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, 2016, (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 March 31, 2017 Compared to the Quarter Ended March 31, 2016
Earnings per Sub-share certificate were $1.88 for the first quarter of 2017, compared to $.90 for the first quarter of 2016. Total operating and investing revenues were $24,238,262 for the first quarter of 2017 compared to $11,898,103 for the first quarter of 2016, an increase of 103.7%. This increase in revenue and earnings was due primarily to increases in easements and sundry income and oil and gas royalty revenue.
Oil and gas royalty revenue was $11,192,762 for the first quarter of 2017, compared to $5,610,751 for the first quarter of 2016, an increase of 99.5%. Oil royalty revenue was $8,078,917 for the first quarter of 2017, an increase of 104.9% from the first quarter of 2016 when oil royalty revenue was $3,942,194. Crude oil production subject to the Trust’s royalty interest increased 38.6% in the first quarter of 2017 compared to the first quarter of 2016. In addition, the average price per royalty barrel of crude oil during the first quarter of 2017 was 47.8% higher than the average price prevailing during the first quarter of 2016. Gas royalty revenue was $3,113,845 for the first quarter of 2017, an increase of 86.6% from the first quarter of 2016 when gas royalty revenue was $1,668,557. This increase in gas royalty revenue resulted from both volume and price increases of 36.4% and 37.0% respectively, in the first quarter of 2017 compared to the first quarter of 2016.
No land sales occurred in the first quarter of 2017. In the first quarter of 2016, the Trust sold approximately 8.56 acres of land for a total of $86,000, or approximately $10,047 per acre.
Easements and sundry income was $12,911,778 for the first quarter of 2017, an increase of 112.7% compared to the first quarter of 2016 when easements and sundry income was $6,070,973. This increase resulted primarily from an increase in pipeline easement income and water sales, and, to a lesser extent, material sales. Pipeline easement income was $11,123,331 (before deferral of term easements) for the first quarter of 2017, compared to $3,117,537 for the first quarter of 2016, an increase of 256.8%. 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, $6,806,890 of easement income received in the first quarter of 2017 was deferred and therefore not reflected in the statements of income and total comprehensive income. This is also the primary reason for the 63.8% 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 $133,722 for the first quarter of 2017 compared to $130,379 for the first quarter of 2016, an increase of 2.6%. Grazing lease income was $123,152 for the first quarter of 2017, compared to $122,075 for the first quarter of 2016, an increase of 0.9%. Interest on notes receivable for the first quarter of 2017 was $1,076, a decrease of 54.4% compared to the first quarter of 2016 when interest on notes receivable was $2,362. This decrease was primarily due to principal prepayments received on notes due to the Trust. As of March 31, 2017, notes receivable for land sales were $58,010 compared to $134,868 at March 31, 2016, a decrease of 57.0%. Interest income earned from investments was $9,494 for the first quarter of 2017, compared to $5,942 for the first quarter of 2016, an increase of 59.8%. 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 $659,759 for the first quarter of 2017 compared to $346,584 for the first quarter of 2016, an increase of 90.4%. This increase is primarily attributable to an increase in oil and gas production tax which resulted from the increase in oil and gas royalty revenue discussed above.
General and administrative expenses were $1,464,944 for the first quarter of 2017 compared to $749,105 for the first quarter of 2016, an increase of 95.6%. This increase was primarily due to increases in professional fees, legal fees, and to a lesser extent, an increase in employment expenses due to the increase in drilling and exploration activity on land owned by the Trust. As of March 31, 2017, the Trust had twelve (12) full-time employees along with several independent contractors. The Trust also incurred additional legal and professional fees related to the Special Meeting of the Holders of Sub-share Certificates of Proprietary Interest (“Sub-share Certificates”) on January 12, 2017 (the “Special Meeting”) where David E. Barry was elected as a Trustee to fill the vacancy created by the death of James K. Norwood.
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.