Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2012
Structure: A passive express trust created in 1980 under Texas law. The Trust holds net overriding royalty interests (75% in Waddell Ranch properties and 95% in Texas Royalty properties) but conducts no business operations. The Trustee is Bank of America, N.A. (U.S. Trust).
Units Outstanding: 46,608,796 as of February 15, 2013.
Key Financial Metrics
| Metric | 2012 | 2011 | 2010 |
|---|---|---|---|
| Royalty Income | $55,131,010 | $64,582,861 | $65,265,303 |
| Distributable Income | $53,982,501 | $63,409,123 | $64,116,670 |
| Distributable Income per Unit | $1.16 | $1.36 | $1.38 |
| Total Assets | $3,399,942 | $5,619,522 | $5,552,130 |
| Cash & Short-term Investments | $2,573,993 | $4,727,946 | N/A |
| Net Overriding Royalty Interests (Net) | $825,949 | $891,576 | N/A |
| General & Administrative Expenses | $1,149,243 | $1,174,374 | $1,149,849 |
Production & Pricing (2012):
- Total Oil Sales: 516,443 barrels (Royalties); Average Price: $90.82/bbl.
- Total Gas Sales: 1,554,574 Mcf (Royalties); Average Price: $6.06/Mcf.
- Capital Expenditures (Waddell Ranch): $65.8 million (gross) in 2012, a significant increase from $11.48 million in 2011.
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 14.6% ($9.45 million) from 2011 to 2012. This was driven by a 31% decrease in total oil production volumes attributable to the Trust and a 28% decrease in gas production volumes.
- Production Volume Impact: The decline in oil volumes was primarily due to increased capital expenditures being allocated against the net overriding royalty calculation, which reduced the volumes attributable to the Trust despite stable or increased underlying production rates in some areas.
- Capital Expenditure Surge: Capital expenditures on the Waddell Ranch properties rose sharply to $65.8 million in 2012 (up from $11.48 million in 2011) to fund horizontal drilling, workovers, and waterflood expansion projects intended to halt production decline.
- Commodity Prices: While the average oil price increased to $90.82/bbl in 2012 (from $88.12 in 2011), the average gas price dropped to $6.06/Mcf (from $7.62 in 2011), negatively impacting revenue.
- Accounting Adjustment: ConocoPhillips recouped an overpayment of approximately $5.9 million made to the Trust between 2007 and 2011 due to accounting inaccuracies. This recoupment was completed in late 2011, affecting cash flows in that period.
Guidance, Outlook, and Risks
Outlook and Capital Plan:
- The operator (Burlington Resources Oil & Gas Company LP, a ConocoPhillips subsidiary) plans to increase capital expenditures to approximately $93.9 million (gross) in 2013, a 28% increase over 2012 actuals. This budget includes 24 vertical wells, 48 recompletions, and facility improvements.
- The Trustee notes that future distributions are highly dependent on oil and gas prices, which are volatile and subject to global economic conditions.
Risks and Contingencies:
- Depleting Assets: The Trust holds depleting assets. Without continued development, production will decline. The production index is approximately 12.6 years.
- Operator Control: Unit holders have no control over operations. The operator may abandon wells or properties if they are no longer economically viable, terminating royalty payments.
- Price Volatility: Distributions are directly tied to commodity prices. A material decrease in oil or gas prices will reduce net proceeds.
- Cost Increases: Rising production and development costs (e.g., electricity, labor) directly reduce net proceeds payable to the Trust.
- Regulatory: Environmental regulations (e.g., EPA rules on hydraulic fracturing and emissions) could increase operating costs or delay development.
Investor Verification Checklist
- Capital Expenditure Impact: Verify how the aggressive 2013 capital budget ($93.9M) will impact the net overriding royalty calculation and subsequent distributions, as higher costs reduce the Trust's share of net proceeds.
- Production vs. Allocation: Confirm the distinction between underlying property production (which may be stable) and the Trust's allocated production (which dropped 31% in oil due to cost allocations).
- Reserve Estimates: Review the independent reserve report by Cawley, Gillespie & Associates, Inc., noting that proved reserves are estimates subject to revision based on price and cost assumptions.
- ConocoPhillips Recoupment: Ensure the $5.9 million overpayment recoupment is fully resolved and understand if any further adjustments are pending.
- Depletion Schedule: Assess the 12.6-year production index and the operator's ability to maintain reserves through the planned drilling and workover programs.