It’s been just under a year since SandRidge Mississippian Trust II (NYSE:SDR) IPO’d on the New York Stock Exchange. The IPO price was right around $21 per share. This was an attractive entry point for some analysts, with at least one analyst expecting a 50% run-up in price in the first year. The trust’s prospectus also laid out the target payouts for this trust for the first year. So, here we are one year later. How did our analysts and prospectus do?
50% Run-Up?
(Watch out for that steep slide at the end…it’s a doosy.) Ever since the new year, this stock has been sliding pretty fast. If you account for re-invested dividends, the return on this stock improves, but only slightly.
It’s interesting to note that the slide of SandRidge Mississippian 2 largely mirrors that of all things SandRidge Energy Inc. (NYSE:SD).
Things for SandRidge have only gone down, down, down. The company is being plagued in important metrics like long term debt, net income, and free cash flow.
SD Long Term Debt data by YCharts
These numbers from SandRidge are enough to make any investor skeptical. I would be very hesitant to invest in SandRidge right now. This seems to be a case of “as goes the parent company, so go the kids.” SandRidge Mississippian Trust 2 is being negatively affected by their association with SandRidge Energy Inc. (NYSE:SD).
How are Payouts?
For the first three quarters, this trust exceeded their payout goals. This had given me a very positive outlook on this trust. I just love it when companies not only do what they say they are going to do, but also do better than expected. But the most recent payment fell far short of the goal.
| Quarter | Estimated Payout | Actual Payout | +/- |
| 1st | $0.26 | $0.2677 | +$0.0077 |
| 2nd | $0.46 | $0.4972 | +$0.0372 |
| 3rd | $0.56 | $0.5986 | +$0.0386 |
| 4th | $0.60 | $0.5326 | -$0.0674 |
| Total | $1.88 | $1.8961 | +$0.0161 |
In their prospectus SandRidge Mississippian Trust 2 had estimated that they would pay out $1.88 in distributions per unit their first year. What investors got was $1.90. The last payout missed what they had hoped by a long shot, but for the year the payouts actually exceeded expectations.
The missed payout and speculation on future payouts have led Bank of America Corp (NYSE:BAC) to downgrade the stock. They have lowered their target price from $19 to $14. Here’s what they had to say: “We are reducing our PO based on our lack of confidence in the company’s ability to meet its targeted production and cash distribution stream.” (emphasis mine)
Big Brother
Big brother Sandridge Mississippian Trust 1 (NYSE:SDT) has also seen target distributions drop during 2012.
| Quarter | Estimated Payout | Actual Payout | +/- |
| 1st | $0.65 | $0.7870 | +$0.1370 |
| 2nd | $0.70 | $0.7277 | +$0.0277 |
| 3rd | $0.74 | $0.6831 | -$0.0569 |
| 4th | $0.73 | $0.6507 | -$0.0793 |
| Total | $2.82 | $2.8485 | +$0.0285 |
Payouts dropped in every quarter of 2012. For a fairly new royalty trust, you would hope that these payouts would be gaining momentum. These falling distributions have certainly been a major factor in Mississippian Trust 1’s stock price. But it is interesting to note that Mississippian Trust 1 was also still able to slightly exceed their distribution goal for 2012.
However, the distributions for this trust fell in every quarter of 2012, and the fall was pretty significant between the 1st quarter and the 4th. Mississippian Trust 2’s distributions only fell in the fourth quarter, and that distribution was still double that of the first quarter.
What Now
It’s interesting that Bank of America should chime in with the phrase “lack of confidence.” Over the past several years BoA has been consistently awful at recognizing value. All you have to do is say “Countrywide” to send shivers down the spine of anyone who was invested in Bank of America in 2008. However, while I believe that we must take BoA analysis with a grain of salt, the most recent drop in distribution is alarming.
This trust is approximately 45% oil and 55% natural gas. As we look at what these commodities have done over the past 12 months, we see that crude oil is down just over 12%, while natural gas has nearly doubled in price. This demonstrates that if there is any problem with target payouts, the root issue will be whether or not SMT 2 can reach their production goals.
In 2012, this trust was able to get 83 wells online, with 99 more to go. These wells are currently being drilled on schedule, with the majority coming online this year. So production goals seem to be within reach.
More wells will mean more money to pay out. Originally this trust had expected payments to rise 26% this year, and 9% next year before peaking in 2015. Given that SMT 2’s dividend yield is currently sitting at 17%, these next couple years could get really interesting.
The article Should We Still Trust Them? originally appeared on Fool.com and is written by Jon Quast.
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