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
1
6
, (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
(the “SEC”)
, 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
7
Compared to the Quarter Ended
September
30, 20
1
6
Earnings per Sub-share certificate
.
Earnings per Sub-share certificate were $3.36 for the third quarter of 2017, compared to $1.12 for the third quarter of 2016. Total operating and investing revenues were $42,496,527 for the third quarter of 2017 compared to $14,273,252 for the third quarter of 2016, an increase of 197.7%. This increase in revenue and earnings was due primarily to increases in oil and gas royalty revenue, easements and sundry income, and water sales and royalty revenue. See further discussion of these revenue increases below.
Oil and gas royalt
ies.
Oil and gas royalty revenue was $21,212,568 (including $7,710,543 for the arbitration settlement with Chevron U.S.A., Inc. previously disclosed in our Form 8-K filed with the SEC on September 14, 2017, the “Chevron Settlement”) for the third quarter of 2017, compared to $8,454,876 for the third quarter of 2016, an increase of 150.9% (59.7% excluding the Chevron Settlement). Oil royalty revenue was $9,703,529 (excluding the Chevron Settlement) for the third quarter of 2017, an increase of 63.3% from the third quarter of 2016 when oil royalty revenue was $5,942,203. This increase is due to the combined effect of a 55.3% increase in crude oil production, subject to the Trust’s royalty interest, and a 5.1% increase in the average price per royalty barrel of crude oil during the third quarter of 2017 compared to the third quarter of 2016. Gas royalty revenue was $3,798,496 (excluding the Chevron Settlement) for the third quarter of 2017, an increase of 51.2% from the third quarter of 2016 when gas royalty revenue was $2,512,673. This increase in gas royalty revenue resulted from a volume increase of 58.2% in the third quarter of 2017 compared to the third quarter of 2016, partially offset by a 4.5% decrease in the average price received.
Easements and sundry income
. Easements and sundry income was $13,221,548 for the third quarter of 2017, an increase of 351.5% compared to the third quarter of 2016 when easements and sundry income was $2,928,095. This increase resulted primarily from increases in pipeline easement income and, to a lesser extent, sundry lease rental income, temporary permit income, and material sales. Pipeline easement income was $14,490,663 (before deferral of term easements) for the third quarter of 2017, compared to $4,313,407 (before deferral of term easements) for the third quarter of 2016, an increase of 235.9%. During the third quarter of 2017, $10,292,827 of easement income was deferred compared to $3,240,403 in the third quarter of 2016. This category of income was the primary reason for the 217.9% increase in unearned revenue on the Trust’s consolidated balance sheets. This category of income is unpredictable and may vary significantly from quarter to quarter.
Water sales and royalties
. Water sales and royalty revenue was $7,917,581 for the third quarter of 2017, compared to $2,272,653 for the third quarter of 2016, an increase of 248.4%. This increase in water sales and royalties is due primarily to the Trust’s decision to develop water well fields on its land along with an increase in the royalties received from existing agreements.
Land sales
. 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. There were no land sales in the third quarter of 2017.
Other
income
.
Other income, including interest on investments, was $144,830 for the third quarter of 2017 compared to $132,123 for the third quarter of 2016, an increase of 9.6%. Grazing lease income was $123,913 for the third quarter of 2017, compared to $122,769 for the third quarter of 2016. Interest income earned from investments was $20,073 for the third quarter of 2017, compared to $7,500 for the third quarter of 2016, an increase of 167.6%. 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
. Taxes, other than income taxes, were $796,633 for the third quarter of 2017 compared to $497,244 for the third quarter of 2016, an increase of 60.2%. 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
.
General and administrative expenses were $2,608,455 for the third quarter of 2017 compared to $676,332 for the third quarter of 2016, an increase of 285.7%. This increase was primarily due to increases in employment expenses, including contract labor costs and, to a lesser extent, non-recurring legal fees and depreciation. Employment costs were higher for third quarter 2017 due to the hiring of additional staff and contractors to address the ongoing increase in drilling and exploration activity on land owned by the Trust.
