Item 2.
|
Trustees Discussion and Analysis
|
Forward Looking Information
Certain information included in this report contains, and other materials filed or to be filed by the Trust with the Securities and Exchange Commission (as
well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. Such forward looking statements may be or may concern, among other things, capital expenditures, drilling activity, development activities, production efforts and volumes,
hydrocarbon prices and the results thereof, and regulatory matters. 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 are within the Trustees control, that may cause such expectations not to be realized, including, among other things, factors such as
actual oil and gas prices and the recoverability of reserves, capital expenditures, general economic conditions, actions and policies of petroleum-producing nations and other changes in the domestic and international energy markets. Such forward
looking statements generally are accompanied by words such as estimate, expect, predict, anticipate, goal, should, assume, believe, or other words that
convey the uncertainty of future events or outcomes.
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
For the quarter ended September 30, 2017, royalty income received by the Trust amounted to $6,095,517 compared to royalty income of $6,554,901
during the third quarter of 2016. The decrease in royalty income is primarily attributable to a decrease in oil and gas production of both oil and gas but offset by an increase in both oil and gas prices for the quarter ending September 30,
2017, as compared to the quarter ended September 30, 2016. Average oil and gas prices were $43.72 and $3.11 for the quarter ending September 30, 2017 compared to $42.94 and $2.01 for the quarter ended September 30, 2016.
Interest income for the quarter ended September 30, 2017, was $3,270 compared to $796 during the third quarter of 2017. The increase in interest income
is primarily attributable to substantially increased amounts of funds available for investment, primarily the reserve of $1,050,000 in the Trust account. Total expenses during the third quarter of 2017 amounted to $198,472 compared to $311,802
during the third quarter of 2016. The decrease in total expenses can be primarily attributed to decreased expense for professional services and no additional reserve for expenses.
14
These transactions resulted in distributable income for the quarter ended September 30, 2017, of $5,900,315
or $.13 per Unit of beneficial interest. Distributions of $0.040754, $0.045610 and $0.040226 per Unit were made to Unit holders of record as of July 31, 2017, August 31, 2017, and September 29, 2017, respectively. For the third
quarter of 2016, distributable income was $6,243,895
or $.13
per Unit of beneficial interest.
Royalty income for the Trust for the third
quarter of the calendar year is associated with actual oil and gas production for the period of May, June and July 2017 from the properties from which the Trusts net overriding royalty interests (Royalties) were carved. Oil and gas
sales attributable to the Royalties and the properties from which the Royalties were carved are as follows:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Royalties:
|
|
|
|
|
|
|
|
|
Oil sales (Bbls)
|
|
|
120,217
|
|
|
|
142,066
|
|
Gas sales (Mcf)
|
|
|
419,229
|
|
|
|
564,577
|
|
|
|
|
Properties From Which The Royalties Were Carved:
|
|
|
|
|
|
|
|
|
Oil:
|
|
|
|
|
|
|
|
|
Total oil sales (Bbls)
|
|
|
236,214
|
|
|
|
282,433
|
|
Average per day (Bbls)
|
|
|
2,568
|
|
|
|
3,070
|
|
Average price per Bbl
|
|
$
|
43.72
|
|
|
$
|
42.94
|
|
|
|
|
Gas:
|
|
|
|
|
|
|
|
|
Total gas sales (Mcf)
|
|
|
1,074,084
|
|
|
|
1,477,878
|
|
Average per day (Mcf)
|
|
|
11,675
|
|
|
|
16,064
|
|
Average price per Mcf
|
|
$
|
3.11
|
|
|
$
|
2.01
|
|
The average received price of oil increased to an average price per barrel of $43.72 per Bbl in the third quarter of 2017,
compared to $42.94 per Bbl in the third quarter of 2016 due to worldwide market variables. The Trustee has been advised by ConocoPhillips that for the period of August 1, 1993, through September 30, 2017, the oil from the Waddell Ranch
properties was being sold under a competitive bid to a third party. The average price of gas (including natural gas liquids) increased
from $2.01 per Mcf in the third quarter of 2016 to $3.11 per Mcf in the third quarter of 2017 due to change
in overall market variables.
