Don't Buy This Insanely High-Yielding Trust

With the Federal Reserve keeping interest rates at historically low levels, investors have been looking for investments to provide them the yield they can't get from bonds or banks. That, however, is pushing investors into riskier and riskier assets. One of the most risky right now is probably Whiting USA Trust I .

What is Whiting USA Trust?
Whiting is one of those investments that seems too good to be true... because it is. Most sources have the yield listed at around 90%. Holy cow! But that yield isn't as good as it looks, making Whiting the perfect example of why you need to understand exactly what you own before you buy.

Whiting is a trust that was set up in late 2007 by Whiting Petroleum Corporation . The trust owns a "term net profits interest that represented the right to receive 90% of the net proceeds from Whiting's interests in certain existing oil and natural gas producing properties." That sounds a bit arcane, and it is. What it means, however, is that Whiting USA Trust I gets "90% of the net proceeds from the sale of production of 9.11 million barrels of oil equivalent (MMBOE)" from a collection of wells.

(Source: Public domain, via Wikimedia Commons)

That's basically equal to 8.2 MMBOE. And if you like oil and gas, this could be a perfectly fine option for getting direct access. However, here's the rub: After the trust has sold the 9.11 MMBOE, it terminates. It just shuts down and goes away. By design, the shares of Whiting USA Trust I will be worth nothing.

This, however, isn't some devious and hidden fact. From the trust's FAQ page: "What will be the value of the units when the trust terminates? A -- Zero." And the time until zero hour hits? Again from the FAQ page: "How long are the trust's distributions expected to last? A -- Based on independent engineering at December 31, 2013, the trust is expected to terminate in March 2015." Basically, early next year, the trust will have pumped the 9.11 MMBOE that triggers its termination.

What's it worth?
That begs the question of what Whiting USA Trust I is worth. The simple answer is that the shares are worth nothing in and of themselves, because they don't actually represent any tangible assets. The trust is worth only what dividends it pays. The most recent distribution was in August, and amounted to roughly $0.56 a share. If the trust terminates in March, trust owners will get two more distributions plus about a month or so of operation in a sort of stub period.

The math is pretty easy. Whiting USA Trust I's value equals $0.56 plus $0.56 plus around $0.20 -- or just less than $1.40. I'm being generous on purpose because oil price movements are what dictate the payment. (It's worth noting that oil prices have been heading lower, so my estimates are likely on the high side.) Even with such mathematical largess, the point is painfully clear. But Whiting USA Trust I was recently trading at more than $2.40 a share.

Source: Chspf, via Wikimedia Commons.

That's wrong, right?
I wish I could say that this was, indeed, a mistake. But it isn't. In fact, in the trust's August distribution announcement, it basically said investors are overpaying: "to the extent that the Trust units are trading at a price substantially in excess of the aggregate distributions that may be reasonably expected to be made prior to the termination of the Trust, the market price decline in Trust units is likely to include one or more abrupt substantial decreases."

That's as close to "don't buy this" as you are likely to see any company say publicly. The scary part is that Whiting USA Trust I has been so open about what is going to happen -- and still investors are buying the trust units at what is almost sure to be an inflated price. If you own Whiting USA Trust I, I suggest you heed the company's advice and expect price declines. If you're looking at Whiting USA Trust I because of its insane yield, move on to greener pastures. And if you're searching for yield in increasingly arcane places, make sure you know what you're buying.