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, 2015
Trustee: Southwest Bank (appointed August 29, 2014)
Outstanding Units: 46,608,796 (as of November 1, 2015)
The Trust holds net overriding royalty interests in 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 | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Royalty Income | $5,882,301 | $15,233,085 | $14,634,316 | $41,975,489 |
| Interest Income | $26 | $77 | $75 | $205 |
| G&A Expenses | $(388,407) | $(193,727) | $(1,435,459) | $(1,110,378) |
| Distributable Income | $5,493,920 | $15,039,435 | $13,198,932 | $40,865,316 |
| Distributable Income per Unit | $0.12 | $0.32 | $0.28 | $0.88 |
| Cash & Short-term Investments | $1,419,770 (as of Sept 30, 2015) | |||
| Net Overriding Royalty Interests | $689,891 (as of Sept 30, 2015) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased 61% in Q3 2015 and 65% in the nine-month period compared to 2014. This is primarily driven by a significant drop in commodity prices.
- Commodity Prices:
- Oil: Average price fell from $94.82/Bbl (Q3 2014) to $54.26/Bbl (Q3 2015). For the nine months, the average dropped from $92.99 to $52.82.
- Gas: Average price fell from $6.67/Mcf (Q3 2014) to $2.90/Mcf (Q3 2015). For the nine months, the average dropped from $6.91 to $3.04.
- Production Volumes: While oil sales volumes attributable to the Trust decreased, gas sales volumes increased. However, the Trustee notes that volume comparisons are not meaningful due to the allocation formula dependent on price and costs.
- Expenses: General and administrative expenses increased due to higher professional fees and the establishment of a cash reserve for potential extraordinary events. The Trustee is building a reserve of $1,000,000, increasing it by $50,000 monthly.
- Capital Expenditures (Operator): ConocoPhillips (operator of Waddell Ranch) reduced capital expenditures for the nine months ended Sept 30, 2015, to $20.1 million from $24.7 million in the prior year period.
Outlook, Risks, and Contingencies
- Outlook: The Trustee provides no specific forward-looking guidance on future distributions, noting that distributable income is not necessarily indicative of full-year results. Future distributions depend entirely on oil and gas prices and production costs.
- Market Risk: The Trust is highly sensitive to fluctuations in oil and gas prices. The filing highlights that worldwide market variables caused the price declines.
- Contingencies: A historical accounting discrepancy with ConocoPhillips regarding gas plant production (overpayment of ~$5.9 million) was resolved. Adjustments were completed in Q1 2014, and the Trustee considers the matter concluded with no impact on 2015 income.
- Subsequent Event: On October 20, 2015, the Trust declared a distribution of $0.019278 per Unit, payable November 16, 2015.
- Impairment: No impairment of assets was recognized as of September 30, 2015.
Investor Verification Checklist
- Price Sensitivity: Verify current oil and gas spot prices against the Trust's break-even thresholds, given the 40-50% price decline reported.
- Reserve Life: Review the latest reserve estimates (referenced as of Jan 1, 2015) to understand the remaining life of the royalty interests under current production rates.
- Operator Activity: Monitor ConocoPhillips' capital expenditure plans for the Waddell Ranch properties, as reduced spending may impact future production volumes.
- Reserve Build-up: Track the growth of the administrative reserve (targeting $1,000,000), which reduces immediate cash available for distribution.
- Tax Status: Confirm the Trust's status as a grantor trust and the implications for Unit holders regarding depletion deductions and passive loss rules.