Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2014
Trustee: Bank of America, N.A. (U.S. Trust) (Resigning effective August 29, 2014; Southwest Bank appointed as successor)
Outstanding Units: 46,608,796
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). Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 |
|---|---|---|
| Royalty Income | $14,607,298 | $26,742,405 |
| Interest Income | $65 | $128 |
| General & Administrative Expenses | $(481,876) | $(916,651) |
| Distributable Income | $14,125,487 | $25,825,881 |
| Distributable Income Per Unit | $0.30 | $0.55 |
| Cash and Short-term Investments | $4,501,531 | $4,501,531 |
| Net Overriding Royalty Interests (Net of Amortization) | $747,706 | $747,706 |
| Total Assets | $5,249,237 | $5,249,237 |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 31% for the quarter ($14.6M vs. $11.2M) and 47% for the six-month period ($26.7M vs. $18.2M) compared to the same periods in 2013.
- Price Drivers: The increase is primarily attributable to higher commodity prices. Average oil prices rose to $94.35/Bbl (Q2 2014) from $84.50/Bbl (Q2 2013), and gas prices rose to $7.56/Mcf from $4.49/Mcf.
- Production Volumes: While royalty income increased, total oil sales volumes from the underlying properties decreased slightly in Q2 2014 (261,209 Bbls) compared to Q2 2013 (270,421 Bbls). Gas sales volumes also decreased in Q2 2014 (617,883 Mcf) vs. Q2 2013 (790,218 Mcf). However, for the six-month period, both oil and gas sales volumes increased.
- Expenses: General and administrative expenses decreased in Q2 2014 due to lower professional fees but increased for the six-month period due to higher professional expenses.
- Capital Expenditures: Gross capital expenditures for the Waddell Ranch properties decreased to $6.8M in Q2 2014 from $8.4M in Q2 2013.
Outlook, Risks, and Contingencies
- Trustee Transition: U.S. Trust, Bank of America Private Wealth Management is resigning as Trustee effective August 29, 2014. Southwest Bank has been approved as the successor trustee.
- ConocoPhillips Accounting Adjustment: A prior period adjustment regarding gas plant production proceeds (initially overpaid by ~$5.9M) was largely resolved. The adjustment decreased reported royalty income for Q1 2014 by $655,161 but had no impact on Q2 2014 results.
- Market Risk: Distributable income is highly sensitive to oil and gas prices and production volumes, which are subject to market volatility and capital expenditure decisions by the interest owners (ConocoPhillips and Riverhill Energy).
- Subsequent Event: A distribution of $0.118511 per Unit was declared on July 21, 2014, payable August 14, 2014.
- Impairment: No impairment of assets was recognized as of June 30, 2014.
Investor Verification Checklist
- Verify the effective date and terms of the Trustee transition from Bank of America to Southwest Bank.
- Monitor future commodity prices (oil and gas) as the primary driver of distributable income.
- Review capital expenditure budgets and drilling activity reports from ConocoPhillips (Waddell Ranch) and Riverhill Energy (Texas Royalty properties) to assess future production sustainability.
- Confirm the status of the ConocoPhillips accounting reconciliation to ensure no further retroactive adjustments to royalty income.
- Check the Trust's cash reserve levels to ensure sufficient liquidity for distributions and contingent liabilities.