SBR

Sabine Royalty Trust 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2020, for Sabine Royalty Trust (SBR), a passive trust holding royalty interests in oil and gas properties across six states. The Trust distributes monthly cash flows derived from production royalties to unit holders. As of August 7, 2020, there were 14,579,345 units of beneficial interest outstanding.

Key Financial Metrics

Note: The Trust operates on a modified cash basis of accounting. Amortization of royalty interests is recorded as a reduction to Trust Corpus, not as an operating expense.

Material Changes vs. Prior Period

• Revenue Decline: Royalty income for the three months ended June 30, 2020, decreased by approximately $514,000 (5%) compared to the same period in 2019. For the six-month period, the decrease was $2.9 million (12%).
• Price vs. Volume: The decline in income was primarily driven by lower commodity prices (oil and natural gas), which reduced revenue by approximately $2.9 million for the quarter and $4.0 million for the six-month period. This was partially offset by higher production volumes, which added approximately $2.5 million (quarter) and $1.9 million (six-month) to revenue.
• Expense Increases: General and administrative expenses increased by approximately $85,200 for the quarter and $98,200 for the six-month period compared to 2019, largely due to higher printing, unitholder services, and legal fees.
• Commodity Prices: Average oil prices received dropped from $51.46 per barrel (Q2 2019) to $41.33 per barrel (Q2 2020). Average gas prices dropped from $2.50 per Mcf to $1.61 per Mcf.

Outlook, Risks, and Management Commentary

• Market Conditions: The Trustee highlights a substantial decrease in oil and natural gas prices due to the COVID-19 pandemic (reduced demand) and an oversupply of crude oil driven by disputes between OPEC and Russia. Oil prices briefly fell below zero in April 2020 before recovering to approximately $40.83 per barrel as of August 3, 2020.
• Production Lag: Royalty income reflects production from prior months (oil: ~2 months lag; gas: ~3 months lag). Consequently, future distributions may reflect price movements not yet fully captured in current results.
• Liquidity: The Trust holds cash and short-term investments of $7.2 million. Borrowings are permitted but not anticipated in the foreseeable future.
• Risks: Key risks include continued volatility in commodity prices, the duration of the pandemic's impact on global economic activity, and potential delays in operator production activities due to supply chain disruptions.
• Subsequent Distributions: Following the quarter end, the Trust declared distributions of $0.327320 per unit (July record date) and $0.101730 per unit (August record date).

Investor Verification Checklist

• Price Sensitivity: Verify current NYMEX oil and Henry Hub gas prices against the Trust's historical average prices to estimate future royalty income, noting the 2-3 month production lag.
• Production Volumes: Confirm if the increase in production volumes (oil and gas) reported in Q2 2020 is sustainable or a temporary anomaly.
• Expense Trends: Monitor general and administrative expenses, which have risen year-over-year, to ensure they do not erode distributable income further.
• State Tax Withholding: Review the impact of New Mexico and Oklahoma withholding taxes on net distributions, particularly for unit holders who may face double taxation if they sell units before refunds are distributed.
• Trust Corpus: Observe the Trust Corpus balance ($6.0 million), which represents the remaining value of the royalty interests after amortization; a declining corpus indicates the depletion of the underlying asset base.