Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarter ended March 31, 2017
Trustee: Southwest Bank
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, meaning it is not subject to federal income tax at the trust level. Units of beneficial interest are traded on the New York Stock Exchange. As of May 1, 2017, there were 46,608,796 Units outstanding.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Royalty Income | $9,552,223 | $2,770,036 |
| Total Income | $9,554,505 | $2,770,120 |
| Distributable Income | $9,189,048 | $2,305,286 |
| Distributable Income per Unit | $0.20 | $0.05 |
| Total Expenses | $365,457 | $464,834 |
| Cash and Short-term Investments | $3,258,067 | $3,795,604 (Dec 31, 2016) |
| Net Overriding Royalty Interests (Net) | $583,666 | $603,119 (Dec 31, 2016) |
| Commitments and Reserve for Contingencies | $1,050,000 | $1,050,000 |
Material Changes vs. Prior Period
- Revenue Surge: Royalty income increased by approximately 245% year-over-year, rising from $2.77 million to $9.55 million. This was driven by higher oil and gas prices and a significant reduction in capital expenditures by the operator.
- Commodity Prices: Average oil prices rose to $46.26 per barrel in Q1 2017 from $34.50 in Q1 2016. Average gas prices increased to $3.16 per Mcf from $2.08.
- Production Volumes: Oil sales attributable to the Royalties increased to 159,629 Bbls from 71,623 Bbls. Gas sales increased to 610,590 Mcf from 95,509 Mcf.
- Capital Expenditures: Capital expenditures on the Waddell Ranch properties dropped significantly to $144,000 in Q1 2017 compared to $2.6 million in Q1 2016. The 2017 budget for these properties is $3.2 million.
- Operating Expenses: Lease operating expenses and property taxes on the Waddell Ranch properties decreased to $2.9 million from $6.9 million due to reduced maintenance work and lower property taxes.
- Waddell Ranch Contribution: In Q1 2016, the Waddell Ranch properties contributed $0 to royalty income due to a Net Profit Interest (NPI) deficit. In Q1 2017, they contributed $5.79 million.
Outlook, Risks, and Unusual Items
- Subsequent Events: On April 18, 2017, the Trust declared a distribution of $0.056259 per Unit, payable on May 12, 2017.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recorded when paid, not when production occurs. Expenses are recorded when liabilities are paid.
- Contingencies: A reserve of $1,050,000 is maintained for contingencies. Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions.
- Market Risk: The Trust is exposed to fluctuations in oil and gas prices and production volumes. The Trustee noted no material changes in market risk compared to the prior year.
- Internal Controls: The Trustee implemented additional review procedures to remediate a material weakness identified in the previous year's 10-K filing.
Investor Verification Checklist
- Verify the sustainability of the reduced capital expenditure budget ($3.2 million for 2017) and its impact on future production volumes.
- Monitor commodity price trends, as the Trust's income is directly correlated to net profits from oil and gas sales.
- Review the status of the $1,050,000 contingency reserve and any potential claims that could reduce future distributions.
- Confirm the continued exemption from Texas franchise tax as a "passive entity."
- Assess the impact of the NPI deficit resolution on the Waddell Ranch properties for future quarters.