Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2015
Trustee: Southwest Bank (appointed August 29, 2014)
Outstanding Units: 46,608,796
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 does not engage in commercial activities; it distributes cash received from royalties to unit holders. Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2015 |
|---|---|---|
| Royalty Income | $4,121,910 | $8,752,016 |
| Interest Income | $17 | $49 |
| General & Administrative Expenses | $(600,958) | $(1,047,051) |
| Distributable Income | $3,520,969 | $7,705,014 |
| Distributable Income Per Unit | $0.08 | $0.17 |
| Cash and Short-term Investments | $1,700,050 (as of June 30, 2015) | |
| Net Overriding Royalty Interests (Net of Amortization) | $702,610 (as of June 30, 2015) | |
| Total Assets | $2,402,660 (as of June 30, 2015) |
Liquidity and Debt: The Trust held $1,700,050 in cash and short-term investments. There were no borrowings reported. Distributions payable to unit holders equaled the cash balance at period end ($1,700,050).
Material Changes vs. Prior Period
The Trust experienced a significant decline in financial performance compared to the same periods in 2014, driven primarily by lower commodity prices and reduced production volumes.
- Royalty Income Decline: Royalty income for the three months ended June 30, 2015, dropped to $4.12 million from $14.61 million in the prior year (a 72% decrease). For the six-month period, income fell to $8.75 million from $26.74 million.
- Commodity Prices: Average oil prices decreased from $94.35 per barrel (Q2 2014) to $48.47 per barrel (Q2 2015). Average gas prices fell from $7.56 per Mcf to $2.63 per Mcf.
- Production Volumes: Oil sales attributable to the Trust's royalties decreased from 140,160 Bbls in Q2 2014 to 87,600 Bbls in Q2 2015. Gas sales decreased from 316,541 Mcf to 176,810 Mcf.
- Expenses: General and administrative expenses increased to $600,958 for the quarter (from $481,876 in 2014) due to higher professional fees.
- Capital Expenditures (Operator): Capital expenditures on the Waddell Ranch properties decreased to $3.4 million for the quarter (from $6.8 million in 2014) as the operator reduced drilling activity.
Outlook, Risks, and Management Commentary
Management Commentary: The Trustee attributes the decrease in royalty income to substantial decreases in oil and gas production and prices. The Trustee noted that the 2015 capital expenditure budget for the Waddell Ranch properties was approved at $48.1 million (gross), down from $76 million in 2014. Drilling activity slowed, with 0 new wells completed in Q2 2015 compared to 1 in Q2 2014.
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.
- Contingencies: A prior accounting discrepancy involving ConocoPhillips (operator of Waddell Ranch) regarding gas plant production overpayments was resolved. Adjustments were completed in Q1 2014, and the Trustee considers the matter concluded with no impact on Q2 2015 income.
- Impairment: The Trustee reviews assets for impairment. No impairment was recognized as of June 30, 2015.
Subsequent Events: On July 21, 2015, the Trust declared a distribution of $0.051674 per Unit, payable on August 14, 2015.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current oil and gas prices against the Trust's historical performance to assess future distribution potential.
- Production Volumes: Monitor operator (ConocoPhillips and Riverhill Energy) drilling reports and production data for the Waddell Ranch and Texas Royalty properties.
- Capital Expenditure Budgets: Confirm if the operator's reduced capital expenditure budget ($48.1M for 2015) will lead to further declines in production volumes.
- Accounting Basis: Note that financial statements are on a modified cash basis; revenues are recognized when received, not when production occurs, creating a lag between production and reported income.
- Trust Corpus Amortization: Review the amortization of net overriding royalty interests ($20,337 for the six months ended June 30, 2015) which reduces the trust corpus directly.