15
Since the oil and gas sales attributable to the Royalties are based on an allocation formula that is dependent on
such factors as price and cost (including capital expenditures), the production amounts in the Royalties section of the above table do not provide a meaningful comparison. Oil sales volumes decreased and gas sales volumes decreased from the
Underlying Properties (as defined in the Trusts Annual Report on Form
10-K
for the year ended December 31, 2016) for the applicable period in 2017 compared to 2016.
Capital expenditures for drilling, remedial and maintenance activities on the Waddell Ranch properties during the third quarter of 2017 totaled $572,000 as
compared to $851,000 for the third quarter of 2016. ConocoPhillips has informed the Trustee that the 2017 capital expenditures budget has been approved at $3.2 million (gross) for the Waddell Ranch properties. The total amount of capital
expenditures for 2016 with regard to the Waddell Ranch properties totaled $11.55 million (gross).
The Trustee has been advised that there were 0
workover wells completed, 0 new wells completed, 0 new wells in progress and 0 workover wells in progress during the three months ended September 30, 2017, as compared to 0 workover wells completed, 0 new wells completed, 0 new wells in
progress and 0 workover wells in progress for the three months ended September 30, 2016, on the Waddell Ranch properties. There were various facility projects in progress for the third quarter of 2017.
Lease operating expenses and property taxes totaled $5 million (gross) for the third quarter of 2017, compared to $5.1 million (gross) for the same
period in 2016 on the Waddell Ranch properties due to decreased maintenance work and reduction of property taxes.
Nine Months Ended September 30,
2017 Compared to Nine Months Ended September 30, 2016
For the nine months ended September 30, 2017, royalty income received by the Trust
amounted to $23,121,478
compared to royalty income of $13,704,703 for the nine months ended September 30, 2016. The increase in royalty income is primarily attributable to a reduction of capital expenditures by the operator and an
increase in oil and gas prices offset by a decline in both oil and gas production for the nine months ending September 30, 2017, as compared to the nine months ended September 30, 2016. Average oil and gas prices were $45.72 and $3.14
for the nine months ending September 30, 2017 compared to $36.57 and $1.97 for the nine months ended September 30, 2016.
Interest income
for the nine months ended September 30, 2017, was $8,608
compared to $1,112 during the nine months ended September 30, 2016. The increase
in interest income is primarily attributable to substantially increased amounts of
funds available for investment, including the reserve for expense. Total expenses during the nine months ending September 30, 2017, amounted to $1,068,926 compared to $1,491,649 during the nine months ended September 30, 2016. The decrease
in total expenses can be primarily attributed to decreased expense for professional services and no additional reserve for expenses.
16
These transactions resulted in distributable income for the nine months ended September 30, 2017 of
$22,061,160, or $.47
per Unit. For the nine months ended September 30, 2016, distributable income was $12,214,166, or $.26 per Unit.
Royalty
income for the Trust for the nine months ended September 30, 2017, is associated with actual oil and gas production for the period November 2016 through July 2017 from the properties from which the Royalties were carved. Oil and gas production
attributable to the Royalties and the properties from which the Royalties were carved are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
2017
|
|
|
2016
|
|
Royalties:
|
|
|
|
|
|
|
|
|
Oil sales (Bbls)
|
|
|
298,085
|
|
|
|
409,349
|
|
Gas sales (Mcf)
|
|
|
1,100,970
|
|
|
|
1,122,229
|
|
|
|
|
Properties From Which The Royalties Were Carved:
|
|
|
|
|
|
|
|
|
Oil:
|
|
|
|
|
|
|
|
|
Total oil sales (Bbls)
|
|
|
720,729
|
|
|
|
889,288
|
|
Average per day (Bbls)
|
|
|
2,630
|
|
|
|
3,246
|
|
Average price per Bbl
|
|
$
|
45.72
|
|
|
$
|
36.57
|
|
|
|
|
Gas:
|
|
|
|
|
|
|
|
|
Total gas sales (Mcf)
|
|
|
3,228,715
|
|
|
|
4,218,954
|
|
Average per day (Mcf)
|
|
|
11,784
|
|
|
|
22,930
|
|
Average price per Mcf
|
|
$
|
3.14
|
|
|
$
|
1.97
|
|
The average received price of oil increased
during the nine months ended September 30, 2017 to $45.72 per barrel
compared to $36.57 per barrel for the same period in 2016. The increase in the average price of oil is primarily due to worldwide market variables. The increase
in the average price of gas (including natural gas liquids) from $1.97
per
Mcf for the nine months ended September 30, 2016, to $3.14
per Mcf for the nine months ended September 30, 2017, is primarily the result of a change in overall market variables.
