Business Context and Reporting Period
Company: Permian Basin Royalty Trust (Trust)
Reporting Period: Quarterly period ended September 30, 2017 (Form 10-Q)
Trustee: Southwest Bank (effective August 29, 2014)
Outstanding Units: 46,608,796 as of November 1, 2017
Business Model: The Trust holds net overriding royalty interests in producing oil and gas properties in Texas. It receives 75% of net profits from the Waddell Ranch properties (operated by Burlington Resources Oil & Gas Company LP) and 95% from Texas Royalty properties (operated by Riverhill Energy Corporation). The Trust is a passive entity taxed as a grantor trust.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 |
|---|---|---|
| Royalty Income | $6,095,517 | $23,121,478 |
| Total Income (Royalty + Interest) | $6,098,787 | $23,130,086 |
| Distributable Income | $5,900,315 | $22,061,160 |
| Distributable Income per Unit | $0.13 | $0.47 |
| General & Administrative Expenses | $198,472 | $1,068,926 |
| Cash and Short-term Investments | $2,924,931 (as of Sep 30, 2017) | |
| Net Overriding Royalty Interests (Net of Amortization) | $550,749 (as of Sep 30, 2017) | |
| Distributions Payable | $1,874,931 (as of Sep 30, 2017) | |
| Reserve for Contingencies | $1,050,000 (as of Sep 30, 2017) |
Material Changes vs. Prior Period
- Quarter-over-Quarter (Q3 2017 vs. Q3 2016):
- Royalty Income: Decreased by 7.0% to $6.096 million from $6.555 million. This decline was driven by reduced oil and gas production volumes, partially offset by higher commodity prices.
- Commodity Prices: Average oil price increased to $43.72/Bbl (from $42.94) and gas price increased to $3.11/Mcf (from $2.01).
- Production Volumes: Oil sales attributable to royalties decreased to 120,217 Bbls (from 142,066 Bbls); Gas sales decreased to 419,229 Mcf (from 564,577 Mcf).
- Expenses: Total expenses decreased to $198,472 from $311,802, primarily due to lower professional service fees and no additional expense reserves.
- Year-to-Date (Nine Months 2017 vs. Nine Months 2016):
- Royalty Income: Increased significantly by 68.7% to $23.12 million from $13.70 million. This increase was driven by higher oil and gas prices and a reduction in capital expenditures by the operator, which offset declines in production volumes.
- Commodity Prices: Average oil price rose to $45.72/Bbl (from $36.57) and gas price rose to $3.14/Mcf (from $1.97).
- Production Volumes: Oil sales decreased to 298,085 Bbls (from 409,349 Bbls); Gas sales decreased to 1,100,970 Mcf (from 1,122,229 Mcf).
- Capital Expenditures (Waddell Ranch): Decreased to $1.2 million (gross) from $4.0 million (gross), contributing to higher net profits available for royalty distribution.
Outlook, Risks, and Unusual Items
- Subsequent Events: On October 20, 2017, the Trust declared a distribution of $0.053960 per Unit, payable November 14, 2017. Additionally, Simmons First National Corporation completed its acquisition of First Texas BHC, Inc. (parent of Southwest Bank) on October 19, 2017. Southwest Bank will operate as a separate subsidiary for an interim period before merging into Simmons Bank.
- Capital Expenditure Budget: ConocoPhillips has approved a 2017 capital expenditure budget of $3.2 million (gross) for the Waddell Ranch properties. As of September 30, 2017, no new or workover wells were completed or in progress on these properties.
- Risks and Contingencies:
- Market Risk: Distributable income is highly sensitive to oil and gas prices and production volumes, which are subject to global market variables outside the Trustee's control.
- Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions. A reserve of $1,050,000 is maintained for such contingencies.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recorded when paid, not when production occurs.
- Management Commentary: The Trustee noted that the decrease in Q3 royalty income was due to production declines despite price increases. The YTD increase was attributed to price increases and reduced capital expenditures by the operator.
Investor Verification Checklist
- Verify the impact of the Simmons First National Corporation acquisition of Southwest Bank on Trustee operations and future reporting.
- Monitor the 2017 capital expenditure budget ($3.2 million) for the Waddell Ranch properties to assess future production sustainability.
- Track oil and gas price trends, as the Trust's income is directly correlated to commodity prices and production volumes.
- Review the status of the $1,050,000 contingency reserve to understand potential future liabilities.
- Confirm the calculation of royalty income based on the 75% (Waddell Ranch) and 95% (Texas Royalty) net profit splits.