Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2012
Trustee: Bank of America, N.A.
Outstanding Units: 46,608,796 (as of August 8, 2012)
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). Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Royalty Income | $16,142,279 | $18,398,691 | $36,563,959 | $35,196,974 |
| Distributable Income | $15,657,282 | $17,895,921 | $35,753,751 | $34,354,886 |
| Distributable Income per Unit | $0.34 | $0.38 | $0.77 | $0.74 |
| General & Admin Expenses | $(485,146) | $(502,935) | $(810,743) | $(842,452) |
| Cash & Short-term Investments | $4,060,709 (as of June 30, 2012) | |||
| Net Overriding Royalty Interests (Net) | $851,276 (as of June 30, 2012) |
Material Changes vs. Prior Period
- Quarterly Performance: Royalty income decreased by approximately 12.3% compared to Q2 2011. This decline was driven by lower oil and gas production volumes and decreased natural gas prices, partially offset by higher oil prices.
- Year-to-Date Performance: Royalty income increased by approximately 3.9% compared to the first six months of 2011, primarily due to higher average oil and gas prices in the first half of 2012.
- Production Volumes (Q2 2012 vs. Q2 2011):
- Oil sales attributable to Royalties: 143,036 Bbls (2012) vs. 152,584 Bbls (2011).
- Gas sales attributable to Royalties: 470,327 Mcf (2012) vs. 632,460 Mcf (2011).
- Commodity Prices (Q2 2012 vs. Q2 2011):
- Average Oil Price: $98.65/Bbl (2012) vs. $93.97/Bbl (2011).
- Average Gas Price: $6.19/Mcf (2012) vs. $7.59/Mcf (2011).
- Capital Expenditures: Waddell Ranch capital expenditures increased significantly to $5.6 million in Q2 2012 compared to $1.9 million in Q2 2011. The revised 2012 budget is $75.4 million.
Outlook, Risks, and Contingencies
- Subsequent Events: A distribution of $0.073765 per Unit was declared on July 20, 2012, payable August 14, 2012.
- Contingency - ConocoPhillips Recoupment: In 2011, ConocoPhillips notified the Trustee of an accounting error resulting in an approximate $5.9 million overpayment since 2007. ConocoPhillips withheld $4,068,067 in September 2011 and $474,480 in October 2011 to recoup this amount. The Trustee is continuing to evaluate the matter, and future distributions may be affected if the recoupment is insufficient or if further adjustments are required.
- Market Risks: Distributable income is highly sensitive to oil and gas prices, production volumes, and capital expenditures by the interest owners (ConocoPhillips and Riverhill Energy). The Trustee has no control over these factors.
- Reserve Estimates: Proved reserve estimates are subject to uncertainty and may differ substantially from actual recovery volumes and timing.
Investor Verification Checklist
- Production Trends: Verify the continued decline in gas production volumes and the impact of the revised $75.4 million capital expenditure budget on future net profits.
- Commodity Price Exposure: Monitor the spread between oil and gas prices, as the Trust's income is heavily weighted toward oil but significantly impacted by gas price volatility.
- Contingency Resolution: Confirm the final status of the ConocoPhillips $5.9 million recoupment and whether any further adjustments to future royalty payments are anticipated.
- Amortization Impact: Review the unit-of-production amortization of the net overriding royalty interests, which reduces the Trust corpus but does not affect distributable income.