PBT

Business Context and Reporting Period

Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2014
Trustee: U.S. Trust, Bank of America Private Wealth Management (resignation effective May 30, 2014, pending approval of Southwest Bank as successor)
Outstanding Units: 46,608,796

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). Financial statements are prepared on a modified cash basis, not GAAP.

Key Financial Metrics

Liquidity: The Trust held approximately $5.06 million in cash and short-term investments as of March 31, 2014, which equals the distribution payable to unit holders. There is no debt reported in the liabilities section.

Material Changes vs. Prior Period

• Revenue Growth: Royalty income increased by approximately 73% ($5.1 million) compared to Q1 2013. This was driven by higher production volumes and increased commodity prices.
• Commodity Prices: Average oil price rose to $89.97 per barrel (from $79.19 in Q1 2013). Average gas price rose to $6.58 per Mcf (from $4.33 in Q1 2013).
• Production Volumes: Oil sales attributable to royalties increased to 121,049 Bbls (from 81,047 Bbls). Gas sales increased to 301,342 Mcf (from 118,747 Mcf).
• Expense Increase: General and administrative expenses increased by $110,127, primarily due to higher professional fees.
• Accounting Adjustments: Royalty income for Q1 2014 was reduced by $655,161 due to prior period adjustments related to ConocoPhillips correcting accounting inaccuracies regarding gas plant production proceeds. These adjustments are expected to conclude.

Outlook, Risks, and Management Commentary

• Trustee Transition: The current Trustee, U.S. Trust, Bank of America Private Wealth Management, has resigned. Southwest Bank is nominated as the successor trustee, subject to conditions and a unit holder vote scheduled for May 23, 2014.
• Capital Expenditures: ConocoPhillips (operator of Waddell Ranch) reported Q1 2014 capital expenditures of $11.6 million. The approved 2014 budget is $76 million (gross), down from $88.6 million in 2013.
• Well Activity: In Q1 2014, 7 new wells and 8 workover wells were completed on Waddell Ranch properties.
• Risks:
  • Commodity Price Volatility: Future distributions are highly dependent on oil and gas prices and production volumes.
  • Contingencies: Unfavorable resolution of contingencies related to underlying properties could reduce future royalty income and distributions.
  • Accounting Basis: Financials are prepared on a modified cash basis, meaning revenues are recognized when received, not when production occurs. This creates a lag between production and reported income.
• Subsequent Event: A distribution of $0.086274 per Unit was declared on April 17, 2014, payable May 14, 2014.

Investor Verification Checklist

• Trustee Change: Verify the outcome of the May 23, 2014 meeting regarding the appointment of Southwest Bank as the new Trustee.
• ConocoPhillips Adjustments: Confirm that the $655,161 reduction in Q1 2014 income represents the final adjustment for the historical accounting error.
• Production vs. Price Sensitivity: Assess the impact of potential declines in oil/gas prices on future distributions, given the Trust's reliance on net overriding royalties.
• Capital Expenditure Execution: Monitor if ConocoPhillips executes the reduced $76 million capital budget and how this impacts long-term production volumes.
• Tax Implications: Review the impact of FATCA withholding rules on foreign unit holders, as distributions may be subject to withholding after June 30, 2014.