SBR

Sabine Royalty Trust 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2001, for Sabine Royalty Trust, a passive entity established to hold royalty 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 August 1, 2001, there were 14,579,345 units of beneficial interest outstanding. The Trust operates on a modified cash basis of accounting and is classified as a grantor trust for federal income tax purposes.

Key Financial Metrics

Note: The filing does not provide explicit debt figures other than stating the Trust has no long-term debt instruments and borrowings are not anticipated. Liquidity is supported by cash and short-term investments of $4.48 million.

Material Changes vs. Prior Period

• Royalty Income Growth: Royalty income for the quarter ended June 30, 2001, increased by approximately $3.59 million (46%) compared to the same period in 2000. This was driven by significant increases in oil and gas prices, partially offset by decreases in production volumes.
• Six-Month Performance: For the six months ended June 30, 2001, royalty income rose approximately $8.79 million (54%) year-over-year due to higher commodity prices, despite declines in both oil and gas production.
• Quarter-over-Quarter Decline: Compared to the preceding quarter (ended March 31, 2001), royalty income decreased by approximately $2.17 million (16%). This was primarily due to lower oil and gas prices and reduced oil production, though increased gas production provided some offset.
• Expense Fluctuations: General and administrative expenses decreased by $20,800 compared to the prior year quarter due to timing differences in payments. However, for the six-month period, expenses increased by $21,900, largely due to a higher New York Stock Exchange listing fee.

Outlook, Risks, and Commentary

Management Commentary: The Trustee notes that distributable income is highly sensitive to oil and gas prices and production volumes. While prices increased significantly in 2001 compared to 2000, production volumes have declined. The Trustee does not anticipate borrowing funds in the foreseeable future.

Risks and Contingencies:

• Market Risk: The Trust is exposed to fluctuations in oil and gas prices and production volumes. The filing states it is difficult to accurately estimate future prices.
• Passive Nature: The Trust cannot engage in business activities or acquire new assets other than those initially transferred. It relies entirely on the remaining life of the royalty interests.
• Impairment: Management reviews royalty interests for impairment if events indicate the carrying amount may not be recoverable.

Subsequent Events: Following the period end, the Trust declared distributions of $0.26624 per unit (July record date) and $0.26243 per unit (August record date).

Key Facts for Investor Verification

• Production Decline: Verify the trend of declining oil and gas production volumes (e.g., oil production dropped from 156,394 Bbls in Q2 2000 to 123,302 Bbls in Q2 2001) to assess the sustainability of income despite higher prices.
• Price Sensitivity: Confirm current oil and gas market prices against the reported averages ($25.49/Bbl for oil and $5.62/Mcf for gas in Q2 2001) to gauge future distributable income potential.
• Amortization Impact: Review the amortization of royalty interests ($133,746 for the six months ended June 30, 2001) as a reduction to Trust Corpus, which reduces the net asset value available to unitholders over time.
• Escrow Timing: Understand that income is recognized when received by escrow agents or the Trust, which may cause a lag between production and reported income.