Hugoton Royalty Trust was created in 1998 when XTO Energy Inc. conveyed 80% net profits interests in gas-producing properties located in Kansas, Oklahoma and Wyoming to the trust. The trust was created to distribute monthly net profits related to the 80% net profits interests.
Oil and gas royalty trusts, like master limited partnerships (MLPs), invest in the energy and commodities sector. However, unlike MLPs, royalty trusts generate income from the actual production of natural resources such as coal, oil, and natural gas and therefore the cash flows from royalty trusts are subject to swings in commodity prices and production levels causing them to be very inconsistent. Royalty trusts have no physical operations, no management, and no employees. Instead, royalty trusts are merely financing vehicles run by banks that trade like stocks. Another company actually mine the resources and pay the royalties to the trust.
Royalty trusts may be recommended to some investors because of the high yields offered. However, yield alone does not make the investment suitable for most investors. Investors need to know that royalty trusts are very close to pure bets on commodity prices. The value of the trust and its distributions are almost directly correlated to the prices of the underlying commodity, an unstable investment whose value cannot be accurately forecasted. In addition, royalty trusts own royalties only on a finite amount of resources and once the commodity is used up the distributions will fall and eventually reach zero rendering the investment worthless.
Our clients tell us similar stories that their advisors hyped oil and gas and commodities high yielding investments without significant discussion of risk. In a recent Associated Press article, common stories of how investors are pitched by their financial advisors on oil and gas investments were reported on. Often times these products are pitched as ways to ride the boom in U.S. oil and gas production and receive steady streams of income.
Financial advisors must ensure that the oil and gas and commodities related investments being recommended to their client is appropriate for the investor and conduct due diligence on the company before making the recommendation. Unfortunately, sometimes adivsors fail to conduct sufficient research or understand the risks and prospects of the company. Oil and gas and commodities related investments have been recommended by brokers under the assumption that commodities prices would continue to go up. However, brokers who sell oil and gas and commodities products are obligated to understand the risks of these investments and convey them to clients.
Our firm represents securities investors in claims against brokerage firms over sales practices related to the recommendations of oil & gas and commodities products such as exchange traded notes (ETNs), structured notes, private placements, MLPs, leveraged ETFs, mutual funds, and individual stocks. Investors who have suffered losses may be able recover their losses through securities arbitration. Our consultations are free of charge and the firm is only compensated if you recover.