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SBR > SEC Filings for SBR > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for SABINE ROYALTY TRUST


7-Nov-2012

Quarterly Report


Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Trust makes monthly distributions to the holders of Units of the excess of the preceding month's revenues received over expenses incurred. Upon receipt, royalty income is invested in short-term investments until its subsequent distribution. In accordance with the Trust Agreement, the Trust's only long-term assets consist of royalty interests in producing and proved undeveloped oil and gas properties. Although the Trust is permitted to borrow funds if necessary to continue its operations, borrowings are not anticipated in the foreseeable future.

Results of Operations

Distributable income consists of royalty income plus interest income plus any decrease in cash reserves established by the Trustee less general and administrative expenses of the Trust less any increase in cash reserves established by the Trustee. Distributable income for the three months ended September 30, 2012 was $11,918,507, or $0.82 per unit. Royalty income for the three months ended September 30, 2012 amounted to $12,354,767 while interest income was $1,594. General and administrative expenses totaled $437,854 for the three months ended September 30, 2012.

Distributions during the period were $.37365, $.33762, and $.24781 per Unit payable to Unit holders of record on July 16, August 15, and September 17, 2012, respectively.


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Royalty income for the quarter ended September 30, 2012 decreased approximately $4,796,000 or 28% compared with the third quarter of 2011. This decrease was caused by decreases in the price of both natural gas and oil ($4.7 million), along with a decrease in the production of oil ($1.0 million). These decreases were offset somewhat by an increase in the production of natural gas ($0.5 million) along with decreases in taxes ($0.4 million). Compared to the preceding quarter ended June 30, 2012, royalty income decreased approximately $2,753,000 or 18%, due mainly to decreases in the price of both natural gas and oil ($2.0 million), a decrease in the production of both natural gas and oil ($0.7 million), and a decrease in refunded state withholding taxes ($0.2 million). These decreases were tempered somewhat by a decrease in production taxes and operating expenses ($0.2 million).

Royalty income for the nine months ended September 30, 2012 decreased $4,525,000 or 10% compared with the same time period in 2011. This decrease was due mainly to a decrease in the price of natural gas ($7.0 million), along with a decrease in the production of oil ($0.5 million), and an increase in operating expenses ($0.2 million). These decreases were offset somewhat by an increase in the production of natural gas ($1.7 million), an increase in the price of oil ($0.6 million), as well as a refund of the 2011 Oklahoma and New Mexico state income taxes in 2012 ($0.7 million).

The following tables illustrate average prices received for the periods discussed above and the related oil and gas production volumes:

                                              Quarter Ended
                            September 30,       September 30,       June 30,
                                2012                2011              2012
           Production
           Oil (Bbls)              102,391             114,258         104,780
           Gas (Mcfs)            1,937,322           1,748,866       2,133,201

           Average Price
           Oil (per Bbl)   $         80.89     $         89.21     $     96.53
           Gas (per Mcf)   $          2.59     $          4.73     $      2.78




                                          Nine-Months Ended
                                  September 30,       September 30,
                                      2012                2011
                 Production
                 Oil (Bbls)              316,060             321,507
                 Gas (Mcfs)            5,723,330           5,148,747

                 Average Price
                 Oil (per Bbl)   $         90.13     $         88.13
                 Gas (per Mcf)   $          3.00     $          4.35

Gas revenues received for the three months ended September 30, 2012, related primarily to production for April 2012 through June 2012. The average price of gas as reported by the Henry Hub for the same time period was $2.09 per Mcf. The average price of gas for the Henry Hub was $2.32 per Mcf for January 2012 through September 2012. Oil revenues for the three months ended September 30, 2012 related primarily to production for May 2012 through July 2012. The average price of oil as reported by NYMEX for that time period was $88.71 per barrel. The average price of oil was $96.23 per barrel for January 2012 through September 2012. As of October 23, 2012, the average price of gas for the Henry Hub was $3.11 per Mcf and the average price of oil reported by NYMEX was $88.73 per barrel. It is difficult to accurately estimate future prices of oil and gas, and any assumptions concerning future prices may prove to be incorrect.

Interest income for the quarter ended September 30, 2012 increased approximately $100 compared with the third quarter of 2011. Compared to the preceding quarter ended June 30, 2012, interest income decreased approximately $400. Interest income for the nine months ended September 30, 2012 increased approximately $1,600 over the same time period in 2011. Changes in interest income are the result of changes in interest rates and funds available for investment.

General and administrative expenses for the quarter ended September 30, 2012 decreased by approximately $10,400 compared to the same quarter of 2011 primarily due to decreases in legal and other professional services of approximately $11,000, transfer agent fees of approximately $4,100 and timing of payment of tax reporting fees of approximately $3,600. These decreases were offset somewhat by an increase in escrow agent/trustee fees of approximately $8,100. Compared to the previous quarter ended June 30, 2012, general and administrative expenses decreased approximately $372,700 due mainly to timing of annual expenses for engineering services of approximately $180,500, printing costs associated with annual reporting of approximately $107,700, legal and other professional services of approximately $74,100 and transfer agent fees of approximately $11,000.

