Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2013
Trustee: Bank of America, N.A.
Outstanding Units: 46,608,796 (as of May 1, 2013)
The Trust holds net overriding royalty interests in oil and gas properties in Texas, specifically the Waddell Ranch properties (75% interest) and Texas Royalty properties (95% interest). Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Royalty Income | $7,023,046 | $20,421,681 |
| Total Income | $7,023,242 | $20,422,066 |
| General & Administrative Expenses | $(324,648) | $(325,596) |
| Distributable Income | $6,698,594 | $20,096,470 |
| Distributable Income per Unit | $0.14 | $0.43 |
| Cash and Short-term Investments | $2,703,246 | $2,573,993 (Dec 31, 2012) |
| Net Overriding Royalty Interests (Net of Amortization) | $816,377 | $825,949 (Dec 31, 2012) |
| Total Assets | $3,519,623 | $3,399,942 (Dec 31, 2012) |
Liquidity & Debt: The Trust held $2.7 million in cash and short-term investments. There is no debt reported; the Trustee is authorized to borrow funds for liabilities but has not done so in this period. Distributions payable to unit holders equaled the cash balance ($2,703,246).
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 65.6% year-over-year, dropping from $20.4 million to $7.0 million.
- Price Volatility: Average oil prices fell from $95.28 per barrel in Q1 2012 to $79.19 in Q1 2013. Average gas prices dropped from $7.61 per Mcf to $4.33 per Mcf.
- Capital Expenditures Impact: A substantial increase in capital expenditures on the Waddell Ranch properties ($11.7 million in Q1 2013 vs. $2.3 million in Q1 2012) significantly reduced net profits available for royalty distribution.
- Production Volumes: While total oil sales from underlying properties increased slightly (267,890 Bbls vs. 263,002 Bbls), the Trust's specific royalty oil sales volume dropped significantly (81,047 Bbls vs. 174,841 Bbls) due to the allocation formula dependent on costs and prices.
Outlook, Risks, and Contingencies
Management Commentary: The Trustee attributes the income decline primarily to increased capital expenditures carried over from 2012 and lower commodity prices. The 2013 capital expenditure budget for Waddell Ranch properties is approved at $93.9 million (gross).
Contingencies:
- ConocoPhillips Accounting Adjustment: ConocoPhillips previously overpaid the Trust approximately $5.9 million due to accounting inaccuracies. Withheld proceeds are being reimbursed to the Trust. As of Q1 2013, $1.19 million was reimbursed. The Trustee is continuing to evaluate the matter, noting that reported royalty income was not significantly impacted by offsetting amounts in this quarter.
- Market Risk: Future distributions are highly sensitive to oil and gas prices, production volumes, and capital expenditure levels, none of which are within the Trustee's control.
Subsequent Events: On April 18, 2013, the Trust declared a distribution of $0.060880 per Unit, payable May 14, 2013.
Investor Verification Checklist
- Capital Expenditure Schedule: Verify the impact of the $93.9 million 2013 capital budget on future quarterly distributions, as high capex directly reduces net profit interest.
- Commodity Price Sensitivity: Monitor current oil and gas prices against the Q1 2013 averages ($79.19 oil / $4.33 gas) to project future royalty income.
- ConocoPhillips Reimbursement Status: Track the ongoing resolution of the $5.9 million overpayment and any further adjustments to monthly royalty payments.
- Production Allocation: Review the specific allocation formula for the Waddell Ranch properties to understand how increased drilling activity suppresses current royalty volumes despite stable or rising total production.