Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2014
Trustee Change: Effective August 29, 2014, Southwest Bank succeeded U.S. Trust, Bank of America Private Wealth Management as Trustee.
Outstanding Units: 46,608,796 (as of November 1, 2014)
The Trust holds net overriding royalty interests in producing oil and gas properties in Texas, specifically the Waddell Ranch properties (75% interest) and Texas Royalty properties (95% interest). Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2014 | Nine Months Ended Sep 30, 2014 |
|---|---|---|
| Royalty Income | $15,233,085 | $41,975,489 |
| Interest Income | $77 | $205 |
| General & Administrative Expenses | $(193,727) | $(1,110,378) |
| Distributable Income | $15,039,435 | $40,865,316 |
| Distributable Income Per Unit | $0.32 | $0.88 |
| Cash and Short-term Investments | $4,417,568 | (Balance Sheet Item) |
| Net Overriding Royalty Interests (Net of Amortization) | $728,717 | (Balance Sheet Item) |
| Total Assets | $5,146,285 | (Balance Sheet Item) |
Liquidity & Debt: The Trust held $4.42 million in cash and short-term investments as of September 30, 2014. There are no long-term debt obligations listed; the Trustee is authorized to borrow funds to pay liabilities but has not reported outstanding borrowings in the balance sheet. Distributions payable to unit holders totaled $4.42 million.
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased 20.7% for the quarter ($15.23M vs. $12.62M) and 36.3% for the nine-month period ($41.98M vs. $30.80M) compared to the same periods in 2013.
- Production Drivers: The increase is primarily attributed to higher oil and gas production volumes resulting from the 2013 drilling program. Oil sales attributable to royalties increased from 114,794 Bbls to 147,713 Bbls in Q3 2014.
- Price Variance: Average oil prices decreased slightly in Q3 2014 ($94.82/Bbl) compared to Q3 2013 ($96.18/Bbl), while average gas prices increased ($6.67/Mcf vs. $6.20/Mcf). For the nine-month period, both oil ($92.99 vs. $86.81) and gas ($6.91 vs. $4.90) prices increased.
- Expense Increase: General and administrative expenses rose to $193,727 in Q3 2014 from $145,855 in Q3 2013, driven by increased professional expenses related to administrative actions (including the trustee transition).
- Capital Expenditures: Gross capital expenditures on Waddell Ranch properties decreased to $6.3 million in Q3 2014 from $9.4 million in Q3 2013.
Outlook, Risks, and Contingencies
- Subsequent Events: On October 21, 2014, the Trust declared a distribution of $0.056006 per Unit, payable November 17, 2014.
- Contingencies (ConocoPhillips Adjustment): ConocoPhillips previously overpaid the Trust approximately $5.9 million due to accounting inaccuracies. $4.5 million was withheld and subsequently reimbursed. Adjustments to monthly royalty payments were completed in Q1 2014; there was no impact on Q3 2014 reported income.
- Market Risk: The Trust is exposed to fluctuations in oil and gas prices and production volumes. The Trustee notes that forward-looking statements regarding production and prices are subject to uncertainties.
- Impairment: The Trustee reviewed assets for impairment as of September 30, 2014, and determined no impairment was necessary.
- Tax Considerations: The Trust is taxed as a grantor trust. Unit holders are responsible for reporting income. Foreign Account Tax Compliance Act (FATCA) withholding rules may apply to certain foreign unit holders for payments made after June 30, 2014.
Investor Verification Checklist
- Production Volumes: Verify the correlation between reported royalty income and the underlying oil/gas production volumes from Waddell Ranch and Texas Royalty properties.
- Capital Expenditure Budget: Monitor the remaining 2014 capital expenditure budget ($51 million gross) for Waddell Ranch properties to assess future production sustainability.
- Trustee Transition: Confirm the operational stability following the August 29, 2014, transition from U.S. Trust to Southwest Bank.
- ConocoPhillips Adjustments: Review ongoing communications regarding the resolution of the historical accounting discrepancies to ensure no future clawbacks or adjustments are pending.
- Commodity Prices: Assess the sensitivity of future distributions to changes in crude oil and natural gas prices, given the Trust's reliance on net profits from these commodities.