Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarter ended March 31, 2018
Trustee: Simmons Bank (effective February 20, 2018, following the merger of Southwest Bank)
Outstanding Units: 46,608,796 (as of May 1, 2018)
Business Model: The Trust holds net overriding royalty interests in producing oil and gas properties in Texas. It does not engage in active business operations but distributes cash received from royalty interests to Unit holders. The financial statements are prepared on a modified cash basis of accounting.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Royalty Income | $9,719,305 | $9,552,223 |
| Total Income (Royalty + Interest) | $9,724,781 | $9,554,505 |
| General & Administrative Expenses | $(413,850) | $(365,457) |
| Distributable Income | $9,310,931 | $9,189,048 |
| Distributable Income per Unit | $0.20 | $0.20 |
| Cash and Short-term Investments | $4,523,106 | $3,421,419 (Dec 31, 2017) |
| Distributions Payable | $3,473,106 | $2,371,419 (Dec 31, 2017) |
| Net Overriding Royalty Interests (Net of Amortization) | $509,721 | $529,043 (Dec 31, 2017) |
Material Changes vs. Prior Period
- Revenue Increase: Royalty income increased by approximately $167,000 (1.7%) compared to Q1 2017. This increase was driven by higher average oil and gas prices, which offset a decline in production volumes.
- Price Trends: Average oil prices rose to $56.39 per barrel in Q1 2018 from $46.26 in Q1 2017. Average gas prices increased to $3.84 per Mcf from $3.16.
- Production Volumes: Oil sales attributable to the Royalties decreased to 143,180 Bbls from 159,629 Bbls. Gas sales decreased to 511,378 Mcf from 610,590 Mcf.
- Expense Increase: General and administrative expenses increased by approximately $48,000, primarily due to higher professional service costs.
- Capital Expenditures: Capital expenditures on the Waddell Ranch properties increased to $428,000 in Q1 2018 from $144,000 in Q1 2017.
Outlook, Risks, and Unusual Items
- Subsequent Events: On April 20, 2018, the Trust declared a distribution of $0.052172 per Unit, payable on May 14, 2018.
- Capital Budget: ConocoPhillips approved a 2018 capital expenditure budget of $4.3 million (gross) for the Waddell Ranch properties, compared to $3.2 million in 2017.
- Operational Activity: No new wells or workover wells were completed or in progress during the quarter for the Waddell Ranch properties; however, various facility projects were underway.
- Accounting Basis: The Trust utilizes a modified cash basis of accounting. Revenues are recorded when paid, and expenses when paid. This differs from GAAP accrual accounting.
- Risks: The Trust is subject to market risks regarding oil and gas prices and production volumes. Contingencies related to underlying properties could reduce future royalty income. The filing notes no material changes to risk factors from the prior 10-K.
Investor Verification Checklist
- Price vs. Volume Sensitivity: Verify the extent to which future income relies on commodity price increases to offset natural production declines.
- Capital Expenditure Impact: Monitor the $4.3 million capital budget for the Waddell Ranch properties to ensure it does not significantly erode net profits available for distribution.
- Trustee Transition: Confirm the operational stability following the change of trustee to Simmons Bank effective February 20, 2018.
- Reserve Life: Review the latest reserve estimates in the annual 10-K to understand the long-term sustainability of the royalty stream given the declining production volumes.
- Tax Status: Confirm the Trust's continued exemption from Texas franchise tax as a "passive entity" and the tax implications for Unit holders.