Tidelands Royalty Trust “B”

Sometimes I stumble upon a weird small stock that looks interesting, but after doing some reading on it I begin to realize I can’t get a good idea of what it is worth. One recent example I found on the pink sheets is Tidelands Royalty Trust “B” (TIRTZ).

I’ll just throw some info out there, because it could be worth digging into for someone. Especially with the turmoil in the oil and gas sector currently.

This royalty trust was created in 1954 and it is basically a vehicle for the administration and liquidation of rights to interests in certain oil, natural gas and other mineral leases obtained by Gulf Oil Corporation in the Gulf of Mexico. The interests of Gulf Oil that were subject to the contract with the Trust are now held by Chevron.

As I understand it, Tidelands, through a wholly-owned subsidiary, now has a remaining royalty interest in four oil and natural gas leases. Tidelands’ overriding royalty interest on three of the four leases is 4.1662%. On the fourth lease, the overriding royalty interest is 1.0416%. Over time the oil and gas wells will deplete and Tidelands’ royalty income will drop and finally stop completely.

Southwest Bank is the trustee since 2014. It is their job to distribute all cash received from the royalty interests to the unitholders. They are not allowed to conduct any kind of trade or business. Distributions are made quarterly. The trust will expire on April 30, 2021, unless extended by a majority vote of the unitholders.

There are currently 1,386,375 units of beneficial interest outstanding. The ask price as I write this is $1.18, giving Tidelands a market cap of just $1.64 million. On Sep. 30, the trust had cash of $573k and total liabilities of just $70k. Distributable income for the trust for the quarter dropped dramatically from $224k to just $90k. For the nine month period ended Sep. 30 it dropped from $356k to $158k. Of course the lower oil and gas prices were the primary cause for the sharply lower income. In the last quarter, 65% of royalty income came from the sale of oil and 35% from the sale of natural gas.

So what an investor needs to figure out is how much cash (s)he is able to receive before the royalties stop. With a market cap of $1.64m and just $1.14m net of cash, it looks like it could be an interesting situation. In 2014 and 2013 distributable income was around $0.5m, but of course oil and gas prices were much higher then and the wells depleted too.

This is a quote from the risk factors section in the latest 10-K:

Important reserve and other information with respect to the particular leases subject to Tidelands’ royalty interest is unreasonably difficult to obtain.

The leasehold working interests that are subject to the rights held by Tidelands were owned in whole or in part by Chevron and have been assigned to other oil and natural gas exploration and production companies. Certain information with respect to the particular leases subject to Tidelands’ interests, including, but not limited to, (i) reserves, (ii) availability of oil and natural gas, (iii) average production cost (lifting cost) per unit, (iv) undeveloped acreage and (v) net wells and net acres, lies solely within the knowledge of these working interest owners. Tidelands does not have access to engineering data regarding these leaseholds and believes such information would have been compiled principally by or for the working interest owners of these leaseholds and such information is unreasonably difficult for Tidelands to obtain.

Tidelands also mentions in the risk factors that a property owner can abandon a property or well when it becomes uneconomical which would of course also stop the royalties.

It is a bit of a black box to me at this point and buying some units now would be speculative for me. I’m sure there are people reading this post who have, or can develop, a much better sense of whether Tidelands Royalty Trust “B” is an attractive investment today.

I also wonder why they file with the SEC. There are fewer than 300 unitholders, which in the case of a normal stock would enable a company to deregister and safe significant costs. Perhaps there are special rules for trusts like this?

The website for the Tidelands Royalty Trust “B” can be found here: http://www.tirtz-tidelands.com/

Finally I wish you all a happy 2016!

P.S.: Let me say in advance that I’m not from the US and have no knowledge of the US tax system. Posts like this often lead to all kinds of tax related questions and I can’t answer those. Other readers might have some idea and you’re free to discuss in the comments. Just remember not to rely on any information presented here.

Disclosure: no position in Tidelands Royalty Trust “B” currently.

Posted in Pink Sheet stocks.

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