Liquidity and Capital Resources

The Trust makes monthly distributions to the holders of Units of the excess of the preceding month's royalty income received over expenses incurred. Upon receipt, royalty income is invested in short-term investments until its subsequent distribution. In accordance with the Trust Agreement, the Trust's only long-term assets consist of royalty interests in producing and proved undeveloped oil and gas properties. Although the Trust is permitted to borrow funds if necessary to continue its operations, borrowings are not anticipated in the foreseeable future.

Commodity Prices

The Trust's income and monthly distributions are heavily influenced by commodity prices. Commodity prices may fluctuate widely in response to (i) relatively minor changes in the supply of and demand for oil and natural gas, (ii) market uncertainty and (iii) a variety of additional factors that are beyond the Trustee's control. Recently, there has been a substantial decrease in oil and natural gas prices due in part to significantly decreased demand as a result of the novel coronavirus ("COVID-19") pandemic and an oversupply of crude oil driven by a dispute between members of the Organization of Petroleum Exporting Countries ("OPEC") and Russia over production cuts, each of which are discussed below under "Item 1A-Risk Factors". A combination of these factors resulted in the price of oil to fall below zero to $(37.63) per barrel of oil on April 20, 2020 recovering the following day to $10.01 per barrel of oil. Factors that may impact future commodity prices, including the price of oil and natural gas, include but are not limited to:





     •    political conditions in major oil producing regions, especially in the
          Middle East;




  •   worldwide economic conditions;




  •   weather conditions;




  •   trade barriers;




  •   public health concerns;




  •   the supply and price of domestic and foreign crude oil or natural gas;




  •   the level of consumer demand;




  •   the price and availability of alternative fuels;




  •   the proximity to, and capacity of, transportation facilities;




  •   the effect of worldwide energy conservation measures; and




  •   the nature and extent of governmental regulation and taxation.

Although we cannot predict the occurrence of events that may affect future commodity prices or the degree to which these prices will be affected, gas royalty income for a given period generally relates to production three months prior to the period and crude oil royalty income for a given period generally relates to production two months prior to the period and will generally approximate current market prices in the geographic region of the production at the time of production. When crude oil and natural gas prices decline, the Trust is affected in two ways. First, distributable income from the Royalty Properties is reduced. Second, exploration and development activity by operators on the Royalty Properties may decline as some projects may become uneconomic and are either delayed or eliminated. It is impossible to predict future crude oil and natural gas price movements, and this reduces the predictability of future cash distributions to Unit holders.





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Results of Operations

Distributable income consists of royalty income plus interest income plus any decrease in cash reserves established by the Trustee less general and administrative expenses of the Trust less any increase in cash reserves established by the Trustee. Distributable income for the three months ended March 31, 2020 was $10,405,023, or $0.71 per unit. Royalty income for the three months ended March 31, 2020 amounted to $11,287,740 while interest income was $23,625. General and administrative expenses totaled $906,342 for the three months ended March 31, 2020.

Distributions during the period were $0.303290, $0.218910, and $0.236560 per Unit payable to Unit holders of record on January 15, February 18, and March 16, 2020, respectively.

Royalty income for the quarter ended March 31, 2020 decreased approximately $2,405,000 or 18% compared with the first quarter of 2019. This decrease was primarily the result of lower prices for natural gas ($2.0 million), lower production for oil ($1.4 million) and the absence of the state withholding tax refunds from Oklahoma and New Mexico ($0.8 million). These decreases were offset somewhat by an increase in the price of oil ($1.4 million), higher production for natural gas ($0.2 million), and lower taxes ($0.2 million).

Compared to the preceding quarter ended December 31, 2019, royalty income decreased approximately $182,000 or 2%, due mainly to a decrease in the production of both oil and natural gas ($2.7 million). This decrease was offset somewhat by the timing of payment of ad valorem taxes in the fourth quarter of 2019 ($1.5 million), higher prices for both oil and natural gas ($0.9 million), and lower taxes and operating expenses ($0.1 million).

The following table illustrates average prices received for the periods discussed above and the related oil and gas production volume:





                                              Quarter Ended
                               March 31,       March 31,       December 31,
                                 2020            2019              2019
              Production
              Oil (Bbls)          153,638         179,016            199,254
              Gas (Mcfs)        2,021,572       1,909,586          2,085,318
              Average Price
              Oil (per Bbl)   $     56.85     $     49.07     $        52.44
              Gas (per Mcf)   $      1.97     $      3.00     $         1.95

Gas royalty income received for the three months ended March 31, 2020, related primarily to production for October through December 2019. The average price of gas reported by the Henry Hub for the same time period was $2.15 per Mcf. The average price of gas for the Henry Hub was $1.71 per Mcf for January through March 2020. Oil royalty income for the three months ended March 31, 2020 related primarily to production for November 2109 through January 2020. The average price of oil as reported by NYMEX for that time period was $58.16 per barrel. The average price of oil was $45.54 per barrel for January through March 2020. As of April 27, 2020, the average price of gas for the Henry Hub was $1.51 per Mcf and the average price of oil reported by NYMEX was $12.17 per barrel. It is difficult to estimate future prices of oil and gas, and any assumptions concerning future prices may prove to be incorrect.

Interest income for the quarter ended March 31, 2020 decreased $25,600 compared with the first quarter of 2019. Compared to the preceding quarter ended December 31, 2019, interest income decreased $7,200. Changes in interest income are the result of changes in interest rates and funds available for investment.

General and administrative expenses for the quarter ended March 31, 2020 increased by approximately $13,000 compared to the same quarter of 2019 primarily due to increases in Escrow Agent/Trustee fees of approximately $22,200, printing and unitholder fees of approximately $9,100 and an increase in the New York Stock Exchange listing fee of $3,000. These increases were offset somewhat by a decrease in legal and professional fees of approximately $21,200.

Compared to the previous quarter ended December 31, 2019, general and administrative expenses increased approximately $315,100 primarily to increases due to the timing of payment of legal and professional fees of approximately $191,800, the timing of payment of the New York Stock Exchange listing fee of $71,000 and the timing of payment of printing and unitholder services of approximately $51,800.





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The financial statements of the Trust differ from financial statements prepared in conformity with accounting principles generally accepted in the United States of America because of the following:





    •     Royalty income is recognized in the month received, pending verification
          of ownership and title, rather than in the month of production.




    •     Expenses other than those expected to be paid on the following monthly
          record date are not accrued.




    •     Amortization of the Royalties is shown as a reduction to Trust corpus and
          not as a charge to operating results.




    •     Reserves may be established for contingencies that would not be recorded
          under accounting principles generally accepted in the United States of
          America.

This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

Critical Accounting Policies and Estimates

A disclosure of critical accounting policies and the more significant judgments and estimates used in the preparation of the Trust's financial statements is included in Item 7 of the Trust's Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes to the critical accounting policies during the three months ended March 31, 2020.

Distributable Income per Unit

Basic distributable income per Unit is computed by dividing distributable income by the weighted average 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 pronouncements that are expected to have a significant impact on the Trust's financial statements.





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Forward Looking Statements

This Report includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor created thereby. All statements other than statements of historical fact included in this Report are forward-looking statements. 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 is within the Trustee's control, that may cause such expectations not to be realized, including, among other things, factors identified in the Trust's most recent Annual Report on Form 10-K affecting oil and gas prices and the recoverability of reserves, general economic conditions, actions and policies of petroleum-producing nations and other changes in the domestic and international energy markets.

The Trust has an Internet website and has made available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act at http://www.sbr-sabine.com as soon as reasonably practicable after such information is electronically filed with or furnished to the SEC.

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