PBT

Business Context and Reporting Period

Company: Permian Basin Royalty Trust (Trust)

Reporting Period: Quarterly period ended June 30, 2005 (Form 10-Q)

Structure: The Trust holds net overriding royalty interests in producing oil and gas properties in Texas, specifically the Waddell Ranch properties (75% interest) and Texas Royalty properties (95% interest). The Trust is managed by Bank of America, N.A. as Trustee. Financial statements are prepared on a modified cash basis, not GAAP.

Outstanding Units: 46,608,796 units as of August 1, 2005.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Royalty income increased 41% for the quarter and 44% for the six-month period compared to the prior year. This is primarily driven by significant increases in oil and gas prices.
• Commodity Prices:
  • Oil: Average price per barrel rose to $46.61 in Q2 2005 from $33.89 in Q2 2004. For the six months, the average was $43.41 vs. $31.84.
  • Gas: Average price per Mcf rose to $6.43 in Q2 2005 from $4.98 in Q2 2004. For the six months, the average was $6.39 vs. $4.92.
• Production Volumes: Underlying property oil sales increased slightly (3,514 Bbls/day in Q2 2005 vs. 3,317 Bbls/day in Q2 2004). Gas sales also increased (17,057 Mcf/day vs. 15,850 Mcf/day).
• Expenses: General and administrative expenses increased significantly (64% for the quarter) due to costs associated with the implementation and compliance of the Sarbanes-Oxley Act. Lease operating expenses and property taxes on the Waddell Ranch properties increased due to higher electrical costs.
• Capital Expenditures: Capital expenditures for the Waddell Ranch properties totaled $4.46 million for the quarter and $5.3 million for the six months, compared to $2.68 million and $3.4 million respectively in 2004. This reflects increased drilling activity (4 wells completed in Q2 2005 vs. none in Q2 2004).

Outlook, Risks, and Management Commentary

• Capital Budget: The 2005 capital expenditures budget for the Waddell Ranch properties was revised to $14.3 million. As of the end of Q2, $5.3 million had been expended, leaving approximately $9 million remaining for the year.
• Subsequent Events: On July 19, 2005, the Trust declared a distribution of $0.099822 per unit, payable on August 12, 2005.
• Market Risk: The Trust's income is highly sensitive to oil and gas prices. The Trustee notes that forward-looking statements regarding production and prices are subject to uncertainties including global market demand and regulatory actions.
• Contingencies: The Trustee is aware of no material contingencies as of June 30, 2005. However, unfavorable resolution of contingencies related to underlying properties would reduce future royalty income and distributions.
• Accounting Basis: Investors should note that financial statements are prepared on a modified cash basis. Royalty income is recorded when received, not when production occurs, and amortization is charged directly to trust corpus rather than against operating results.

Key Facts for Investor Verification

• Price Sensitivity: Verify current oil and gas market prices, as the Trust's distributable income is directly correlated to commodity prices (75% and 95% net overriding royalties).
• Production Trends: Monitor the underlying production volumes from the Waddell Ranch and Texas Royalty properties, as these are the sole source of revenue.
• Capital Expenditure Execution: Track the execution of the $14.3 million capital budget for the Waddell Ranch properties to ensure sustained production levels.
• Amortization Impact: Understand that the Trust Corpus decreases over time due to unit-of-production amortization, which is not reflected in the distributable income calculation but reduces the net asset value of the trust.
• Regulatory Compliance Costs: Be aware that administrative expenses may remain elevated due to ongoing Sarbanes-Oxley compliance requirements.