Mineral Revenue Recognition

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Some chatter about this yesterday.  From the K.

https://www.sec.gov/Archives/edgar/data/97517/000009751720000017/tpl-20191231.htm

Revenue Recognition

Oil and Gas Royalties

Oil and gas royalties are received in connection with royalty interests owned by the Trust. Oil and gas royalties are reported net of production taxes and are recognized as revenue when crude oil and gas products are removed from the respective mineral reserve locations. Oil and gas royalty payments are generally received one to two months after the crude oil and gas products are removed. An accrual is included in accrued receivables for amounts not received during the month removed based on historical trends.

The oil and gas royalties which the Trust receives are dependent upon the market prices for oil and gas. The market prices for oil and gas are subject to national and international economic and political conditions and, in the past, have been subject to significant price fluctuations.

The Trust has analyzed public reports of drilling activities by the oil companies operating where the Trust has an oil and gas royalty interest in an effort to identify unpaid royalties associated with royalty interests owned by the Trust. Rights to certain oil and gas royalties believed by the Trust to be due and payable may be subject to dispute with the oil company involved as a result of disagreements with respect to drilling and related engineering information. Disputed oil and gas royalties are recorded when these contingencies are resolved.

8 thoughts on “Mineral Revenue Recognition”

  1. It will be interesting when the Q comes out if their accrual is based on historical trends, or historical volume trends with decline adjusted oil prices.

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  2. So it’s a 4-8 week lagging indicator, currently reported royalty revenues.

    Also, I think it’s worth noting the bit in the last paragraph: that they don’t recognize royalty revenue in dispute until resolution. That’s a positive accounting policy, in my opinion.

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  3. If I am reading this right, it seems they account for the royalty (unless it is being disputed) before the royalty is received 1-2 months later?

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    • Yea, they book it as a receivable. Check out the most recent annual report for a breakdown in the footnotes (see page F-7). It says essentially the same thing (it might even be word-for-word, not sure) as what they put out for Q1.

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  4. Here is what the Q from September of 2019 says about accrual of oil and gas royalties:

    “Our most critical accounting policies and estimates include: accrual of oil and gas royalties and gain recognition on land sales. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2018 Annual Report on Form 10-K.” (Page 18)

    https://www.sec.gov/ix?doc=/Archives/edgar/data/97517/000009751719000049/tpl-20190930.htm

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  5. Does this make sense that prices received for crude were higher in 2020 than 2019?

    Oil and gas royalty revenue was $42.4 million for the first quarter ended March 31, 2020, compared with $33.2 million for the first quarter ended March 31, 2019, an increase of 27.5%. Crude oil and gas production subject to the Trust’s royalty interests increased 11.9% and 31.4%, respectively, in the first quarter ended March 31, 2020 compared to the first quarter ended March 31, 2019. Additionally, prices received for crude oil production increased 21.9% in the first quarter ended March 31, 2020 compared to the same period of 2019, while prices received for gas production decreased 23.1% over the same time period.

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  6. Interesting discussion… that means the actual cash inflow and balance at the end of March that will show in the 10q will be good, but for 2Q and very likely 3Q, its not going to be pretty.

    Hopefully they are looking at their staffing levels given the significant slowdown in activity. Perhaps a salary cut for senior management, given the massive increases over the past couple of years. I know, I had a hard time finishing that sentence while I was laughing….

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    • The cash flow will be good if their revenue estimates for the end of Q1 are correct, but it doesn’t seem right to me that pricing was better in 2020 than it was in 2019.

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