SABINE ROYALTY TRUST - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for the period ended September 30, 2011. Sabine Royalty Trust is a passive trust holding royalty and mineral interests in producing and proved undeveloped oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trustee is Bank of America, N.A. (U.S. Trust). The Trust distributes monthly cash payments to unit holders based on cash received from royalties and interest, less expenses.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2011 | Nine Months Ended Sep 30, 2011 |
|---|---|---|
| Royalty Income | $17,150,882 | $47,199,183 |
| Interest Income | $1,446 | $3,696 |
| Total Income | $17,152,328 | $47,202,879 |
| General & Administrative Expenses | $(448,249) | $(1,634,717) |
| Distributable Income | $16,704,079 | $45,568,162 |
| Distributable Income per Unit | $1.15 | $3.13 |
| Distributions per Unit (YTD) | N/A | $3.09 |
| Cash and Short-Term Investments | $5,498,797 | N/A |
| Trust Corpus | $5,608,212 | N/A |
| Outstanding Units | 14,579,345 | 14,579,345 |
Note: The Trust has no long-term debt. Liabilities consist primarily of trust expenses payable ($169,723) and other payables ($235,303).
Material Changes vs. Prior Period
- Quarter-over-Quarter (Q3 2011 vs. Q3 2010): Royalty income increased by approximately $3.04 million (22%). This was driven by higher natural gas production and higher oil prices, partially offset by lower oil production and lower natural gas prices. Distributable income per unit rose from $0.94 to $1.15.
- Year-over-Year (9 Months 2011 vs. 9 Months 2010): Royalty income increased by approximately $4.68 million (11%). The increase was primarily due to higher natural gas production and higher oil prices, tempered by lower oil production and lower natural gas prices.
- Expense Trends: General and administrative expenses for the quarter increased by approximately $14,200 compared to Q3 2010, mainly due to higher printing, unitholder reporting, and legal fees. However, expenses decreased significantly compared to the preceding quarter (Q2 2011) due to timing differences in annual fees and engineering services.
Outlook, Risks, and Commentary
- Production and Pricing: Average oil prices received were $89.21 per barrel in Q3 2011 (up from $68.78 in Q3 2010). Average gas prices were $4.73 per Mcf (down slightly from $4.74 in Q3 2010). Management notes that future prices are difficult to estimate.
- Liquidity: The Trust invests royalty income in short-term investments (Bank of America certificates of deposit) pending distribution. Borrowings are not anticipated in the foreseeable future.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Royalty income is recognized when received, not when produced. Amortization of royalty interests reduces Trust Corpus rather than operating income.
- Risks: The Trust is subject to commodity price volatility and production declines. There are no material legal proceedings or known contingencies as of September 30, 2011. The Trustee is not aware of any impairment events requiring asset write-downs.
- Subsequent Events: Distributions of $0.35272 and $0.22847 per unit were declared for October and November 2011, respectively.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current oil and natural gas prices against the Trust's historical average prices ($89.21/bbl oil, $4.73/Mcf gas) to assess future distribution potential.
- Production Volumes: Monitor production trends, as oil production decreased slightly in Q3 2011 compared to Q3 2010, while gas production increased.
- Trust Corpus Amortization: Review the reduction in Trust Corpus due to amortization ($57,566 for the nine months ended Sep 30, 2011) to understand the depletion of the asset base.
- Tax Implications: Confirm state tax withholding requirements (specifically New Mexico and Oklahoma) which may affect net distributions if units are transferred before refunds are processed.
- Credit Risk: Assess the creditworthiness of Bank of America, N.A., as the Trust's cash reserves are invested in their certificates of deposit.