General and administrative expenses increased approximately $175,200 for the nine months ended September 30, 2012 compared to the same period in 2011 due primarily to increases in legal and other professional expenses of approximately $66,700, engineering services of approximately $65,800, printing and unitholder information services of approximately $30,400 and escrow agent/trustee fees of approximately $24,800. These increases were tempered by a decrease in the timing of payment of tax reporting fees of approximately $19,500.


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Critical Accounting Policies and Estimates

The Trust's financial statements reflect the selection and application of accounting policies that require the Trust to make significant estimates and assumptions. The following are some of the more critical judgement areas in the application of accounting policies that currently affect the Trust's financial condition and results of operations.

Basis of Accounting

The financial statements of the Trust are prepared on the following basis and are not intended to present financial position and results of operations in conformity with accounting principles generally accepted in the United States of America:

Royalty income, net of severance and ad valorem taxes, and interest income are recognized in the month in which amounts are received by the Trust.

Trust expenses, consisting principally of routine general and administrative costs, include payments made during the accounting period. Expenses are accrued to the extent of amounts that become payable on the next monthly record date following the end of the accounting period. Reserves for liabilities that are contingent or uncertain in amount may also be established if considered necessary.

Royalties that are producing properties are amortized using the unit-of-production method. This amortization is shown as a reduction of Trust corpus.

Distributions to Unit holders are recognized when declared by the Trustee.


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The financial statements of the Trust differ from financial statements prepared in conformity with accounting principles generally accepted in the United States of America because of the following:

Royalty income is recognized in the month received rather than in the month of production.

Expenses other than those expected to be paid on the following monthly record date are not accrued.

Amortization of the Royalties is shown as a reduction to Trust corpus and not as a charge to operating results.

Reserves may be established for contingencies that would not be recorded under accounting principles generally accepted in the United States of America.

This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

Revenue Recognition

Revenues from royalty interests are recognized in the period in which amounts are received by the Trust. Royalty income received by the Trust in a given calendar year will generally reflect the proceeds, on an entitlements basis, from natural gas produced for the twelve-month period ended September 30th in that calendar year and from oil produced for the twelve-month period ended October 31st in the same calendar year.

Reserve Disclosure

The SEC and the Financial Accounting Standards Board requires supplemental disclosures for oil and gas producers based on a standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities. Under this disclosure, future cash inflows are computed by applying the average prices during the 12-month period prior to the fiscal year-end, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. Future price changes are only considered to the extent provided by contractual arrangements in existence at year end. The standardized measure of discounted future net cash flows is achieved by using a discount rate of 10% a year to reflect the timing of future cash flows relating to proved oil and gas reserves. Numerous uncertainties are inherent in estimating volumes and the value of proved reserves and in projecting future production rates and the timing of development of nonproducing reserves. Such reserve estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production may be substantially different from the reserve estimates. Other than those filed with the SEC, our estimated reserves have not been filed with or included in any reports to any federal agency.

Contingencies

Contingencies related to the royalty properties that are unfavorably resolved would generally be reflected by the Trust as reductions to future royalty income payments to the Trust with corresponding reductions to cash distributions to Unit holders. The Trustee is not aware of any such items as of September 30, 2012.

Use of Estimates

The preparation of financial statements in conformity with the basis of accounting described above requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting periods. Actual results may differ from such estimates.

Impairment

The Trustee routinely reviews the Trust's royalty interests in oil and gas properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust's royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows.


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Distributable Income per Unit

Basic distributable income per Unit is computed by dividing distributable income by the weighted average Units outstanding. Distributable income per Unit assuming dilution is computed by dividing distributable income by the weighted average number of Units and equivalent Units outstanding. The Trust had no equivalent Units outstanding for any period presented. Therefore, basic distributable income per Unit and distributable income per Unit assuming dilution are the same.

New Accounting Pronouncements

There are no new pronouncements that are expected to have a significant impact on the Trust's financial statements.

Forward Looking Statements

This Report includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor created thereby. All statements other than statements of historical fact included in this Report are forward-looking statements. Although the Trustee believes that the expectations reflected in such forward-looking statements are reasonable, such expectations are subject to numerous risks and uncertainties and the Trustee can give no assurance that they will prove correct. There are many factors, none of which is within the Trustee's control, that may cause such expectations not to be realized, including, among other things, factors identified in the Trust's most recent Annual Report on Form 10-K affecting oil and gas prices and the recoverability of reserves, general economic conditions, actions and policies of petroleum-producing nations and other changes in the domestic and international energy markets.

The Trust has an Internet website and has made available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act at http://www.sbr-sabineroyalty.com as soon as reasonably practicable after such information is electronically filed with or furnished to the SEC.

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