Business Context and Reporting Period
The Permian Basin Royalty Trust (PBT) is a passive express trust created under Texas law, holding net overriding royalty interests in oil and gas properties. The Trust has no employees; administrative functions are performed by the Trustee, Southwest Bank (appointed August 29, 2014, succeeding Bank of America N.A.). The Trust's assets consist of a 75% net overriding royalty in the Waddell Ranch properties (Crane County, Texas) and a 95% net overriding royalty in various Texas Royalty properties. The reporting period covers the fiscal year ended December 31, 2014.
Key Financial Metrics
| Metric | 2014 | 2013 | 2012 |
|---|---|---|---|
| Royalty Income | $49,010,648 | $41,746,191 | $55,131,010 |
| Distributable Income | $47,717,493 | $40,519,731 | $53,982,501 |
| Distributions per Unit | $1.023781 | $0.869352 | $1.158198 |
| Total Assets (Dec 31) | $2,828,267 | $3,917,570 | $3,399,942 |
| Cash and Short-term Investments | $2,105,320 | $3,136,698 | N/A |
| General & Administrative Expenses | $1,293,418 | $1,226,932 | $1,149,243 |
Production and Pricing (2014): Total oil sales were 496,193 barrels at an average price of $90.24 per barrel. Total gas sales were 1,064,269 Mcf at an average price of $6.57 per Mcf. Lease operating expenses for the Waddell Ranch properties totaled approximately $29.4 million.
Material Changes vs. Prior Period
- Revenue Increase: Royalty income increased 17.4% from 2013 to 2014, driven primarily by a 30% increase in total oil production volumes due to drilling programs initiated in 2012-2014.
- Price Volatility: While oil production increased, the average oil price decreased slightly to $90.24/bbl in 2014 from $91.11/bbl in 2013. Conversely, the average gas price increased to $6.57/Mcf from $5.43/Mcf.
- Capital Expenditures: Gross capital expenditures for the Waddell Ranch properties were $57.1 million in 2014, compared to $42.9 million in 2013. This included 17 new vertical wells and 36 recompletions.
- Reserve Revisions: Proved reserves decreased from 6,122 thousand barrels of oil equivalent (BOE) in 2013 to 5,376 thousand BOE in 2014. This decline was attributed to production and downward revisions in estimates due to weaker oil pricing, partially offset by stronger gas pricing.
- Trustee Change: Southwest Bank officially replaced Bank of America N.A. as Trustee on August 29, 2014.
Outlook, Risks, and Contingencies
- Guidance and Budget: The operator (BROG) advised a 2015 capital expenditure budget of approximately $48.1 million (gross), representing a 37% decrease from 2014. This reduction is due to fewer planned capital recompletions and a reduced drilling program.
- Market Risk: Distributions are highly sensitive to crude oil and natural gas prices. Subsequent to year-end (as of Feb 23, 2015), NYMEX oil prices dropped to approximately $49.45/bbl and gas to $3.22/MMBtu, significantly lower than the year-end pricing used for reserve valuations ($94.99/bbl and $4.35/MMBtu). This indicates a likely reduction in future standardized measures of discounted cash flows.
- Operational Risks: The Trust is exposed to operational hazards, including facility shutdowns (notably the single processing facility for Waddell Ranch), and the creditworthiness of operators. The Trust has no control over development activities.
- Contingencies: An accounting discrepancy regarding gas plant production identified in 2011 resulted in an initial overpayment of $5.9 million. Adjustments to recover this amount were completed in the first quarter of 2014. The Trustee continues to evaluate the matter.
- Regulatory Risks: Potential new EPA regulations regarding methane emissions and hydraulic fracturing could increase operating costs or delay development.
Investor Verification Checklist
- Price Sensitivity: Verify the impact of the post-year-end collapse in oil prices (approx. $49/bbl) on the Trust's ability to maintain 2014 distribution levels in 2015.
- Reserve Depletion: Confirm the production index (approx. 11 years) and the rate of reserve decline given the reduction in the 2015 capital expenditure budget.
- Operator Activity: Monitor the execution of the reduced 2015 drilling program (10 vertical, 2 horizontal wells) to ensure it is sufficient to offset natural production decline.
- Accounting Adjustments: Review future filings for any residual impacts from the ConocoPhillips accounting corrections regarding gas plant production.
- Trustee Fees: Note the administrative fee structure (0.05% of first $100M + hourly rate) and its impact on distributable income.