PBT

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1995, for the Permian Basin Royalty Trust. The Trust is a fixed investment trust taxed as a grantor trust, holding net overriding royalty interests in producing oil and gas properties. The Trustee is NationsBank of Texas, N.A. As of May 15, 1995, there were 46,608,796 units of beneficial interest outstanding. Financial statements are prepared on a modified cash basis and have been reviewed, but not audited, by Deloitte & Touche LLP.

Key Financial Metrics

Production Data (Properties from which Royalties were carved):

• Oil Sales: 399,487 Bbls (Q1 1995) vs. 365,470 Bbls (Q1 1994). Average price: $15.94/Bbl (1995) vs. $12.95/Bbl (1994).
• Gas Sales: 1,833,983 Mcf (Q1 1995) vs. 1,927,109 Mcf (Q1 1994). Average price: $1.74/Mcf (1995) vs. $1.85/Mcf (1994).

Material Changes vs. Prior Period

Distributable income decreased by approximately 50% compared to the first quarter of 1994. This decline is primarily attributable to the absence of significant one-time payments received in Q1 1994 related to historical disputes:

• Q1 1994 Anomalies: The prior year included a $2.9 million payment regarding underpayments of royalty income from Texas Royalty properties (dating back to 1991) and an $850,000 settlement regarding a pricing dispute.
• Price vs. Volume: While the average oil price increased from $12.95 to $15.94 per barrel, gas prices declined. Oil production volumes increased, but gas volumes decreased due to natural decline in well deliverability.
• Capital Expenditures: Capital expenditures for the Waddell Ranch properties dropped to $2.4 million in Q1 1995 from $5.4 million in Q1 1994. The 1994 figure included $1.6 million of costs incurred in 1993 but deducted in 1994.

Outlook, Risks, and Contingencies

Ad Valorem Tax Contingency: Southland Royalty Company (the interest owner) advised the Trust that approximately $1.3 million in ad valorem taxes for the Texas Royalty properties (1991–1994) will be charged to the Trust. These charges will be deducted from gross proceeds over twelve months beginning in March 1995, estimated at $87,000 per month. This will reduce funds available for future distributions.

Ongoing Disputes: The Trustee is verifying the actual amount of ad valorem taxes and discussing the deduction methodology with Southland. Additionally, previous payments regarding royalty underpayments were estimates and remain subject to revision; final resolution is not guaranteed.

Capital Budget: Southland projects 1995 capital expenditures to total approximately $10.2 million ($8.4 million for development/drilling and $1.8 million for maintenance).

Production Activity: In Q1 1995, 4 gross (1.875 net) wells were completed, with 2 gross (1.0 net) wells in progress. This is a decrease from Q1 1994, which saw 13 gross (6.5 net) wells completed.

Investor Verification Checklist

• Verify the final calculation of the $1.3 million ad valorem tax charge and confirm the monthly deduction amount ($87,000) to assess impact on future cash flows.
• Monitor the status of the royalty underpayment investigation to determine if further adjustments (positive or negative) are expected beyond the payments already received in 1994.
• Review the 1995 capital expenditure budget ($10.2 million) to ensure it aligns with the Trust's long-term production sustainability goals.
• Confirm the decline in gas production volumes and its impact on the weighted average price and total net profits.
• Check the number of wells in progress (currently 2 gross) to gauge future production growth potential.