Business Context and Reporting Period
The Permian Basin Royalty Trust (PBT) is a passive express trust created under Texas law, holding net overriding royalty interests in oil and gas properties. The Trust has no employees; administrative functions are performed by the Trustee, Simmons Bank. The reporting period covers the fiscal year ended December 31, 2021. The Trust's assets consist of a 75% net overriding royalty in the Waddell Ranch properties (Crane County, Texas) and a 95% net overriding royalty in various Texas Royalty properties. Blackbeard Operating, LLC is the operator for the Waddell Ranch properties, while Riverhill Energy Corporation owns the Texas Royalty properties.
Key Financial Metrics
| Metric | 2021 | 2020 | 2019 |
|---|---|---|---|
| Total Royalty Income | $11,805,514 | $12,040,318 | $20,487,433 |
| Total Income (incl. Interest) | $11,810,626 | $12,049,921 | $20,510,433 |
| Distributable Income | $10,721,775 | $10,958,618 | $19,421,131 |
| Distributable Income per Unit | $0.23 | $0.24 | $0.42 |
| Cash and Short-term Investments | $2,248,527 | $1,725,449 | N/A |
| Net Overriding Royalty Interests (Carrying Value) | $352,688 | $382,876 | N/A |
| General and Administrative Expenses | $1,088,851 | $1,041,303 | $1,089,302 |
Production and Pricing (2021): Total oil sales were 967,106 barrels at an average price of $63.34 per barrel. Total gas sales were 3,876,648 Mcf at an average price of $3.53 per Mcf. Underlying property oil production increased approximately 50% from 2020 to 2021, and gas production increased approximately 46%.
Material Changes Versus Prior Period
- Waddell Ranch Deficit: Due to a Net Profits Interest (NPI) deficit, the Waddell Ranch properties contributed $0 to royalty income from June 1, 2021, through December 31, 2021. The cumulative NPI deficit as of December 31, 2021, was $13,203,497 (at 75%). This deficit must be recovered from future proceeds before further distributions can be made from these properties.
- Capital Expenditures: Capital expenditures deducted in the net overriding royalty calculation for the Waddell Ranch properties were approximately $66.6 million (gross) in 2021, a significant increase from $10.3 million in 2020 and $3.3 million in 2019. This aggressive spending was aimed at halting production decline and exploiting remaining potential.
- Reserve Revisions: Proved reserves increased significantly in 2021 due to upward revisions driven by stronger oil and gas pricing. Total proved oil reserves rose to 6,623 thousand barrels, and gas reserves rose to 11,264 thousand Mcf.
- Operator Change: Blackbeard Operating, LLC became the operator of the Waddell Ranch properties effective April 1, 2020, following the sale from Burlington Resources Oil & Gas Company LP.
Guidance, Outlook, and Risks
Outlook and Capital Budget: The operator, Blackbeard, has advised that the 2022 capital expenditure budget is approximately $245 million (gross), representing a 59% increase over 2021. This budget includes drilling 34 net vertical wells and 13 net horizontal wells. However, due to market volatility, the operator could not provide accurate projections for anticipated revenue streams or production levels for 2022.
Trustee Transition: On November 4, 2021, Simmons Bank announced an agreement to resign as Trustee and nominate Argent Trust Company as the successor. This transition is subject to Unit holder approval and other conditions.
Risks and Contingencies:
- Commodity Price Volatility: Distributions are heavily influenced by oil and gas prices, which remain volatile due to geopolitical factors (e.g., war in Ukraine) and supply/demand dynamics.
- Depleting Assets: The Trust holds depleting assets. If operators do not perform additional development, production may decline faster than expected. A portion of distributions is considered a return of capital.
- Regulatory and Environmental: Operations are subject to stringent environmental regulations, including potential restrictions on saltwater disposal wells due to seismic activity concerns in the Permian Basin.
- Accounting Basis: Financial statements are prepared on a modified cash basis, not GAAP. Revenues are recognized when received, not when production occurs.
Investor Verification Checklist
- NPI Deficit Recovery: Verify the timeline for recovering the $13.2 million Waddell Ranch NPI deficit, as this directly impacts future cash flow from the Trust's largest asset.
- 2022 Capital Efficiency: Monitor the return on the increased $245 million capital expenditure budget to ensure new drilling offsets the high costs and restores net proceeds.
- Trustee Transition Status: Confirm the completion of the transition from Simmons Bank to Argent Trust Company and any associated changes in administrative fees or procedures.
- Commodity Price Sensitivity: Assess the impact of current oil and gas prices on the standardized measure of discounted future net cash flows, noting the significant upward revision in 2021 reserves was price-driven.
- Seismic Regulations: Track regulatory actions by the Railroad Commission of Texas regarding saltwater disposal wells in the Gardendale and other Seismic Response Areas, which could disrupt operations.