Sabine Royalty Trust - 10-Q Summary (Q2 1996)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1996, for Sabine Royalty Trust, a grantor trust established to hold royalty and mineral interests in oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. The Trust distributes monthly cash flows to unit holders and does not engage in commercial business activities. As of August 12, 1996, there were 14,579,345 units of beneficial interest outstanding.
Key Financial Metrics
| Metric | Q2 1996 (3 Months) | Q2 1995 (3 Months) | YTD 1996 (6 Months) | YTD 1995 (6 Months) |
|---|---|---|---|---|
| Royalty Income | $5,970,059 | $4,541,456 | $11,140,621 | $8,838,687 |
| Interest Income | $35,988 | $25,980 | $69,146 | $51,427 |
| Total Income | $6,006,047 | $4,567,436 | $11,209,767 | $8,890,105 |
| G&A Expenses | $(451,695) | $(380,722) | $(793,135) | $(736,229) |
| Distributable Income | $5,554,352 | $4,186,714 | $10,416,632 | $8,153,876 |
| Distributable Income Per Unit | $0.38 | $0.29 | $0.71 | $0.56 |
| Distributions Per Unit (YTD) | $0.63 (1996) vs $0.55 (1995) | |||
| Cash & Short-Term Investments | $3,425,728 (as of June 30, 1996) | |||
| Net Royalty Interests (Book Value) | $3,750,820 (as of June 30, 1996) | |||
| Trust Corpus | $6,330,843 (as of June 30, 1996) |
Material Changes vs. Prior Period
- Revenue Growth: Royalty income increased by approximately 24% ($1.43 million) in Q2 1996 compared to Q2 1995. Year-to-date royalty income increased by 21% ($2.3 million).
- Drivers: The increase is attributed to higher oil and gas prices and increased production volumes. Average oil prices rose from $16.52/bbl in Q2 1995 to $17.08/bbl in Q2 1996. Average gas prices rose from $1.39/Mcf to $2.05/Mcf.
- Production Volumes: Oil production increased from 131,143 bbls (Q2 1995) to 183,184 bbls (Q2 1996). Gas production increased from 1,446,968 Mcfs to 1,831,117 Mcfs.
- Expenses: General and administrative expenses increased by approximately $71,000 (19%) for the quarter, primarily due to the timing of payments to an unrelated party and annual reporting costs.
- Liquidity: Cash and short-term investments increased from $2.51 million (Dec 31, 1995) to $3.43 million (June 30, 1996).
Outlook, Risks, and Management Commentary
- Outlook: Management notes that estimating future oil and gas prices remains difficult and assumptions may prove incorrect. No borrowings are 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 is recorded as a reduction of trust corpus rather than an operating expense.
- Tax Status: The Trust is classified as a grantor trust for federal income tax purposes; no tax provision is made at the trust level.
- Subsequent Events: Following the quarter end, distributions were declared for July ($0.16629/unit) and August ($0.14052/unit).
- Contingencies: "Other payables" of $691,646 consist primarily of royalty receipts suspended pending verification of ownership or title, which management expects to resolve in the normal course of business.
Key Facts for Investor Verification
- Verify the modified cash basis of accounting, as it differs from GAAP and impacts the timing of income recognition and expense accruals.
- Confirm the declining nature of the asset base: Royalty interests are amortized using the unit-of-production method, reducing the trust corpus over time as reserves are depleted.
- Monitor commodity price volatility, as the Trust's distributable income is directly correlated to oil and gas prices and production volumes, with no hedging strategy mentioned.
- Review the suspended royalties ($691,646) to ensure title disputes do not materially impact future cash flows.
- Note that distributable income for a quarter does not equal the sum of distributions made in that quarter due to the monthly record date timing mechanism.