Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended June 30, 2016 (Form 10-Q)
Trustee: Southwest Bank
Outstanding Units: 46,608,796 as of August 1, 2016
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 exempt from Texas franchise tax and is taxed as a grantor trust for federal income tax purposes. Financial statements are prepared on a modified cash basis.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2016 |
|---|---|---|
| Royalty Income | $4,379,766 | $7,149,802 |
| Total Expenses | $565,013 | $879,847 |
| Distributable Income | $3,664,985 | $5,970,271 |
| Distributable Income per Unit | $0.08 | $0.13 |
| Cash and Short-term Investments | $2,409,776 | $2,409,776 (as of June 30) |
| Reserve for Expenses | $800,000 | $800,000 (as of June 30) |
| Net Overriding Royalty Interests (Net) | $655,073 | $655,073 (as of June 30) |
Material Changes vs. Prior Period
- Quarterly Comparison (Q2 2016 vs. Q2 2015):
- Royalty Income: Increased by approximately 6.3% to $4.38 million from $4.12 million. This increase was driven by reduced capital expenditures and higher production volumes, which offset a significant decline in commodity prices.
- Commodity Prices: Average oil price dropped to $30.02/Bbl (from $48.47) and gas price to $1.79/Mcf (from $2.63).
- Expenses: Increased to $565,013 from $450,958, primarily due to higher professional service fees.
- Capital Expenditures (Waddell Ranch): Decreased significantly to $710,000 from $3.4 million.
- Semi-Annual Comparison (6 Months 2016 vs. 6 Months 2015):
- Royalty Income: Decreased by approximately 18.3% to $7.15 million from $8.75 million, primarily due to the substantial decrease in oil and gas prices.
- Distributable Income: Decreased to $5.97 million ($0.13/unit) from $7.71 million ($0.17/unit).
- Capital Expenditures (Waddell Ranch): Decreased to $3.3 million from $13.6 million.
- Production Volumes: Total oil and gas sales volumes from the underlying properties increased compared to the prior year period, despite lower prices.
Outlook, Risks, and Management Commentary
- Management Commentary: The Trustee noted that the increase in Q2 royalty income was a result of reduced capital expenditures and increased production, which mitigated the impact of lower oil and gas prices. For the six-month period, the decline in income was directly attributed to lower market prices for oil and gas.
- Capital Expenditure Budget: ConocoPhillips advised that the 2016 capital expenditure budget for the Waddell Ranch properties is approved at $2.45 million (gross), a significant reduction from the $27 million spent in 2015.
- Drilling Activity: No new wells or workover wells were completed on the Waddell Ranch properties during the three or six months ended June 30, 2016, compared to activity in the prior year.
- Risks and Contingencies:
- Market Risk: The Trust is highly sensitive to fluctuations in oil and gas prices. The filing notes that average prices decreased due to worldwide market variables.
- Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions.
- Impairment: No impairment of assets was recognized as of June 30, 2016.
- Subsequent Events: On July 19, 2016, the Trust declared a distribution of $0.040122 per Unit, payable on August 12, 2016.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current oil and gas prices against the reported averages ($30.02/Bbl oil, $1.79/Mcf gas for Q2) to assess future income potential.
- Capital Expenditure Plans: Confirm the $2.45 million 2016 capital expenditure budget for Waddell Ranch properties and monitor for any changes in drilling activity that could impact future production.
- Production Volumes: Review the increase in total oil and gas sales volumes from underlying properties to ensure production sustainability despite lower prices.
- Reserve Adequacy: Note the $800,000 reserve for expenses and monitor if this is sufficient for future administrative or contingent liabilities.
- Distribution History: Verify the consistency of monthly distributions and the impact of the "excess costs" carry-forward mechanism on future payouts.