SBR

Sabine Royalty Trust 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2013, for Sabine Royalty Trust, a passive trust holding royalty interests in oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trust is managed by Bank of America, N.A. (U.S. Trust). As of August 7, 2013, there were 14,579,345 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis, not GAAP, as permitted for royalty trusts.

Key Financial Metrics

Note: Distributions per unit for the quarter were $0.44058, $0.35200, and $0.24428 for April, May, and June respectively.

Material Changes vs. Prior Period

• Quarter-over-Quarter (Q2 2013 vs. Q2 2012): Royalty income decreased by approximately $1.25 million (8%). This decline was driven by reduced production volumes for both oil and natural gas ($1.8 million impact) and lower oil prices ($1.1 million impact), partially offset by higher natural gas prices ($1.6 million).
• Year-over-Year (Six Months 2013 vs. 2012): Royalty income decreased by approximately $960,000 (3%). The primary drivers were lower oil prices ($2.3 million) and reduced natural gas production ($0.1 million), offset by higher natural gas prices ($1.1 million) and increased oil production ($0.5 million).
• Expenses: General and administrative expenses decreased by approximately $88,700 for the quarter and $154,500 for the six-month period compared to the prior year, largely due to reductions in legal, engineering, and trustee fees.
• Production Volumes (Q2 2013): Oil production was 103,589 Bbls (down from 104,780 Bbls in Q2 2012); Gas production was 1,642,953 Mcfs (down significantly from 2,133,201 Mcfs in Q2 2012).

Outlook, Risks, and Management Commentary

• Outlook: The Trustee notes that it is difficult to accurately estimate future oil and gas prices. Future distributable income is dependent on commodity prices and production volumes, which are outside the Trustee's control.
• Liquidity: The Trust holds cash and short-term investments (Bank of America certificates of deposit) to fund monthly distributions. Borrowing is permitted but not anticipated in the foreseeable future.
• Risks: Key risks include fluctuations in oil and gas prices, declines in production volumes, and the depletion of royalty interests. The Trust is subject to state tax considerations in multiple jurisdictions (e.g., withholding taxes in New Mexico and Oklahoma).
• Subsequent Events: Following the period end, the Trust declared distributions of $0.30479 per unit (July record date) and $0.44969 per unit (August record date).
• Contingencies: The Trustee is not aware of any material contingencies related to royalty properties as of June 30, 2013.

Investor Verification Checklist

• Production Trends: Verify the continued decline in natural gas production volumes compared to prior periods and its impact on future cash flows.
• Commodity Price Sensitivity: Assess the impact of current oil and gas market prices against the Trust's historical average prices ($85.89/Bbl oil and $3.55/Mcf gas for Q2 2013).
• Depletion Rate: Monitor the amortization of royalty interests ($25,449 for the six months ended June 30, 2013) as a reduction to Trust corpus, indicating the finite life of the asset base.
• State Tax Withholding: Confirm understanding of potential double taxation risks for unit holders regarding New Mexico and Oklahoma withholding taxes if units are transferred before refunds are distributed.
• Credit Risk: Evaluate the creditworthiness of Bank of America, N.A., as the Trust's cash is invested in their certificates of deposit.