Oil and Gas Profit Play

Yesterday, I told you that there is a class of investments that can produce gains that far exceed their risk level.

I gave, as an example, Chevron and Exxon, which returned, respectively, an annual average of 19.9% and 10% over the last decade.

Then I told you about another type of investment in the oil and gas industry that did much better.

This one averaged 80% annually over the same time period.

As I explained yesterday, the oil majors take on quite a bit of risk — and expense — when exploring for oil. They can spend hundreds of millions of dollars just to bring one oil well into production.

And investors were rewarded for accepting that risk by getting back 10% annually on Exxon and 19.9% annually on Chevron.

So how was it possible for the other type of investment to return 6 to 8 times more than that?

Here’s how…

This type of oil and gas “company” doesn’t worry about looking for oil. They do no exploring. They don’t drill a single well head, build any infrastructure, or hire any drill workers. They don’t even transport any oil or gas.

These companies are called “royalty trusts.”

And their business model couldn’t be any simpler. They own land and the rights to the oil and gas reserves beneath it. They then hire an operator (like Chevron or Exxon) to come in and do all the heavy lifting.

The operator spends money to identify a deposit and explore it. They also pay for drilling the wells and transporting the oil or gas.

The royalty trust company just sits back and gets paid on every barrel of oil or gas sold.

As an investor, you are rewarded for buying these royalty trusts in two ways:

The first way is through simple price appreciation. (The royalty trust I mentioned yesterday went up 800% in the last decade.)

The second way is through quarterly dividends. These trusts are legally obligated to pay out a significant portion of their income as dividends. (The one that went up 800% is currently offering a 7.7% dividend yield.)

And when you consider that worldwide oil demand is projected to increase 40% over the next 20 years, that makes these companies a very low risk investment for you.

[Ed. Note: I am currently looking at several royalty trust candidates to add to my Trend Trader portfolio in the Liberty Street League newsletter.]