Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2012
Trustee: Bank of America, N.A.
Outstanding Units: 46,608,796 (as of November 7, 2012)
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 distributed monthly to unit holders.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Royalty Income | $9,120,982 | $14,879,902 | $45,684,941 | $50,076,877 |
| Distributable Income | $8,953,411 | $14,729,881 | $44,707,162 | $49,084,769 |
| Distributable Income per Unit | $0.19 | $0.32 | $0.96 | $1.05 |
| General & Admin Expenses | $(167,683) | $(150,178) | $(978,425) | $(992,629) |
| Cash & Short-term Investments | $2,847,723 | $4,727,946 (Dec 31, 2011) | N/A | |
| Net Overriding Royalty Interests (Net) | $838,242 | $891,576 (Dec 31, 2011) | N/A |
Liquidity & Debt: The Trust holds cash and short-term investments of approximately $2.85 million. There are no long-term debt obligations listed; the Trustee is authorized to borrow funds to pay liabilities but has not reported outstanding debt in the balance sheet. Distributions payable to unit holders equal the cash on hand ($2,847,723).
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 39% in Q3 2012 compared to Q3 2011 ($9.1M vs $14.9M) and 9% for the nine-month period ($45.7M vs $50.1M).
- Price Volatility: The average realized oil price dropped to $81.88/Bbl in Q3 2012 from $94.11/Bbl in Q3 2011. Gas prices fell significantly to $5.13/Mcf in Q3 2012 from $8.52/Mcf in Q3 2011.
- Capital Expenditures: Capital expenditures on the Waddell Ranch properties surged to $9.2 million in Q3 2012 compared to $1.9 million in Q3 2011. For the nine months ended Sept 30, 2012, capex totaled $17.2 million versus $8.2 million in the prior year. These costs are deducted from net profits before royalty calculation, significantly reducing distributable income.
- Production Volumes: While underlying property oil sales volumes increased (260,281 Bbls in Q3 2012 vs 191,190 Bbls in Q3 2011), the Trust's allocated royalty volumes decreased due to the impact of higher costs and price fluctuations on the net profit calculation.
Outlook, Risks, and Contingencies
- Management Commentary: The Trustee attributes the decline in income to lower oil and gas prices, decreased production, and substantial increases in capital expenditures and lease operating expenses. The 2012 capital expenditure budget for Waddell Ranch was revised to $75.4 million (gross), with $17.2 million expended through Q3.
- Contingencies (ConocoPhillips Recoupment): In 2011, ConocoPhillips notified the Trustee of an accounting error resulting in an approximate $5.9 million overpayment to the Trust. ConocoPhillips withheld $4.07 million in September 2011 and $474,480 in October 2011 to recoup this amount. The Trustee is continuing to evaluate the matter, noting that future distributions may be affected if the recoupment is not fully satisfied or if further adjustments are required.
- Risks: The Trust is exposed to commodity price volatility, changes in production volumes, and the financial decisions of the interest owners (ConocoPhillips and Riverhill Energy) regarding capital expenditures and operating costs. There is no impairment of assets as of September 30, 2012.
- Subsequent Events: On October 19, 2012, the Trust declared a distribution of $0.074625 per Unit, payable November 15, 2012.
Investor Verification Checklist
- Capital Expenditure Impact: Verify the extent to which the revised $75.4 million capex budget for Waddell Ranch will continue to suppress net profits and distributions in the remainder of 2012 and into 2013.
- Commodity Price Sensitivity: Assess the Trust's exposure to current oil and gas price levels, given the significant drop in realized prices compared to 2011.
- ConocoPhillips Recoupment Status: Confirm that the $5.9 million overpayment recoupment is fully resolved and that no further withholdings or adjustments are anticipated.
- Production Trends: Monitor the underlying production volumes of the Waddell Ranch and Texas Royalty properties to ensure they align with the Trust's net profit calculations.
- Amortization of Royalty Interests: Review the unit-of-production amortization charges ($53,334 for 9M 2012) to understand the depletion of the Trust corpus.