Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2019
Trustee: Simmons Bank
Outstanding Units: 46,608,796 as of May 1, 2019
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 taxed as a grantor trust, with income distributed monthly to unit holders.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Royalty Income | $4,530,445 | $9,719,305 |
| Total Income | $4,537,603 | $9,724,781 |
| General & Administrative Expenses | $(301,131) | $(413,850) |
| Distributable Income | $4,236,472 | $9,310,931 |
| Distributable Income Per Unit | $0.09 | $0.20 |
| Cash and Short-term Investments | $2,245,165 | $3,526,613 (Dec 31, 2018) |
| Net Overriding Royalty Interests (Net) | $457,731 | $467,580 (Dec 31, 2018) |
| Total Assets | $2,702,896 | $3,994,193 (Dec 31, 2018) |
| Distributions Payable | $1,195,165 | $2,476,613 (Dec 31, 2018) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 53% year-over-year, dropping from $9.72 million to $4.53 million.
- Price and Volume Impact: The decline is attributed to lower oil and gas prices and reduced production volumes. Average oil prices fell from $56.39/Bbl in Q1 2018 to $44.47/Bbl in Q1 2019. Average gas prices fell from $3.84/Mcf to $3.38/Mcf.
- Production Volumes: Oil sales attributable to royalties dropped from 143,180 Bbls to 85,893 Bbls. Gas sales dropped from 511,378 Mcf to 221,006 Mcf.
- Expense Reduction: General and administrative expenses decreased by 27% to $301,131, primarily due to reduced professional service costs and timing of payments.
- Capital Expenditures: Capital expenditures on the Waddell Ranch properties increased to $881,000 in Q1 2019 compared to $428,000 in Q1 2018, reflecting a higher approved budget for 2019 ($6.6 million gross).
Outlook, Risks, and Unusual Items
- Subsequent Events: On April 18, 2019, the Trust declared a distribution of $0.017601 per Unit, payable on May 14, 2019.
- Operational Activity: During Q1 2019, there were 2 new wells in progress on the Waddell Ranch properties, compared to zero in the prior year. No workover wells were completed.
- Market Risk: The Trust's income is highly sensitive to commodity prices and production levels, which are subject to global market variables outside the Trustee's control.
- Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions. A reserve of $1,050,000 is maintained for commitments and contingencies.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recorded when paid, and expenses when paid.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current oil and gas price trends relative to the Q1 2019 averages of $44.47/Bbl and $3.38/Mcf to assess future income potential.
- Production Decline: Confirm the reasons for the significant drop in oil and gas sales volumes (approx. 40% drop in oil, 57% drop in gas) and whether this is a temporary fluctuation or a structural decline.
- Capital Expenditure Impact: Monitor the execution of the $6.6 million capital budget for Waddell Ranch properties to determine if increased spending will offset production declines.
- Distribution Consistency: Review the trend of monthly distributions, noting the significant reduction from $0.20 per unit in Q1 2018 to $0.09 per unit in Q1 2019.
- Reserve Adequacy: Assess the sufficiency of the $1.05 million contingency reserve against potential future liabilities or unfavorable legal resolutions.