SABINE ROYALTY TRUST - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2016, for Sabine Royalty Trust (the "Trust"). The Trust is a passive entity established to hold royalty and mineral interests in oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. It does not engage in commercial activities or acquire new assets. As of August 4, 2016, there were 14,579,345 units of beneficial interest outstanding. The Trustee is Southwest Bank.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2016 |
|---|---|---|
| Royalty Income | $6,504,020 | $13,472,965 |
| Interest Income | $1,161 | $1,997 |
| Total Income | $6,505,181 | $13,474,962 |
| General & Administrative Expenses | $(651,029) | $(1,452,148) |
| Distributable Income | $5,854,152 | $12,022,814 |
| Distributable Income per Unit | $0.40 | $0.82 |
| Distributions per Unit (Actual) | $0.41 (Q2 Total) | $0.95 (YTD Total) |
| Cash and Short-Term Investments | $4,571,741 (as of June 30, 2016) | |
| Trust Corpus | $3,291,428 (as of June 30, 2016) | |
| Liabilities | $1,569,803 (as of June 30, 2016) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income for the three months ended June 30, 2016, decreased by approximately $3.79 million (37%) compared to the same period in 2015. For the six-month period, the decrease was $11.93 million (47%).
- Price and Volume Impact: The decline was primarily driven by lower commodity prices (oil and natural gas) and reduced production volumes.
- Oil: Average price dropped from $48.85/Bbl (Q2 2015) to $33.35/Bbl (Q2 2016). Production decreased from 119,011 Bbls to 104,006 Bbls.
- Gas: Average price dropped from $3.26/Mcf (Q2 2015) to $2.35/Mcf (Q2 2016). Production decreased slightly from 1,740,871 Mcfs to 1,704,049 Mcfs.
- Expense Reduction: General and administrative expenses decreased by approximately $159,300 for the quarter compared to 2015, largely due to the timing of payments for engineering services, auditing fees, and printing expenses.
- Trust Corpus: The Trust corpus decreased from $5,180,285 at December 31, 2015, to $3,291,428 at June 30, 2016, reflecting distributions exceeding distributable income for the period.
Outlook, Risks, and Commentary
- Market Risk: The Trust is highly sensitive to fluctuations in oil and natural gas prices. The filing notes that future prices are difficult to estimate and that current market conditions have significantly reduced revenue.
- Liquidity: The Trust maintains cash and short-term investments to fund monthly distributions. It has no long-term debt and does not anticipate borrowing in the foreseeable future.
- Accounting Basis: Financial statements are prepared on a modified cash basis (per SAB Topic 12:E), not GAAP. Royalty income is recognized when received, not when produced. Amortization of royalty interests is a reduction of Trust Corpus, not an operating expense.
- Contingencies: The Trustee is not aware of any material contingencies as of June 30, 2016. However, unfavorable resolution of royalty property contingencies would reduce future income and distributions.
- Subsequent Distributions: Following the quarter end, distributions of $0.13457 (July) and $0.13527 (August) per unit were declared.
Investor Verification Checklist
- Verify the correlation between current NYMEX oil and Henry Hub gas prices and the Trust's future royalty receipts, noting the lag in revenue recognition.
- Review the "Other payables" line item ($1.38 million), which consists primarily of royalty receipts suspended pending title verification.
- Confirm the impact of state withholding taxes (New Mexico and Oklahoma) on net distributions, particularly for unit holders transferring units between record dates.
- Monitor the Trust Corpus balance, as distributions have exceeded distributable income in recent periods, drawing down the reserve.
- Check for any updates on the "suspended" royalty receipts to ensure they are released and distributed in upcoming months.