PBT

Business Context and Reporting Period

Company: Permian Basin Royalty Trust (Trust)

Reporting Period: Quarterly period ended June 30, 1997 (Form 10-Q)

Business Overview: The Trust holds net overriding royalty interests in producing oil and gas properties in Texas. Specifically, it holds a 75% interest in the Waddell Ranch properties (Crane County) and a 95% interest in Texas Royalty properties. The Trustee is NationsBank of Texas, N.A. The financial statements are prepared on a modified cash basis, not GAAP. There are 46,608,796 units of beneficial interest outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Royalty income for the six months ended June 30, 1997, was $12.89 million, a significant increase from $6.41 million in the same period in 1996. Quarterly royalty income rose from $3.84 million in Q2 1996 to $4.19 million in Q2 1997.
• Price Drivers: The average oil price for the six months ended June 30, 1997, was $21.24 per barrel, compared to $18.34 in 1996. Average gas prices increased from $2.04 to $2.96 per Mcf over the same period.
• Production Volumes: Oil sales attributable to the properties from which royalties were carved remained relatively stable (891,313 Bbls in 1997 vs. 889,258 Bbls in 1996 for the six-month period). However, royalty income increased due to higher prices and successful drilling programs on the Waddell Ranch properties.
• Capital Expenditures: Capital expenditures for the Waddell Ranch properties decreased to $5.1 million for the six months ended June 30, 1997, compared to $8.4 million in 1996, attributed to timing differences. The 1997 budget is $11.8 million.
• Corporate Structure: Burlington Resources Oil & Gas Company (BROG) sold its interests in the Texas Royalty properties to Riverhill Energy Corporation, with the transaction closing on February 14, 1997. Riverhill succeeded to BROG's responsibilities under the Conveyance.

Outlook, Risks, and Contingencies

• Legal Proceedings (Class Action): A class action lawsuit settlement was approved by the court, but an appeal was filed in February 1997. On July 24, 1997, the Court of Appeals dismissed the appeal on procedural grounds. However, the filing notes that further appellate action is possible. No settlement proceeds have been distributed to the Trust until the judgment is final and no longer subject to appeal.
• Forward-Looking Statements: The Trust warns that statements regarding capital expenditures, drilling activity, production volumes, and hydrocarbon prices involve uncertainty and are not guarantees of future results.
• Accounting Basis: Financial statements are prepared on a modified cash basis, differing from GAAP. Revenues are not accrued in the month of production, and certain cash reserves may be established for contingencies.
• Drilling Activity: For the quarter ended June 30, 1997, 2 gross wells were completed on the Waddell Ranch properties, with 17 gross wells in progress.

Key Facts for Investor Verification

• Settlement Proceeds Status: Verify the final status of the class action lawsuit appeal to determine if and when the Trust will receive settlement proceeds.
• Production vs. Income Correlation: Note that royalty income is based on net profits (revenue minus costs), not just production volume. Increases in income are driven by both price and cost management.
• Capital Expenditure Budget: Confirm adherence to the $11.8 million 1997 capital expenditure budget for the Waddell Ranch properties to ensure future production sustainability.
• Asset Valuation: The net overriding royalty interests are amortized on a unit-of-production basis directly against trust corpus; verify the impact of this amortization on the trust corpus value over time.
• Ownership Changes: Acknowledge the transfer of Texas Royalty property interests from BROG to Riverhill Energy Corporation and the role of Coastal Management Corporation in operations.