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BPT > SEC Filings for BPT > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for BP PRUDHOE BAY ROYALTY TRUST

Form 10-Q for BP PRUDHOE BAY ROYALTY TRUST


9-May-2014

Quarterly Report


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

Cautionary Statement

This report contains forward looking statements (that is, statements anticipating future events or conditions and not statements of historical fact). Words such as "anticipate," "expect," "believe," "intend," "plan" or "project," and "should," "would," "could," "potentially," "possibly" or "may," and other words that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. Forward-looking statements in this report are subject to a number of risks and uncertainties beyond the control of the Trustee. These risks and uncertainties include such matters as future changes in oil prices, oil production levels, economic activity, domestic and international political events and developments, legislation and regulation, and certain changes in expenses of the Trust.

The actual results, performance and prospects of the Trust could differ materially from those expressed or implied by forward-looking statements. Descriptions of material risks known to the Trustee that could affect the future performance of the Trust appear in Item 1A, "Risk Factors," of the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the "2013 Annual Report"). There may be additional risks of which the Trustee is unaware or which are currently deemed immaterial.

In the light of these risks, uncertainties and assumptions, you should not rely unduly on any forward-looking statements. Forward-looking events and outcomes discussed in the 2013 Annual Report and in this report may not occur or may transpire differently. The Trustee undertakes no obligation to update forward-looking statements after the date of this report, except as required by law, and all such forward-looking statements in this report are qualified in their entirety by the preceding cautionary statements.

Liquidity and Capital Resources

The Trust is a passive entity. The Trustee's activities are limited to collecting and distributing the revenues from the Royalty Interest and paying liabilities and expenses of the Trust. Generally, the Trust has no source of liquidity and no capital resources other than the revenue attributable to the Royalty Interest that it receives from time to time. (See the discussion under "THE ROYALTY INTEREST" in Part I, Item 1 of the 2013 Annual Report for a description of the calculation of the Per Barrel Royalty, and the discussion under "THE PRUDHOE BAY UNIT AND FIELD - Reserve Estimates" in Part I, Item 1 of the 2013 Annual Report for information concerning the estimated future net revenues of the Trust.) However, the Trustee has a limited power to borrow, establish a cash reserve, or dispose of all or part of the Trust Estate, under limited circumstances pursuant to the terms of the Trust Agreement. See the discussion under "THE TRUST" in Part I, Item 1 of the 2013 Annual Report.

Since 1999, the Trustee has maintained a $1,000,000 cash reserve to provide liquidity to the Trust during any future periods in which the Trust does not receive a distribution. The Trustee will draw funds from the cash reserve account during any quarter in which the quarterly distribution received by the Trust does not exceed the liabilities and expenses of the Trust, and will replenish the reserve from future quarterly distributions, if any. The Trustee anticipates that it will keep this cash reserve program in place until termination of the Trust.


Amounts set aside for the cash reserve are invested by the Trustee in U.S. government or agency securities secured by the full faith and credit of the United States. Interest income received by the Trust from the investment of the reserve fund is added to the distributions received from BP Alaska and paid to the holders of Units with each quarterly distribution.

As discussed under "CERTAIN TAX CONSIDERATIONS" in Part I, Item 1 of the 2013 Annual Report, amounts received by the Trust as quarterly distributions are income to the holders of the Units (as are any earnings on investment of the cash reserve) and must be reported by the holders of the Units, even if such amounts are used by the Trustee to repay borrowings or replenish the cash reserve and are not received by the holders of the Units.

Results of Operations

Relatively modest changes in oil prices significantly affect the Trust's revenues and results of operations. Crude oil prices are subject to significant changes in response to fluctuations in domestic and world supply and demand and other market conditions as well as the world political situation as it affects the members of OPEC and other producing countries. The effect of changing economic and political conditions on the demand for and supply of energy throughout the world and future prices of oil cannot be accurately projected.

Under the terms of the Conveyance of the Royalty Interest to the Trust, the Per Barrel Royalty for any day is the WTI Price for the day less the sum of
(i) Chargeable Costs multiplied by the Cost Adjustment Factor and
(ii) Production Taxes. The narrative under the captions "THE TRUST - Trust Property" and "THE ROYALTY INTEREST" in the 2013 Annual Report explains the meanings of the terms "Conveyance," "Royalty Interest," "Per Barrel Royalty," "WTI Price, "Chargeable Costs" and "Cost Adjustment Factor" and should be read in conjunction with this report.

Royalty revenues are generally received on the fifteenth day of the month following the end of the calendar quarter in which the related Royalty Production occurred (the "Quarterly Record Date"). The Trustee, to the extent possible, pays all accrued expenses of the Trust on each Quarterly Record Date from the royalty payment received. Revenues and Trust expenses presented in the statement of cash earnings and distributions are recorded on a modified cash basis and, as a result, royalty revenues and distributions shown in such statements for the three-month periods ended March 31, 2014 and 2013, respectively, are attributable to BP Alaska's operations during the three-month periods ended December 31, 2013 and 2012, respectively.

The following table summarizes the factors which determined the Per Barrel Royalties used to calculate the payments received by the Trust in January 2014 and 2013 (see Note 1 of Notes to Financial Statements (Unaudited) in Part I, Item 1). The information in the table has been furnished by BP Alaska.

