prices are certain to keep climbing - which is good news for natural gas.

About 35 percent of the world's power plants can switch to natural gas when coal becomes too expensive. And as most folks know, natural gas is the preferred fuel, because it releases only 30 percent of the greenhouse gas emissions of coal. Coal plants belch out sulfur and noxious nitrogen that pollutes everything it touches, while the ash is considered a hazardous waste.

Still, while coal nearly doubled in price since 2006, natural gas prices have fallen about 50 percent in that same timeframe, from $8.20 per million cubic feet (MCF) to just over $4.20 per MCF today. Therefore, the energy trading thugs at Goldman Sachs, Merrill Lynch and J.P. Morgan now suggest it's time to load up on natural gas stocks.

And because I'm a conservative investor, I'm not comfortable owning natural gas producers, the companies that drill and explore for natural gas deposits. While there may be some uncommon profits in producer stocks, I'm turned off by their volatility. So I will recommend royalty trusts that own portfolios of gas-producing properties. Royalty trusts also enjoy a tax status that allows them to pay out 90 percent of their income to shareholders in the form of "distribution" payments.

The beauty of owning royalty trusts is that you get paid very nicely as you wait for gas prices to rise. So if the economy falters and your shares don't climb, you still rake in a good return while you wait for prices to go up.

The two royalty trusts I like are Permian Basin Royalty Trusts (PBT-$22.12), which has been paying dividends since 1987. PBT pays monthly, and the current annual $1.38 payout yields 8 percent. The San Juan Basin Trust (SJT-$24.04) has also paid monthly dividends since 1987. Its current $1.48 dividend yields 6.2 percent.

So if natural gas prices rise (some suggest to over $6.25 per MCF), both PBT and SJT could ascend to the mid-$30s, and their dividends could grow by 50 percent. This may be an excellent time to buy.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Wed, Sep 7, 2011

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