Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2009
Trustee: Bank of America, N.A.
Outstanding Units: 46,608,796 (as of November 2, 2009)
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
| Metric | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Royalty Income | $10,469,008 | $35,552,084 | $24,907,635 | $89,237,008 |
| Distributable Income | $10,333,701 | $35,437,454 | $23,845,038 | $88,463,347 |
| Distributable Income per Unit | $0.221711 | $0.760317 | $0.511600 | $1.897997 |
| General & Admin Expenses | $(135,642) | $(134,748) | $(1,065,614) | $(848,993) |
| Cash & Short-term Investments | $3,158,404 | $5,147,216 (Dec 31, 2008) | N/A | |
| Net Overriding Royalty Assets | $1,106,943 | $1,170,793 (Dec 31, 2008) | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 70% in Q3 2009 compared to Q3 2008, and by 72% for the nine-month period. This is primarily attributed to significant decreases in oil and gas prices and related production volumes.
- Price Volatility:
- Oil: Average price per barrel dropped from $104.07 (Q3 2008) to $59.65 (Q3 2009). For the nine months, the average was $46.66 vs. $104.07.
- Gas: Average price per Mcf dropped from $11.06 (Q3 2008) to $4.48 (Q3 2009). For the nine months, the average was $4.44 vs. $11.06.
- Production Volumes: While total oil sales from underlying properties remained relatively stable (266,797 Bbls in Q3 2009 vs. 265,967 Bbls in Q3 2008), gas sales volumes decreased slightly. However, the royalty interest volumes allocated to the Trust decreased significantly due to the allocation formula dependent on price and costs.
- Capital Expenditures: Capital expenditures for the Waddell Ranch properties increased to $3.88 million in Q3 2009 from $2.64 million in Q3 2008. For the nine months, expenditures were $9.3 million vs. $4.3 million in 2008.
Outlook, Commentary, and Risks
- Management Commentary: The Trustee notes that the decrease in income is driven by worldwide market variables affecting oil and gas prices. Capital expenditure budgets for the Waddell Ranch properties were revised to $27.1 million for 2009, with $20.2 million expended through Q3.
- Subsequent Events: A distribution of $0.096663 per Unit was declared on October 20, 2009, payable November 16, 2009.
- Risks and Contingencies:
- Market Risk: Future distributable income is highly sensitive to oil and gas prices and production levels, which are outside the Trustee's control.
- Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions. The Trustee is aware of no such items as of September 30, 2009.
- Reserve Estimates: Proved reserve estimates are subject to change based on new information and market conditions.
- Accounting Basis: The Trust uses a modified cash basis of accounting. Revenues are recognized when received, not when produced. Amortization is charged directly to trust corpus.
Investor Verification Checklist
- Price Sensitivity: Verify current oil and gas spot prices against the Trust's historical performance to model future distributions.
- Capital Expenditure Impact: Confirm the remaining 2009 capital expenditure budget ($6.9 million) and its potential impact on future royalty calculations (as costs reduce net profits).
- Production Trends: Review the latest production reports from ConocoPhillips (Waddell Ranch) and Riverhill Energy (Texas Royalty) to assess volume trends independent of price.
- Reserve Life: Review the most recent independent reserve estimates to understand the remaining life of the Trust's assets.
- Tax Implications: Confirm the classification of income as portfolio income for passive loss rules and the applicability of Texas margin tax exemptions for unit holders.