SBR

Sabine Royalty Trust 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for Sabine Royalty Trust, a passive entity 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., as Trustee. As of August 5, 2003, there were 14,579,345 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis of accounting, not GAAP.

Key Financial Metrics

Liquidity and Assets: Cash and short-term investments totaled $4,481,328 as of June 30, 2003, up from $3,898,378 at year-end 2002. Total assets were $5,867,215. The Trust holds no long-term debt and does not anticipate borrowing in the foreseeable future. Liabilities totaled $654,725, primarily consisting of trust expenses payable and other payables related to suspended royalty receipts pending title verification.

Material Changes vs. Prior Period

• Revenue Growth: Royalty income for the quarter ended June 30, 2003, increased by approximately $5.46 million (90%) compared to the same period in 2002. For the six-month period, income increased by $7.05 million (54%).
• Drivers: The increase is attributed to significant rises in both oil and gas prices and increased production volumes.
  • Oil: Average price rose from $21.85/Bbl (Q2 2002) to $28.27/Bbl (Q2 2003). Production increased from 104,183 Bbls to 129,900 Bbls.
  • Gas: Average price rose from $2.32/Mcf (Q2 2002) to $4.74/Mcf (Q2 2003). Production increased from 1,441,334 Mcfs to 1,854,708 Mcfs.
• Expenses: General and administrative expenses increased by $48,600 (11%) for the quarter compared to 2002, primarily due to the timing of payments for printing and professional services.

Outlook, Risks, and Unusual Items

Management Commentary: The Trustee notes that distributable income is not necessarily indicative of full-year results due to the timing of cash receipts. The Trust operates as a passive entity with no ability to engage in commercial activities or acquire new assets.

Risks and Contingencies:

• Market Risk: Future distributions are highly dependent on volatile oil and gas prices and production volumes. The Trustee states it is difficult to accurately estimate future prices.
• Tax Withholding: A new 5% withholding tax applies to the Oklahoma share of income distributed to non-resident unit holders. This will reduce cash distributions for affected holders, starting with the August 29, 2003 distribution.
• Subsequent Events: The Trust received a refund of approximately $312,000 subsequent to June 30, 2003, related to Oklahoma non-resident taxes on 2002 royalties.

Guidance: No specific forward-looking financial guidance was provided beyond the standard caution regarding the unpredictability of commodity prices.

Investor Verification Checklist

• Commodity Prices: Verify current oil and gas prices against the reported averages ($28.27/Bbl and $4.74/Mcf) to assess future income potential.
• Production Volumes: Confirm if the reported production increases (Oil: +25%, Gas: +29% QoQ) are sustainable or if they reflect temporary factors.
• Tax Impact: Review the specific impact of the new 5% Oklahoma withholding tax on net distributions for non-resident unit holders.
• Reserve Estimates: Note that the filing does not provide updated reserve volumes; investors should refer to the latest Form 10-K for independent engineer estimates of proved reserves.
• Accounting Basis: Remember that financial results are on a modified cash basis (income recognized when received), which may lag behind actual production dates.