Sabine Royalty Trust - 10-Q Summary (Q3 2018)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2018, for Sabine Royalty Trust (the "Trust"). The Trust is a passive entity established to receive royalty and mineral interests from oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. Simmons Bank serves as the Trustee. The Trust holds 14,579,345 units of beneficial interest outstanding. Financial statements are prepared on a modified cash basis of accounting, not GAAP.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | YTD 9M 2018 | YTD 9M 2017 |
|---|---|---|---|---|
| Royalty Income | $11,856,756 | $9,097,970 | $35,746,273 | $28,149,450 |
| Total Income | $11,892,725 | $9,109,556 | $35,832,788 | $28,176,259 |
| Distributable Income | $11,321,314 | $8,520,756 | $33,797,327 | $26,228,019 |
| Distributable Income per Unit | $0.78 | $0.58 | $2.32 | $1.80 |
| Distributions per Unit | $0.78 (Total Q3) | $0.68 (Total Q3) | $2.27 | $1.86 |
| Cash and Short-Term Investments | $8,984,068 | $5,085,661 (Dec 31, 2017) | N/A | |
| Trust Corpus | $5,256,489 | $4,594,384 (Dec 31, 2017) | N/A | |
| Other Payables | $3,791,670 | $570,841 (Dec 31, 2017) | N/A |
Note: The Trust has no debt. Liquidity is maintained through cash reserves and short-term investments.
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased by approximately 30% ($2.76 million) in Q3 2018 compared to Q3 2017. Year-to-date (9 months) royalty income increased by 27% ($7.6 million).
- Drivers of Increase: The increase was primarily driven by higher oil prices (up ~$16.39/bbl average in Q3 vs. prior year) and increased production volumes for both oil and natural gas.
- Offsetting Factors: Revenue gains were partially offset by a decrease in natural gas prices (down ~$0.56/Mcf average in Q3 vs. prior year) and slightly higher taxes and operating expenses.
- Quarter-over-Quarter: Royalty income decreased by approximately 10% ($1.28 million) compared to Q2 2018, mainly due to a decrease in oil production volume.
- Payables: "Other payables" increased significantly to $3.79 million from $570,841 at year-end 2017. This includes a $2.9 million revenue check from Parsley Energy deposited in late September, largely representing suspended revenue for two wells.
Outlook, Risks, and Commentary
- Management Commentary: The Trustee notes that distributable income approximates distributions made in the last two months of the quarter and the first month of the next. The Trust does not anticipate borrowing funds in the foreseeable future.
- Subsequent Events: A distribution of $0.274080 per unit was declared on October 4, 2018, for the October 15 record date.
- Risks: The Trust is subject to commodity price volatility. The filing states it is difficult to estimate future oil and gas prices. There are no material legal proceedings or changes to risk factors from the 2017 10-K.
- Contingencies: The Trustee is not aware of any unfavorable contingencies related to royalty properties as of September 30, 2018. However, unfavorable resolutions would reduce future royalty income and distributions.
- Tax Considerations: The Trust is a grantor trust for federal tax purposes. Unit holders are responsible for state taxes, including potential withholding in New Mexico and Oklahoma.
Key Facts for Investor Verification
- Suspended Revenue: Verify the status of the $2.9 million suspended revenue from Parsley Energy included in "Other Payables" to understand timing of future cash flows.
- Production Volumes: Confirm the sustainability of the increased oil and gas production volumes reported in Q3 2018 compared to Q2 2018.
- Commodity Prices: Monitor current NYMEX oil and Henry Hub gas prices against the reported averages ($61.55/bbl and $2.73/Mcf for Q3 2018) to forecast future distributable income.
- Amortization: Note that royalty interests are amortized using the unit-of-production method, reducing Trust corpus rather than operating income.
- State Tax Withholding: Review the impact of New Mexico and Oklahoma withholding taxes on net distributions, particularly for non-resident unit holders.