SBR

Sabine Royalty Trust - Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Sabine Royalty Trust is a passive entity holding royalty and mineral interests in oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trust is managed by Bank of America, N.A. (U.S. Trust) and distributes monthly cash flows to unit holders. The financial statements are prepared on a modified cash basis permitted for royalty trusts by the SEC, rather than GAAP.

Key Financial Metrics

Liquidity and Assets: Cash and short-term investments totaled $4,639,696 as of March 31, 2009, down from $6,383,896 at year-end 2008. Total assets were $5,351,668. The Trust holds no long-term debt. Liabilities consist primarily of trust expenses payable ($211,209) and other payables ($1,009,332), the latter largely representing royalty receipts suspended pending title verification.

Material Changes vs. Prior Period

• Revenue Decline: Royalty income decreased by approximately $7.98 million (42%) compared to Q1 2008. This was driven by lower production volumes and significantly lower commodity prices.
• Commodity Prices: Average oil prices received dropped from $85.89 per barrel in Q1 2008 to $39.13 in Q1 2009. Average natural gas prices fell from $6.60 per Mcf to $5.00 per Mcf.
• Production Volumes: Oil production decreased from 110,302 barrels to 104,171 barrels. Gas production decreased from 1,651,669 Mcfs to 1,572,366 Mcfs.
• Expense Increase: General and administrative expenses rose by approximately $63,500 year-over-year, primarily due to increases in professional fees, printing expenses, and unit holder information services.
• Trust Corpus: The Trust corpus decreased from $6,735,265 at December 31, 2008, to $4,131,127 at March 31, 2009, reflecting distributions exceeding current quarter income.

Outlook, Risks, and Contingencies

Outlook and Commentary: Management notes that it is difficult to accurately estimate future oil and gas prices. The Trust does not anticipate borrowing funds in the foreseeable future. Distributions for the quarter were $0.41550, $0.25441, and $0.21205 per unit. A subsequent distribution of $0.23787 per unit was declared for April 2009.

Risks:

• Market Risk: Future income is highly sensitive to fluctuations in crude oil and natural gas prices and production volumes.
• Credit Risk: Cash reserves are invested in Bank of America, N.A. certificates of deposit. While backed by the bank's credit, these are only FDIC insured up to $250,000. Future royalty income is also subject to the creditworthiness of operators and purchasers of the underlying properties.
• Regulatory/Tax: New Mexico imposes a withholding tax on oil and gas proceeds, which may result in double taxation for certain unit holders. Texas margin tax applies to business entity unit holders.

Contingencies: The Trustee is not aware of any contingencies related to royalty properties as of March 31, 2009. No impairment of royalty interests was required as of the reporting date.

Investor Verification Checklist

• Verify the current market prices of oil and natural gas against the Trust's average realized prices to assess future distribution potential.
• Confirm the credit rating and financial stability of Bank of America, N.A., given the concentration of cash reserves in their certificates of deposit.
• Review the status of "other payables" ($1.0 million) to understand the timeline for release of suspended royalty receipts.
• Monitor production volume trends to distinguish between price-driven and volume-driven revenue declines.
• Check for any updates on New Mexico withholding tax refunds and their impact on net distributions.