Business Context and Reporting Period
The Permian Basin Royalty Trust (PBT) is an express trust created under Texas law, holding net overriding royalty interests in oil and gas properties in Texas. The Trust is a passive entity with no employees; administrative functions are performed by the Trustee, Southwest Bank. The reporting period covers the fiscal year ended December 31, 2016. The Trust's income is derived from a 75% net overriding royalty on the Waddell Ranch properties and a 95% net overriding royalty on Texas Royalty properties.
Key Financial Metrics
| Metric | 2016 | 2015 | 2014 |
|---|---|---|---|
| Royalty Income | $21,087,908 | $17,795,462 | $49,010,648 |
| Distributable Income | $19,348,835 | $16,049,702 | $47,717,493 |
| Distributable Income per Unit | $0.42 | $0.34 | $1.02 |
| Total Assets (Dec 31) | $4,398,723 | $2,145,443 | $2,828,267 |
| Cash and Short-term Investments | $3,795,604 | $1,464,757 | N/A |
| Net Overriding Royalty Interests (Net) | $603,119 | $680,686 | N/A |
| Reserve for Contingencies | $1,050,000 | $500,000 | N/A |
Production and Pricing (2016): Total oil production attributable to royalties was 490,431 barrels at an average price of $39.73 per barrel. Total gas production was 1,590,681 Mcf at an average price of $2.29 per Mcf. Average production costs were $12.94 per BOE.
Material Changes vs. Prior Period
- Revenue Increase: Royalty income increased 18.5% from 2015 to 2016, driven by higher production volumes despite lower commodity prices. Oil production increased 42% and gas production increased 144% compared to 2015.
- Price Decline: Average oil prices fell to $39.73/bbl in 2016 from $51.61/bbl in 2015. Average gas prices fell to $2.29/Mcf from $4.15/Mcf.
- Capital Expenditures: Capital expenditures deducted from net proceeds dropped significantly to approximately $2.2 million in 2016, compared to $7.2 million in 2015 and $57.1 million in 2014, due to reduced drilling activity.
- Reserve Revisions: Proved reserves decreased to 4,455 thousand barrels of oil and 8,518 thousand Mcf of gas. The standardized measure of discounted future net cash flows decreased to $98.08 million from $126.11 million in 2015, primarily due to lower pricing assumptions.
Outlook, Risks, and Unusual Items
- Internal Control Material Weakness: The Trustee identified a material weakness in internal controls over financial reporting regarding the reconciliation of cash reserve accounts and distributions payable. This resulted in a restatement of the unaudited condensed interim financial statements for the period ended September 30, 2016. The independent auditor issued an adverse opinion on internal controls.
- Guidance and Outlook: The Trustee does not provide formal guidance. Future distributions depend on volatile oil and gas prices and the operator's capital expenditure decisions. The operator (Burlington Resources Oil & Gas Company LP) indicated a 2017 capital budget of approximately $3.2 million (gross), a 72% decrease from 2016, with no new drill wells planned.
- Risks: Key risks include commodity price volatility, depletion of reserves (production index of 9.7 years), and the passive nature of the Trust which limits control over operations. The Trust is subject to termination if net revenues fall below $1,000,000 for two consecutive years.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recognized when received, not when produced.
Investor Verification Checklist
- Verify the status of remediation plans for the material weakness in internal controls over financial reporting.
- Monitor commodity prices (WTI crude and Henry Hub natural gas) as they directly dictate monthly distributions.
- Review the operator's (Burlington Resources) capital expenditure plans for 2017 and beyond to assess production decline rates.
- Confirm the Trust's reserve estimates and the standardized measure of discounted future net cash flows in subsequent filings.
- Check for any changes in the Trustee or operator that could affect the calculation or payment of royalties.