Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended September 30, 2010 (Form 10-Q).
Business Overview: 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 fixed investment trust taxed as a grantor trust, with Bank of America, N.A. serving as Trustee. Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Royalty Income | $16,016,241 | $50,969,184 |
| Distributable Income | $15,892,605 | $49,982,601 |
| Distributable Income per Unit | $0.340979 | $1.072386 |
| General & Administrative Expenses | $(124,056) | $(987,391) |
| Cash and Short-term Investments | $5,253,628 (as of Sep 30, 2010) | |
| Net Overriding Royalty Interests (Net of Amortization) | $995,454 (as of Sep 30, 2010) | |
| Units Outstanding | 46,608,796 |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased significantly compared to the prior year periods. For the three months ended September 30, 2010, income rose to $16.0 million from $10.5 million in 2009. For the nine-month period, income reached $51.0 million compared to $24.9 million in 2009.
- Price Drivers: The increase in income is primarily attributable to higher oil and gas prices. Average oil prices rose to $69.56 per barrel (Q3 2010) from $59.65 (Q3 2009), and average gas prices increased to $6.45 per Mcf from $4.48.
- Production Volumes: Despite higher prices, total oil and gas sales volumes from the underlying properties decreased compared to 2009. Oil sales averaged 2,788 Bbls/day in Q3 2010 versus 2,900 Bbls/day in Q3 2009.
- Capital Expenditures: Capital expenditures for the Waddell Ranch properties dropped significantly to $366,440 in Q3 2010 compared to $3.9 million in Q3 2009. For the nine months, expenditures were $1.6 million versus $9.3 million in 2009.
- Expenses: General and administrative expenses decreased slightly due to reduced professional fees.
Outlook, Risks, and Management Commentary
- Capital Budget: ConocoPhillips revised the 2010 capital expenditures budget for the Waddell Ranch properties to $22 million (gross). As of September 30, 2010, $4.3 million had been expended, with $17.7 million remaining for the year.
- Drilling Activity: Drilling activity slowed considerably. In Q3 2010, there were 0 wells completed and 1 drill well in progress, compared to 3 wells completed and 2 in progress in Q3 2009. Workover activity remained active with 13 wells in progress.
- Subsequent Events: On October 19, 2010, the Trust declared a distribution of $0.107227 per Unit, payable November 15, 2010.
- Risks: The Trust's income is highly sensitive to oil and gas prices and production volumes. Contingencies related to underlying properties could reduce future royalty income. The Trustee is aware of no material contingencies as of September 30, 2010.
- Accounting Basis: Investors should note that financial statements are prepared on a modified cash basis. Royalty income is recorded when received, not when produced, and amortization is charged directly to trust corpus.
Key Facts for Investor Verification
- Verify the current status of the $17.7 million remaining capital expenditure budget for the Waddell Ranch properties and its impact on future production.
- Monitor oil and gas price trends, as the Trust's distributable income is directly correlated to commodity prices rather than production volume growth.
- Confirm the continued exemption from Texas margin tax as a "passive entity," as this affects net distributions to unit holders.
- Review the allocation formula for royalty income, as it depends on price and cost factors, meaning production volume declines may not linearly reduce income if prices rise sufficiently.
- Check for any updates on the ownership or operational status of the Texas Royalty properties managed by Riverhill Energy Corporation.