Sabine Royalty Trust: Q2 2011 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2011, for Sabine Royalty Trust, a passive trust holding royalty interests in oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trust is managed by Bank of America, N.A. (U.S. Trust). As of July 29, 2011, there were 14,579,345 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis permitted for royalty trusts by the SEC, rather than GAAP.
Key Financial Metrics
| Metric | Q2 2011 (3 Months) | YTD 2011 (6 Months) | Q2 2010 (3 Months) | YTD 2010 (6 Months) |
|---|---|---|---|---|
| Royalty Income | $16,370,674 | $30,048,301 | $14,030,965 | $28,406,558 |
| Total Income | $16,372,035 | $30,050,551 | $14,031,999 | $28,407,879 |
| General & Admin Expenses | ($681,888) | ($1,186,468) | ($610,902) | ($1,178,578) |
| Distributable Income | $15,690,147 | $28,864,083 | $13,421,097 | $27,229,301 |
| Distributable Income per Unit | $1.08 | $1.98 | $0.92 | $1.87 |
| Distributions per Unit (YTD) | $1.88 (2011) vs $1.82 (2010) | |||
| Cash and Short-Term Investments | $6,413,456 (as of June 30, 2011) | |||
| Trust Corpus | $6,452,246 (as of June 30, 2011) | |||
| Liabilities | $495,451 (as of June 30, 2011) |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income for Q2 2011 increased by approximately $2.34 million (17%) compared to Q2 2010. YTD 2011 royalty income increased by $1.64 million (6%) compared to YTD 2010.
- Production and Pricing Drivers: The increase in revenue was driven by higher production volumes of both oil and natural gas and a significant increase in oil prices.
- Oil: Average price increased from $74.45/Bbl (Q2 2010) to $94.50/Bbl (Q2 2011). Production increased from 96,717 Bbls to 105,949 Bbls.
- Gas: Average price decreased from $4.79/Mcf (Q2 2010) to $4.27/Mcf (Q2 2011), partially offsetting oil gains. Production increased from 1,634,717 Mcfs to 1,756,698 Mcfs.
- Expense Increases: General and administrative expenses rose by approximately $71,000 in Q2 2011 compared to Q2 2010, primarily due to higher escrow agent/trustee fees, engineering services, and auditing costs.
Outlook, Risks, and Contingencies
- Subsequent Distributions: Following the quarter end, the Trust declared a distribution of $0.40925 per unit for the month of July 2011 (record date July 15, payment date July 29).
- Liquidity: The Trust holds cash and short-term investments of $6.4 million. Borrowings are not anticipated in the foreseeable future, though the Trust Agreement permits borrowing to pay liabilities if necessary.
- Market Risk: The Trust has no derivative instruments or foreign currency exposure. It is subject to commodity price risk (oil and gas prices) and production volume risk. The Trustee notes that future price estimates are difficult and assumptions may prove incorrect.
- Contingencies: The Trustee is not aware of any contingencies related to royalty properties as of June 30, 2011. Unfavorable resolutions to potential contingencies would reduce future royalty income and distributions.
- Tax Considerations: The Trust is a grantor trust for federal tax purposes. Unit holders are subject to withholding taxes in New Mexico and Oklahoma, which the Trust files for and seeks refunds on; however, unit holders transferring units before refunds are received may face double taxation.
Investor Verification Checklist
- Verify the production volumes and average realized prices for oil and gas against current market benchmarks (Henry Hub for gas, Nymex for oil) to assess sustainability of revenue growth.
- Review the amortization of royalty interests ($37,766 for the six months ended June 30, 2011) to understand the depletion of the Trust corpus.
- Confirm the status of New Mexico and Oklahoma tax refunds and their impact on net distributions to unit holders.
- Monitor general and administrative expenses, specifically engineering and trustee fees, for trends that may impact distributable income margins.
- Check the Trust corpus balance ($6.45 million) relative to total assets to gauge the remaining life of the royalty interests.