PBT

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, 2019. 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. On November 1, 2019, the Waddell Ranch properties were sold to Blackbeard Operating, LLC, which assumed operatorship effective April 1, 2020.

Key Financial Metrics

Production and Pricing (2019): Total oil production attributable to the Trust was 360,606 barrels at an average price of $51.74 per barrel. Total gas production was 858,009 Mcf at an average price of $2.64 per Mcf. The Trust holds no debt and has limited borrowing capacity solely for paying expenses.

Material Changes vs. Prior Period

• Revenue Decline: Royalty income decreased by approximately 36% from 2018 to 2019 ($32.1M to $20.5M). This was driven by a combination of lower commodity prices and natural production decline.
• Commodity Prices: The average oil price dropped from $58.11/bbl in 2018 to $51.74/bbl in 2019. The average gas price fell from $3.55/Mcf to $2.64/Mcf.
• Production Volumes: Total oil sales decreased by roughly 23% (467,473 bbls in 2018 vs. 360,606 bbls in 2019). Gas sales decreased by approximately 46% (1,595,999 Mcf in 2018 vs. 858,009 Mcf in 2019).
• Capital Expenditures: Gross capital expenditures for the Waddell Ranch properties were $3.3 million in 2019, a significant increase from $0.73 million in 2018, primarily due to remedial and maintenance activities. However, the 2020 budget is projected to decrease to $1.35 million.
• Operator Change: The Waddell Ranch properties, the Trust's largest asset, were sold by the previous operator (Burlington Resources Oil & Gas Company LP) to Blackbeard Operating, LLC, effective November 1, 2019.

Outlook, Risks, and Management Commentary

• Outlook: Management notes that oil and gas prices remain volatile. As of March 6, 2020, NYMEX oil prices were approximately $41.14/bbl and gas prices were $1.89/MMBtu, significantly lower than the year-end 2019 prices used for reserve valuations. This suggests a potential reduction in future standardized measures of discounted cash flows.
• Capital Strategy: The operator indicated that a more aggressive capital expenditure budget is necessary to halt production decline, though the 2020 budget was reduced due to lower prices. No new drill wells are planned for 2020.
• Key Risks:
  • Price Volatility: Distributions are highly dependent on crude oil and natural gas prices, which fluctuate based on global economic conditions, OPEC policies, and geopolitical events.
  • Depleting Assets: The Trust's assets are depleting. Without significant development, production will decline. The production index for Trust properties is approximately 9.8 years.
  • Operator Control: Unit holders have no control over operations. The Trust relies on third-party operators (Blackbeard and Riverhill Energy) to manage properties and calculate net proceeds.
  • Regulatory/Environmental: Changes in environmental regulations (e.g., EPA rules on methane, water disposal) could increase operating costs or delay production.
• 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

• Operator Transition: Verify the impact of the operator change from BROG to Blackbeard Operating on the Waddell Ranch properties and the accuracy of future royalty calculations.
• Price Sensitivity: Assess the sensitivity of future distributions to current oil and gas prices, which have dropped significantly since the December 31, 2019 reporting date.
• Reserve Estimates: Review the independent reserve report by Cawley, Gillespie & Associates, noting that proved reserves decreased to 4,029 thousand barrels of oil and 5,386 thousand Mcf of gas.
• Capital Expenditure Budgets: Monitor the 2020 capital expenditure budget ($1.35M gross) to ensure it is sufficient to maintain production levels or if further cuts are anticipated.
• Depletion Tax Benefits: Confirm the tax treatment of distributions, as a portion may be considered a return of capital due to the depleting nature of the assets.