Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarter ended March 31, 2016
Trustee: Southwest Bank
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 passed through to unit holders. There were 46,608,796 Units outstanding as of May 1, 2016.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Royalty Income | $2,770,036 | $4,630,106 |
| Total Expenses | $464,834 | $446,094 |
| Distributable Income | $2,305,286 | $4,184,044 |
| Distributable Income per Unit | $0.05 | $0.09 |
| Cash and Short-term Investments | $1,258,027 | $1,464,757 (Dec 31, 2015) |
| Reserve for Expenses | $650,000 | $500,000 (Dec 31, 2015) |
| Distributions Payable | $608,027 | $964,757 (Dec 31, 2015) |
| Net Overriding Royalty Interests (Net Book Value) | $671,875 | $680,686 (Dec 31, 2015) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 40% ($1.86 million) compared to Q1 2015. This was driven by a significant drop in commodity prices: average oil prices fell from $57.72 to $34.50 per barrel, and gas prices fell from $4.15 to $2.08 per Mcf.
- Waddell Ranch Deficit: The Waddell Ranch properties generated $0 royalty income for the quarter due to a cumulative Net Profit Interest (NPI) deficit of $497,560. Costs exceeded revenues for this specific property, preventing any distribution contribution from this asset.
- Capital Expenditures: Capital expenditures on the Waddell Ranch properties dropped significantly to $2.6 million in Q1 2016 from $10.2 million in Q1 2015. No new or workover wells were completed in Q1 2016, compared to 9 wells (6 workover, 3 new) in Q1 2015.
- Expense Reserve: The Reserve for Expenses increased by $150,000 to $650,000, contributing to the slight increase in total expenses despite lower operational activity.
Outlook, Risks, and Unusual Items
- Subsequent Distribution: On April 19, 2016, the Trust declared a distribution of $0.010037 per Unit, payable May 13, 2016.
- Market Risk: The Trust's income is highly sensitive to oil and gas prices and production volumes. The filing notes that worldwide market variables caused the price decreases observed in Q1 2016.
- Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions. The filing states there were no material changes to risk factors from the previous 10-K.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recorded when paid by interest owners, and certain cash reserves are established for contingencies.
Investor Verification Checklist
- Verify the current status of the cumulative NPI deficit for the Waddell Ranch properties and the timeline for recovery.
- Monitor future commodity price trends (oil and gas) as they directly dictate royalty income.
- Review the Trustee's capital expenditure budget for the Waddell Ranch properties ($2.45 million approved for 2016) to assess future production maintenance.
- Confirm the impact of the increased expense reserve on future distributable cash flow.
- Check for any updates on the Texas franchise tax exemption status for the Trust as a "passive entity."