Sabine Royalty Trust Still Has Significant Downside Risk

seekingalpha09-17

I initially purchased Sabine Royalty Trust during the coronavirus crisis for its cheap valuation and later sold it in late 2022 after it tripled.The stock has underperformed the market since late 2022...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSabine Royalty Trust Still Has Significant Downside Risk\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-17 12:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4721469-sabine-royalty-trust-still-has-significant-downside-risk><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>I initially purchased Sabine Royalty Trust during the coronavirus crisis for its cheap valuation and later sold it in late 2022 after it tripled.The stock has underperformed the market since late 2022...</p>\n\n<a href=\"https://seekingalpha.com/article/4721469-sabine-royalty-trust-still-has-significant-downside-risk\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4213","symbol_name":"石油与天然气的勘探与生产","start_time":0,"source_url":"https://seekingalpha.com/article/4721469-sabine-royalty-trust-still-has-significant-downside-risk","article_id":"2468388538","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/2151247502/image_2151247502.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2468388538","pubTimestamp":1726545600,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"I initially purchased Sabine Royalty Trust during the coronavirus crisis for its cheap valuation and later sold it in late 2022 after it tripled.The stock has underperformed the market since late 2022","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4213":"石油与天然气的勘探与生产","SBR":"Sabine Royalty Trust UBI"},"translate_title":"萨宾版税信托仍面临重大下行风险","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SBR":1},"content_text":"I initially purchased Sabine Royalty Trust during the coronavirus crisis for its cheap valuation and later sold it in late 2022 after it tripled.The stock has underperformed the market since late 2022, with a total return of -8% compared to the S&P 500's 47% gain.The recent plunge of oil prices below $70, driven by weak demand from China, signals a bearish outlook for Sabine Royalty Trust.Given the bearish oil market and potential for reduced distributions, Sabine Royalty Trust bears significant downside risk despite its current valuation.   Torsten Asmus About four years ago, at the depths of the coronavirus crisis, I recommended purchasing Sabine Royalty Trust (NYSE:SBR) for its extremely cheap valuation, as the stock had been sold off to the extreme by investors who had panicked and did not pay attention to fundamentals anymore. In less than two years after that article, the stock nearly tripled. Later, in late 2022, I recommended selling the stock, which had skyrocketed to an all-time high thanks to the Ukrainian crisis and the resultant surge of the prices of oil and gas to multi-year highs. Since that article, the stock has vastly underperformed the broad market, as it has offered a total return of -8% while the S&P 500 has surged 47%. Since late 2022, I have reiterated my bearish call many times. The last time was about four months ago. Even during this short period, the stock has offered a total return of -5% whereas the S&P 500 has gained 4%. After such a sustained underperformance, many investors may be tempted to conclude that Sabine Royalty Trust will soon begin covering its lost ground, particularly given its cyclical nature. However, such an investment thesis is highly risky. The outlook of the oil market has become remarkably bearish lately, given a sharp decrease in the demand from China and the slump of the price of oil below its critical support of $70, which had held firm in many occasions in the last two years. Therefore, investors should remain on the sidelines. Business overview Sabine Royalty Trust is an oil and gas trust with a history of 41 years. It derives approximately 60% of its royalty income from oil and the remaining 40% from natural gas. Therefore, the distributions of the trust are greatly affected by the underlying conditions in both the oil and gas market. Sabine Royalty Trust greatly benefited from the invasion of Russia in Ukraine in early 2022 and the resultant sanctions of the U.S. and European Union on Russia. Before the sanctions, Russia was supplying approximately one-third of natural gas consumed in Europe. It is thus easy to understand why the global gas market became exceptionally undersupplied and the price of natural gas surged to a 13-year high in the first half of 2022. However, the price of natural gas has returned to pre-crisis levels since early last year, primarily due to abnormally warm winter weather in the U.S. and Europe for two consecutive years. This aberration in weather has resulted in high gas inventories and hence the effect of the Ukrainian crisis has abated. Going forward, there is no visible catalyst for a recovery of the price of natural gas, particularly given the ongoing boom of renewable energy projects. Due to the Ukrainian crisis, the price of oil surged in tandem with the price of natural gas in 2022, to a 13-year high. Even better for Sabine Royalty Trust, in contrast to the global gas market, the global oil market has remained tight due to the deep production cuts executed by OPEC and Russia. The cartel has maintained these production cuts over the last two years in order to provide a solid floor to the price of oil, and has accomplished its goal so far. Thanks to the above-average oil prices that have prevailed in the last three years, Sabine Royalty Trust offered an all-time high distribution per unit of $8.65 in 2022 