Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read together with (i) the factors discussed in Item 1A “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 20
15
, (ii) the factors discussed in Part II, Item 1A “Risk Factors,” if any, of this Quarterly Report on Form 10-Q and (iii) the Financial Statements, including the Notes thereto, and the other financial information appearing elsewhere in this Report. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Trust’s future performance. Words or phrases such as “does not believe” and “believes”, or similar expressions, when used in this Form 10-Q or other filings with the Securities and Exchange Commission, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Results of Operations for the Quarter Ended
September
30, 201
6
Compared to the Quarter Ended
September
30, 20
15
Earnings per Sub-share certificate were $1.12 for the third quarter of 2016, compared to $1.40 for the third quarter of 2015. Total operating and investing revenues were $14,273,252 for the third quarter of 2016 compared to $18,186,748 for the third quarter of 2015, a decrease of 21.5%. This decrease in revenue and earnings was due primarily to decreases in easements and sundry income and land sales. These decreases were partially offset by an increase in oil and gas royalty revenue.
Oil and gas royalty revenue was $8,454,876 for the third quarter of 2016, compared to $6,060,645 for the third quarter of 2015, an increase of 39.5%. Oil royalty revenue was $5,942,203 for the third quarter of 2016, an increase of 35.9% from the third quarter of 2015 when oil royalty revenue was $4,371,573. Crude oil production subject to the Trust’s royalty interests increased 58.6% in the third quarter of 2016 compared to the third quarter of 2015. This increase in production was partially offset by a 14.3% decrease in the average price per royalty barrel of crude oil during the third quarter of 2016 compared to the third quarter of 2015. Gas royalty revenue was $2,512,673 for the third quarter of 2016, an increase of 48.8% from the third quarter of 2015 when gas royalty revenue was $1,689,072. This increase in gas royalty revenue resulted from a volume increase of 31.2% in the third quarter of 2016 compared to the third quarter of 2015, in addition to a 13.2% increase in the average price received.
In the third quarter of 2016, the Trust sold approximately 647 acres of land for a total of $485,505, or approximately $750 per acre. In the third quarter of 2015, the Trust sold approximately 267.85 acres for a total of $1,888,635, or approximately $7,051 per acre.
Easements and sundry income was $5,200,748 for the third quarter of 2016, a decrease of 48.5% compared to the third quarter of 2015 when easements and sundry income was $10,091,161. This decrease resulted primarily from a decrease in pipeline easement income and, to a lesser extent, seismic permit income. These decreases were partially offset by an increase in sundry income. The Trust is currently moving toward the use of term easements (in lieu of perpetual) which will require us to gradually recognize the income for easements over the life of the agreement, in lieu of recognizing it all at the beginning of the term of the easement. As a result, $3,240,403 of easement income received in the third quarter of 2016 was deferred and therefore not reflected in the statements of income and total comprehensive income. This was also the primary reason for the 270.1% increase in unearned revenue. This category of income is unpredictable and may vary significantly from quarter to quarter.
Other income, including interest on investments, was $132,123 for the third quarter of 2016 compared to $146,307 for the third quarter of 2015, a decrease of 9.7%. Grazing lease income was $122,769 for the third quarter of 2016, compared to $133,333 for the third quarter of 2015, a decrease of 7.9%. Interest on notes receivable for the third quarter of 2016 was $1,854, a decrease of 67.4% compared to the third quarter of 2015 when interest on notes receivable was $5,684. This decrease is primarily due to principal prepayments received on notes due to the Trust. As of September 30, 2016, notes receivable for land sales were $94,971 compared to $139,114 at September 30, 2015, a decrease of 31.7%. Interest income earned from investments was $7,500 for the third quarter of 2016, compared to $7,290 for the third quarter of 2015, an increase of 2.9%. Interest on investments is affected by such variables as cash on hand for investment and the rate of interest on short-term investments.
Taxes, other than income taxes, were $497,244 for the third quarter of 2016 compared to $362,556 for the third quarter of 2015, an increase of 37.1%. This increase is primarily attributable to an increase in oil and gas production taxes which resulted from the increase in oil and gas royalty revenues discussed above.
General and administrative expenses were $676,332 for the third quarter of 2016 compared to $590,984 for the third quarter of 2015, an increase of 14.4%. This increase was primarily due to increases in employment expenses, and to a lesser extent, legal fees.
