SABINE ROYALTY TRUST - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2018. Sabine Royalty Trust is a passive entity established to receive distributions from royalty and mineral interests in oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trust is managed by Simmons Bank as Trustee. As of August 3, 2018, there were 14,579,345 units of beneficial interest outstanding.
Key Financial Metrics
The Trust operates on a modified cash basis of accounting. Key financial results for the three and six months ended June 30, 2018, are as follows:
| Metric | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
|---|---|---|
| Royalty Income | $13,139,278 | $23,889,517 |
| Interest Income | $30,096 | $50,546 |
| Total Income | $13,169,374 | $23,940,063 |
| General & Administrative Expenses | $(625,443) | $(1,464,050) |
| Distributable Income | $12,543,931 | $22,476,013 |
| Distributable Income per Unit | $0.86 | $1.54 |
| Distributions per Unit (Paid) | $0.86 (approx. sum of Q2) | $1.49 |
Liquidity and Balance Sheet:
- Cash and Short-term Investments: $7,289,852 (June 30, 2018) vs. $5,085,661 (Dec 31, 2017).
- Trust Corpus: $5,367,920 (June 30, 2018) vs. $4,594,384 (Dec 31, 2017).
- Liabilities: Total liabilities were $2,150,544, primarily consisting of "Other payables" ($1,981,322) related to suspended royalty receipts pending verification.
- Debt: The Trust has no long-term debt and does not anticipate borrowing in the foreseeable future.
Material Changes vs. Prior Period
Quarter-over-Quarter (Q2 2018 vs. Q2 2017):
- Royalty Income: Increased by approximately $4.57 million (53%).
- Drivers: The increase was driven by higher production volumes for both oil and natural gas ($3.8 million) and higher oil prices ($1.3 million). These gains were partially offset by lower natural gas prices ($0.2 million) and increased taxes/operating expenses ($0.3 million).
- Expenses: General and administrative expenses decreased by approximately $54,000, primarily due to lower legal and professional service fees.
Six-Month Comparison (YTD 2018 vs. YTD 2017):
- Royalty Income: Increased by $4.84 million (25%).
- Drivers: Attributed to increased production ($3.1 million) and higher oil prices ($2.6 million), partially offset by higher taxes/expenses ($0.6 million) and lower natural gas prices ($0.2 million).
Production and Pricing Data (Q2 2018):
- Oil Production: 166,145 Bbls (vs. 114,115 Bbls in Q2 2017); Average Price: $59.56/Bbl (vs. $48.36/Bbl).
- Gas Production: 1,612,179 Mcfs (vs. 1,357,768 Mcfs in Q2 2017); Average Price: $2.81/Mcf (vs. $2.95/Mcf).
Outlook, Risks, and Contingencies
Management Commentary: The Trustee notes that distributable income is not necessarily indicative of full-year results due to the timing of cash receipts. The Trust continues to make monthly distributions based on cash received less expenses and reserve adjustments.
Risks and Contingencies:
- Market Risk: The Trust is exposed to fluctuations in oil and natural gas prices and production volumes. Future prices are difficult to estimate.
- Contingencies: The Trustee is not aware of any unfavorable contingencies related to royalty properties as of June 30, 2018. Unfavorable resolutions would reduce future royalty income and distributions.
- Tax Considerations: The Trust is a grantor trust for federal tax purposes. Unit holders are subject to state taxes in jurisdictions where properties are located (e.g., New Mexico and Oklahoma withholding taxes).
- Legal Proceedings: No material legal proceedings were reported.
Subsequent Events: Following the quarter end, the Trust declared distributions of $0.281180 per unit (July record date) and $0.239900 per unit (August record date).
Investor Verification Checklist
- Production Volumes: Verify the reported increases in oil and gas production volumes against independent industry data for the specific regions (FL, LA, MS, NM, OK, TX).
- Price Realization: Confirm the average realized prices for oil ($59.56/Bbl) and gas ($2.81/Mcf) against benchmark indices (NYMEX, Henry Hub) for the relevant production periods.
- Payables Status: Investigate the nature of the $1.98 million in "Other payables" to understand the duration and risk of suspended royalty receipts pending title verification.
- Reserve Life: Review the Trust's latest 10-K for updated estimates of proved reserves and the remaining life of the royalty interests, as the Trust cannot acquire new assets.
- State Tax Withholding: Confirm the impact of New Mexico and Oklahoma withholding taxes on net distributions for non-resident unit holders.