SBR

Sabine Royalty Trust 2011 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2011, for the Sabine Royalty Trust (the "Trust"). The Trust is an express trust formed under Texas law, holding royalty and mineral interests in producing oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trust is a passive entity; it does not operate the properties, which are managed by third-party operators. The Trustee is Bank of America, N.A. (U.S. Trust, Bank of America Private Wealth Management). As of March 2, 2012, there were 14,579,345 Units of Beneficial Interest outstanding.

Key Financial Metrics

Commodity Prices (Average Received): Oil increased to $87.22 per barrel in 2011 from $70.82 in 2010. Natural gas decreased to $4.36 per Mcf in 2011 from $4.55 in 2010.

Material Changes vs. Prior Period

• Revenue Growth: Royalty income increased by approximately 8.2% ($4.6 million) compared to 2010. This was driven primarily by higher oil prices and increased natural gas sales volumes, partially offset by lower natural gas prices and slightly lower oil volumes.
• Expense Increases: General and administrative expenses rose slightly to $2.13 million, primarily due to increases in legal, engineering, and auditing fees, offset by decreases in escrow agent fees and unit holder information services.
• Reserve Valuation: The present worth of future net revenue from proved developed reserves increased to $257.1 million (as of Jan 1, 2012) from $227.8 million (as of Jan 1, 2011). This increase was largely due to higher oil price assumptions used in the calculation ($90.74/bbl vs $74.84/bbl), despite a decrease in gas price assumptions.
• Production Volumes: Oil volumes sold decreased slightly to 430,203 barrels in 2011 from 442,936 barrels in 2010. Gas volumes increased slightly to 6,912,203 Mcf in 2011 from 6,894,361 Mcf in 2010.

Outlook, Risks, and Management Commentary

• Passive Nature: The Trust has no control over operations, development, or the timing of production. Distributions depend entirely on the performance of third-party operators and commodity prices.
• Price Volatility: The Trustee notes that crude oil and natural gas prices are highly volatile and subject to global economic conditions, political instability, and supply/demand dynamics. Future distributions are unpredictable.
• Depleting Assets: The Trust's assets are depleting. If operators do not undertake additional development projects, production rates may decline faster than expected. A portion of distributions represents a return of capital.
• Regulatory Risks: Operations are subject to extensive federal, state, and local regulations regarding environmental protection, hydraulic fracturing, and climate change. Non-compliance by operators could result in reduced production or liabilities.
• Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Royalty income is recognized when received, not when produced.
• Future Expenses: The Trustee expects costs and expenses for 2012 to be approximately $2,475,000.

Investor Verification Checklist

• Verify the current market price of crude oil and natural gas against the Trust's average realized prices to assess future distribution potential.
• Review the "Standardized Measure of Discounted Future Net Cash Flows" ($257.1 million) to understand the estimated remaining value of the reserves.
• Confirm the identity and financial stability of the major operators on the Royalty Properties, as the Trust has no recourse if operators abandon wells.
• Check for any pending litigation or regulatory actions against the operators that could impact production or royalty payments.
• Understand the tax implications of the "return of capital" portion of distributions, which reduces the tax basis of the Units.
• Monitor the Trust's cash reserves and any potential need for borrowings to pay liabilities, though none are currently anticipated.