SABINE ROYALTY TRUST - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for the period ended September 30, 2014. Sabine Royalty Trust is a passive entity holding royalty and mineral interests in oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trust distributes monthly cash payments to unit holders based on revenues received. Southwest Bank serves as the Trustee, having replaced Bank of America, N.A., effective May 30, 2014. The Trust has 14,579,345 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2014 | Nine Months Ended Sep 30, 2014 |
|---|---|---|
| Royalty Income | $18,427,595 | $48,741,513 |
| Total Income (Royalty + Interest) | $18,427,829 | $48,744,334 |
| General & Administrative Expenses | $(469,096) | $(1,891,786) |
| Distributable Income | $17,958,733 | $46,852,548 |
| Distributable Income per Unit | $1.23 | $3.21 |
| Distributions per Unit (Actual Paid) | $1.02 (Sum of Q3 payments) | $3.10 |
| Cash and Short-Term Investments | $8,916,482 | $8,916,482 |
| Total Assets | $9,281,236 | $9,281,236 |
| Total Liabilities | $2,004,894 | $2,004,894 |
| Trust Corpus | $7,276,342 | $7,276,342 |
Note: The Trust operates on a modified cash basis of accounting. Royalty income is recognized when received, not when produced. There is no long-term debt.
Material Changes vs. Prior Period
- Quarter-over-Quarter (Q3 2014 vs. Q3 2013): Royalty income increased by approximately $1.18 million (7%). This was driven by higher oil and natural gas prices ($1.1 million) and increased natural gas production ($1.5 million), partially offset by decreased oil production ($1.1 million) and higher taxes/expenses ($0.4 million).
- Year-to-Date (9 Months 2014 vs. 9 Months 2013): Royalty income increased by $2.14 million (5%). Drivers included higher oil and gas prices ($4.7 million), increased oil production ($1.0 million), and settlement funds ($0.2 million). These were offset by decreased natural gas production ($3.0 million) and higher taxes/expenses ($0.8 million).
- Expenses: General and administrative expenses increased by $53,100 for the quarter and $258,300 for the nine-month period compared to the prior year, primarily due to higher legal fees, printing, and trustee fees.
- Production Volumes (Q3 2014): Oil production was 118,410 Bbls (down from 130,291 Bbls in Q3 2013). Natural gas production was 1,920,881 Mcfs (up from 1,570,622 Mcfs in Q3 2013).
Outlook, Risks, and Commentary
- Commodity Prices: The Trustee notes that future prices are difficult to estimate. As of October 20, 2014, the average Henry Hub gas price was $3.32/Mcf and NYMEX oil was $82.76/barrel, representing a decline from the averages realized during the reporting period.
- Liquidity: The Trust holds cash and short-term investments pending distribution. Borrowings are not anticipated in the foreseeable future.
- Contingencies: The Trustee is not aware of any contingencies related to royalty properties that would unfavorably impact future income as of September 30, 2014.
- Tax Considerations: The Trust is a grantor trust for federal tax purposes. Unit holders are responsible for taxes on income. New Mexico and Oklahoma withhold taxes on proceeds, which the Trust seeks to recover and distribute; however, unit holders transferring units before refunds are received may face double taxation.
- Subsequent Events: Distributions of $0.46947 per unit (record date Oct 15) and $0.35393 per unit (record date Nov 17) were declared subsequent to the period end.
Investor Verification Checklist
- Production vs. Price Sensitivity: Verify the impact of declining oil and gas prices (as of late October 2014) on future monthly distributions, given the Trust's reliance on commodity pricing.
- Production Decline: Monitor the trend of decreasing oil production volumes (down 9% in Q3 2014 vs. Q3 2013) which may offset price increases in future periods.
- State Tax Refunds: Confirm the status of New Mexico and Oklahoma tax refunds, as delays or changes in withholding rules could affect net cash available for distribution.
- Trustee Transition: Review the operational impact of the trustee change from Bank of America to Southwest Bank effective May 2014.
- Reserve Life: Assess the remaining life of the royalty interests, as the Trust is a passive entity with no ability to acquire new assets or drill new wells.