How George Soros Earns 6% to 11% Yields Outside the Stock Market
September 18, 2019
Little-Known Investment Pays George Soros Double-Digit Yields
George Soros is one of the best investors on the planet.
Back in 1969, the financier founded the Quantum Fund. And over the following years, investors in this firm averaged more than 30% in annual returns.
Those types of profits put George Soros in the same class of investors as Warren Buffett and Carl Icahn. So, based on his exceptional track record, I always pay attention to what stocks Soros is buying. And right now, the billionaire investor has made some interesting bets in the energy patch.
In recent U.S. Securities and Exchange Commission (SEC) filings, Soros revealed new positions in a number of oil well royalty trusts. The report revealed stakes in Brigham Minerals Inc (NYSE:MNRL), Falcon Minerals Corp (NASDAQ:FLMN), and Kimbell Royalty Partners LP (NYSE:KRP). His largest position, Viper Energy Partners LP (NASDAQ:VNOM), now amounts to more than 950,000 units. (Source: “Hedge Fund – Soros Fund Management,” Insider Monkey, last accessed September 18, 2019.)
These trusts are unique businesses. In essence, a trust simply owns a collection of oil wells and milks the profits from their operations. Unlike normal oil and gas companies, these firms invest little or nothing into exploration. Instead, they pay everything out to unitholders, which can result in yields of 12%, 15%, or even as high as 21%.
Admittedly, this model has its drawbacks. Like any oil company, royalty trust profits can swing wildly with changes in the energy market. With the recent downturn in the industry, the share prices for many royalty trusts have collapsed. Even more alarming, many firms have resorted to slashing their distributions.
These income streams also run dry over time. Because oil wells are depleting assets, production generally declines with each passing year. New technologies can extend the life of old properties, but by and large, most royalty trusts only have enough reserves to remain in operation for 10 to 20 years.
Yet this simple model still has a number of advantages.
First, royalty trusts come with a certain degree of safety. Investors can hit it big when an oil company strikes a gusher while drilling for new wells. But when management hits a dry hole or a new well isn’t profitable to drill, shareholders pay the price. These trusts, by comparison, don’t have any of these problems.
Furthermore, drilling programs come with big price tags. Oil companies run on a treadmill, spending more and more money to replace every barrel pulled out of the ground—money, by the way, that can’t be paid to shareholders.
Royalty trusts, however, spend nothing in the way of exploration and drilling. As a result, every dollar of revenue flows straight to the bottom line.
And perhaps best of all, these trusts enjoy a number of tax breaks. These firms are structured as pass-through entities, so they pay no corporate taxes.
The government, moreover, treats the distributions as capital gains, therefore taxing them at a lower rate. And because investors can also write off the depreciation of their assets, they receive a nice tax break each April.
For unitholders, these advantages can create lucrative income streams. Royalty trusts pay out some of the highest yields around, many times higher than what investors earn on traditional stocks and bonds. And as you can see in the table below, George Soros collects upfront dividend yields as high as 11%.
George Soros Royalty Trust Holdings |
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| Company | Market Cap | Yield |
| Brigham Minerals Inc | $1.1 Billion | 6.2% |
| Viper Energy Partners LP | $1.9 Billion | 6.1% |
| Falcon Minerals Corp | $575.2 Million | 5.7% |
| Kimbell Royalty Partners LP | $346.8 Million | 10.9% |
(Source: Google Finance, last accessed September 18, 2019.)
I like to think of these investments as a unique kind of bond. A royalty trust has a finite life and pays out regular distributions. They also pay out a large chunk of cash, the residual value of the oil wells, at the end of the partnership’s life.
But unlike bonds, these payments fluctuate with swings in the energy market. And if prices fall far enough, you might not recoup the value of your original investment.
That, however, doesn’t make royalty trusts bad options. On the contrary, these firms have often generated far better returns than many traditional oil and gas companies.
BP Prudhoe Bay Royalty Trust (NYSE:BPT), one of the oldest firms in this space, for instance, generated a total return of 5,085% during the oil boom between mid-1999 and mid-2014. By comparison, an investment in the trust’s parent company, BP plc (NYSE:BP), returned only 85% over the same period.
And George Soros isn’t the only one buying. Last quarter, small-cap investing legend Chuck Royce revealed an 869,000-share stake in Permian Basin Royalty Trust (NYSE:PBT). (Source: “Permian Basin Rty Tr (PBT) – Hedge Fund Holdings,” Insider Monkey, last accessed September 18, 2019.)
Other hedge fund honchos, including Jim Simons, John Overdeck, and David Siegel, have also started investing in this space.
What could all these smart-money investors see in these little-known investments?
Following the recent downturn in the oil patch, royalty trusts trade at bargain prices. And because of their unique business model, these firms gush income. Dividend hunters might be wise to follow George Soros and give this industry a look.