--------------------------------------------------------------------------------
                                                                        Data for Quarter
           Is Based on                                                                                       Average        Average
Royalty      Data for       Average                           Cost           Adjusted         Average          Per            Net
Payment      Quarter          WTI         Chargeable       Adjustment       Chargeable       Production       Barrel      Production
in Month      Ended          Price          Costs            Factor           Costs            Taxes         Royalty        (mb/d)
Jan 2014     12/31/2013     $  97.40     $      16.80            1.795     $      30.15     $      26.88     $  40.33            88.3
Jan 2013     12/31/2012     $  88.15     $      16.70            1.773     $      29.60     $      21.37     $  37.18            92.6

"Royalty Production" for each day in a calendar quarter is 16.4246% of the first 90,000 barrels of the actual average daily net production of oil and condensate for the quarter from the proved reserves allocated to the Trust. During periods when BP Alaska's average daily net production from those reserves exceeds 90,000 barrels, the principal factors affecting the Trust's revenues and distributions to Unit holders are changes in WTI Prices, scheduled annual increases in Chargeable Costs, changes in the Consumer Price Index and changes in Production Taxes. Since 2006, BP Alaska has undertaken a program of field wide infrastructure renewal, pipeline replacement and well mechanical improvements. As a consequence of these activities and the required downtime, and the natural production declines from the Prudhoe Bay field, Royalty Production from the proved reserves of oil and condensate allocated to the Trust was less than 90,000 barrels per day on an annual basis in 2011, 2012 and 2013. BP Alaska anticipates that its average net production of oil and condensate from those reserves will be below 90,000 barrels per day on an annual basis in most future years.

BP Alaska estimates Royalty Production from the reserves allocated to the Trust for purposes of calculating quarterly royalty payments to the Trust because complete actual field production data for the preceding calendar quarter generally is not available by the Quarterly Record Date. To the extent that average net production from those reserves is below 90,000 barrels per day in any quarter, recalculation by BP Alaska of actual Royalty Production data may result in revisions of prior Royalty Production estimates. Revisions by BP Alaska of its Royalty Production calculations cause BP Alaska to adjust its quarterly royalty payments to the Trust to compensate for overpayments or underpayments of royalties with respect to prior quarters. Such adjustments, if material, may adversely affect certain Unit holders who buy or sell Units between the Quarterly Record Dates for the Quarterly Distributions affected.

The Quarterly Distributions received by the Trust from BP Alaska in January 2014 and January 2013 were adjusted by BP Alaska to compensate for the underpayment and overpayment of royalties due to the Trust with respect to the quarters ended September 30, 2013 and September 30, 2012, respectively. See Note 6 of Notes to Financial Statements (Unaudited) in Item 1. Because the statements of cash earnings and distributions of the Trust are prepared on a modified cash basis, royalty revenues for the three-month periods ended March 31, 2014 and 2013 reflect the amounts of the adjustments with respect to the earlier fiscal periods.

Three Months Ended March 31, 2014 Compared to

Three Months Ended March 31, 2013

Trust royalty revenues received during the first quarter of the fiscal year are based on Royalty Production during the fourth quarter of the preceding fiscal year. The first of the following two


tables shows the changes from the fourth quarter of 2012 to the fourth quarter of 2013 in the factors which determined the Per Barrel Royalties used to calculate the royalty payments received during the first quarter of 2013 and 2014.

                                                     Increase (decrease)
                                   3 Months                                        3 Months
                                    Ended                                           Ended
                                  12/31/2013       Amount          Percent        12/31/2012
 Average WTI Price               $      97.40     $    9.25            10.5      $      88.15
 Adjusted Chargeable Costs       $      30.15     $    0.55             1.9      $      29.60
 Average Production Taxes        $      26.88     $    5.51            25.8      $      21.37
 Average Per Barrel Royalty      $      40.33     $    3.15             8.5      $      37.18
 Average net production (mb/d)           88.3          (4.3 )          (4.6 )            92.6

The increase in adjusted Chargeable Costs shown in the table above resulted principally from the scheduled annual increase in Chargeable Costs from $16.70 in 2012 to $16.80 in 2013. The Cost Adjustment Factor increased marginally between the two periods due to low inflation. The rate of increase in Production Taxes was higher than that of the rate of increase in average WTI Prices as a result of the progressivity feature of the Alaska Production Tax Statutes. The decline in average net production from the 1989 Working Interests between the two periods reflects a combination of (1) naturally declining production rate from the Prudhoe Bay field and (2) variance in the impacts of planned and unplanned downtime during the two reporting periods.

The following table shows the changes to the Trust's revenues received and distributions paid during the first quarters of 2013 and of 2014 resulting from the factors in the table above, as well as changes for the Trust's administrative expenses.

                                                  Increase (decrease)
                                3 Months                                       3 Months
                                  Ended                                          Ended
                                3/31/2014        Amount         Percent        3/31/2013
                                             (Dollar amounts in thousands)
     Royalty revenues          $    54,222     $    4,510            9.1      $    49,712
     Cash earnings             $    54,095     $    4,550            9.2      $    49,545
     Cash distributions        $    54,095     $    4,550            9.2      $    49,545
     Administrative expenses   $       127     $      (40 )        (24.0 )    $       167

The period-to-period increases in royalty revenues, cash earnings and cash distributions are due to the higher average WTI Prices that prevailed in the fourth quarter of 2013, compared to the fourth quarter of 2012. The average increase in WTI Prices was somewhat offset by increase in Production Taxes due to the progressivity feature of the Alaska Production Tax Statutes. The decrease in administrative expenses reflects lower overall costs of supplies and services and timing differences in accruals of expenses. Because the payments shown in the table above relate to Royalty Production during the fourth quarter of the respective years, they do not reflect the changes to the Alaska Production State Statutes by the Act, which took effect January 1, 2014.


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