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, 2011
Business Overview: 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 Trustee is Bank of America, N.A. The financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Royalty Income | $18,398,691 | $18,444,207 | $35,196,974 | $34,952,943 |
| Distributable Income | $17,895,921 | $17,984,919 | $34,354,886 | $34,089,996 |
| Distributable Income per Unit | $0.38 | $0.39 | $0.74 | $0.73 |
| General & Admin Expenses | $(502,935) | $(459,539) | $(842,452) | $(863,335) |
| Cash and Short-term Investments | $6,708,026 (as of June 30, 2011) | |||
| Net Overriding Royalty Interests (Net) | $927,753 (as of June 30, 2011) | |||
| Units Outstanding | 46,608,796 |
Material Changes vs. Prior Period
- Revenue Trends: Royalty income for Q2 2011 decreased slightly ($45,516) compared to Q2 2010 due to lower oil and gas production volumes, which were offset by higher commodity prices. For the six-month period, royalty income increased by $244,031, driven primarily by higher oil and gas prices.
- Commodity Prices: Average oil prices increased to $93.97 per barrel in Q2 2011 from $77.01 in Q2 2010. Average gas prices rose to $7.59 per Mcf in Q2 2011 from $7.10 in Q2 2010.
- Production Volumes: Oil sales attributable to the Trust decreased to 152,584 Bbls in Q2 2011 from 174,469 Bbls in Q2 2010. Gas sales decreased to 632,460 Mcf from 799,308 Mcf.
- Capital Expenditures: Capital expenditures for the Waddell Ranch properties increased significantly to $1.9 million in Q2 2011 compared to $0.2 million in Q2 2010. The 2011 budget was revised to $23 million (gross).
- Expenses: General and administrative expenses increased in Q2 2011 due to timing of payments but decreased for the six-month period due to reduced reporting and professional expenses.
Outlook, Risks, and Contingencies
- Significant Contingency (ConocoPhillips Overpayment): On May 2, 2011, ConocoPhillips notified the Trustee of an accounting error regarding gas plant production proceeds since January 2007, resulting in an overpayment of approximately $5.9 million to the Trust. ConocoPhillips intends to recoup this amount through adjustments to future distributions over the next year. The Trustee is evaluating the claim, but the outcome is uncertain.
- Risk to Distributions: If the overpayment claim is resolved unfavorably, future distributions could be reduced or potentially eliminated for the next year.
- Subsequent Event: A distribution of $0.148472 per unit was declared on July 19, 2011, payable on August 12, 2011.
- Market Risk: The Trust is subject to fluctuations in oil and gas prices and production volumes. There have been no material changes in market risk disclosures since the 2010 Annual Report.
Investor Verification Checklist
- Verify the status of the $5.9 million overpayment claim by ConocoPhillips and the specific mechanism for recoupment.
- Monitor future quarterly distributions for reductions resulting from the ConocoPhillips adjustment.
- Review the impact of declining production volumes on long-term distributable income despite higher commodity prices.
- Confirm the revised 2011 capital expenditure budget of $23 million for the Waddell Ranch properties and its effect on net profits.
- Check the Trust's tax status as a "passive entity" for Texas franchise tax purposes to ensure continued exemption.