Results of Operations for the
Nine
Months Ended
September
30, 201
7
Compared to the
Nine
Months Ended
September
30, 20
1
6
Earnings per Sub-share certificate
.
Earnings per Sub-share certificate were $7.37 for the first nine months of 2017, compared to $3.28 for the first nine months of 2016. Total operating and investing revenues were $94,092,908 for the first nine months of 2017 compared to $42,367,466 for the first nine months of 2016, an increase of 122.1%. This increase in revenue and earnings was due primarily to increases in oil and gas royalty revenue, easements and sundry income, and water sales and royalty revenue. See further discussion of these revenue increases below.
Oil and gas royalty revenue
.
Oil and gas royalty revenue was $45,288,306 (including $7,710,543 for the previously announced Chevron Settlement) for the first nine months of 2017, compared to $20,932,329 for the first nine months of 2016, an increase of 116.4% (79.5% excluding the Chevron Settlement). Oil royalty revenue was $26,975,330 (excluding the Chevron Settlement) for the first nine months of 2017, an increase of 75.3% from the first nine months of 2016 when oil royalty revenue was $15,387,710. This increase is due to the combined effect of a 39.0% increase in crude oil production, subject to the Trust’s royalty interest, and a 26.1% increase in the average price per royalty barrel of crude oil during the third quarter of 2017 compared to the third quarter of 2016. Gas royalty revenue was $10,602,433 (excluding the Chevron Settlement) for the first nine months of 2017, an increase of 91.2% from the first nine months of 2016 when gas royalty revenue was $5,544,619. This increase in gas royalty revenue resulted from a volume increase of 52.7% in the first nine months of 2017 compared to the first nine months of 2016, coupled with a price increase of 25.3%.
Easements and sundry income
. Easements and sundry income was $28,587,706 for the first nine months of 2017, an increase of 96.7% compared to the first nine months of 2016 when easements and sundry income was $14,535,517. This increase resulted primarily from increases in pipeline easement income, temporary permit income, and material sales. Pipeline easement income was $33,441,720 (before deferral of term easements) for the first nine months of 2017, compared to $13,810,736 (before deferral of term easements) for the first nine months of 2016, an increase of 142.1%. During the first nine months of 2017, $23,036,260 of easement income was deferred compared to $5,726,314 in the first nine months of 2016. This category of income was the primary reason for the 217.9% increase in unearned revenue on the Trust’s consolidated balance sheets. This category of income is unpredictable and may vary significantly from quarter to quarter.
Water sales and royalties
. Water sales and royalty revenue was $19,583,897 for the first nine months of 2017, compared to $5,935,174 for the first nine months of 2016, an increase of 230.0%. This increase in water sales and royalties is due primarily to the Trust’s decision to develop water well fields on its land along with an increase in the royalties received from existing agreements.
Land sales
. During the first nine 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 nine months of 2016, the Trust sold approximately 656 acres for a total of $571,505, or approximately $871 per acre.
Other income
.
Other income, including interest on investments, was $412,599 for the first nine months of 2017 compared to $392,941 for the first nine months of 2016, an increase of 5.0%. Grazing lease income was $370,521 for the first nine months of 2017, compared to $367,078 for the first nine months of 2016. Interest income earned from investments was $39,132 for the first nine months of 2017, compared to $19,286 for the first nine months of 2016, an increase of 102.9%. 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
. Taxes, other than income taxes, were $2,218,599 for the first nine months of 2017 compared to $1,238,046 for the first nine months of 2016, an increase of 79.2%. 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
.
General and administrative expenses were $5,927,862 for the first nine months of 2017 compared to $2,123,860 for the first nine months of 2016, an increase of 179.1%. This increase is primarily due to an increase in professional fees related to a strategic review of the Trust and an increase in employment expenses (including contract labor) related to the hiring of additional staff to address the ongoing 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.