Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended June 30, 2007 (Form 10-Q)
Trustee: Bank of America, N.A.
Outstanding Units: 46,608,796 (as of August 1, 2007)
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 | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Royalty Income | $13,419,418 | $27,319,961 |
| Interest Income | $27,208 | $57,993 |
| General & Administrative Expenses | $(322,344) | $(644,620) |
| Distributable Income | $13,124,282 | $26,733,334 |
| Distributable Income per Unit | $0.28 | $0.57 |
| Cash and Short-term Investments | $4,500,184 (as of June 30, 2007) | |
| Net Overriding Royalty Interests (Net of Amortization) | $1,372,295 (as of June 30, 2007) | |
| Distributions Payable | $4,500,184 (as of June 30, 2007) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by 4.4% in the quarter and 17.1% in the six-month period compared to the same periods in 2006. This decline is primarily attributed to lower average oil and gas prices.
- Price Trends:
- Oil: Average price per barrel dropped to $55.49 (Q2 2007) from $57.44 (Q2 2006) and $53.72 (6-month 2007) from $56.11 (6-month 2006).
- Gas: Average price per Mcf dropped to $6.78 (Q2 2007) from $7.23 (Q2 2006) and $6.95 (6-month 2007) from $8.39 (6-month 2006).
- Production Volumes: Oil sales volumes from underlying properties decreased slightly, while gas sales volumes increased approximately 10% year-over-year for the six-month period.
- Expense Increases: General and administrative expenses increased due to enhanced Unit holder tax reporting requirements. Lease operating expenses and property taxes on the Waddell Ranch properties rose due to higher electrical costs and ad valorem taxes.
- Capital Expenditures: Capital expenditures for the Waddell Ranch properties totaled $5.7 million for the quarter and $8.5 million for the six months, compared to $5.6 million and $6.2 million, respectively, in 2006.
Outlook, Risks, and Management Commentary
- Capital Budget: ConocoPhillips revised the 2007 capital expenditures budget for the Waddell Ranch properties to $32.0 million. As of June 30, 2007, $8.5 million had been expended, leaving $23.5 million remaining for the year.
- Drilling Activity: During the quarter, 2 wells were completed and 1 was in progress on the Waddell Ranch properties. For the six months, 13 wells were drilled and completed.
- Tax Status: The Trust is taxed as a grantor trust; Unit holders report income as ordinary income from oil and gas royalties. The Trust is exempt from the new Texas margin tax as a passive entity.
- Subsequent Events: A distribution of $0.116911 per Unit was declared on July 20, 2007, payable August 14, 2007.
- Risks: Future income is highly dependent on oil and gas prices, production volumes, and capital expenditures by the interest owners (ConocoPhillips and Riverhill Energy). The Trustee has no control over these factors.
Investor Verification Checklist
- Verify the impact of fluctuating oil and gas prices on future royalty income, given the Trust's reliance on net profit calculations.
- Confirm the remaining 2007 capital expenditure budget ($23.5 million) and its potential effect on future production volumes.
- Review the allocation formula for royalty income, as production volumes in the "Royalties" section do not provide a direct comparison to underlying property volumes due to cost and price dependencies.
- Monitor the Trust's cash reserves and distribution schedule, noting that distributions are recorded when declared and income is recognized on a modified cash basis.
- Check for any changes in the ownership or operational status of the underlying properties (Waddell Ranch and Texas Royalty properties) managed by ConocoPhillips and Riverhill Energy.