Financial Services Stocks
What are Royalty Trust Companies Doing?
November 15, 2007As we said in our earlier post, the Royalty Trust space has been in trouble this past year. However, companies are trying to do all they can to adjust to this turbulent climate. Gordon Tait, analyst at BMO Capital Markets, has more on what companies are trying to do:
TWST: Given that difficult environment, what have the companies been doing to adjust to it?Mr. Tait: They have been doing a couple of things. As gas prices fall, it impacts their cash flows. In order to keep their balance sheets intact, without stretching them too far, they have to bring their distribution levels down to reflect the weaker operating environment. A lot of them have cut their distributions to prevent them from getting too onerous. They don’t want to keep their distributions artificially high when their cash flow is reduced or falls. When you are buying a royalty trust, you are becoming an owner of the cash flow. Like any other owner, you enjoy the good times and you enjoy rising cash distributions. You get strong cash flows and rising distributions, but you have to take the down side. When cash flows fall because commodity prices fall, you have to cut back on the amount of cash you are paying out.
For the full Royalty Trust issue, including interviews with 13 different CEOs and stock picks, click here.
