SBR

Sabine Royalty Trust 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2005, for Sabine Royalty Trust, a passive trust established to hold royalty and mineral interests in oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trust is administered by Bank of America, N.A. as Trustee. As of July 29, 2005, there were 14,579,345 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis of accounting, not GAAP, as permitted for royalty trusts.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Royalty income for the three months ended June 30, 2005, increased by approximately $1.39 million (13%) compared to the same period in 2004. For the six-month period, royalty income increased by $4.04 million (20%).
• Drivers: The increase is primarily attributed to higher oil and gas prices and increased oil production volumes. This was partially offset by a decrease in gas production volumes.
• Expense Increases: General and administrative expenses rose by approximately $46,100 for the quarter and $224,700 for the six-month period compared to 2004. This increase is largely due to higher professional and auditing fees associated with Sarbanes-Oxley Section 404 compliance, as well as increased costs for unitholder information and printing services.
• Production Volumes (Q2 2005 vs Q2 2004): Oil production increased from 130,816 to 136,733 barrels. Gas production decreased from 1,555,341 to 1,271,939 Mcfs.
• Prices (Q2 2005 vs Q2 2004): Average oil price rose from $32.22 to $39.34 per barrel. Average gas price rose from $4.54 to $5.86 per Mcf.

Outlook, Risks, and Contingencies

• Market Risk: The Trust is exposed to fluctuations in oil and gas prices. The filing notes that future prices are difficult to estimate and assumptions may prove incorrect. As of July 15, 2005, Henry Hub gas prices were $7.01/Mcf and Nymex oil prices were $57.81/barrel.
• Reserve Uncertainty: Estimates of proved reserves and future production rates are subject to change as new information becomes available. Actual recovery may differ significantly from estimates.
• Contingencies: The Trustee is aware of no material contingencies as of July 29, 2005. However, unfavorable resolution of property-related contingencies would reduce future royalty income and distributions.
• Liquidity: The Trust holds cash and short-term investments to fund monthly distributions. Borrowing is permitted but not anticipated in the foreseeable future.
• Subsequent Distributions: Following the quarter end, distributions of $0.28078 (July) and $0.31653 (August) per unit were declared.

Key Facts for Investor Verification

• Income Timing: Verify that royalty income is recognized on a cash-received basis, which may lag behind production dates (e.g., Q2 2005 income reflects production from Jan-Mar 2005).
• Production Trends: Monitor the divergence between rising oil production/volumes and declining gas production volumes to assess future revenue stability.
• Expense Structure: Confirm if Sarbanes-Oxley compliance costs are a one-time increase or a recurring baseline for future administrative expenses.
• Reserve Life: Review the amortization of royalty interests ($70,160 for the six months) against the remaining Trust Corpus to gauge the depletion rate of the asset base.
• Price Sensitivity: Assess the impact of current market prices (Oil ~$57.81, Gas ~$7.01) versus the average prices realized in the filing ($39.34 Oil, $5.86 Gas) on upcoming quarterly distributions.