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, 2020. 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 became the operator of the Waddell Ranch properties effective April 1, 2020.
Key Financial Metrics
| Metric | 2020 | 2019 | 2018 |
|---|---|---|---|
| Total Royalty Income | $12,040,318 | $20,487,433 | $32,088,282 |
| Distributable Income | $10,958,618 | $19,421,131 | $30,789,460 |
| Distributable Income per Unit | $0.24 | $0.42 | $0.66 |
| General & Administrative Expenses | $1,041,303 | $1,089,302 | $1,324,828 |
| Cash and Short-term Investments (Year End) | $1,725,449 | $2,862,570 | N/A |
| Net Overriding Royalty Interests (Net) | $382,876 | $424,507 | N/A |
| Reserve for Contingencies | $1,100,000 | $1,050,000 | N/A |
Production and Pricing (2020): Total oil sales were 435,319 barrels at an average price of $39.51 per barrel. Total gas sales were 1,437,362 Mcf at an average price of $1.47 per Mcf. Average production costs were $26.54 per BOE.
Material Changes vs. Prior Period
- Revenue Decline: Total royalty income decreased by approximately 41% from 2019 to 2020, driven primarily by a significant drop in commodity prices due to the COVID-19 pandemic and global economic conditions.
- Commodity Prices: Average oil prices fell from $51.74 per barrel in 2019 to $39.51 in 2020. Average gas prices dropped from $2.64 per Mcf to $1.47.
- Waddell Ranch Deficit: Due to excess costs (capital expenditures exceeding gross proceeds) on the Waddell Ranch properties, no royalty income was generated from these properties from June 1, 2020, through December 31, 2020. A cumulative Net Profits Interest (NPI) deficit of $6,437,477 (at 75%) existed as of year-end, which must be recovered from future proceeds before further distributions can be made from this asset.
- Capital Expenditures: Gross capital expenditures on the Waddell Ranch properties increased significantly to $10.3 million in 2020 compared to $3.3 million in 2019, as the new operator pursued an aggressive drilling program to halt production decline.
Outlook, Risks, and Management Commentary
- Future Capital Budget: The operator (Blackbeard) advised a 2021 capital expenditure budget of approximately $86.6 million (gross), a substantial increase from 2020, intended to exploit remaining asset potential. This includes 91 new drill wells and 24 recompletions.
- Price Volatility: Management notes that oil and gas prices remain volatile. While prices rebounded to approximately $64.75 per barrel by March 10, 2021, future distributions remain heavily dependent on commodity prices and production costs.
- Depleting Assets: The Trust holds depleting assets. The production index for the Trust properties is approximately 10.1 years. Distributions are partly a return of capital, which reduces the tax basis of the Units.
- Key Risks:
- Commodity Price Risk: Lower prices directly reduce net proceeds and may cause operators to delay development.
- Operator Risk: The Trust has no control over operations. Operators may abandon properties or transfer interests without Trust consent.
- Regulatory/Environmental: Changes in environmental regulations (e.g., methane emissions, water disposal) could increase costs or delay production.
- Deficit Recovery: The Waddell Ranch NPI deficit must be recovered before income flows from that property again.
Investor Verification Checklist
- Waddell Ranch Deficit Status: Verify the current status of the $6.4 million NPI deficit and the timeline for its recovery from future gross proceeds.
- 2021 Capital Expenditure Execution: Monitor whether the operator executes the planned $86.6 million capital budget and the impact of these costs on near-term cash flow.
- Commodity Price Sensitivity: Assess the impact of current oil and gas prices on the standardized measure of discounted future net cash flows ($80.1 million as of Dec 31, 2020).
- Production Decline Rates: Review quarterly production reports to confirm if new drilling is successfully offsetting natural decline rates.
- Reserve Revisions: Watch for future reserve reports, as estimates are sensitive to price and cost assumptions and have shown volatility in recent years.