Characteristics of Royalty Trusts
Royalty trusts typically own oil or natural gas wells, the mineral rights of wells, or mineral rights on other types of properties. An outside company must perform the actual operation of the oil or gas field, or mine, and the trust itself, in the United States, may have no employees. Shares of the trust generally trade on the public stock markets, but the trust itself is typically overseen by a trust officer in a bank.
They are a powerful investment tool for people who wish to invest directly in extraction of petroleum or mining of other materials, but who do not have the resources or risk-tolerance to buy their own well or mine. Additionally, since trusts often own numerous individual wells, oil fields, or mines, they represent a convenient way for the average investor to diversify investments across a number of properties. Also, since commodities are considered a hedge against inflation, the popularity of royalty trusts as investments rises as interest rates rise, and their shares often rise as a result.
These trusts often attract investors with their relatively high yields; in 2007, their distributions were often in the 10 to 15 percent annual range. This makes the shares sensitive to interest rates, as share prices are likely to decline in periods of rising interest rates, and to rise when interest rates fall. Additionally, royalty trusts in the United States and Canada usually involve oil and gas fields or mines which are at or past their production peak, and will gradually decline in output as well as revenue; however, the infrastructure to develop them has already been built, so that an investor can expect a reasonably steady income stream.
In addition to allowing investors to achieve high distribution returns, especially during periods of low interest rates, royalty trusts allow investors to speculate directly on commodities such as gas, oil, or iron ore without having to buy futures contracts, or use the other investment vehicles traditionally associated with commodities – since the trusts trade like stocks. During times when a commodity price is rising, the share value as well as the dividend return of a trust engaging in production of that commodity will rise as well.
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