Results of Operations for the
Nine
Months Ended
September
30, 201
6
Compared to the
Nine
Months Ended
September
30, 20
15
Earnings per Sub-share certificate were $3.28 for the first nine months of 2016, compared to $4.99 for the first nine months of 2015. Total operating and investing revenues were $42,367,466 for the first nine months of 2016 compared to $64,721,235 for the first nine months of 2015, a decrease of 34.5%. This decrease in revenue and earnings was due primarily to decreases in land sales and easements and sundry income, which were partially offset by an increase in oil and gas royalty revenue.
Oil and gas royalty revenue was $20,932,329 for the first nine months of 2016, compared to $18,285,504 for the first nine months of 2015, an increase of 14.5%. Oil royalty revenue was $15,387,710 for the first nine months of 2016, an increase of 10.8% from the first nine months of 2015 when oil royalty revenue was $13,884,267. Crude oil production subject to the Trust’s royalty interests increased 52.3% in the first nine months of 2016 compared to the first nine months of 2015. This increase in production was offset by a 27.2% decrease in the average price per royalty barrel of crude oil during the first nine months of 2016 compared to the first nine months of 2015. Gas royalty revenue was $5,544,619 for the first nine months of 2016, an increase of 26.0% from the first nine months of 2015 when gas royalty revenue was $4,401,237. This increase in gas royalty revenue resulted from a volume increase of 38.6% in the first nine months of 2016 compared to the first nine months of 2015, which was partially offset by a price decrease of 9.2%.
During the first nine months of 2016, the Trust sold approximately 656 acres of land for a total of $571,505 or approximately $871 per acre. In the first nine months of 2015, the Trust sold approximately 20,900 acres for a total of $22,316,635, or approximately $1,068 per acre.
Easements and sundry income was $20,470,691 for the first nine months of 2016, a decrease of 13.6% compared to the first nine months of 2015 when easements and sundry income was $23,697,100. This decrease resulted primarily from a decrease in pipeline easement income, which was partially offset by an increase in sundry income. The Trust is currently moving toward the use of term easements (in lieu of perpetual) which will require us to gradually recognize the income for easements over the life of the agreement, in lieu of recognizing it all at the beginning of the term of the easement. As a result, $5,726,314 of easement income received in the first nine months of 2016 was deferred and therefore not reflected in the statements of income and comprehensive income. This was also the primary reason for the 270.1% increase in unearned revenue. This category of income is unpredictable and may vary significantly from quarter to quarter.
Other income, including interest on investments, was $392,941 for the first nine months of 2016 compared to $421,996 for the first nine months of 2015, a decrease of 6.9%. Grazing lease income was $367,078 for the first nine months of 2016, compared to $362,375 for the first nine months of 2015, an increase of 1.3%. Interest on notes receivable for the first nine months of 2016 was $6,577, a decrease of 82.9% compared to the first nine months of 2015 when interest on notes receivable was $38,378. This decrease is primarily due to principal prepayments received on notes due to the Trust. As of September 30, 2016, notes receivable for land sales were $94,971 compared to $139,114 at September 30, 2015, a decrease of 31.7%. Interest income earned from investments was $19,286 for the first nine months of 2016, compared to $21,243 for the first nine months of 2015, a decrease of 9.2%. Interest on investments is affected by such variables as cash on hand for investment and the rate of interest on short-term investments.
Taxes, other than income taxes, were $1,238,046 for the first nine months of 2016 compared to $1,081,136 for the first nine months of 2015, an increase of 14.5%. This increase is primarily attributable to an increase in oil and gas production taxes which resulted from the increase in oil and gas royalty revenue discussed above.
General and administrative expenses were $2,123,860 for the first nine months of 2016 compared to $1,702,248 for the first nine months of 2015, an increase of 24.8%. This increase is primarily due to an ongoing project to enhance the information systems of the Trust and, to a lesser extent, an increase in non-recurring legal fees and employment expenses.
Liquidity and Capital Resources
The Trust’s principal sources of liquidity are revenues from oil and gas royalties, easements and sundry income, and land sales. In the past, those sources have generated more than adequate amounts of cash to meet the Trust’s needs and, in the opinion of management, should continue to do so in the foreseeable future.