Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended June 30, 1995 (Form 10-Q)
Trustee: NationsBank of Texas, N.A.
Outstanding Units: 46,608,796 (as of August 14, 1995)
The Trust holds net overriding royalty interests in producing oil and gas properties, primarily the Waddell Ranch Properties and Texas Royalty Properties. Financial statements are prepared on a modified cash basis, not GAAP. Royalty income is calculated as a percentage of net profits (75% for Waddell Ranch, 95% for Texas Royalty) after deducting production costs, taxes, and capital expenditures.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1995 | Six Months Ended June 30, 1995 |
|---|---|---|
| Royalty Income | $2,251,940 | $5,426,356 |
| Interest Income | $4,541 | $13,852 |
| Total Income | $2,256,481 | $5,440,208 |
| General & Administrative Expenses | $132,460 | $282,042 |
| Distributable Income | $2,124,021 | $5,158,166 |
| Distributable Income per Unit | $0.045571 | $0.110668 |
| Cash and Short-term Investments | $754,888 (June 30, 1995) | N/A |
| Net Overriding Royalty Interests (Net of Amortization) | $4,185,235 (June 30, 1995) | N/A |
| Distributions Payable | $754,888 (June 30, 1995) | N/A |
Material Changes vs. Prior Period
- Quarterly Comparison (Q2 1995 vs. Q2 1994):
- Royalty Income: Increased 47.7% from $1,524,534 to $2,251,940. This increase is driven by higher average oil prices ($17.13/bbl in 1995 vs. $12.17/bbl in 1994) and increased oil sales volume attributable to the Trust.
- Gas Prices: Average gas price decreased from $1.93/Mcf in 1994 to $1.45/Mcf in 1995.
- Expenses: General and administrative expenses decreased 20.5% to $132,460, primarily due to timing differences.
- Distributable Income per Unit: Increased from $0.029255 to $0.045571.
- Six-Month Comparison (YTD 1995 vs. YTD 1994):
- Royalty Income: Decreased 30.4% from $7,795,038 to $5,426,356. The 1994 period included a one-time payment of approximately $2.9 million related to the resolution of prior royalty underpayments.
- Distributable Income per Unit: Decreased from $0.159739 to $0.110668, largely due to the absence of the 1994 one-time adjustment.
Outlook, Risks, and Contingencies
- Capital Expenditures: Southland Royalty Company (the interest owner) budgeted approximately $10.2 million for 1995 capital expenditures ($8.4 million for development/drilling, $1.8 million for maintenance). Through June 30, 1995, capital costs totaled $6.064 million.
- Ad Valorem Tax Contingency: Southland advised that approximately $1.3 million in ad valorem taxes for the Texas Royalty properties (1991-1994) will be charged to the Trust over 12 months beginning March 1995. This results in a deduction of approximately $87,000 per month from gross proceeds.
- Historical Underpayment Issue: A dispute regarding potential underpayments of royalty income by Southland (dating back to 1991) resulted in payments in 1994. The filing notes these payments were estimates and the issue is not finally resolved; future adjustments may occur.
- Cost Recovery: Southland is entitled to recover cumulative excess production costs from gross proceeds. In 1994, approximately $1.68 million was recovered from Waddell Ranch properties, reducing royalty income available for distribution during that period.
- Production Activity: During the quarter ended June 30, 1995, 9 gross (3.625 net) wells were drilled and completed, with 22 wells in progress.
Investor Verification Checklist
- One-Time Adjustments: Verify the impact of the 1994 $2.9 million underpayment resolution on year-over-year comparisons; 1995 results exclude this non-recurring item.
- Ad Valorem Tax Deductions: Confirm the monthly $87,000 deduction for Texas Royalty properties and its impact on future distributable income.
- Oil Price Sensitivity: Monitor posted oil prices, as the Trust's income is highly correlated with net profits which depend on price vs. cost allocations.
- Capital Expenditure Budget: Track Southland's $10.2 million 1995 capital budget, as higher capital costs reduce the net profit base from which royalties are calculated.
- Trust Corpus Amortization: Note that amortization of royalty interests is charged directly to trust corpus, reducing the asset base over time.