Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2019
Trustee: Simmons Bank
Outstanding Units: 46,608,796 (as of August 1, 2019)
Business Model: The Trust holds net overriding royalty interests in producing oil and gas properties in Texas (Waddell Ranch and Texas Royalty properties). It does not engage in active operations; income is derived from royalties paid by interest owners (ConocoPhillips/Burlington Resources and Riverhill Energy) based on production sales less costs.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Royalty Income | $4,767,067 | $7,623,122 | $9,297,512 | $17,342,427 |
| Total Income | $4,771,330 | $7,629,876 | $9,308,933 | $17,354,657 |
| General & Admin Expenses | $(456,419) | $(581,462) | $(757,550) | $(995,312) |
| Distributable Income | $4,314,911 | $7,048,414 | $8,551,383 | $16,359,345 |
| Distributable Income per Unit | $0.09 | $0.15 | $0.18 | $0.35 |
| Cash & Short-term Investments | $2,900,400 | $3,526,613 | $2,900,400 | $3,526,613 |
| Net Overriding Royalty Interests (Net) | $448,358 | $467,580 | $448,358 | $467,580 |
| Distributions Payable | $1,850,400 | $2,476,613 | $1,850,400 | $2,476,613 |
Liquidity & Debt: The Trust holds no debt. Liquidity is maintained through cash reserves and royalty receipts. A cash reserve of $1,050,000 is held for contingencies.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 37.5% in Q2 2019 compared to Q2 2018, and 46.4% on a year-to-date basis. This is primarily due to lower oil and gas prices and reduced production volumes.
- Price Volatility:
- Q2 2019: Average oil price was $54.90/Bbl (vs. $60.94 in Q2 2018); Average gas price was $2.72/Mcf (vs. $3.12 in Q2 2018).
- YTD 2019: Average oil price was $49.61/Bbl (vs. $58.60 in YTD 2018); Average gas price was $3.08/Mcf (vs. $3.49 in YTD 2018).
- Production Volumes: Oil sales attributable to royalties dropped from 109,771 Bbls in Q2 2018 to 79,772 Bbls in Q2 2019. Gas sales dropped from 363,560 Mcf to 192,130 Mcf in the same period.
- Capital Expenditures: Capital expenditures on the Waddell Ranch properties increased significantly to $1.67 million in Q2 2019 (vs. $0.17 million in Q2 2018) and $2.5 million YTD 2019 (vs. $0.6 million YTD 2018). This increase reduced net profits available for royalty distribution.
- Expenses: General and administrative expenses decreased due to lower professional service costs and timing of payments.
Outlook, Risks, and Unusual Items
- Management Commentary: The Trustee attributes the decline in income to worldwide market variables affecting commodity prices and natural production declines. The Trustee relies on information provided by the interest owners (ConocoPhillips and Riverhill Energy) regarding production and costs.
- Capital Budget: ConocoPhillips has approved a 2019 capital expenditures budget of $6.6 million (gross) for the Waddell Ranch properties, compared to $4.3 million in 2018. Higher capital spending reduces the net profit base from which royalties are calculated.
- Risks:
- Commodity Prices: Income is highly sensitive to fluctuations in oil and natural gas prices.
- Production Decline: The underlying properties are mature, leading to natural depletion of reserves.
- Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions.
- Subsequent Events: On July 19, 2019, the Trust declared a distribution of $0.044227 per Unit, payable on August 14, 2019.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current WTI crude and Henry Hub natural gas prices against the Trust's historical performance to model future distributions.
- Capital Expenditure Impact: Confirm the $6.6 million 2019 capital budget for Waddell Ranch properties and its specific impact on net profit calculations.
- Production Volumes: Monitor monthly production reports from ConocoPhillips and Riverhill Energy for signs of accelerated decline or new drilling activity.
- Reserve Life: Review the Trust's latest 10-K for estimated remaining life of the royalty interests, as the Trust is a finite-life entity.
- Contingency Reserves: Note the $1.05 million reserve for contingencies; verify if any new legal or operational issues have arisen that might draw from this reserve.