Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended June 30, 2017 (Form 10-Q)
Structure: The Trust holds net overriding royalty interests in producing oil and gas properties in Texas. It is a passive entity taxed as a grantor trust, with Southwest Bank serving as Trustee. The Trust distributes all distributable income to Unit holders monthly. There are 46,608,796 Units outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 |
|---|---|---|
| Royalty Income | $7,473,738 | $17,025,961 |
| Total Income (Royalty + Interest) | $7,476,794 | $17,031,299 |
| Distributable Income | $6,971,797 | $16,160,845 |
| Distributable Income per Unit | $0.15 | $0.35 |
| Cash and Short-term Investments | $2,968,037 (as of June 30, 2017) | |
| Net Overriding Royalty Interests (Net of Amortization) | $566,047 (as of June 30, 2017) | |
| Distributions Payable | $1,918,037 (as of June 30, 2017) | |
| Commitments and Reserves for Contingencies | $1,050,000 (as of June 30, 2017) |
Debt: The filing does not report any outstanding debt or borrowings. The Trustee is authorized to borrow funds to pay liabilities, but none were utilized in this period.
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased significantly compared to the prior year periods. For the three months ended June 30, 2017, income rose to $7.47 million from $4.38 million in Q2 2016. For the six months, income rose to $17.03 million from $7.15 million in the same period in 2016.
- Price Drivers: The increase is primarily attributed to higher average oil and gas prices and reduced capital expenditures by the operator.
- Oil Prices: Average price increased to $47.14/Bbl (Q2 2017) from $32.71/Bbl (Q2 2016).
- Gas Prices: Average price increased to $3.13/Mcf (Q2 2017) from $1.81/Mcf (Q2 2016).
- Production Volumes: While royalty income increased, total oil and gas sales volumes from the underlying properties decreased compared to 2016.
- Oil: Average daily production dropped from 3,349 Bbls (Q2 2016) to 2,651 Bbls (Q2 2017).
- Gas: Average daily production dropped from 15,062 Mcf (Q2 2016) to 11,570 Mcf (Q2 2017).
- Expenses: General and administrative expenditures decreased slightly to $504,997 for Q2 2017 from $565,013 in Q2 2016, largely due to reduced professional service fees and no additional reserve for expenses.
Outlook, Risks, and Commentary
- Capital Expenditures: Capital expenditures for the Waddell Ranch properties were $517,000 in Q2 2017, down from $710,000 in Q2 2016. The approved 2017 budget is $3.2 million (gross), significantly lower than the $11.55 million spent in 2016.
- Operational Activity: No new wells or workover wells were completed or in progress during the quarter. Various facility projects were in progress.
- Subsequent Events: On July 21, 2017, the Trust declared a distribution of $0.040754 per Unit, payable on August 14, 2017.
- Risks: The Trust's income is highly sensitive to oil and gas prices and the operator's capital expenditure decisions. Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income. The Trustee relies on information provided by the interest owners (Burlington Resources Oil & Gas Company LP and Riverhill Energy Corporation).
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recorded when paid, not when production occurs.
Investor Verification Checklist
- Verify the current market price of oil and gas to assess the sustainability of the $47.14/Bbl and $3.13/Mcf averages reported.
- Confirm the operator's (ConocoPhillips/Burlington Resources) capital expenditure plans for the remainder of 2017, as reduced spending directly boosts royalty income.
- Monitor the "Commitments and reserves for contingencies" line item ($1.05 million) for any changes that might indicate pending liabilities.
- Review the Trust's distribution history to ensure the monthly distribution model aligns with cash flow expectations.
- Check for any updates on the "NPI deficit" (Net Profit Interest) mentioned in the notes, which can temporarily suspend royalty income from specific properties.