Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2013
Trustee: Bank of America, N.A.
Outstanding Units: 46,608,796 (as of November 4, 2013)
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). The Trust is a passive entity that distributes all distributable income to unit holders and does not engage in commercial activities.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Royalty Income | $12,620,943 | $9,120,982 | $30,798,499 | $45,684,941 |
| Distributable Income | $12,475,186 | $8,953,411 | $29,794,411 | $44,707,162 |
| Distributable Income per Unit | $0.27 | $0.19 | $0.64 | $0.96 |
| General & Admin Expenses | $(145,855) | $(167,683) | $(1,004,442) | $(978,425) |
| Cash & Short-term Investments | $4,953,042 | N/A | $4,953,042 | N/A |
| Net Overriding Royalty Interests (Net) | $792,408 | N/A | $792,408 | N/A |
Liquidity & Debt: The Trust held $4.95 million in cash and short-term investments as of September 30, 2013. 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.
Material Changes vs. Prior Period
- Quarterly Performance (Q3): Royalty income increased 38% year-over-year, driven by higher average oil prices ($96.18/Bbl vs. $81.88/Bbl) and gas prices ($6.20/Mcf vs. $5.13/Mcf). Distributable income per unit rose from $0.19 to $0.27.
- Nine-Month Performance (YTD): Royalty income decreased 33% year-over-year. This decline is attributed to a substantially increased capital expenditure program in 2013 (which reduces net proceeds to the trust) and lower average oil and gas prices for the first nine months of 2013 compared to 2012.
- Production Volumes: For the nine months ended September 30, 2013, total oil sales from underlying properties increased to 822,758 Bbls (from 780,809 Bbls in 2012), while total gas sales decreased to 2,461,397 Mcf (from 3,213,859 Mcf in 2012).
- Capital Expenditures: Gross capital expenditures for the Waddell Ranch properties totaled $29.5 million for the nine months of 2013, compared to $17.2 million in the same period of 2012.
Outlook, Risks, and Contingencies
- Subsequent Events: On October 21, 2013, the Trust declared a distribution of $0.09950 per Unit, payable November 15, 2013.
- Capital Expenditure Budget: ConocoPhillips advised that the remaining 2013 capital expenditure budget for the Waddell Ranch properties is approximately $30 million (gross). High capital spending continues to reduce net proceeds available for distribution.
- Contingencies (ConocoPhillips Accounting Error): An ongoing matter regarding inaccuracies in ConocoPhillips' accounting for gas plant production since 2007 resulted in an initial overpayment of approximately $5.9 million. ConocoPhillips withheld proceeds in 2011 and has been reimbursing the Trust since October 2012. The Trustee is continuing to evaluate the matter, though recent reimbursements did not significantly impact reported royalty income for the period.
- Market Risks: The Trust's income is highly sensitive to oil and gas prices and production volumes. The filing notes that forward-looking statements regarding prices and reserves are subject to significant uncertainty.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recognized when received, not when production occurs.
Investor Verification Checklist
- Capital Expenditure Impact: Verify the extent to which the $93.9 million 2013 gross capital budget for Waddell Ranch properties will continue to suppress distributable income in Q4 2013 and 2014.
- Price Sensitivity: Monitor current oil and gas spot prices, as the Trust's revenue is directly tied to net proceeds after costs, making it highly volatile with commodity price swings.
- ConocoPhillips Reimbursement Status: Confirm if the accounting error resolution with ConocoPhillips is fully settled or if further adjustments to future royalty payments are expected.
- Production Decline: Review the trend in gas sales volumes, which decreased significantly year-over-year for the nine-month period, to assess long-term reserve depletion rates.
- Tax Implications: Confirm the Trust's status as a "passive entity" for Texas franchise tax purposes and ensure unit holders are aware of their individual tax reporting obligations for royalty income.