Description

LL&E Royalty Trust has royalty interests in certain productive oil and gas properties located in Alabama, Florida, Texas, in federal waters offshore Louisiana and south Louisiana fee lands. The Trust is passive, with JPMorgan Chase Bank as Trustee, having only such powers as are necessary for the collection and distribution of revenues resulting from the Royalties, the payment of Trust liabilities and the conservation and protection of the Trust estate.

I have been following this one for several years. There are two reasons why I expect the monthly distribution to increase starting with the November distribution (which will be announced on October 25th). The distribution in October was 1.6 cents per unit. I expect the November distribution to be about 3 cents per unit, with December and January distributions of 3.6 cents and 4 cents respectively. Based on a unit price of $1.70 this amounts to about a 25% annual distribution rate. I think the unit price will increase to about $2.80 so that the yield will drop to about 15%.

Catalyst

The first reason for an increase in distributions is that the monthly distributions react to changes in the prices of crude oil and natural gas with a bit of a time lag since the monthly distributions paid by the trust are based on prices from three months earlier. For example, the distribution to be paid in early November is based on production during the month of August. The price of natural gas was 2.98 for July, 3.09 for August, 3.55 for September, and over 4.00 per mcf (thousand cubic feet) so far in October. This should result in a 40%increase in revenue from the gas wells – without any increase in costs. Currently most of the distribution is coming from gas wells on the Offshore Louisiana property due to excess production costs at the Jay Field property (more on the excess production costs below).

The second reason for an increase in distributions involves the excess production costs mentioned above. When new wells are drilled on the properties the cost of drilling is carried over from month to month until the production of gas and oil pays off all expenses incurred. During 2002 both the Offshore Louisiana and Jay Field properties have had no distributions due to these excess production costs. The Offshore Louisiana property has just finished paying off these excess production costs. As a result the distribution increased to 1.6 cents in October from 0.3 cents in September as the final $252,000 of costs were paid off at Offshore Louisiana. The Offshore Louisiana property wells produced 200,000 mcf of gas during July (October distribution) at a cost of $70,000 excluding the excess production costs. At this rate of production and with natural gas at 3.09 during August, there should be 3.09*200,000-70,000 = $550,000 in net proceeds from Offshore Louisiana. 90% of this amount is distributed to unitholders. So about $500,000 should be distributed from Offshore Louisiana in November. This amounts to 2.6 cents for each of the 19 million units outstanding. Nothing will be distributed from Jay Field, but there is a third property (South Pass 89) that should add to the distribution for November. South Pass 89 has paid more than 0.5 cents per month this year, so the total distribution for November should be about 3.1 cents per unit.

Similar calculations result in the other estimates for December and January distributions. I believe these estimates are reasonable. There is quite a lot of variability in the normal production costs from month to month, but the total distribution for the three months will likely be more than 10 cents per unit.

One possible problem here is the lack of knowledge about when new drilling projects are undertaken – if a new well is drilled on Offshore Louisiana, there will likely be no distributions from that property for a while.