Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2015
Trustee: Southwest Bank (appointed August 29, 2014)
Outstanding Units: 46,608,796 (as of May 11, 2015)
The Trust holds net overriding royalty interests in producing oil and gas properties in Texas, specifically the Waddell Ranch properties (75% interest) and Texas Royalty properties (95% interest). Financial statements are prepared on a modified cash basis, not GAAP.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Royalty Income | $4,630,106 | $12,135,107 |
| Total Income | $4,630,138 | $12,135,170 |
| General & Administrative Expenses | $(446,094) | $(434,775) |
| Distributable Income | $4,184,044 | $11,700,395 |
| Distributable Income per Unit | $0.09 | $0.25 |
| Cash and Short-term Investments | $1,005,686 | $2,105,320 (Dec 31, 2014) |
| Net Overriding Royalty Interests (Net Book Value) | $713,404 | $722,947 (Dec 31, 2014) |
| Trust Corpus | $713,404 | $722,947 (Dec 31, 2014) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income decreased by approximately 62% compared to Q1 2014. This was driven by a significant drop in commodity prices: average oil price fell from $89.97 to $57.72 per barrel, and gas price fell from $6.58 to $4.15 per Mcf.
- Waddell Ranch Deficit: Due to a Net Profit Interest (NPI) deficit, the Waddell Ranch properties contributed $0 to royalty income for Q1 2015. In Q1 2014, these properties contributed $4,568,477.
- Texas Royalty Properties: These properties generated the entirety of the Trust's royalty income ($4,630,106) for the quarter, down from $7,566,630 in the prior year.
- Production Volumes: While prices dropped, total oil sales volumes from the underlying properties increased slightly (311,483 Bbls in 2015 vs. 306,742 Bbls in 2014), and gas sales volumes increased (1,180,576 Mcf in 2015 vs. 1,006,039 Mcf in 2014).
- Capital Expenditures: Gross capital expenditures for the Waddell Ranch properties decreased to $10.2 million in Q1 2015 from $11.6 million in Q1 2014.
Outlook, Risks, and Contingencies
- Forward-Looking Risks: The Trustee notes that future results depend on oil and gas prices, production volumes, and capital expenditures, none of which are within the Trustee's control. A continued decline in prices could further reduce distributable income.
- Contingencies: Unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions. The Trustee is continuing to evaluate a historical accounting discrepancy with ConocoPhillips regarding gas plant production, though adjustments were completed in Q1 2014 and did not impact Q1 2015 income.
- Subsequent Events: On April 20, 2015, the Trust declared a distribution of $0.023781 per Unit, payable May 14, 2015.
- Impairment: No impairment of assets was recognized as of March 31, 2015.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current oil and gas prices against the Trust's break-even thresholds, given the Waddell Ranch properties currently contribute zero income due to cost deficits.
- Capital Expenditure Budgets: Monitor the approved 2015 capital expenditure budget ($48.1 million gross for Waddell Ranch) to assess future cost impacts on net profits.
- Production Trends: Confirm if the increase in underlying production volumes (oil and gas) can offset the significant decline in commodity prices.
- Trustee Changes: Note the transition to Southwest Bank as Trustee and review any ongoing operational impacts from the change.
- Tax Implications: Review the "passive entity" status for Texas franchise tax and FATCA withholding requirements for foreign investors.