SBR

Sabine Royalty Trust 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, for Sabine Royalty Trust, a passive entity established to hold royalty interests in oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trust is administered by Bank of America, N.A., as Trustee. As of November 1, 2002, there were 14,579,345 units of beneficial interest outstanding. The financial statements are prepared on a modified cash basis of accounting.

Key Financial Metrics

Material Changes vs. Prior Period

• Royalty Income Decline: Royalty income for the three months ended September 30, 2002, decreased by approximately $2.17 million (22%) compared to the same period in 2001. This was primarily driven by a decrease in natural gas prices, partially offset by increases in gas production and oil prices/production.
• Year-to-Date Decline: For the nine months ended September 30, 2002, royalty income decreased by approximately $14.19 million (40%) compared to the prior year. This decline was due to lower prices for both oil and gas, exacerbated by decreased production volumes for both commodities.
• Production and Pricing:
  • Oil: Average price received dropped from $24.50 per barrel (9M 2001) to $21.13 per barrel (9M 2002). Production volumes were relatively flat (406,394 Bbls vs. 413,822 Bbls).
  • Gas: Average price received dropped significantly from $5.30 per Mcf (9M 2001) to $2.61 per Mcf (9M 2002). Production volumes were relatively flat (5.15M Mcfs vs. 5.16M Mcfs).
• Expenses: General and administrative expenses remained relatively stable, increasing only slightly ($1,600 for the quarter; $1,800 for the nine months) compared to the prior year periods.

Outlook, Risks, and Commentary

• Market Price Volatility: The Trustee notes that future oil and gas prices are difficult to estimate. While prices had recovered somewhat by November 1, 2002 (Henry Hub gas at $3.89/Mcf; Nymex oil at $27.22/barrel), the Trust remains highly sensitive to commodity price fluctuations.
• Passive Nature: The Trust is a passive entity with no ability to engage in business activities or acquire new assets. It relies entirely on the production from existing royalty interests.
• Liquidity and Debt: The Trust holds cash and short-term investments pending distribution. It has no long-term debt and does not anticipate borrowing in the foreseeable future. Borrowings are permitted only to pay liabilities if cash is insufficient, but must be repaid before further distributions.
• Accounting Basis: Financial statements are prepared on a modified cash basis, meaning income is recognized when received, not when produced. This may cause distributable income to differ from production volumes in a given period.

Key Facts for Investor Verification

• Commodity Price Sensitivity: Verify current oil and gas prices against the Trust's historical average prices ($21.13/bbl oil, $2.61/Mcf gas for 9M 2002) to assess future income potential.
• Production Decline: Confirm the status of the underlying oil and gas reserves, as the Trust has no mechanism to replace depleting assets.
• Distribution Timing: Note that distributions are made monthly based on cash received in the preceding month, which may lag behind current production or price changes.
• Liabilities: Review the $964,199 in payables (primarily ad valorem taxes and suspended royalty receipts) to ensure they are being resolved in the normal course of business.
• Trust Corpus Reduction: Observe the reduction in Trust Corpus from $5.68 million (Dec 31, 2001) to $3.13 million (Sep 30, 2002), driven by distributions exceeding distributable income and amortization.