Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2010
Trustee: Bank of America, N.A.
Outstanding Units: 46,608,796 (as of August 3, 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 | Three Months Ended June 30, 2010 |
Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
|---|---|---|---|---|
| Royalty Income | $18,444,207 | $6,725,240 | $34,952,943 | $14,438,626 |
| Distributable Income | $17,984,919 | $6,238,131 | $34,089,996 | $13,511,336 |
| Distributable Income per Unit | $0.39 | $0.13 | $0.73 | $0.29 |
| General & Admin Expenses | $(459,539) | $(487,556) | $(863,335) | $(929,972) |
| Cash & Short-term Investments | $5,885,870 (as of June 30, 2010) | |||
| Net Overriding Royalty Interests | $1,023,995 (as of June 30, 2010) |
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased 174% for the quarter and 142% for the six-month period compared to 2009. This is primarily driven by significant increases in oil and gas prices.
- Price Increases:
- Oil: Average price per barrel rose to $77.01 (Q2 2010) from $39.47 (Q2 2009). For the six months, the average was $74.56 vs. $40.31.
- Gas: Average price per Mcf rose to $7.10 (Q2 2010) from $3.90 (Q2 2009). For the six months, the average was $7.20 vs. $4.42.
- Production Volumes: While royalty income surged, actual oil and gas sales volumes from the underlying properties decreased slightly compared to 2009 due to natural decline and reduced drilling activity.
- Capital Expenditures: Capital expenditures for the Waddell Ranch properties dropped significantly to $0.2 million in Q2 2010 compared to $1.9 million in Q2 2009. No new wells were completed in Q2 2010.
- Expenses: General and administrative expenses decreased slightly due to reduced professional and reporting costs.
Outlook, Risks, and Commentary
- Capital Budget: ConocoPhillips revised the 2010 capital expenditures budget for the Waddell Ranch properties to $22 million (gross). As of June 30, 2010, $2.4 million had been expended.
- Drilling Activity: There were 0 wells completed and 0 wells in progress during Q2 2010. There were 3 workover wells in progress.
- Subsequent Event: A distribution of $0.116351 per unit was declared on July 20, 2010, payable on August 13, 2010.
- Risks: The Trust is highly sensitive to commodity prices. Future royalty income depends on the recoverability of reserves and capital expenditures by the interest owners (ConocoPhillips and Riverhill Energy). Unfavorable resolution of contingencies related to underlying properties would reduce future distributions.
- Tax Status: The Trust is taxed as a grantor trust; income is reported by unit holders as ordinary income from oil and gas royalties. The Trust is likely exempt from Texas margin tax as a passive entity.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current oil and gas prices against the $77.01 (oil) and $7.10 (gas) averages reported to assess future distribution potential.
- Capital Expenditure Plans: Monitor ConocoPhillips' execution of the remaining $20 million capital budget for the Waddell Ranch properties to ensure reserve maintenance.
- Production Decline: Review subsequent reports for trends in underlying production volumes, as volumes decreased in 2010 despite higher prices.
- Reserve Estimates: Note that independent engineers estimated net proved reserves as of January 1, 2010; verify if updated reserve reports have been issued.
- Distribution Timing: Confirm the payment of the subsequent distribution declared in July 2010.