and its second-best distribution per unit of $6.38 in 2023. As the effect of the war in Ukraine on the global oil market has been fading, the price of oil has decreased to about $70 in some occasions in the last two years. In every occasion, the price of oil found strong support at that level and recovered, primarily thanks to the sustained production cuts of OPEC and Russia. However, the price of oil plunged below its support of $70 a few days ago and has remained below that level since then. The plunge below a key support level is a strong bearish signal, which indicates that a significant change in fundamentals has taken place. In this case, the game changer is an extremely negative surprise in the demand from China. It is well known that consumption of oil has stopped growing in OECD (Organization of Economic Cooperation & Development) countries, which are most of the developed countries, due to their focus on reducing their environmental footprint and their modest economic growth when compared to emerging countries. China has remained the largest contributor to the annual growth of oil consumption for several years in a row. However, according to the latest report of the Energy Information Administration [EIA], the consumption of diesel in China decreased 11% year-over-year in June. That marked the largest year-over-year decrease in diesel consumption for any month since July 2021, which had been affected by social distancing measures amid the coronavirus crisis. In other words, under normal conditions (no pandemic), it is the first time in years that China exhibits such a sharp decrease in its consumption of diesel. The decrease was attributed primarily to a slowing economy, but also to the replacement of diesel with LNG in heavy-duty trucks. Of course, no-one can be sure about the future path of oil prices. However, the recent slump of the price of oil below its key support of $70, which had remained firm in many occasions in the last two years, is as bearish as it gets from both a technical and a fundamental point of view. If the demand from China remains disappointing, the price of oil is likely to decrease much further, particularly given the unprecedented number of green energy projects that are in their development phase in the aftermath of the energy crisis in 2022. According to a recent report of the International Energy Agency [IEA], the global investment in clean energy sources is expected to surpass $2 trillion this year, for the first time in history. It will also be approximately double the global investment in fossil fuels. This is just a confirmation that the secular shift from fossil fuels to green energy sources has ample room to keep running. When all the ongoing green power projects begin to generate energy, they are likely to weigh heavily on the prices of oil and natural gas. Sabine Royalty Trust is a pure upstream player and hence it is highly sensitive to the swings of the prices of oil and gas. Given the aforementioned headwinds facing the oil and gas industry and the bearish outlook of the oil market, the stock bears a significant amount of risk. Valuation As an oil and gas trust, Sabine Royalty Trust distributes all its income to its unitholders. As a result, there is no need to examine the price-to-earnings ratio of the stock. Instead, the stock can be evaluated based on its distribution yield. The stock has offered an average distribution yield of 8.5% over the last decade. The above-average yield is justified, given the highly cyclical nature of the trust and especially the natural decay of its production over the long run. Based on its distributions in the last three months, the stock is currently offering an annualized distribution yield of 8.5%, exactly in line with its historical average. This means that the stock appears reasonably valued right now. However, the recent plunge in the price of oil has not been reflected in the distributions of the trust yet. Moreover, if the price of oil decreases further due to the weakening demand from China, the trust will have to reduce its distributions drastically. To cut a long story short, Sabine Royalty Trust will probably have significant downside risk in the event of lower oil prices. Upside risk While the base scenario is bearish for the price of oil, investors should be aware that there is upside risk to the base scenario. If an unexpected geopolitical incident in the Middle East causes disruption of global oil supply, then the price of oil will recover. As the equilibrium in this area is fragile, no-one can exclude such an incident. In addition, if the consumption of oil and refined products recovers in China, it is likely to provide support to the price of oil. In either of these two scenarios, the stock price of Sabine Royalty Trust is likely to appreciate, at least in the short run. Investors should be aware of these risk factors before shorting or selling their shares of Sabine Royalty Trust. Nevertheless, while the price of oil is rather unpredictable in the short run, the odds do not favor a sustained recovery of the price of oil in the upcoming years. Final thoughts  Technical analysis has numerous indicators, with most of them having minimal significance, at least in my opinion. One of the most important technical signals is the decline below a key support level, which has held firm in many instances. Such a breakout usually signals that fundamentals have greatly deteriorated, and hence there is more downside ahead. The recent breach of the support of the oil price at $70 does not bode well for oil producers, including Sabine Royalty Trust.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2468388538"}