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
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, (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 June 30, 201
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Compared to the Quarter Ended June 30, 20
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Earnings per Sub-share certificate were $2.12 for the second quarter of 2017, compared to $1.26 for the second quarter of 2016. Total operating and investing revenues were $27,358,119 for the second quarter of 2017 compared to $16,196,110 for the second quarter of 2016, an increase of 68.9%. 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 $12,882,976 for the second quarter of 2017, compared to $6,866,702 for the second quarter of 2016, an increase of 87.6%. Oil royalty revenue was $9,192,884 for the second quarter of 2017, an increase of 67.0% from the second quarter of 2016 when oil royalty revenue was $5,503,313. Crude oil production subject to the Trust’s royalty interest increased 29.1% in the second quarter of 2017 compared to the second quarter of 2016. In addition, the average price per royalty barrel of crude oil received during the second quarter of 2017 was 29.3% higher than the average price received during the second quarter of 2016. Gas royalty revenue was $3,690,092 for the second quarter of 2017, an increase of 170.7% from the second quarter of 2016 when gas royalty revenue was $1,363,389. This increase in gas royalty revenue resulted from both price and volume increases of 67.8% and 61.2%, respectively, in the second quarter of 2017 compared to the second quarter of 2016.
In the second quarter of 2017, the Trust sold approximately 11.02 acres of land for a total of $220,400, or approximately $20,000 per acre. No land sales occurred in the second quarter of 2016.
Easements and sundry income was $14,120,696 for the second quarter of 2017, an increase of 53.5% compared to the second quarter of 2016 when easements and sundry income was $9,198,970. This increase resulted primarily from increases in pipeline easement income and water sales, and, to a lesser extent, material sales. Pipeline easement income was $7,827,726 (before deferral of term easements) for the second quarter of 2017, compared to $6,379,792 (before deferral of term easements) for the second quarter of 2016, an increase of 22.7%. 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, $5,936,543 of easement income received in the second quarter of 2017 and $2,485,911 of easement income received in the second quarter of 2016 was deferred and therefore not reflected in the consolidated statements of income and total comprehensive income. This was the primary reason for the 120.0% increase in unearned revenue. Water sales for the second quarter of 2017 were $6,838,747 compared to $2,276,813 in the second quarter of 2016 an increase of 200.4%. This category of income is unpredictable and may vary significantly from quarter to quarter.
Other income, including interest on investments, was $134,047 for the second quarter of 2017 compared to $130,438 for the second quarter of 2016, an increase of 2.8%. Grazing lease income was $123,457 for the second quarter of 2017, compared to $122,234 for the second quarter of 2016, an increase of 1.0%. Interest on notes receivable for the second quarter of 2017 was $1,025, a decrease of 56.6% compared to the second quarter of 2016 when interest on notes receivable was $2,360. This decrease is primarily due to principal prepayments received on notes due to the Trust. As of June 30, 2017, notes receivable for land sales were $46,389 compared to $111,781 at June 30, 2016, a decrease of 58.5%. Interest income earned from investments was $9,565 for the second quarter of 2017, compared to $5,844 for the second quarter of 2016, an increase of 63.7%. 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 $762,207 for the second quarter of 2017 compared to $394,217 for the second quarter of 2016, an increase of 93.3%. 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 $1,854,463 for the second quarter of 2017 compared to $698,423 for the second quarter of 2016, an increase of 165.5%. This increase was primarily due to an increase in professional fees related to a strategic review of the company and an increase in employment expenses due to the increase in drilling and exploration activity on land owned by the Trust.
Results of Operations for the Six Months Ended June 30, 201
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Compared to the Six Months Ended June 30, 20
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Earnings per Sub-share certificate were $4.00 for the first six months of 2017, compared to $2.16 for the first six months of 2016. Total operating and investing revenues were $51,596,381 for the first six months of 2017 compared to $28,094,213 for the first six months of 2016, an increase of 83.7%. 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 $24,075,738 for the first six months of 2017, compared to $12,477,453 for the first six months of 2016, an increase of 93.0%. Oil royalty revenue was $17,271,801 for the first six months of 2017, an increase of 82.9% from the first six months of 2016 when oil royalty revenue was $9,445,507. Crude oil production subject to the Trust’s royalty interest increased 29.9% in the first six months of 2017 compared to the first six months of 2016. In addition, the average price per royalty barrel of crude oil received during the first six months of 2017 was 40.8% higher than the average price received during the first six months of 2016. Gas royalty revenue was $6,803,937 for the first six months of 2017, an increase of 124.4% from the first six months of 2016 when gas royalty revenue was $3,031,946. This increase in gas royalty revenue resulted from both price and volume increases of 50.6% and 49.4% respectively, in the first six months of 2017 compared to the first six months of 2016.
During the first six months of 2017, the Trust sold approximately 11.02 acres of land for a total of $220,400, or approximately $20,000 per acre. In the first six months of 2016, the Trust sold approximately 8.56 acres for a total of $86,000, or approximately $10,047 per acre.
Easements and sundry income was $27,032,474 for the first six months of 2017, an increase of 77.0% compared to the first six months of 2016 when easements and sundry income was $15,269,943. This increase resulted primarily from increases in pipeline easement income and water sales, and, to a lesser extent, material sales. Pipeline easement income was $18,951,057 (before deferral of term easements) for the first six months of 2017, compared to $9,497,329 (before deferral of term easements) for the first six months of 2016, an increase of 99.5%. 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, $12,743,433 of easement income received in the first six months of 2017 and $2,485,911 of easement income received in the first six months of 2016 was deferred and therefore not reflected in the consolidated statements of income and total comprehensive income. This was the primary reason for the 120.0% increase in unearned revenue. Water sales for the first six months of 2017 were $11,666,316 compared to $3,662,521 in the first six months of 2016 an increase of 218.5%. This category of income is unpredictable and may vary significantly from quarter to quarter.
Other income, including interest on investments, was $267,769 for the first six months of 2017 compared to $260,817 for the first six months of 2016, an increase of 2.7%. Grazing lease income was $246,608 for the first six months of 2017, compared to $244,309 for the first six months of 2016, an increase of 0.9%. Interest on notes receivable for the first six months of 2017 was $2,102, a decrease of 55.5% compared to the first six months of 2016 when interest on notes receivable was $4,723. This decrease is primarily due to principal prepayments received on notes due to the Trust. As of June 30, 2017, notes receivable for land sales were $46,389 compared to $111,781 at June 30, 2016, a decrease of 58.5%. Interest income earned from investments was $19,059 for the first six months of 2017, compared to $11,785 for the first six months of 2016, an increase of 61.7%. 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 $1,421,966 for the first six months of 2017 compared to $740,801 for the first six months of 2016, an increase of 91.9%. 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 $3,319,407 for the first six months of 2017 compared to $1,447,528 for the first six months of 2016, an increase of 129.3%. This increase was primarily due to an increase in professional fees related to a strategic review of the company and an increase in employment expenses due to the increase in drilling and exploration activity on land owned by the Trust.
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.