Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarter ended March 31, 2009
Trustee: Bank of America, N.A.
The Trust holds net overriding royalty interests in producing oil and gas properties in Texas, specifically the Waddell Ranch properties (75% interest) and Texas Royalty properties (95% interest). The Trust is a fixed investment trust taxed as a grantor trust, meaning income is passed through to unit holders. Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Royalty Income | $7,713,387 | $26,424,398 |
| Interest Income | $2,235 | $33,694 |
| Total Income | $7,715,206 | $26,458,092 |
| General & Administrative Expenses | $(442,416) | $(354,756) |
| Distributable Income | $7,273,206 | $26,103,336 |
| Distributable Income per Unit | $0.16 | $0.56 |
| Cash and Short-term Investments | $1,380,578 | $5,147,216 (Dec 31, 2008) |
| Net Overriding Royalty Interests (Net Book Value) | $1,151,914 | $1,170,793 (Dec 31, 2008) |
| Total Assets | $2,532,492 | $6,318,009 (Dec 31, 2008) |
Production Data (Q1 2009 vs Q1 2008):
- Oil Sales: 125,302 Bbls (2009) vs 204,881 Bbls (2008)
- Gas Sales: 510,082 Mcf (2009) vs 1,019,806 Mcf (2008)
- Average Oil Price: $41.10/Bbl (2009) vs $87.80/Bbl (2008)
- Average Gas Price: $4.87/Mcf (2009) vs $9.49/Mcf (2008)
Material Changes
Revenue Decline: Royalty income decreased by approximately 71% compared to the prior year quarter. This decline is primarily attributed to significant drops in both oil and gas commodity prices and reduced production volumes.
Capital Expenditures: Capital expenditures for the Waddell Ranch properties increased significantly to $2.7 million in Q1 2009, compared to $275,000 in Q1 2008. The 2009 budget for these properties was revised to $43.5 million.
Operating Expenses: General and administrative expenses increased by approximately 25% ($442,416 vs $354,756), driven largely by increased printing costs due to a higher number of unit holders.
Liquidity: Cash and short-term investments decreased from $5.15 million at year-end 2008 to $1.38 million at March 31, 2009, reflecting the lower distributable income and distributions paid.
Outlook, Risks, and Commentary
Management Commentary: The Trustee notes that the decrease in income is due to worldwide market variables affecting oil and gas prices. The Trustee relies on information provided by property owners (Burlington Resources Oil & Gas Company LP and Riverhill Energy Corporation) for production and cost data.
Subsequent Events: On April 20, 2009, the Trust declared a distribution of $0.036633 per unit, payable on May 14, 2009.
Risks and Contingencies:
- Market Risk: The Trust is highly sensitive to fluctuations in oil and gas prices and production volumes, which are outside the Trustee's control.
- Reserve Estimates: Future net revenues depend on reserve estimates which are subject to uncertainty and change as new information becomes available.
- Taxation: While the Trust is exempt from Texas margin tax as a passive entity, unit holders may be subject to this tax on their share of revenues.
- Accounting Basis: Financial statements are prepared on a modified cash basis, meaning revenues are recognized when received, not when produced. This may cause timing differences compared to GAAP reporting.
Investor Verification Checklist
- Commodity Prices: Verify current and projected oil and gas prices, as the Trust's income is directly correlated to these market rates.
- Production Volumes: Monitor production data from the Waddell Ranch and Texas Royalty properties to assess the impact of capital expenditures on future output.
- Capital Expenditure Budgets: Review the revised $43.5 million capital budget for the Waddell Ranch properties to understand future cost deductions against royalty income.
- Distribution History: Confirm the payment of the subsequent distribution declared in April 2009 and compare it to historical payout ratios.
- Reserve Estimates: Review the latest independent reserve estimates to gauge the remaining life and potential of the underlying assets.