Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended June 30, 2018 (10-Q)
Trustee: Simmons Bank (effective February 20, 2018)
Outstanding Units: 46,608,796 as of August 1, 2018
Business Overview: 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 that distributes cash received from royalties to unit holders. It is taxed as a grantor trust.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
|---|---|---|
| Royalty Income | $7,623,122 | $17,342,427 |
| Total Income (Royalty + Interest) | $7,629,876 | $17,354,657 |
| General & Administrative Expenses | $(581,462) | $(995,312) |
| Distributable Income | $7,048,414 | $16,359,345 |
| Distributable Income per Unit | $0.15 | $0.35 |
| Cash and Short-term Investments | $3,104,519 (as of June 30, 2018) | |
| Distributions Payable | $2,054,519 (as of June 30, 2018) | |
| Net Overriding Royalty Interests (Net of Amortization) | $495,327 (as of June 30, 2018) |
Note: The filing does not provide explicit debt figures; the Trustee is authorized to borrow funds to pay liabilities, but no borrowings are listed in the liabilities section.
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased by approximately 2.0% for the quarter ($7.62M vs. $7.47M) and 1.9% for the six-month period ($17.34M vs. $17.03M) compared to the same periods in 2017.
- Price vs. Volume: The increase in royalty income was driven by higher average oil prices ($60.94/Bbl in Q2 2018 vs. $47.14/Bbl in Q2 2017) and gas prices ($3.12/Mcf vs. $3.13/Mcf), which offset a decline in production volumes. Oil sales volumes attributable to the Trust decreased from 138,456 Bbls in Q2 2017 to 109,771 Bbls in Q2 2018.
- Expense Increase: General and administrative expenses rose to $581,462 for the quarter (from $504,997 in 2017) and $995,312 for the six months (from $870,454 in 2017), primarily due to increased professional service fees.
- Capital Expenditures: Capital expenditures on the Waddell Ranch properties decreased significantly to $167,801 in Q2 2018 compared to $517,000 in Q2 2017. For the six months, expenditures were $0.6 million (2018) vs. $0.7 million (2017).
- Operating Costs: Lease operating expenses and property taxes on the Waddell Ranch properties increased to $6.3 million in Q2 2018 from $4.0 million in Q2 2017 due to increased maintenance work.
Outlook, Risks, and Unusual Items
- Subsequent Events: On July 20, 2018, the Trust declared a distribution of $0.057454 per Unit, payable on August 14, 2018, to unit holders of record on July 31, 2018.
- Capital Budget: ConocoPhillips has approved a 2018 capital expenditures budget of $4.3 million (gross) for the Waddell Ranch properties.
- Production Activity: During the quarter ended June 30, 2018, 2 workover wells were completed on the Waddell Ranch properties, with no new wells completed or in progress. Various facility projects were in progress.
- Risk Factors: The Trustee notes that forward-looking statements are subject to risks including oil and gas price volatility, production declines, and regulatory changes. No material changes to risk factors were reported since the 2017 10-K.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recorded when paid, and expenses when paid or reserved.
Investor Verification Checklist
- Production Decline: Verify the long-term trend of declining oil and gas production volumes against the Trust's amortization schedule to assess the remaining life of the royalty interests.
- Price Sensitivity: Confirm the correlation between current market oil prices and the Trust's distributable income, given the significant reliance on price increases to offset volume declines.
- Operator Activity: Monitor ConocoPhillips' adherence to the $4.3 million capital expenditure budget for the Waddell Ranch properties to ensure maintenance of production levels.
- Contingencies: Review the $1,050,000 reserve for contingencies to understand potential liabilities that could reduce future distributions.
- Trustee Transition: Confirm the operational stability following the trustee change from Southwest Bank to Simmons Bank effective February 20, 2018.