Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2013
Structure: PBT is an express trust created under Texas law, holding net overriding royalty interests in oil and gas properties. It is a passive entity with no employees; administrative functions are performed by the Trustee, Bank of America, N.A. (U.S. Trust).
Assets: The Trust holds a 75% net overriding royalty in the Waddell Ranch properties (Crane County, Texas) and a 95% net overriding royalty in various Texas Royalty properties. The Trustee announced on January 9, 2014, its intent to resign, with Southwest Bank nominated as the successor trustee, effective May 30, 2014, subject to conditions.
Key Financial Metrics
| Metric | 2013 | 2012 | 2011 |
|---|---|---|---|
| Royalty Income | $41,746,191 | $55,131,010 | $64,582,861 |
| Distributable Income | $40,519,731 | $53,982,501 | $63,409,123 |
| Distributions per Unit | $0.87 | $1.16 | $1.36 |
| Total Assets (Dec 31) | $3,917,570 | $3,399,942 | $5,619,522 |
| Cash & Short-term Investments | $3,136,698 | $2,573,993 | N/A |
| Net Overriding Royalty Interests (Net) | $780,872 | $825,949 | N/A |
| Units Outstanding | 46,608,796 | 46,608,796 | 46,608,796 |
Production & Pricing (2013):
- Average Oil Price: $91.11 per barrel (vs. $90.82 in 2012).
- Average Gas Price: $5.43 per Mcf (vs. $6.06 in 2012).
- Total Oil Sales (Royalties): 381,947 barrels.
- Total Gas Sales (Royalties): 692,992 Mcf.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 24% from 2012 to 2013 ($55.1M to $41.7M). This was primarily driven by a significant increase in capital expenditures allocated to the Waddell Ranch properties, which reduced the net proceeds attributable to the Trust.
- Capital Expenditures: Gross capital expenditures used in the royalty calculation rose to $42.9 million in 2013, compared to $28.0 million in 2012 and $11.5 million in 2011. The operator (BROG/ConocoPhillips) implemented a more aggressive drilling and recompletion program to halt production decline.
- Production Volumes: Total oil production attributable to the Royalties decreased approximately 26% from 2012 to 2013 due to the allocation formula adjustments related to higher capital costs. Gas production also declined.
- Reserve Revisions: Proved reserves decreased from 6,429 thousand barrels of oil equivalent (BOE) in 2012 to 6,122 thousand BOE in 2013. The standardized measure of discounted future net cash flows decreased from $354.1 million to $333.6 million, largely due to increased capital expenditures and lower gas prices, partially offset by higher oil prices.
Outlook, Risks, and Contingencies
- Trustee Resignation: U.S. Trust, Bank of America Private Wealth Management is resigning as Trustee. Southwest Bank is nominated as the successor. The resignation is effective May 30, 2014, contingent on the appointment of Southwest Bank to other trusts and satisfaction of specific conditions.
- Capital Expenditure Outlook: The operator projects a 2014 capital expenditure budget of approximately $76 million (gross), a 14% decrease from 2013 actuals, though still significantly higher than historical levels. This includes 16 new drill wells and 36 recompletions.
- Market Risk: Distributions are highly sensitive to crude oil and natural gas prices. While oil prices remained relatively stable or increased slightly in 2013, gas prices declined. Future volatility in commodity prices remains a primary risk.
- Accounting Contingency: ConocoPhillips previously overpaid the Trust approximately $5.9 million due to accounting errors. $4.5 million was withheld and subsequently reimbursed to the Trust starting in late 2012. The Trustee is continuing to evaluate the matter, though reported income for 2013 was not significantly impacted by the offsetting amounts.
- Depletion: The Trust holds depleting assets. Distributions include a return of capital component, which reduces the tax basis of the Units over time.
Investor Verification Checklist
- Capital Expenditure Impact: Verify the extent to which increased capital spending by the operator (ConocoPhillips/BROG) continues to suppress net proceeds and distributions in 2014.
- Trustee Transition: Confirm the successful appointment of Southwest Bank as the new Trustee and the absence of any legal or operational disruptions during the transition.
- Commodity Price Sensitivity: Monitor NYMEX oil and gas prices, as the Trust's cash flow is directly correlated to these spot prices and the operator's ability to market production.
- Reserve Estimates: Review the independent engineer's report (Cawley, Gillespie & Associates) for updates on proved reserves and the production index (currently approx. 17 years).
- Accounting Adjustments: Track any further adjustments or withholdings related to the historical ConocoPhillips accounting error regarding gas plant production proceeds.