Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarter ended March 31, 2010
Trustee: Bank of America, N.A. (U.S. Trust, Bank of America Private Wealth Management)
Outstanding Units: 46,608,796 (as of May 1, 2010)
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 | Q1 2010 | Q1 2009 |
|---|---|---|
| Royalty Income | $16,508,736 | $7,713,387 |
| Interest Income | $137 | $2,235 |
| General & Administrative Expenses | $(403,797) | $(442,416) |
| Distributable Income | $16,105,076 | $7,273,206 |
| Distributable Income per Unit | $0.35 | $0.16 |
| Cash and Short-term Investments | $5,848,497 | $5,483,148 |
| Net Overriding Royalty Interests (Net of Amortization) | $1,053,585 | $1,079,986 |
| Total Assets | $6,902,082 | $6,563,134 |
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased 114% year-over-year, driven by significant increases in both oil and gas prices and production volumes.
- Price Increases: Average oil price rose to $72.16 per barrel (from $41.10 in Q1 2009). Average gas price rose to $7.31 per Mcf (from $4.87 in Q1 2009).
- Production Volumes: Oil sales attributable to the Trust increased to 164,086 Bbls (from 125,302 Bbls). Gas sales increased to 729,090 Mcf (from 510,082 Mcf).
- Capital Expenditures: Capital expenditures on Waddell Ranch properties decreased to $1.1 million in Q1 2010 compared to $2.7 million in Q1 2009. The 2010 budget was revised to $43.0 million.
- Operating Expenses: Lease operating expenses and property taxes on Waddell Ranch properties increased to $4.4 million (from $3.84 million) due to increased maintenance work.
Outlook, Risks, and Commentary
- Subsequent Distribution: On April 20, 2010, the Trust declared a distribution of $0.120920 per unit, payable May 14, 2010.
- Operational Activity: In Q1 2010, 6 workover wells were completed and 6 were in progress on Waddell Ranch properties. No new wells were completed or in progress.
- Accounting Basis: The Trust operates on a modified cash basis. Royalty income is recorded when received, not when produced. Q1 2010 income reflects production from November 2009 through January 2010.
- Risks: Future distributions are contingent on oil and gas prices, production volumes, and capital expenditures. Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income.
- Tax Status: The Trust is taxed as a grantor trust; unit holders report income as ordinary income from oil and gas royalties and are entitled to claim depletion.
Investor Verification Checklist
- Verify the correlation between current oil/gas market prices and the Trust's projected future distributions.
- Confirm the status of the 6 workover wells in progress and their expected impact on production volumes.
- Review the revised 2010 capital expenditure budget ($43.0 million) to ensure it aligns with production maintenance needs.
- Monitor the "excess costs" carryforward mechanism, as costs exceeding revenues in one conveyance cannot be offset by another.
- Check for any updates on the ownership structure of Riverhill Energy Corporation regarding the Texas Royalty properties.