OPEC Just Created The Income Trade Of The Decade

If you have been around the energy markets long enough, you know crude oil has a flair for the dramatic.

When it sells off, it does not just trickle down; it falls off a cliff.

The rebound is vicious, fast and usually overdue when it finally wakes up. The trick, as always, is understanding the cycles, not panicking in the downtrend, and positioning for the inevitable rebound.

That is especially true for one of my favorite corners of the energy market: mineral royalty trusts and non-operator oil and gas interests. These are the little guys who do not drill a thing but still get paid when the oil flows.

All this is happening again right now.

It's setting you up for the best income trade in a decade.

Let us walk through the big oil busts of the last few decades in the late 1990s: the 2008 crash, the 2014 to 2016 wipeout, and, of course, the COVID collapse of 2020.

I want to talk about what happened, how long sentiment stayed sour and what eventually got prices off the mat. Then, we will dig into what all that meant for the royalty trusts and non-operators and how their dividends held up (or not), how the market treated them, and what happened when oil came roaring back.

1998: The Asian Flu And The $10 Barrel

In the late 1990s, OPEC had a problem. They pumped too much oil, thinking Asia would keep consuming it. However, when the Asian financial crisis hit, demand cratered, inventories ballooned, and prices dropped like a rock.

Brent went as low as $10, and nobody wanted to touch an oil stock with a ten-foot pole.

Royalty trusts got smashed. Cash flows dried up, distributions were cut, and unit prices plunged. Investors were left staring at trailing yields in the teens, but those payouts were not sticking around.

Most trusts saw 50% or more wiped off their market capitalizations. However, by late 1999, OPEC got its act together and cut production. Inventories fell, demand slowly came back, and oil doubled. Royalty trust distributions rebounded quickly, and anyone who had the courage to buy when it all looked hopeless got rewarded in a big way.

2008: Peak Oil Euphoria Meets Lehman Brothers

By mid-2008, oil was $147 a barrel and people were chanting "peak oil" like it was gospel.

Then, the financial system imploded.

Demand evaporated, oil crashed to $30 and panic spread. Trust distributions went over the cliff.

Sabine Royalty Trust SBR cut payouts by more than 50% in a single month.

Prices followed. These income names saw unit values drop 70% or more.

Yields were sky-high on paper, showing 20% or even 30%, but those were based on past payouts that had already been slashed. For most of 2009, distributions were a shadow of their former selves.

However, when the smoke cleared, oil demand returned, OPEC slashed production, and oil started climbing again. Trust distributions bounced, unit prices doubled or tripled off the lows and yields normalized in the high single digits.

Patience paid off.

2014 To 2016: The Shale Tsunami

This one was different. It was not a demand crash. It was too much U.S. shale oil.

OPEC got tired of losing market share and let prices fall from $115 in mid-2014 to under $30 by early 2016. Oil was in freefall for almost two years.

That stretched the pain out.

It was Drill, Baby, Drill Gone Bad, The Prequel.

Royalty and non-op names bled out slowly. Distributions did not collapse all at once…they just shrank quarter by quarter.

Permian Basin Royalty Trust's PBT payout dropped by two-thirds.

PrairieSky PREKF and Freehold slashed their dividends.

The market priced them accordingly.

Yields dropped, unit prices got hammered, and by 2016, it was hard to find anyone still bullish.

Then OPEC and Russia teamed up and finally cut production in late 2016.

By 2017, oil was back in the $60s, and royalty trusts started increasing dividends again.

Trusts that had lost 70% of their value doubled or more over the next 18 months. Investors who stayed the course got paid.

2020: The Pandemic Panic And Negative Oil Prices

Then came COVID. Demand did not just shrink. It vanished.

Planes stopped flying, cars stopped driving, and suddenly, the world was drowning in oil.

Saudi Arabia and Russia decided to have a price war on top of it all, and in April 2020, WTI futures went negative.

Royalty trusts had a rough time. Distributions were suspended.

Permianville PVL went 13 months without a single payout.

PrairieSky slashed its dividend by two-thirds.

Investors fled. Unit prices dropped 60% to 80% in weeks.

Trailing yields? Meaningless. Nobody was paying anything.

However, it did not last.

OPEC+ made historic cuts.

Demand started recovering.

When vaccines arrived in late 2020, the game changed. By mid-2021, Permianville was paying again. PrairieSky and Freehold started raising dividends.

Share prices doubled or tripled.

By 2022, Sabine's distribution hit $8.65, a monster rebound.

What It All Means

These downturns tell the same story every time: oil crashes, royalty and non-operator income disappear, and the market throws these stocks in the trash. Yields spike on trailing numbers, then vanish when dividends get cut. Sentiment stays ugly for too long.

However, when the oil price recovers, and it always has, these names come back fast. Distributions climb, unit prices follow, and investors who bought when everyone else was scared end up with huge yields on cost and big capital gains.

They are not for the faint of heart. You have to be willing to hold when there is blood in the oil patch.

It's a pain trade.

However, if you buy these things when oil is hated and the checks have stopped, you set yourself up for some of the most explosive total returns in the market.

This is deep value investing, oilfield-style.

And now, it's happening again.

Read the headlines:

• OPEC is going to increase production.
• Oil demand forecasts are being cut.
• The much more energy-efficient AI from China will slash demand even further.
• Nuclear energy plants are going to pop up like mushrooms with no regulatory delays or cost overruns and be built faster than Buc-ee's.
• China will never import another drop of oil.

Negative sentiment is building, we’ve seen some distribution cuts and optimism is harder to find than a good book in a Blockbuster.

Royalty trusts and nonowner operators may go down before they go up, but when they do, they are going to go up a lot.

Those who buy in scale, with patience and a dash of courage, will be well rewarded.

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