17
Since the oil and gas sales volumes attributable to the Royalties are based on an allocation formula that is
dependent on such factors as price and cost (including capital expenditures), the production amounts in the Royalties section of the above table do not provide a meaningful comparison. Both oil and gas sales volumes from the properties from which
the Royalties are carved have decreased for the applicable period of 2017 compared to 2016.
Capital expenditures for the Waddell Ranch properties for the
nine months ended September 30, 2017 totaled $1.2
million (gross) compared to $4.0 million (gross) to the Trust for the same period in 2016. ConocoPhillips has previously advised the Trust that the 2017 capital expenditures
budget for the Waddell Ranch properties is $3.2 million (gross).
The Trustee has been advised that 0 workover wells were completed and 0 new wells
were completed (0 vertical, 0 horizontal) on the Waddell Ranch properties during the nine months ended September 30, 2017, as compared to 0 workover wells completed and 0 new wells completed on the Waddell Ranch properties during the nine
months ended September 30, 2016. There were various facility projects in progress for the third quarter of 2017.
Lease operating expenses and
property taxes totaled $11.9
million for the nine months ended September 30, 2017, compared to $17.1 million for the same period in 2016. The decrease in lease operating expense is primarily attributable to decreased spending
on facilities and maintenance.
Calculation of Royalty Income
The Trusts royalty income is computed as a percentage of the net profit from the operation of the properties in which the Trust owns net overriding
royalty interests. These percentages of net profits are 75% and 95% in the case of the Waddell Ranch properties and the Texas Royalty properties, respectively. Royalty income received by the Trust for the three months ended September 30, 2017
and 2016, respectively, were computed as shown in the table below:
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED SEPTEMBER 30
|
|
|
|
2017
|
|
|
2016
|
|
|
|
WADDELL
RANCH
PROPERTIES
|
|
|
TEXAS
ROYALTY
PROPERTIES
|
|
|
WADDELL
RANCH
PROPERTIES
|
|
|
TEXAS
ROYALTY
PROPERTIES
|
|
Gross proceeds of sales from the Underlying Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil proceeds
|
|
$
|
7,115,106
|
|
|
$
|
3,211,420
|
|
|
$
|
9,039,115
|
|
|
$
|
3,088,046
|
|
Gas proceeds
|
|
|
2,941,147
|
|
|
|
401,527
|
|
|
|
2,642,591
|
|
|
|
321,731
|
|
Other (adjustment)
|
|
|
54,404
|
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,110,657
|
|
|
|
3,612,947
|
|
|
|
11,681,706
|
|
|
|
3,409,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
316,070
|
|
|
|
124,355
|
|
|
|
399,953
|
|
|
|
94,991
|
|
Gas
|
|
|
(29,322
|
)
|
|
|
18,469
|
|
|
|
130,895
|
|
|
|
13,987
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense and property tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
|
|
|
5,044,748
|
|
|
|
375,000
|
|
|
|
4,773,880
|
|
|
|
465,000
|
|
Capital expenditures
|
|
|
572,564
|
|
|
|
|
|
|
|
1,229,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,904,060
|
|
|
|
517,824
|
|
|
|
6,533,850
|
|
|
|
573,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits
|
|
|
4,206,597
|
|
|
|
3,095,123
|
|
|
|
5,147,856
|
|
|
|
2,835,799
|
|
Net overriding royalty interests
|
|
|
75
|
%
|
|
|
95
|
%
|
|
|
75
|
%
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income
|
|
$
|
3,154,948
|
|
|
|
2,940,367
|
|
|
$
|
3,860,892
|
|
|
|
2,694,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
As of September 30, 2017, the cumulative NPI deficit is zero.
|
19
Critical Accounting Policies and Estimates
A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trusts financial statements
is included in Item 7 of the Trusts Annual Report on Form
10-K
for the year ended December 31, 2016. There have been no significant changes to the critical accounting policies during the nine months
ended September 30, 2017.
Distributable Income Per Unit
Basic distributable income per Unit is computed by dividing distributable income by the weighted average of 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 accounting pronouncements that are expected to have a significant impact on the Trusts financial statements.