Business Context and Reporting Period
Company: Permian Basin Royalty Trust (PBT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2020
Trustee: Simmons Bank
Outstanding Units: 46,608,796 (as of November 1, 2020)
The Trust holds net overriding royalty interests in producing oil and gas properties in Texas, specifically the Waddell Ranch properties (75% interest) and Texas Royalty properties (95% interest). The Trustee distributes cash received from these royalties to unit holders. The financial statements are prepared on a modified cash basis of accounting.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 |
|---|---|---|
| Royalty Income | $1,358,890 | $10,059,901 |
| Total Income (Royalty + Interest) | $1,360,120 | $10,067,965 |
| Distributable Income | $1,254,340 | $9,112,684 |
| Distributable Income Per Unit | $0.03 | $0.20 |
| Cash and Short-term Investments | $1,675,819 | (Balance Sheet Item) |
| Net Overriding Royalty Interests (Net) | $389,440 | (Balance Sheet Item) |
| Commitments and Reserves | $1,100,000 | (Balance Sheet Item) |
Material Changes vs. Prior Period
- Revenue Decline: Royalty income for the quarter ended September 30, 2020, dropped to $1.36 million from $6.06 million in the same period in 2019. For the nine-month period, income fell to $10.06 million from $15.36 million.
- Price Impact: Average oil prices decreased to $28.55 per barrel (Q3 2020) from $54.30 (Q3 2019). Average gas prices fell to $1.74 per Mcf from $1.82.
- Production Impact: The Trust received zero royalty income from the Waddell Ranch properties in Q3 2020 due to a workover of specific wells initiated by the new operator, Blackbeard Operating, LLC. This contrasts with Q3 2019 when these properties contributed significantly.
- Capital Expenditures: Capital expenditures on Waddell Ranch properties increased to $2.8 million in Q3 2020 compared to $351,706 in Q3 2019, reflecting increased drilling and workover activity.
- Liquidity: Cash and short-term investments decreased from $2.86 million (Dec 31, 2019) to $1.68 million (Sep 30, 2020).
Outlook, Risks, and Management Commentary
- Commodity Price Risk: Income is heavily influenced by oil and gas prices, which have been volatile due to the COVID-19 pandemic and global demand shifts. Oil prices briefly turned negative in April 2020 before recovering to approximately $35.56 by late October 2020.
- Operator Changes: Blackbeard Operating, LLC became the operator of the Waddell Ranch properties on April 1, 2020. Their revised 2020 budget includes approximately $7 million for drilling/completion and $3 million for recompletions and infrastructure, though some expenditures were delayed to later in the year.
- NPI Deficit: As of September 30, 2020, the Waddell Ranch properties have a cumulative Net Profit Interest (NPI) deficit of $3,374,635 (at 75%). This deficit must be recovered from future proceeds before any further royalty income is paid to the Trust from these properties.
- Subsequent Event: On October 20, 2020, the Trust declared a distribution of $0.012620 per Unit, payable November 16, 2020.
- Tax Status: The Trust is taxed as a grantor trust; unit holders are responsible for taxes on income deemed received when earned by the Trust, not when distributed.
Investor Verification Checklist
- NPI Deficit Recovery: Verify the timeline for recovering the $3.37 million NPI deficit on Waddell Ranch properties, as this directly delays future distributions from that asset.
- Operator Strategy: Monitor Blackbeard Operating's execution of their revised capital budget and the impact of workovers on production volumes.
- Commodity Prices: Assess sensitivity of future distributions to fluctuations in crude oil and natural gas prices, given the Trust's lack of operational control.
- Cash Reserves: Review the adequacy of the $1.1 million reserve for contingencies against potential future liabilities or unfavorable resolution of property contingencies.