Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended September 30, 2018 (Form 10-Q)
Trustee: Simmons Bank (effective February 20, 2018)
Outstanding Units: 46,608,796 as of November 1, 2018
The Trust holds net overriding royalty interests in producing oil and gas properties in Texas, specifically the Waddell Ranch properties (75% interest) and Texas Royalty properties (95% interest). The Trust is a passive entity taxed as a grantor trust, with income passed through to unit holders. Financial statements are prepared on a modified cash basis of accounting.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 |
|---|---|---|
| Royalty Income | $7,236,350 | $24,578,777 |
| Total Income (Royalty + Interest) | $7,243,344 | $24,598,001 |
| General & Administrative Expenses | $(186,501) | $(1,181,813) |
| Distributable Income | $7,056,843 | $23,416,188 |
| Distributable Income Per Unit | $0.15 | $0.50 |
| Cash and Short-Term Investments (Sep 30, 2018) | $3,604,578 | |
| Distributions Payable (Sep 30, 2018) | $2,554,578 | |
| Net Overriding Royalty Interests (Net of Amortization) | $484,945 |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 18.7% for the quarter ($7.24M vs. $6.10M) and 6.3% for the nine-month period ($24.58M vs. $23.12M) compared to the prior year.
- Price vs. Volume: The increase in royalty income was driven primarily by higher average oil and gas prices, which offset a decrease in production volumes.
- Oil Prices: Average price increased to $60.19/Bbl (Q3 2018) from $43.72/Bbl (Q3 2017).
- Gas Prices: Average price increased to $3.54/Mcf (Q3 2018) from $3.11/Mcf (Q3 2017).
- Production: Total oil sales from underlying properties decreased to 2,327 Bbls/day (Q3 2018) from 2,568 Bbls/day (Q3 2017). Gas sales decreased to 10,538 Mcf/day from 11,675 Mcf/day.
- Capital Expenditures: Capital expenditures for the Waddell Ranch properties dropped significantly to $5,200 in Q3 2018 compared to $572,000 in Q3 2017. For the nine months, expenditures were $0.6 million (2018) vs. $1.2 million (2017).
- Operating Expenses: Lease operating expenses and property taxes for the Waddell Ranch properties increased to $6.75 million (Q3 2018) from $5.0 million (Q3 2017) due to increased maintenance work.
Outlook, Risks, and Commentary
- Management Commentary: The Trustee attributes the increase in distributable income to higher commodity prices and reduced capital expenditures by the operator. No new wells or workover wells were completed on the Waddell Ranch properties during the quarter or the nine-month period.
- Capital Budget: ConocoPhillips has approved a 2018 capital expenditures budget of $4.3 million (gross) for the Waddell Ranch properties.
- Subsequent Events: On October 19, 2018, the Trust declared a distribution of $0.055098 per Unit, payable November 15, 2018.
- Risks and Contingencies:
- Market Risk: Income is highly sensitive to oil and gas prices and production volumes, which are subject to global market variables.
- Depletion: The Trust is a declining asset; production volumes are decreasing over time.
- Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions.
- Accounting Basis: The filing notes that financial statements are prepared on a modified cash basis, not GAAP. Revenues are recorded when paid, and expenses when paid.
Investor Verification Checklist
- Verify the current status of the 2018 capital expenditure budget ($4.3M) and whether spending aligns with the reduced activity seen in Q3.
- Monitor future oil and gas price trends, as the Trust's income growth is currently price-dependent rather than volume-dependent.
- Confirm the impact of increased lease operating expenses ($6.75M in Q3) on future net profits, as maintenance costs may continue to rise on aging infrastructure.
- Review the specific terms of the "excess costs" provision, where costs exceeding revenues in one conveyance cannot be offset by income from another, potentially affecting distribution timing.
- Check for any updates on the ownership structure of the Texas Royalty properties (Riverhill Energy) and Waddell Ranch properties (Burlington Resources/ConocoPhillips).